UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 22, 2008

Nelnet, Inc.
 (Exact name of registrant as specified in its charter)

Nebraska	 	001-31924	 	84-0748903	
(State or other Jurisdiction of Incorporation)	 	(Commission File Number)	 	(IRS Employer Identification No.)	
 	 	 	
121 South 13 th Street, Suite 201, Lincoln, Nebraska	 	68508	
(Address of Principal Executive Offices)	 	(Zip Code)	
Registrant’s telephone number, including area code: (402) 458-2370

 	
(Former name or former address if changed since last report.)	
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Item 2.02 Results of Operations and Financial Condition.
On October 29, 2008, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter ended September 30, 2008. A copy of the press release is furnished as Exhibit 99.1 to this report. In addition, a copy of the supplemental financial information for the quarter ended September 30, 2008, which was made available on the Company’s website at www.nelnetinvestors.com on October 29, 2008 in connection with the press release, is furnished as Exhibit 99.2 to this report.
The above information and Exhibits 99.1 and 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), nor shall such information and Exhibits be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. In addition, information on the Company’s website is not incorporated by reference into this report and should not be considered part of this report.  
Item 8.01 Other Events.
Federal Family Education Loan Program (“FFELP”) Warehouse Facility – Equity Funding Support
As previously disclosed, the terms and conditions of the Company’s warehouse facility for FFELP loans provide for mark-to-market advance rates. On October 22, 2008, the Company posted $165.5 million in additional funds to the facility based on the most recent valuation. While the Company does not believe that the loan valuation formula is reflective of the actual fair value of its loans, it is subject to compliance with such mark-to-market provisions of the warehouse facility agreement. As of October 29, 2008, the Company has a cumulative amount of $374.6 million posted as equity funding support for the facility.
The Company has utilized its $750.0 million unsecured line of credit to fund equity advances on its warehouse facility. As of October 29, 2008, the Company has $691.5 million outstanding under this line of credit and $58.5 million available for future use.
Continued dislocations in the credit markets may cause additional volatility in the loan valuation formula. Should a significant change in the valuation of loans result in additional equity support greater than what the Company can provide, the facility could be subject to an event of default resulting in a termination of the facility and an acceleration of the repayment provisions.
The Company is currently in discussions with the banks included in the FFELP warehouse facility and the unsecured line of credit concerning the terms and conditions of these agreements.
The Company continues to generate positive cash flow from operations and currently maintains cash and cash equivalents of approximately $80 million. In addition, the Company has approximately $90 million of unencumbered private loan assets.

 

FFELP Warehouse Facility – Annual Obligation to Remove Loans
As of October 29, 2008, there was $2.5 billion of notes outstanding on the Company’s FFELP warehouse facility. As previously disclosed, the FFELP warehouse facility has a provision requiring the Company to refinance or remove 75% of the pledged collateral on an annual basis. The Company believes it has met this requirement for the annual period ending in May 2009. Under the current terms of the facility, the remaining collateral will need to be refinanced or removed by May 9, 2010.
Information other than historical facts contained in this report may be considered forward looking in nature and is subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or expected. Among the key factors that may have a direct bearing on the Company’s operating results, performance, or financial condition expressed or implied by the forward-looking statements are changes in federal legislation which significantly affect student loan programs, the uncertain nature of management estimates, changes in terms of student loans and the educational credit marketplace, changes in the demand for educational financing or in financing preferences of educational institutions, students, and their families, the Company’s ability to maintain its credit facilities or obtain new facilities, the ability of lenders under the Company’s credit facilities to fulfill their lending commitments under those facilities, changes to the terms and conditions of the liquidity programs offered by the Department of Education, including the new participation program, changes in the general interest rate environment and in the securitization markets for education loans, and other matters discussed in the Risk Factors section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.  
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits. The following exhibit is furnished as part of this report: 

Exhibit	
No.	 	Description	
99.1	 	Press Release dated October 29, 2008 – “Nelnet Reports Strong Third Quarter Results; Provides Update on Warehouse Facility and Line of Credit”	
99.2	 	Nelnet, Inc. Supplemental Financial Information for the Third Quarter 2008	

 
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 hereunto duly authorized.
Dated: October 29, 2008

 	 	 	 	 	
 	NELNET, INC.
	
 	By: 	/ s/ TERRY J. HEIMES	
 	 	 	
 	 	Name:
Title:	 	Terry J. Heimes
Chief Financial Officer	

 
EXHIBIT INDEX 

Exhibit	
No.	 	Description	
99.1	 	Press Release dated October 29, 2008 – “Nelnet Reports Strong Third Quarter Results; Provides Update on Warehouse Facility and Line of Credit”	
99.2	 	Nelnet, Inc. Supplemental Financial Information for the Third Quarter 2008	

Exhibit 99.1
Media contact: Ben Kiser, 402.458.3024
Investor contact: Phil Morgan, 402.458.3038
Nelnet Reports Strong Third Quarter Results; Provides Update on Warehouse Facility and Line of Credit

 	•	 	Base net income of $0.47 per share	
 		
 	•	 	Other fee-based income increased to $45.9 million	
 		
 	•	 	Core student loan spread of 1.02	
 		
 	•	 	Operating expenses decreased by $56.4 million	
Lincoln, NEB., October 29, 2008 — Nelnet, Inc. (NYSE: NNI) today reported GAAP net income for the third quarter of 2008 of $23.8 million, or $0.48 per share, compared with a GAAP net loss of $15.7 million, or $0.32 per share, for the third quarter of 2007. Base net income excluding discontinued operations and legislative and restructuring related charges for the third quarter of 2008 was $23.4 million, or $0.47 per share, compared with $22.2 million, or $0.45 per share, for the same period a year ago.
The company also reported that it has provided additional equity support for its $2.5 billion federal student loan warehouse facility. All of the student loans held in this facility are guaranteed by the federal government. According to the terms of the facility and the valuation formula contained therein, the company has increased the equity support to a total of $374.6 million by drawing on its unsecured line of credit. Currently the company has $691.5 million outstanding on its $750 million unsecured line of credit. The company continues to generate positive cash flow from operations and currently maintains cash and cash equivalents of approximately $80 million. In addition, the company has approximately $90 million of unencumbered private loan assets.
“Due to this unprecedented period of market disruption, the mark-to-market formula specified under the terms of the facility produces an unreasonably low value for these federally guaranteed student loans,” said Mike Dunlap, Chairman and Chief Executive Officer. “These loans are guaranteed by the federal government and have almost no default risk. However, we appreciate that we are truly in unprecedented times, and we are engaged in discussions with our lenders to reach amicable terms on these financings.
“Importantly, the fundamentals of our core businesses are strong and we have additional sources of liquidity. The company has diversified its revenue with fee-based businesses that have significant growth opportunities and operating margins. We are pleased with our strong performance and earnings in the third quarter.”
GAAP net loss for the first nine months of 2008 was $2.3 million, or $0.05 per share, compared with GAAP net income of $13.8 million, or $0.28 per share, for the first nine months of 2007. Base net income excluding discontinued operations, legislative and restructuring related charges, and the loss on the sale of certain loans for the first nine months of 2008 was $65.2 million, or $1.33 per share, compared with $68.6 million, or $1.38 per share, for the first nine months of 2007.

 

Fee-based Revenue
In the third quarter of 2008, other fee-based income increased to $45.9 million, up from $38.0 million in the same period a year ago. Other fee-based income increased to $132.6 million for the first nine months of 2008 compared with $116.3 million for the first nine months of 2007. Other fee-based income includes Nelnet’s list management, direct marketing, tuition payment plan, and enrollment services businesses.
In the third quarter of 2008, loan and guaranty servicing income was $30.6 million compared with $33.0 million in the third quarter of 2007. Income from loan and guaranty servicing was $81.7 million for the first nine months of 2008 compared with $95.1 million in the first nine months of 2007.
Operating Expenses
Operating expenses were $103.7 million in the third quarter of 2008 compared with $173.4 million for the same period a year ago. For the first nine months of 2008, the company reported operating expenses of $330.4 million compared with $415.3 million for the first nine months of 2007. Excluding restructuring and impairment charges, operating expenses decreased by $15.3 million and $56.4 million for the three and nine months ended September 30, 2008, compared with the same periods in 2007, respectively.
Net Interest Margin
For the third quarter of 2008, Nelnet reported net interest income of $59.6 million compared with $64.4 million for the third quarter of 2007. Net interest income for the first nine months of 2008 was $149.4 million compared with $200.4 million for the first nine months of 2007. Net interest income includes variable-rate floor income and excludes settlements on the company’s derivative portfolio.
For the third quarter of 2008, Nelnet reported core student loan spread of 1.02 percent compared with 1.05 percent in the same period of 2007 and 1.07 percent for the second quarter of 2008.
Student Loan Assets and Liquidity
Nelnet reported net student loan assets of $26.4 billion at September 30, 2008. Approximately 90 percent of these student loans are life-of-loan financed at rates that the company believes will generate cash flow in excess of $1.4 billion.
The company has liquidity for new loan originations through the Department of Education’s loan participation and put programs. This will allow Nelnet to make loans to all eligible students for the 2008-2009 and 2009-2010 academic years.
In addition, the company believes it has met the annual requirement to remove 75% of loans from its federal student loan warehouse facility for the annual period ending in May 2009. Under the current terms of the facility, the remaining collateral will need to be removed or refinanced by May 2010.

 

Non-GAAP Performance Measures
A description of base net income and a reconciliation of GAAP net income to base net income can be found in supplemental financial information to this earnings release that is available online at http://www.nelnetinvestors.com/releases.cfm?reltype=Financial.
Conference Call
Nelnet will host a conference call to discuss earnings at 3:00 p.m. (Eastern) Wednesday, November 12, 2008. To access the call live, participants in the United States and Canada should dial 877.723.9521, and international callers should dial 719.325.4804 at least 15 minutes prior to the call. A live audio Web cast of the call will also be available at http://www.nelnetinvestors.com under the conference calls and Web casts menu. A replay of the conference call will be available between 6:00 p.m. (Eastern) November 12, 2008, and 11:59 p.m. (Eastern) November 22, 2008. To access the replay via telephone within the United States and Canada, callers should dial 888.203.1112. International callers should dial 719.457.0820. All callers accessing the replay will need to use the confirmation code 7046007. A replay of the audio Web cast will also be available at http://www.nelnetinvestors.com.

 
Condensed Consolidated Statements of Operations
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Nine months ended	 	
 	 	September 30,	 	 	June 30,	 	 	September 30,	 	 	September 30,	 	 	September 30,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	
 	 	(dollars in thousands, except share data)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	304,226	 	 	 	297,601	 	 	 	460,103	 	 	 	938,399	 	 	 	1,317,936	 	
Variable-rate floor income	 	 	1,580	 	 	 	21,927	 	 	 	597	 	 	 	42,325	 	 	 	597	 	
Amortization of loan premiums and deferred origination costs	 	 	(21,338	)	 	 	(22,842	)	 	 	(23,449	)	 	 	(69,584	)	 	 	(67,142	)	
Investment interest	 	 	9,118	 	 	 	9,116	 	 	 	21,023	 	 	 	29,914	 	 	 	61,231	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	 	293,586	 	 	 	305,802	 	 	 	458,274	 	 	 	941,054	 	 	 	1,312,622	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	234,016	 	 	 	232,464	 	 	 	393,875	 	 	 	791,621	 	 	 	1,112,263	 	

Net interest income	 	 	59,570	 	 	 	73,338	 	 	 	64,399	 	 	 	149,433	 	 	 	200,359	 	
Less provision for loan losses	 	 	7,000	 	 	 	6,000	 	 	 	18,340	 	 	 	18,000	 	 	 	23,628	 	

Net interest income after provision for loan losses	 	 	52,570	 	 	 	67,338	 	 	 	46,059	 	 	 	131,433	 	 	 	176,731	 	

Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	30,633	 	 	 	24,904	 	 	 	33,040	 	 	 	81,650	 	 	 	95,116	 	
Other fee-based income	 	 	45,887	 	 	 	40,817	 	 	 	38,025	 	 	 	132,617	 	 	 	116,316	 	
Software services income	 	 	4,217	 	 	 	4,896	 	 	 	5,426	 	 	 	15,865	 	 	 	17,022	 	
Other income	 	 	1,242	 	 	 	1,646	 	 	 	7,028	 	 	 	4,298	 	 	 	14,048	 	
Gain (loss) on sale of loans	 	 	—	 	 	 	48	 	 	 	492	 	 	 	(47,426	)	 	 	3,288	 	
Derivative market value, foreign currency, and put option adjustments	 	 	6,085	 	 	 	15,755	 	 	 	18,449	 	 	 	(35,521	)	 	 	11,866	 	
Derivative settlements, net	 	 	789	 	 	 	4,437	 	 	 	(2,336	)	 	 	45,989	 	 	 	7,100	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	 	88,853	 	 	 	92,503	 	 	 	100,124	 	 	 	197,472	 	 	 	264,756	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	44,739	 	 	 	43,549	 	 	 	60,545	 	 	 	142,131	 	 	 	182,010	 	
Other expenses	 	 	52,332	 	 	 	47,812	 	 	 	52,511	 	 	 	149,744	 	 	 	159,792	 	
Amortization of intangible assets	 	 	6,598	 	 	 	6,561	 	 	 	10,885	 	 	 	19,719	 	 	 	24,014	 	
Impairment expense	 	 	—	 	 	 	—	 	 	 	49,504	 	 	 	18,834	 	 	 	49,504	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	103,669	 	 	 	97,922	 	 	 	173,445	 	 	 	330,428	 	 	 	415,320	 	

Income (loss) before income taxes	 	 	37,754	 	 	 	61,919	 	 	 	(27,262	)	 	 	(1,523	)	 	 	26,167	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense (benefit)	 	 	13,969	 	 	 	19,195	 	 	 	(10,664	)	 	 	1,793	 	 	 	9,906	 	

Income (loss) from continuing operations	 	 	23,785	 	 	 	42,724	 	 	 	(16,598	)	 	 	(3,316	)	 	 	16,261	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from discontinued operations, net of tax	 	 	—	 	 	 	981	 	 	 	909	 	 	 	981	 	 	 	(2,416	)	

Net income (loss)	 	$	23,785	 	 	 	43,705	 	 	 	(15,689	)	 	 	(2,335	)	 	 	13,845	 	

Earnings (loss) per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.48	 	 	 	0.87	 	 	 	(0.34	)	 	 	(0.07	)	 	 	0.32	 	
Income (loss) from discontinued operations, net of tax	 	 	—	 	 	 	0.02	 	 	 	0.02	 	 	 	0.02	 	 	 	(0.04	)	

Net income (loss)	 	$	0.48	 	 	 	0.89	 	 	 	(0.32	)	 	 	(0.05	)	 	 	0.28	 	

Weighted average shares outstanding	 	 	49,176,436	 	 	 	49,095,153	 	 	 	49,018,091	 	 	 	49,109,340	 	 	 	49,810,552	 	

 
Condensed Consolidated Balance Sheets
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As of	 	 	As of	 	 	As of	 	
 	 	September 30,	 	 	December 31,	 	 	September 30,	 	
 	 	2008	 	 	2007	 	 	2007	 	
 	 	(unaudited)	 	 	 	 	 	(unaudited)	 	
 	 	(dollars in thousands)	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Student loans receivable, net	 	$	26,376,269	 	 	 	26,736,122	 	 	 	26,596,123	 	
Cash, cash equivalents, and investments	 	 	1,454,881	 	 	 	1,120,838	 	 	 	1,451,772	 	
Goodwill	 	 	175,178	 	 	 	164,695	 	 	 	164,695	 	
Intangible assets, net	 	 	83,565	 	 	 	112,830	 	 	 	119,242	 	
Other assets	 	 	880,122	 	 	 	1,028,298	 	 	 	1,010,632	 	
 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	28,970,015	 	 	 	29,162,783	 	 	 	29,342,464	 	

Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	28,004,835	 	 	 	28,115,829	 	 	 	28,234,147	 	
Other liabilities	 	 	355,450	 	 	 	438,075	 	 	 	516,424	 	
 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	28,360,285	 	 	 	28,553,904	 	 	 	28,750,571	 	

Shareholders’ equity	 	 	609,730	 	 	 	608,879	 	 	 	591,893	 	

Total liabilities and shareholders’ equity	 	$	28,970,015	 	 	 	29,162,783	 	 	 	29,342,464	 	

   

 

This press release contains forward-looking statements and information based on management’s current expectations as of the date of this document. When used in this press release, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and “will” 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, the risks and uncertainties set forth in the “Risk Factors” section of the company’s Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent Quarterly Reports on Form 10-Q, changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and costs of yields on student loans under the FFEL Program or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the company. In addition, a larger than expected increase in third party consolidations of the company’s FFELP loans could materially adversely affect the company’s results of operations. 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; the company’s ability to maintain its credit facilities or obtain new facilities; the ability of lenders under the company’s credit facilities to fulfill their lending commitments under those facilities; changes to the terms and conditions of the liquidity programs offered by the Department of Education; 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; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; the uncertain nature of the expected benefits from acquisitions and the ability to successfully integrate operations; and the uncertain nature of estimated expenses that may be incurred and cost savings that may result from the company’s strategic restructuring initiatives. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this press release. Additionally, financial projections may not prove to be accurate and may vary materially. Although the company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

Exhibit 99.2
For Release: 10/29/08
Media Contact: Ben Kiser, 402.458.3024
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the third quarter 2008
This earnings supplement contains forward-looking statements and information based on management’s current expectations as of the date of this document. When used in this press release, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and “will” 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, the risks and uncertainties set forth in the “Risk Factors” section of the company’s Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent Quarterly Reports on Form 10-Q, changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and costs of yields on student loans under the FFEL Program or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the company. In addition, a larger than expected increase in third party consolidations of the company’s FFELP loans could materially adversely affect the company’s results of operations. 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; the company’s ability to maintain its credit facilities or obtain new facilities; the ability of lenders under the company’s credit facilities to fulfill their lending commitments under those facilities; changes to the terms and conditions of the liquidity programs offered by the Department of Education; 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; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; the uncertain nature of the expected benefits from acquisitions and the ability to successfully integrate operations; and the uncertain nature of estimated expenses that may be incurred and cost savings that may result from the company’s strategic restructuring initiatives. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this press release. Additionally, financial projections may not prove to be accurate and may vary materially. Although the company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

 

Condensed Consolidated Statements of Operations
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Nine months ended	 	
 	 	September 30,	 	 	June 30,	 	 	September 30,	 	 	September 30,	 	 	September 30,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	
 	 	(dollars in thousands, except share data)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	304,226	 	 	 	297,601	 	 	 	460,103	 	 	 	938,399	 	 	 	1,317,936	 	
Variable-rate floor income	 	 	1,580	 	 	 	21,927	 	 	 	597	 	 	 	42,325	 	 	 	597	 	
Amortization of loan premiums and deferred origination costs	 	 	(21,338	)	 	 	(22,842	)	 	 	(23,449	)	 	 	(69,584	)	 	 	(67,142	)	
Investment interest	 	 	9,118	 	 	 	9,116	 	 	 	21,023	 	 	 	29,914	 	 	 	61,231	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	 	293,586	 	 	 	305,802	 	 	 	458,274	 	 	 	941,054	 	 	 	1,312,622	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	234,016	 	 	 	232,464	 	 	 	393,875	 	 	 	791,621	 	 	 	1,112,263	 	

Net interest income	 	 	59,570	 	 	 	73,338	 	 	 	64,399	 	 	 	149,433	 	 	 	200,359	 	
Less provision for loan losses	 	 	7,000	 	 	 	6,000	 	 	 	18,340	 	 	 	18,000	 	 	 	23,628	 	

Net interest income after provision for loan losses	 	 	52,570	 	 	 	67,338	 	 	 	46,059	 	 	 	131,433	 	 	 	176,731	 	

Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	30,633	 	 	 	24,904	 	 	 	33,040	 	 	 	81,650	 	 	 	95,116	 	
Other fee-based income	 	 	45,887	 	 	 	40,817	 	 	 	38,025	 	 	 	132,617	 	 	 	116,316	 	
Software services income	 	 	4,217	 	 	 	4,896	 	 	 	5,426	 	 	 	15,865	 	 	 	17,022	 	
Other income	 	 	1,242	 	 	 	1,646	 	 	 	7,028	 	 	 	4,298	 	 	 	14,048	 	
Gain (loss) on sale of loans	 	 	—	 	 	 	48	 	 	 	492	 	 	 	(47,426	)	 	 	3,288	 	
Derivative market value, foreign currency, and put option adjustments	 	 	6,085	 	 	 	15,755	 	 	 	18,449	 	 	 	(35,521	)	 	 	11,866	 	
Derivative settlements, net	 	 	789	 	 	 	4,437	 	 	 	(2,336	)	 	 	45,989	 	 	 	7,100	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	 	88,853	 	 	 	92,503	 	 	 	100,124	 	 	 	197,472	 	 	 	264,756	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	44,739	 	 	 	43,549	 	 	 	60,545	 	 	 	142,131	 	 	 	182,010	 	
Other expenses	 	 	52,332	 	 	 	47,812	 	 	 	52,511	 	 	 	149,744	 	 	 	159,792	 	
Amortization of intangible assets	 	 	6,598	 	 	 	6,561	 	 	 	10,885	 	 	 	19,719	 	 	 	24,014	 	
Impairment expense	 	 	—	 	 	 	—	 	 	 	49,504	 	 	 	18,834	 	 	 	49,504	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	103,669	 	 	 	97,922	 	 	 	173,445	 	 	 	330,428	 	 	 	415,320	 	

Income (loss) before income taxes	 	 	37,754	 	 	 	61,919	 	 	 	(27,262	)	 	 	(1,523	)	 	 	26,167	 	
Income tax expense (benefit)	 	 	13,969	 	 	 	19,195	 	 	 	(10,664	)	 	 	1,793	 	 	 	9,906	 	

Income (loss) from continuing operations	 	 	23,785	 	 	 	42,724	 	 	 	(16,598	)	 	 	(3,316	)	 	 	16,261	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from discontinued operations, net of tax	 	 	—	 	 	 	981	 	 	 	909	 	 	 	981	 	 	 	(2,416	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	23,785	 	 	 	43,705	 	 	 	(15,689	)	 	 	(2,335	)	 	 	13,845	 	

Earnings (loss) per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.48	 	 	 	0.87	 	 	 	(0.34	)	 	 	(0.07	)	 	 	0.32	 	
Income (loss) from discontinued operations, net of tax	 	 	—	 	 	 	0.02	 	 	 	0.02	 	 	 	0.02	 	 	 	(0.04	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	0.48	 	 	 	0.89	 	 	 	(0.32	)	 	 	(0.05	)	 	 	0.28	 	

Weighted average shares outstanding	 	 	49,176,436	 	 	 	49,095,153	 	 	 	49,018,091	 	 	 	49,109,340	 	 	 	49,810,552	 	
 
 2 

 

Condensed Consolidated Balance Sheets and Financial Data
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As of	 	 	As of	 	 	As of	 	
 	 	September 30,	 	 	December 31,	 	 	September 30,	 	
 	 	2008	 	 	2007	 	 	2007	 	
 	 	(unaudited)	 	 	 	 	 	(unaudited)	 	
 	 	(dollars in thousands)	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Student loans receivable, net	 	$	26,376,269	 	 	 	26,736,122	 	 	 	26,596,123	 	
Cash, cash equivalents, and investments	 	 	1,454,881	 	 	 	1,120,838	 	 	 	1,451,772	 	
Goodwill	 	 	175,178	 	 	 	164,695	 	 	 	164,695	 	
Intangible assets, net	 	 	83,565	 	 	 	112,830	 	 	 	119,242	 	
Other assets	 	 	880,122	 	 	 	1,028,298	 	 	 	1,010,632	 	
 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	28,970,015	 	 	 	29,162,783	 	 	 	29,342,464	 	

Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	28,004,835	 	 	 	28,115,829	 	 	 	28,234,147	 	
Other liabilities	 	 	355,450	 	 	 	438,075	 	 	 	516,424	 	
 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	28,360,285	 	 	 	28,553,904	 	 	 	28,750,571	 	

Shareholders’ equity	 	 	609,730	 	 	 	608,879	 	 	 	591,893	 	

Total liabilities and shareholders’ equity	 	$	28,970,015	 	 	 	29,162,783	 	 	 	29,342,464	 	
 	 	 	 	 	 	 	 	 	 	
Non-GAAP Performance Measures
In accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company prepares financial statements in accordance with generally accepted accounting principles (“GAAP”). In addition to evaluating the Company’s GAAP-based financial information, management also evaluates the Company on a non-GAAP performance measure referred to as base net income. While base net income is not a substitute for reported results under GAAP, the Company provides base net income as additional information regarding its financial results.
Base net income is the primary financial performance measure used by management to develop financial plans, allocate resources, track results, evaluate performance, establish corporate performance targets, and determine incentive compensation. The Company’s board of directors utilizes base net income to set performance targets and evaluate management’s performance. The Company also believes analysts, rating agencies, and creditors use base net income in their evaluation of the Company’s results of operations. While base net income is not a substitute for reported results under GAAP, the Company utilizes base net income in operating its business because base net income permits management to make meaningful period-to-period comparisons by eliminating the temporary volatility in the Company’s performance that arises from certain items that are primarily affected by factors beyond the control of management. Management believes base net income provides additional insight into the financial performance of the core business activities of the Company’s operations.
 
 3 

 

The following table provides a reconciliation of GAAP net income (loss) to base net income (loss).
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Nine months ended	 	
 	 	September 30,	 	 	June 30,	 	 	September 30,	 	 	September 30,	 	 	September 30,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(dollars in thousands, except share data)	 	
 		
GAAP net income (loss)	 	$	23,785	 	 	 	43,705	 	 	 	(15,689	)	 	 	(2,335	)	 	 	13,845	 	
Base adjustments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	 	(6,085	)	 	 	(15,755	)	 	 	(18,449	)	 	 	35,987	 	 	 	(11,866	)	
Amortization of intangible assets	 	 	6,598	 	 	 	6,561	 	 	 	10,885	 	 	 	19,719	 	 	 	24,014	 	
Compensation related to business combinations	 	 	477	 	 	 	750	 	 	 	503	 	 	 	2,523	 	 	 	1,456	 	
Variable-rate floor income, net of settlements on derivatives	 	 	(1,580	)	 	 	(14,726	)	 	 	(597	)	 	 	(32,360	)	 	 	(597	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total base adjustments before income taxes	 	 	(590	)	 	 	(23,170	)	 	 	(7,658	)	 	 	25,869	 	 	 	13,007	 	
Net tax effect (a)	 	 	218	 	 	 	7,183	 	 	 	2,971	 	 	 	(7,984	)	 	 	(4,128	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total base adjustments	 	 	(372	)	 	 	(15,987	)	 	 	(4,687	)	 	 	17,885	 	 	 	8,879	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income (loss)	 	 	23,413	 	 	 	27,718	 	 	 	(20,376	)	 	 	15,550	 	 	 	22,724	 	
Discontinued operations, net of tax	 	 	—	 	 	 	(981	)	 	 	(909	)	 	 	(981	)	 	 	2,416	 	

Base net income (loss), excluding discontinued operations	 	$	23,413	 	 	 	26,737	 	 	 	(21,285	)	 	 	14,569	 	 	 	25,140	 	

Earnings (loss) per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
GAAP net income (loss)	 	$	0.48	 	 	 	0.89	 	 	 	(0.32	)	 	 	(0.05	)	 	 	0.28	 	
Total base adjustments	 	 	(0.01	)	 	 	(0.33	)	 	 	(0.10	)	 	 	0.36	 	 	 	0.18	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income (loss)	 	 	0.47	 	 	 	0.56	 	 	 	(0.42	)	 	 	0.31	 	 	 	0.46	 	
Discontinued operations, net of tax	 	 	—	 	 	 	(0.02	)	 	 	(0.02	)	 	 	(0.02	)	 	 	0.04	 	

Base net income (loss), excluding discontinued operations	 	$	0.47	 	 	 	0.54	 	 	 	(0.44	)	 	 	0.29	 	 	 	0.50	 	

(a)	 	Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable quarterly period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods was not tax effected as this is not deductible for income tax purposes.	
Limitations of Base Net Income
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons discussed above, management believes that base net income is an important additional tool for providing a more complete understanding of the Company’s results of operations. Nevertheless, base net income is subject to certain general and specific limitations that investors should carefully consider. For example, unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The Company’s base net income is not a defined term within GAAP and may not be comparable to similarly titled measures reported by other companies. Investors, therefore, may not be able to compare the Company’s performance with that of other companies based upon base net income. Base net income results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely monitored and used by the Company’s management and board of directors to assess performance and information which the Company believes is important to analysts, rating agencies, and creditors.
 
 4 

 

Other limitations of base net income arise from the specific adjustments that management makes to GAAP results to derive base net income results. These differences are described below.
Differences between GAAP and Base Net Income
Management’s financial planning and evaluation of operating results does not take into account the following items because their volatility and/or inherent uncertainty affect the period-to-period comparability of the Company’s results of operations. A more detailed discussion of the differences between GAAP and base net income follows.
Derivative market value, foreign currency, and put option adjustments : “ Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company’s risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), requires that changes in fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria, as specified by SFAS No. 133, are met. The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative instruments primarily used by the Company include interest rate swaps, basis swaps, and cross-currency interest rate swaps. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective. However, the Company does not qualify its derivatives for “hedge treatment” as defined by SFAS No. 133, and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. The Company believes these point-in-time estimates of asset and liability values that are subject to interest rate fluctuations make it difficult to evaluate the ongoing results of operations against its business plan and affect the period-to-period comparability of the results of operations. Included in “base net income” are the economic effects of the Company’s derivative instruments, which includes any cash paid or received being recognized as an expense or revenue upon actual derivative settlements. These settlements are included in “Derivative settlements, net” on the attached consolidated statements of operations.
“Base net income” excludes the foreign currency transaction gains or losses caused by the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars. In connection with the issuance of the Euro-denominated bonds, the Company has entered into cross-currency interest rate swaps. Under the terms of these agreements, the principal payments on the Euro-denominated notes will effectively be paid at the exchange rate in effect at the issuance date of the bonds. The cross-currency interest rate swaps also convert the floating rate paid on the Euro-denominated bonds (EURIBOR index) to an index based on LIBOR. Included in “base net income” are the economic effects of any cash paid or received being recognized as an expense or revenue upon actual settlements of the cross-currency interest rate swaps. These settlements are included in “Derivative settlements, net” on the attached consolidated statements of operations. However, the gains or losses caused by the re-measurement of the Euro-denominated bonds to U.S. dollars and the change in market value of the cross-currency interest rate swaps are excluded from “base net income” as the Company believes the point-in-time estimates of value that are subject to currency rate fluctuations related to these financial instruments make it difficult to evaluate the ongoing results of operations against the Company’s business plan and affect the period-to-period comparability of the results of operations. The re-measurement of the Euro-denominated bonds correlates with the change in fair value of the cross-currency interest rate swaps. However, the Company will experience unrealized gains or losses related to the cross-currency interest rate swaps if the two underlying indices (and related forward curve) do not move in parallel.
 
 5 

 

“Base net income” also excludes the change in fair value of put options issued by the Company for certain business acquisitions. The put options are valued by the Company each reporting period using a Black-Scholes pricing model. Therefore, the fair value of these options is primarily affected by the strike price and term of the underlying option, the Company’s current stock price, and the dividend yield and volatility of the Company’s stock. The Company believes these point-in-time estimates of value that are subject to fluctuations make it difficult to evaluate the ongoing results of operations against the Company’s business plans and affects the period-to-period comparability of the results of operations.
The gains and/or losses included in “Derivative market value, foreign currency, and put option adjustments” on the attached consolidated statements of operations are primarily caused by interest rate and currency volatility, changes in the value of put options based on the inputs used in the Black-Scholes pricing model, as well as the volume and terms of put options and of derivatives not receiving hedge treatment. “Base net income” excludes these unrealized gains and losses and isolates the effect of interest rate, currency, and put option volatility on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the put options and the derivative instruments (but not the underlying hedged item) tend to show more volatility in the short term.
Amortization of intangible assets : “Base net income” excludes the amortization of acquired intangibles, which arises primarily from the acquisition of definite life intangible assets in connection with the Company’s acquisitions, since the Company feels that such charges do not drive the Company’s operating performance on a long-term basis and can affect the period-to-period comparability of the results of operations.
Compensation related to business combinations : The Company has structured certain business combinations in which the consideration paid has been dependent on the sellers’ continued employment with the Company. As such, the value of the consideration paid is recognized as compensation expense by the Company over the term of the applicable employment agreement. “Base net income” excludes this expense because the Company believes such charges do not drive its operating performance on a long-term basis and can affect the period-to-period comparability of the results of operations. If the Company did not enter into the employment agreements in connection with the acquisition, the amount paid to these former shareholders of the acquired entity would have been recorded by the Company as additional consideration of the acquired entity, thus, not having an effect on the Company’s results of operations.
Variable-rate floor income, net of settlements on derivatives: Loans that reset annually on July 1 can generate excess spread income compared with the rate based on the special allowance payment formula in declining interest rate environments. The Company refers to this additional income as variable-rate floor income. The Company excludes variable-rate floor income, net of settlements paid on derivatives used to hedge student loan assets earning variable-rate floor income, from its “base net income” since the timing and amount of variable-rate floor income (if any) is uncertain, it has been eliminated by legislation for all loans originated on and after April 1, 2006, and it is in excess of expected spreads. In addition, because variable-rate floor income is subject to the underlying rate for the subject loans being reset annually on July 1, it is a factor beyond the Company’s control which can affect the period-to-period comparability of results of operations.
 
 6 

 

Discontinued operations : In May 2007, the Company sold EDULINX. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The Company presents “base net income” excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company.
Impact of Legislative and Restructuring Charges and Loss on Sale of Loans to Base Net Income
Legislative Charges
On September 27, 2007, the President signed into law the College Cost Reduction and Access Act of 2007 (the “Act”). This legislation contains provisions with significant implications for participants in the FFEL Program by cutting funding to the FFEL Program by $20 billion over the next five years as estimated by the Congressional Budget Office. Upon passage of the Act, management evaluated the carrying amount of goodwill and certain intangible assets. Based on the legislative changes and the student loan business model modifications the Company implemented as a result of the legislative changes, the Company recorded an impairment charge of $39.4 million ($24.5 million after tax) during the third quarter of 2007.
During the three month period ended September 30, 2007, the Company also recorded an expense of $15.7 million ($9.7 million after tax) to increase the Company’s allowance for loan losses related to the increase in risk share as a result of the elimination of the Exceptional Performer program.
Restructuring Charges
Legislative
On September 6, 2007, the Company announced a strategic initiative to create efficiencies and lower costs in advance of the anticipated passage of federal legislation impacting the student loan programs in which the Company participates.
During the three month period ended September 30, 2007, the Company recorded charges of $15.0 million ($9.3 million after tax) related to this restructuring.
Capital Markets
The Company has significant financing needs that it meets through the capital markets, including the debt and secondary markets. Since August 2007, these markets have experienced unprecedented disruptions, which are having an adverse impact on the Company’s earnings and financial condition. 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 the ongoing disruption in the credit markets.
During 2008, the Company recorded approximately $26 million (approximately $18 million after tax) related to this restructuring.
 
 7 

 

Loss on Sale of Loans
On March 31, 2008, the Company sold $857.8 million (par value) of federally insured student loans resulting in the recognition of a loss of $30.4 million. In addition, on April 8, 2008, the Company sold $428.6 million (par value) of federally insured student loans. The portfolio of student loans sold on April 8, 2008 was presented as “held for sale” on the March 31, 2008 consolidated balance sheet and was valued at the lower of cost or fair value. As of March 31, 2008, the fair value of this portfolio was $423.7 million. The Company recognized a loss of $17.1 million during the three month period ended March 31, 2008 as a result of marking these loans to fair value. Combined, the Company recorded a loss of $47.5 million ($32.8 million after tax) on the sale of these loans. The portfolios sold on March 31, 2008 and April 8, 2008 were sold for a purchase price of approximately 98% of the par value of such loans. As a result of the disruptions in the debt and secondary markets, the Company sold these loan portfolios in order to reduce the amount of student loans remaining under the Company’s multi-year committed financing facility for FFELP loans which reduced the Company’s exposure related to certain equity support provisions included in this facility.
The following table summarizes the impact of the legislative and restructuring charges and the loss on the sale of loans recognized by the Company to the Company’s non-GAAP performance measure referred to as base net income (see “Non-GAAP Performance Measures.”)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Nine months ended	 	
 	 	September 30,	 	 	June 30,	 	 	September 30,	 	 	September 30,	 	 	September 30,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(dollars in thousands, except share data)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income (loss), excluding discontinued operations	 	$	23,413	 	 	 	26,737	 	 	 	(21,285	)	 	 	14,569	 	 	 	25,140	 	
Legislative charges, net of tax	 	 	—	 	 	 	—	 	 	 	34,197	 	 	 	—	 	 	 	34,197	 	
Restructuring charges, net of tax	 	 	(3	)	 	 	(244	)	 	 	9,310	 	 	 	17,907	 	 	 	9,310	 	
Loss on sale of loans, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	32,770	 	 	 	—	 	

Base net income (loss), excluding discontinued operations, legislative and restructuring charges (net of tax), and loss on sale of loans (net of tax)	 	$	23,410	 	 	 	26,493	 	 	 	22,222	 	 	 	65,246	 	 	 	68,647	 	

Earnings (loss) per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income (loss), excluding discontinued operations	 	$	0.47	 	 	 	0.54	 	 	 	(0.44	)	 	 	0.29	 	 	 	0.50	 	
Legislative charges, net of tax	 	 	—	 	 	 	—	 	 	 	0.70	 	 	 	—	 	 	 	0.69	 	
Restructuring charges, net of tax	 	 	—	 	 	 	—	 	 	 	0.19	 	 	 	0.37	 	 	 	0.19	 	
Loss on sale of loans, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	0.67	 	 	 	—	 	

Base net income (loss), excluding discontinued operations, legislative and restructuring charges (net of tax), and loss on sale of loans (net of tax)	 	$	0.47	 	 	 	0.54	 	 	 	0.45	 	 	 	1.33	 	 	 	1.38	 	

 8 

 

Operating Segments
The Company has five operating segments as defined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of Enterprise and Related Information (“SFAS No. 131”) as follows: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services and List Management, Software and Technical Services, and Asset Generation and Management. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. The accounting policies of the Company’s operating segments are the same as those described in the summary of significant accounting policies included in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Intersegment revenues are charged by a segment to another segment that provides the product or service. Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.
The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources. Management, including the Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability. As discussed further, management measures the profitability of the Company’s operating segments based on base net income. Accordingly, information regarding the Company’s operating segments is provided based on base net income. The Company’s base net income is not a defined term within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting.
In May 2007, the Company sold EDULINX, a Canadian student loan service provider and subsidiary of the Company. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The operating results of EDULINX were included in the Student Loan and Guaranty Servicing operating segment. The Company presents base net income excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company. Therefore, the results of operations for the Student Loan and Guaranty Servicing segment exclude the operating results of EDULINX for all periods presented.
Fee-based Operating Segments
Historically, the Company generated the majority of its revenue from net interest income earned in its Asset Generation and Management operating segment. In recent years, the Company has made several acquisitions that have expanded the Company’s products and services and has diversified its revenue — primarily from fee-based businesses. The Company currently offers a broad range of pre-college, in-college, and post-college products and services to students, families, schools, and financial institutions. These products and services help students and families plan and pay for their education and students plan their careers. The Company’s products and services are designed to simplify the education planning and financing process and are focused on providing value to students, families, and schools throughout the education life cycle. The Company continues to diversify its sources of revenue, including those generated from businesses that are not dependent upon government programs, reducing legislative and political risk.
 
 9 

 

Student Loan and Guaranty Servicing
The Student Loan and Guaranty Servicing segment provides for the servicing of the Company’s student loan portfolios and the portfolios of third parties and servicing provided to guaranty agencies. The servicing and business process outsourcing activities include loan origination activities, application processing, borrower updates, payment processing, due diligence procedures, and claim processing. These activities are performed internally for the Company’s portfolio in addition to generating fee revenue when performed for third-party clients. The guaranty servicing, servicing support, and business process outsourcing activities include providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services to guaranty agencies. The following are the primary product and service offerings the Company offers as part of its Student Loan and Guaranty Servicing segment:

 	•	 	Origination and servicing of FFELP loans;	
 		
 	•	 	Servicing of non-federally insured student loans; and	
 		
 	•	 	Servicing and support outsourcing for guaranty agencies.	
Tuition Payment Processing and Campus Commerce
The Tuition Payment Processing and Campus Commerce segment provides products and services to help institutions and education seeking families manage the payment of education costs during the pre-college and college stages of the education life cycle. The Company provides actively managed tuition payment solutions, online payment processing, detailed information reporting, financial needs analysis, and data integration services to K-12 and higher educational institutions, families, and students. In addition, the Company provides customer-focused electronic transactions, information sharing, and account and bill presentment to colleges and universities.
Enrollment Services and List Management
The Enrollment Services and List Management segment provides a wide range of direct marketing products and services to help schools and businesses reach the middle school, high school, college bound high school, college, and young adult market places. In addition, this segment offers products and services that are focused on helping (i) students plan and prepare for life after high school and (ii) colleges recruit and retain students.
Software and Technical Services
The Software and Technical Services segment provides information technology products and full-service technical consulting, with core areas of business in educational loan software solutions, business intelligence, technical consulting services, and Enterprise Content Management (ECM) solutions.
Asset Generation and Management Operating Segments
The Asset Generation and Management segment includes the acquisition, management, and ownership of the Company’s student loan assets. Revenues are primarily generated from the Company’s earnings from the spread, referred to as the Company’s student loan spread, between the yield received on the student loan portfolio and the costs associated with originating, acquiring, financing, servicing, and managing the student loan portfolio. The Company generates student loan assets through direct origination or through acquisitions. The student loan assets are held in a series of education lending subsidiaries designed specifically for this purpose. In addition to the student loan portfolio, all costs and activity associated with the generation of assets, funding of those assets, and maintenance of the debt transactions are included in this segment. This includes derivative activity and the related derivative market value and foreign currency adjustments. The Company is also able to leverage its capital market expertise by providing investment advisory services and other related services to third parties through a licensed broker dealer subsidiary. Revenues and expenses for those functions are also included in the Asset Generation and Management segment.
 
 10 

 

Segment Operating Results
The tables below reflect base net income for each of the Company’s operating segments. Reconciliation of the segment totals to the Company’s operating results in accordance with GAAP is also included in the tables below.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	 	Three months ended September 30, 2008	 		
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	 	Student	 	 	Tuition	 	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	“Base net	 	 	 	 		
 	 	Loan	 	 	Payment	 	 	Services	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income”	 	 	 	 		
 	 	and	 	 	Processing	 	 	and	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 		
 	 	Guaranty	 	 	and Campus	 	 	List	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 		
 	 	Servicing	 	 	Commerce	 	 	Management	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 		
 	 	(dollars in thousands)	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Total interest income	 	$	304	 	 	 	396	 	 	 	6	 	 	 	—	 	 	 	706	 	 	 	290,039	 	 	 	2,010	 	 	 	(749	)	 	 	1,580	 	 	 	293,586	 		
Interest expense	 	 	—	 	 	 	—	 	 	 	1	 	 	 	—	 	 	 	1	 	 	 	224,272	 	 	 	10,492	 	 	 	(749	)	 	 	—	 	 	 	234,016	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net interest income (loss)	 	 	304	 	 	 	396	 	 	 	5	 	 	 	—	 	 	 	705	 	 	 	65,767	 	 	 	(8,482	)	 	 	—	 	 	 	1,580	 	 	 	59,570	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7,000	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7,000	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net interest income (loss) after provision for loan losses	 	 	304	 	 	 	396	 	 	 	5	 	 	 	—	 	 	 	705	 	 	 	58,767	 	 	 	(8,482	)	 	 	—	 	 	 	1,580	 	 	 	52,570	 		

Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Loan and guaranty servicing income	 	 	30,769	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	30,769	 	 	 	(136	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	30,633	 		
Other fee-based income	 	 	—	 	 	 	11,861	 	 	 	29,859	 	 	 	—	 	 	 	41,720	 	 	 	4,167	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	45,887	 		
Software services income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,217	 	 	 	4,217	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,217	 		
Other income	 	 	6	 	 	 	1	 	 	 	—	 	 	 	—	 	 	 	7	 	 	 	(88	)	 	 	1,323	 	 	 	—	 	 	 	—	 	 	 	1,242	 		
Gain on sale of loans	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 		
Intersegment revenue	 	 	18,402	 	 	 	58	 	 	 	2	 	 	 	1,660	 	 	 	20,122	 	 	 	—	 	 	 	15,671	 	 	 	(35,793	)	 	 	—	 	 	 	—	 		
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	6,085	 	 	 	6,085	 		
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	789	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	789	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Total other income (expense)	 	 	49,177	 	 	 	11,920	 	 	 	29,861	 	 	 	5,877	 	 	 	96,835	 	 	 	4,732	 	 	 	16,994	 	 	 	(35,793	)	 	 	6,085	 	 	 	88,853	 		

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Salaries and benefits	 	 	13,876	 	 	 	6,236	 	 	 	5,805	 	 	 	4,161	 	 	 	30,078	 	 	 	1,979	 	 	 	14,162	 	 	 	(1,957	)	 	 	477	 	 	 	44,739	 		
Restructure expense — severance and contract termination costs	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(23	)	 	 	(23	)	 	 	1	 	 	 	17	 	 	 	5	 	 	 	—	 	 	 	—	 		
Other expenses	 	 	10,632	 	 	 	2,132	 	 	 	20,416	 	 	 	568	 	 	 	33,748	 	 	 	5,354	 	 	 	13,477	 	 	 	(247	)	 	 	6,598	 	 	 	58,930	 		
Intersegment expenses	 	 	11,940	 	 	 	288	 	 	 	1,509	 	 	 	826	 	 	 	14,563	 	 	 	18,200	 	 	 	831	 	 	 	(33,594	)	 	 	—	 	 	 	—	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Total operating expenses	 	 	36,448	 	 	 	8,656	 	 	 	27,730	 	 	 	5,532	 	 	 	78,366	 	 	 	25,534	 	 	 	28,487	 	 	 	(35,793	)	 	 	7,075	 	 	 	103,669	 		

Income (loss) before income taxes	 	 	13,033	 	 	 	3,660	 	 	 	2,136	 	 	 	345	 	 	 	19,174	 	 	 	37,965	 	 	 	(19,975	)	 	 	—	 	 	 	590	 	 	 	37,754	 		
Income tax expense (benefit) (a)	 	 	4,823	 	 	 	1,354	 	 	 	790	 	 	 	128	 	 	 	7,095	 	 	 	14,047	 	 	 	(7,391	)	 	 	—	 	 	 	218	 	 	 	13,969	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net income (loss) from continuing operations	 	 	8,210	 	 	 	2,306	 	 	 	1,346	 	 	 	217	 	 	 	12,079	 	 	 	23,918	 	 	 	(12,584	)	 	 	—	 	 	 	372	 	 	 	23,785	 		
Income from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net income (loss)	 	$	8,210	 	 	 	2,306	 	 	 	1,346	 	 	 	217	 	 	 	12,079	 	 	 	23,918	 	 	 	(12,584	)	 	 	—	 	 	 	372	 	 	 	23,785	 		

(a) Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for each operating segment.	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Three months ended September 30, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Before Tax Operating Margin — excluding restructure expense	 	 	26.3	%	 	 	29.7	%	 	 	7.2	%	 	 	5.5	%	 	 	19.6	%	 	 	59.8	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Three months ended September 30, 2007:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Before Tax Operating Margin — excluding restructure expense, impairment expense, and provision for loan losses related to the loss of Exceptional Performer	 	 	42.9	%	 	 	36.3	%	 	 	7.3	%	 	 	26.7	%	 	 	32.3	%	 	 	49.2	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 
 11 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended September 30, 2007	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	“Base net	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	Services	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income”	 	 	 	 	
 	 	and	 	 	Processing	 	 	and	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 	
 	 	Guaranty	 	 	and Campus	 	 	List	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Management	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 	
 	 	(dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	1,182	 	 	 	990	 	 	 	110	 	 	 	—	 	 	 	2,282	 	 	 	454,053	 	 	 	1,875	 	 	 	(533	)	 	 	597	 	 	 	458,274	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	1	 	 	 	—	 	 	 	1	 	 	 	384,793	 	 	 	9,614	 	 	 	(533	)	 	 	—	 	 	 	393,875	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss)	 	 	1,182	 	 	 	990	 	 	 	109	 	 	 	—	 	 	 	2,281	 	 	 	69,260	 	 	 	(7,739	)	 	 	—	 	 	 	597	 	 	 	64,399	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,340	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,340	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss) after provision for loan losses	 	 	1,182	 	 	 	990	 	 	 	109	 	 	 	—	 	 	 	2,281	 	 	 	50,920	 	 	 	(7,739	)	 	 	—	 	 	 	597	 	 	 	46,059	 	

Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	32,870	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	32,870	 	 	 	170	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	33,040	 	
Other fee-based income	 	 	—	 	 	 	10,316	 	 	 	23,471	 	 	 	—	 	 	 	33,787	 	 	 	3,526	 	 	 	712	 	 	 	—	 	 	 	—	 	 	 	38,025	 	
Software services income	 	 	—	 	 	 	—	 	 	 	169	 	 	 	5,257	 	 	 	5,426	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,426	 	
Other income	 	 	—	 	 	 	31	 	 	 	—	 	 	 	—	 	 	 	31	 	 	 	1,673	 	 	 	5,816	 	 	 	—	 	 	 	—	 	 	 	7,520	 	
Gain on the sale of loans	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Intersegment revenue	 	 	22,237	 	 	 	168	 	 	 	(37	)	 	 	4,805	 	 	 	27,173	 	 	 	—	 	 	 	1,492	 	 	 	(28,665	)	 	 	—	 	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,449	 	 	 	18,449	 	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(4,065	)	 	 	1,729	 	 	 	—	 	 	 	—	 	 	 	(2,336	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income (expense)	 	 	55,107	 	 	 	10,515	 	 	 	23,603	 	 	 	10,062	 	 	 	99,287	 	 	 	1,304	 	 	 	9,749	 	 	 	(28,665	)	 	 	18,449	 	 	 	100,124	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	21,961	 	 	 	5,312	 	 	 	8,095	 	 	 	6,537	 	 	 	41,905	 	 	 	6,154	 	 	 	9,691	 	 	 	2,292	 	 	 	503	 	 	 	60,545	 	
Restructure expense — severance and contract termination costs	 	 	1,231	 	 	 	—	 	 	 	737	 	 	 	58	 	 	 	2,026	 	 	 	1,921	 	 	 	1,009	 	 	 	(4,956	)	 	 	—	 	 	 	—	 	
Impairment of assets	 	 	—	 	 	 	—	 	 	 	11,401	 	 	 	—	 	 	 	11,401	 	 	 	28,291	 	 	 	9,812	 	 	 	—	 	 	 	—	 	 	 	49,504	 	
Other expenses	 	 	8,565	 	 	 	2,029	 	 	 	13,809	 	 	 	689	 	 	 	25,092	 	 	 	7,429	 	 	 	19,822	 	 	 	168	 	 	 	10,885	 	 	 	63,396	 	
Intersegment expenses	 	 	1,613	 	 	 	(15	)	 	 	67	 	 	 	147	 	 	 	1,812	 	 	 	20,924	 	 	 	3,433	 	 	 	(26,169	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	33,370	 	 	 	7,326	 	 	 	34,109	 	 	 	7,431	 	 	 	82,236	 	 	 	64,719	 	 	 	43,767	 	 	 	(28,665	)	 	 	11,388	 	 	 	173,445	 	

Income (loss) before income taxes	 	 	22,919	 	 	 	4,179	 	 	 	(10,397	)	 	 	2,631	 	 	 	19,332	 	 	 	(12,495	)	 	 	(41,757	)	 	 	—	 	 	 	7,658	 	 	 	(27,262	)	
Income tax expense (benefit) (a)	 	 	8,709	 	 	 	1,588	 	 	 	(3,951	)	 	 	1,000	 	 	 	7,346	 	 	 	(4,748	)	 	 	(16,233	)	 	 	—	 	 	 	2,971	 	 	 	(10,664	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) from continuing operations	 	 	14,210	 	 	 	2,591	 	 	 	(6,446	)	 	 	1,631	 	 	 	11,986	 	 	 	(7,747	)	 	 	(25,524	)	 	 	—	 	 	 	4,687	 	 	 	(16,598	)	
Loss from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	909	 	 	 	909	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	14,210	 	 	 	2,591	 	 	 	(6,446	)	 	 	1,631	 	 	 	11,986	 	 	 	(7,747	)	 	 	(25,524	)	 	 	—	 	 	 	5,596	 	 	 	(15,689	)	

(a)	 	Income taxes are based on 38% of net income before tax for the individual operating segment.	
 
 12 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
  	 	Nine months ended September 30, 2008	 		
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	 	Student	 	 	Tuition	 	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	“Base net	 	 	 	 		
 	 	Loan	 	 	Payment	 	 	Services	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income”	 	 	 	 		
 	 	and	 	 	Processing	 	 	and	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 		
 	 	Guaranty	 	 	and Campus	 	 	List	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 		
 	 	Servicing	 	 	Commerce	 	 	Management	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 		
 	 	(dollars in thousands)	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Total interest income	 	$	1,160	 	 	 	1,471	 	 	 	16	 	 	 	—	 	 	 	2,647	 	 	 	892,690	 	 	 	4,781	 	 	 	(1,389	)	 	 	42,325	 	 	 	941,054	 		
Interest expense	 	 	—	 	 	 	—	 	 	 	3	 	 	 	—	 	 	 	3	 	 	 	762,689	 	 	 	30,318	 	 	 	(1,389	)	 	 	—	 	 	 	791,621	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net interest income (loss)	 	 	1,160	 	 	 	1,471	 	 	 	13	 	 	 	—	 	 	 	2,644	 	 	 	130,001	 	 	 	(25,537	)	 	 	—	 	 	 	42,325	 	 	 	149,433	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,000	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,000	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net interest income (loss) after provision for loan losses	 	 	1,160	 	 	 	1,471	 	 	 	13	 	 	 	—	 	 	 	2,644	 	 	 	112,001	 	 	 	(25,537	)	 	 	—	 	 	 	42,325	 	 	 	131,433	 		

Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Loan and guaranty servicing income	 	 	81,624	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	81,624	 	 	 	26	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	81,650	 		
Other fee-based income	 	 	—	 	 	 	35,975	 	 	 	83,148	 	 	 	—	 	 	 	119,123	 	 	 	13,494	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	132,617	 		
Software services income	 	 	—	 	 	 	—	 	 	 	37	 	 	 	15,828	 	 	 	15,865	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	15,865	 		
Other income	 	 	44	 	 	 	5	 	 	 	—	 	 	 	—	 	 	 	49	 	 	 	293	 	 	 	3,956	 	 	 	—	 	 	 	—	 	 	 	4,298	 		
Loss on sale of loans	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(47,426	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(47,426	)		
Intersegment revenue	 	 	57,008	 	 	 	242	 	 	 	2	 	 	 	4,993	 	 	 	62,245	 	 	 	—	 	 	 	46,844	 	 	 	(109,089	)	 	 	—	 	 	 	—	 		
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	466	 	 	 	—	 	 	 	—	 	 	 	(35,987	)	 	 	(35,521	)		
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	55,954	 	 	 	—	 	 	 	—	 	 	 	(9,965	)	 	 	45,989	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Total other income (expense)	 	 	138,676	 	 	 	36,222	 	 	 	83,187	 	 	 	20,821	 	 	 	278,906	 	 	 	22,807	 	 	 	50,800	 	 	 	(109,089	)	 	 	(45,952	)	 	 	197,472	 		

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Salaries and benefits	 	 	40,365	 	 	 	17,450	 	 	 	18,701	 	 	 	14,031	 	 	 	90,547	 	 	 	6,157	 	 	 	41,581	 	 	 	1,323	 	 	 	2,523	 	 	 	142,131	 		
Restructure expense — severance and contract termination costs	 	 	747	 	 	 	—	 	 	 	282	 	 	 	487	 	 	 	1,516	 	 	 	1,845	 	 	 	3,746	 	 	 	(7,107	)	 	 	—	 	 	 	—	 		
Impairment expense	 	 	5,074	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,074	 	 	 	9,351	 	 	 	4,409	 	 	 	—	 	 	 	—	 	 	 	18,834	 		
Other expenses	 	 	27,130	 	 	 	6,743	 	 	 	55,863	 	 	 	1,901	 	 	 	91,637	 	 	 	15,793	 	 	 	42,263	 	 	 	51	 	 	 	19,719	 	 	 	169,463	 		
Intersegment expenses	 	 	35,040	 	 	 	1,045	 	 	 	4,936	 	 	 	1,562	 	 	 	42,583	 	 	 	57,754	 	 	 	3,019	 	 	 	(103,356	)	 	 	—	 	 	 	—	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Total operating expenses	 	 	108,356	 	 	 	25,238	 	 	 	79,782	 	 	 	17,981	 	 	 	231,357	 	 	 	90,900	 	 	 	95,018	 	 	 	(109,089	)	 	 	22,242	 	 	 	330,428	 		

Income (loss) before income taxes	 	 	31,480	 	 	 	12,455	 	 	 	3,418	 	 	 	2,840	 	 	 	50,193	 	 	 	43,908	 	 	 	(69,755	)	 	 	—	 	 	 	(25,869	)	 	 	(1,523	)		
Income tax expense (benefit) (a)	 	 	10,542	 	 	 	4,081	 	 	 	1,187	 	 	 	902	 	 	 	16,712	 	 	 	15,889	 	 	 	(22,824	)	 	 	—	 	 	 	(7,984	)	 	 	1,793	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net income (loss) from continuing operations	 	 	20,938	 	 	 	8,374	 	 	 	2,231	 	 	 	1,938	 	 	 	33,481	 	 	 	28,019	 	 	 	(46,931	)	 	 	—	 	 	 	(17,885	)	 	 	(3,316	)		
Income from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	981	 	 	 	981	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net income (loss)	 	$	20,938	 	 	 	8,374	 	 	 	2,231	 	 	 	1,938	 	 	 	33,481	 	 	 	28,019	 	 	 	(46,931	)	 	 	—	 	 	 	(16,904	)	 	 	(2,335	)		

(a) Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for each operating segment.	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Nine months ended September 30, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Before Tax Operating Margin — excluding restructure expense, impairment expense, and the loss on sale of loans during the first quarter of 2008	 	 	26.7	%	 	 	33.0	%	 	 	4.4	%	 	 	16.0	%	 	 	20.2	%	 	 	56.3	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Nine months ended September, 2007:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Before Tax Operating Margin — excluding restructure expense, impairment expense, and provision for loan losses related to the loss of Exceptional Performer	 	 	35.6	%	 	 	36.0	%	 	 	7.0	%	 	 	26.9	%	 	 	27.6	%	 	 	53.7	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 
 13 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine months ended September 30, 2007	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	“Base net	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	Services	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income”	 	 	 	 	
 	 	and	 	 	Processing	 	 	and	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 	
 	 	Guaranty	 	 	and Campus	 	 	List	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Management	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 	
 	 	(dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	4,607	 	 	 	2,670	 	 	 	290	 	 	 	18	 	 	 	7,585	 	 	 	1,301,947	 	 	 	6,230	 	 	 	(3,737	)	 	 	597	 	 	 	1,312,622	 	
Interest expense	 	 	—	 	 	 	7	 	 	 	5	 	 	 	—	 	 	 	12	 	 	 	1,084,792	 	 	 	31,196	 	 	 	(3,737	)	 	 	—	 	 	 	1,112,263	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss)	 	 	4,607	 	 	 	2,663	 	 	 	285	 	 	 	18	 	 	 	7,573	 	 	 	217,155	 	 	 	(24,966	)	 	 	—	 	 	 	597	 	 	 	200,359	 	
 		
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	23,628	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	23,628	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss) after provision for loan losses	 	 	4,607	 	 	 	2,663	 	 	 	285	 	 	 	18	 	 	 	7,573	 	 	 	193,527	 	 	 	(24,966	)	 	 	—	 	 	 	597	 	 	 	176,731	 	

Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	94,828	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	94,828	 	 	 	288	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	95,116	 	
Other fee-based income	 	 	—	 	 	 	31,492	 	 	 	73,341	 	 	 	—	 	 	 	104,833	 	 	 	10,511	 	 	 	972	 	 	 	—	 	 	 	—	 	 	 	116,316	 	
Software services income	 	 	—	 	 	 	—	 	 	 	456	 	 	 	16,566	 	 	 	17,022	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	17,022	 	
Other income	 	 	11	 	 	 	59	 	 	 	—	 	 	 	—	 	 	 	70	 	 	 	7,617	 	 	 	9,649	 	 	 	—	 	 	 	—	 	 	 	17,336	 	
Gain on the sale of loans	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Intersegment revenue	 	 	58,821	 	 	 	508	 	 	 	891	 	 	 	13,026	 	 	 	73,246	 	 	 	—	 	 	 	7,608	 	 	 	(80,854	)	 	 	—	 	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,866	 	 	 	11,866	 	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(4,950	)	 	 	12,050	 	 	 	—	 	 	 	—	 	 	 	7,100	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income (expense)	 	 	153,660	 	 	 	32,059	 	 	 	74,688	 	 	 	29,592	 	 	 	289,999	 	 	 	13,466	 	 	 	30,279	 	 	 	(80,854	)	 	 	11,866	 	 	 	264,756	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	66,988	 	 	 	15,312	 	 	 	26,486	 	 	 	18,869	 	 	 	127,655	 	 	 	20,600	 	 	 	34,669	 	 	 	(2,370	)	 	 	1,456	 	 	 	182,010	 	
Restructure expense — severance and contract termination costs	 	 	1,231	 	 	 	—	 	 	 	737	 	 	 	58	 	 	 	2,026	 	 	 	1,921	 	 	 	1,009	 	 	 	(4,956	)	 	 	—	 	 	 	—	 	
Impairment of assets	 	 	—	 	 	 	—	 	 	 	11,401	 	 	 	—	 	 	 	11,401	 	 	 	28,291	 	 	 	9,812	 	 	 	—	 	 	 	—	 	 	 	49,504	 	
Other expenses	 	 	26,219	 	 	 	6,522	 	 	 	42,957	 	 	 	2,224	 	 	 	77,922	 	 	 	22,940	 	 	 	58,762	 	 	 	168	 	 	 	24,014	 	 	 	183,806	 	
Intersegment expenses	 	 	8,681	 	 	 	384	 	 	 	252	 	 	 	550	 	 	 	9,867	 	 	 	59,594	 	 	 	4,235	 	 	 	(73,696	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	103,119	 	 	 	22,218	 	 	 	81,833	 	 	 	21,701	 	 	 	228,871	 	 	 	133,346	 	 	 	108,487	 	 	 	(80,854	)	 	 	25,470	 	 	 	415,320	 	

Income (loss) before income taxes	 	 	55,148	 	 	 	12,504	 	 	 	(6,860	)	 	 	7,909	 	 	 	68,701	 	 	 	73,647	 	 	 	(103,174	)	 	 	—	 	 	 	(13,007	)	 	 	26,167	 	
Income tax expense (benefit) (a)	 	 	20,956	 	 	 	4,752	 	 	 	(2,607	)	 	 	3,006	 	 	 	26,107	 	 	 	27,986	 	 	 	(40,059	)	 	 	—	 	 	 	(4,128	)	 	 	9,906	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) from continuing operations	 	 	34,192	 	 	 	7,752	 	 	 	(4,253	)	 	 	4,903	 	 	 	42,594	 	 	 	45,661	 	 	 	(63,115	)	 	 	—	 	 	 	(8,879	)	 	 	16,261	 	
Loss from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,416	)	 	 	(2,416	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	34,192	 	 	 	7,752	 	 	 	(4,253	)	 	 	4,903	 	 	 	42,594	 	 	 	45,661	 	 	 	(63,115	)	 	 	—	 	 	 	(11,295	)	 	 	13,845	 	

(a)	 	Income taxes are based on 38% of net income before tax for the individual operating segment.	
Corporate Activity and Overhead in the previous tables primarily includes the following items:

 	•	 	Income earned on certain investment activities;	
 		
 	•	 	Interest expense incurred on unsecured debt transactions;	
 		
 	•	 	Other products and service offerings that are not considered operating segments; and	
 		
 	•	 	Corporate activities and overhead functions such as executive management, human resources, accounting and finance, legal, marketing, and corporate technology support.	
 
 14 

 

The adjustments required to reconcile from the Company’s base net income measure to its GAAP results of operations relate to differing treatments for derivatives, foreign currency transaction adjustments, amortization of intangible assets, discontinued operations, and certain other items that management does not consider in evaluating the Company’s operating results. See “Non-GAAP Performance Measures.” The following tables reflect adjustments associated with these areas by operating segment and Corporate Activity and Overhead:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	Services	 	 	Software	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	
 	 	and	 	 	Processing	 	 	and	 	 	and	 	 	Generation	 	 	Activity	 	 	 	 	 	 	 	 	
 	 	Guaranty	 	 	and Campus	 	 	List	 	 	Technical	 	 	and	 	 	and	 	 	 	 	 	 	 	 	
 	 	Servicing	 	 	Commerce	 	 	Management	 	 	Services	 	 	Management	 	 	Overhead	 	 	Total	 	 	 	 	 	
 	 	(dollars in thousands)	 	
 		
 	 	Three months ended September 30, 2008	 	
 	 	 		
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(9,030	)	 	 	2,945	 	 	 	(6,085	)	 	 	 	 	
Amortization of intangible assets	 	 	1,165	 	 	 	1,889	 	 	 	3,258	 	 	 	286	 	 	 	—	 	 	 	—	 	 	 	6,598	 	 	 	 	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	477	 	 	 	477	 	 	 	 	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,580	)	 	 	—	 	 	 	(1,580	)	 	 	 	 	
Net tax effect (a)	 	 	(432	)	 	 	(699	)	 	 	(1,205	)	 	 	(106	)	 	 	3,926	 	 	 	(1,266	)	 	 	218	 	 	 	 	 	

Total adjustments to GAAP	 	$	733	 	 	 	1,190	 	 	 	2,053	 	 	 	180	 	 	 	(6,684	)	 	 	2,156	 	 	 	(372	)	 	 	 	 	

 	 	Three months ended September 30, 2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(20,017	)	 	 	1,568	 	 	 	(18,449	)	 	 	 	 	
Amortization of intangible assets	 	 	1,350	 	 	 	1,434	 	 	 	6,442	 	 	 	287	 	 	 	1,372	 	 	 	—	 	 	 	10,885	 	 	 	 	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	503	 	 	 	503	 	 	 	 	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(597	)	 	 	—	 	 	 	(597	)	 	 	 	 	
Income (loss) from discontinued operations, net of tax	 	 	(909	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(909	)	 	 	 	 	
Net tax effect (a)	 	 	(513	)	 	 	(545	)	 	 	(2,448	)	 	 	(109	)	 	 	7,312	 	 	 	(726	)	 	 	2,971	 	 	 	 	 	

Total adjustments to GAAP	 	$	(72	)	 	 	889	 	 	 	3,994	 	 	 	178	 	 	 	(11,930	)	 	 	1,345	 	 	 	(5,596	)	 	 	 	 	

 	 	Nine months ended September 30, 2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	32,504	 	 	 	3,483	 	 	 	35,987	 	 	 	 	 	
Amortization of intangible assets	 	 	3,586	 	 	 	5,937	 	 	 	9,193	 	 	 	858	 	 	 	145	 	 	 	—	 	 	 	19,719	 	 	 	 	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,523	 	 	 	2,523	 	 	 	 	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(32,360	)	 	 	—	 	 	 	(32,360	)	 	 	 	 	
Income from discontinued operations, net of tax	 	 	(981	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(981	)	 	 	 	 	
Net tax effect (a)	 	 	(1,182	)	 	 	(1,954	)	 	 	(3,045	)	 	 	(284	)	 	 	548	 	 	 	(2,067	)	 	 	(7,984	)	 	 	 	 	

Total adjustments to GAAP	 	$	1,423	 	 	 	3,983	 	 	 	6,148	 	 	 	574	 	 	 	837	 	 	 	3,939	 	 	 	16,904	 	 	 	 	 	

 	 	Nine months ended September 30, 2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(7,801	)	 	 	(4,065	)	 	 	(11,866	)	 	 	 	 	
Amortization of intangible assets	 	 	3,744	 	 	 	4,372	 	 	 	9,797	 	 	 	904	 	 	 	5,197	 	 	 	—	 	 	 	24,014	 	 	 	 	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,456	 	 	 	1,456	 	 	 	 	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(597	)	 	 	—	 	 	 	(597	)	 	 	 	 	
Income (loss) from discontinued operations, net of tax	 	 	2,416	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,416	 	 	 	 	 	
Net tax effect (a)	 	 	(1,423	)	 	 	(1,661	)	 	 	(3,723	)	 	 	(343	)	 	 	1,216	 	 	 	1,806	 	 	 	(4,128	)	 	 	 	 	

Total adjustments to GAAP	 	$	4,737	 	 	 	2,711	 	 	 	6,074	 	 	 	561	 	 	 	(1,985	)	 	 	(803	)	 	 	11,295	 	 	 	 	 	

(a)	 	Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable quarterly period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods (included in Corporate Activity and Overhead) was not tax effected as this is not deductible for income tax purposes.	
 
 15 

 

Student Loans Receivable
Student loans receivable includes all student loans owned by or on behalf of the Company and includes the unamortized cost of acquisition or origination less an allowance for loan losses. The following table describes the components of the Company’s loan portfolio:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As of September 30, 2008	 	 	As of December 31, 2007	 	 	As of September 30, 2007	 	
 	 	Dollars	 	 	Percent	 	 	Dollars	 	 	Percent	 	 	Dollars	 	 	Percent	 	
 	 	(dollars in thousands)	 	
Federally insured: (a)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stafford	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	$	6,780,214	 	 	 	25.7	%	 	$	6,624,009	 	 	 	24.8	%	 	$	6,683,801	 	 	 	25.1	%	
Originated on or after 10/1/07	 	 	689,097	 	 	 	2.6	 	 	 	101,901	 	 	 	0.4	 	 	 	—	 	 	 	—	 	
PLUS/SLS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	 	428,037	 	 	 	1.6	 	 	 	414,708	 	 	 	1.5	 	 	 	419,940	 	 	 	1.6	 	
Originated on or after 10/1/07	 	 	85,066	 	 	 	0.3	 	 	 	15,233	 	 	 	0.1	 	 	 	—	 	 	 	—	 	
Consolidation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	 	17,427,448	 	 	 	66.2	 	 	 	18,646,993	 	 	 	69.8	 	 	 	18,824,726	 	 	 	70.9	 	
Originated on or after 10/1/07	 	 	316,031	 	 	 	1.2	 	 	 	251,554	 	 	 	0.9	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-federally insured	 	 	275,520	 	 	 	1.0	 	 	 	274,815	 	 	 	1.0	 	 	 	251,503	 	 	 	0.9	 	

Total	 	 	26,001,413	 	 	 	98.6	 	 	 	26,329,213	 	 	 	98.5	 	 	 	26,179,970	 	 	 	98.5	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unamortized premiums and deferred origination costs	 	 	423,926	 	 	 	1.6	 	 	 	452,501	 	 	 	1.7	 	 	 	460,167	 	 	 	1.7	 	
Allowance for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance — federally insured	 	 	(24,366	)	 	 	(0.1	)	 	 	(24,534	)	 	 	(0.1	)	 	 	(23,907	)	 	 	(0.1	)	
Allowance — non-federally insured	 	 	(24,704	)	 	 	(0.1	)	 	 	(21,058	)	 	 	(0.1	)	 	 	(20,107	)	 	 	(0.1	)	

Net	 	$	26,376,269	 	 	 	100.0	%	 	$	26,736,122	 	 	 	100.0	%	 	$	26,596,123	 	 	 	100.0	%	

(a)	 	The College Cost Reduction Act reduced the yield on the federally insured loans originated on or after October 1, 2007. As of September 30, 2008, December 31, 2007, and September 30, 2007, $221.6 million, $278.9 million, and $309.0 million, respectively, of federally insured student loans are excluded from the above table as these loans are accounted for as participation interests sold under an agreement with Union Bank. As of September 30, 2008, $172.6 million of the loans accounted for as participation interests sold under this agreement were originated on or after October 1, 2007.	
 
 16 

 

Origination and Acquisition
The Company originates and acquires loans through various methods and channels including: (i) direct-to-consumer channel (in which the Company originates student loans directly with student and parent borrowers), (ii) campus based origination channels, and (iii) spot purchases.
The Company will originate or acquire loans through its campus based channel either directly under one of its brand names or through other originating lenders. In addition to its brands, the Company acquires student loans from lenders to whom the Company provides marketing and/or origination services established through various contracts. Branding partners are lenders for which the Company acts as a marketing agent in specified geographic areas. A forward flow lender is one for whom the Company provides origination services but provides no marketing services or whom simply agrees to sell loans to the Company under forward sale commitments. The following table sets forth the activity of loans originated or acquired through each of the Company’s channels:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Nine months ended	 	
 	 	September 30,	 	 	June 30,	 	 	September 30,	 	 	September 30,	 	 	September 30,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning balance	 	$	25,612,126	 	 	 	26,347,354	 	 	 	25,746,000	 	 	 	26,329,213	 	 	 	23,414,468	 	
Direct channel:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidation loan originations	 	 	44	 	 	 	3,284	 	 	 	914,842	 	 	 	69,073	 	 	 	2,815,791	 	
Less consolidation of existing portfolio	 	 	(27	)	 	 	(988	)	 	 	(537,539	)	 	 	(28,474	)	 	 	(1,450,326	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net consolidation loan originations	 	 	17	 	 	 	2,296	 	 	 	377,303	 	 	 	40,599	 	 	 	1,365,465	 	
Stafford/PLUS loan originations	 	 	416,721	 	 	 	114,228	 	 	 	426,740	 	 	 	952,050	 	 	 	923,450	 	
Branding partner channel	 	 	334,685	 	 	 	127,929	 	 	 	125,220	 	 	 	935,992	 	 	 	583,213	 	
Forward flow channel	 	 	114,488	 	 	 	84,216	 	 	 	178,226	 	 	 	517,548	 	 	 	946,342	 	
Other channels	 	 	—	 	 	 	—	 	 	 	24,373	 	 	 	55,922	 	 	 	791,087	 	

Total channel acquisitions	 	 	865,911	 	 	 	328,669	 	 	 	1,131,862	 	 	 	2,502,111	 	 	 	4,609,557	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repayments, claims, capitalized interest, participations, and other	 	 	(633,860	)	 	 	(585,443	)	 	 	(192,700	)	 	 	(1,519,103	)	 	 	(826,066	)	
Department of Education participation	 	 	263,920	 	 	 	—	 	 	 	—	 	 	 	263,920	 	 	 	—	 	
Consolidation loans lost to external parties	 	 	(106,684	)	 	 	(46,849	)	 	 	(200,719	)	 	 	(282,951	)	 	 	(627,473	)	
Loans sold	 	 	—	 	 	 	(431,605	)	 	 	(304,473	)	 	 	(1,291,777	)	 	 	(390,516	)	

Ending balance	 	$	26,001,413	 	 	 	25,612,126	 	 	 	26,179,970	 	 	 	26,001,413	 	 	 	26,179,970	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The Company has significant financing needs that it meets through the capital markets, including the debt and secondary markets. Since August 2007, these markets have experienced unprecedented disruptions, which has had an adverse impact on the Company’s earnings and financial condition. Since the Company could not determine nor control the length of time or extent to which the capital markets would remain disrupted, it reduced its direct and indirect costs related to its asset generation activities and was more selective in pursuing origination activity, in both the school and direct to consumer channels. Accordingly, in January 2008, the Company suspended Consolidation and private student loan originations and, during the second quarter of 2008, exercised contractual rights to discontinue, suspend, or defer the acquisition of student loans in connection with substantially all of its branding and forward flow relationships. Prior to and in conjunction with exercising this right, during the first quarter of 2008, the Company accelerated the purchase of loans from certain branding partner and forward flow lenders of approximately $511 million.
 
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During July 2008, the Company purchased approximately $440 million of student loans from certain branding partner and forward flow lenders of which such purchases were previously deferred. These loans were financed in the Company’s FFELP warehouse facility prior to the term-out of this agreement.
Student Loan Spread
The following table analyzes the student loan spread on the Company’s portfolio of student loans and represents the spread on assets earned in conjunction with the liabilities and derivative instruments used to fund the assets.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Nine months ended	 	
 	 	September 30,	 	 	June 30,	 	 	September 30,	 	 	September 30,	 	 	September 30,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Student loan yield	 	 	5.38	%	 	 	5.65	%	 	 	7.83	%	 	 	5.69	%	 	 	7.87	 	
Consolidation rebate fees	 	 	(0.72	)	 	 	(0.74	)	 	 	(0.76	)	 	 	(0.74	)	 	 	(0.77	)	
Premium and deferred origination costs amortization	 	 	(0.33	)	 	 	(0.36	)	 	 	(0.36	)	 	 	(0.35	)	 	 	(0.36	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan net yield	 	 	4.33	 	 	 	4.55	 	 	 	6.71	 	 	 	4.60	 	 	 	6.74	 	
Student loan cost of funds	 	 	(3.29	)	 	 	(3.25	)	 	 	(5.65	)	 	 	(3.50	)	 	 	(5.54	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan spread	 	 	1.04	 	 	 	1.30	 	 	 	1.06	 	 	 	1.10	 	 	 	1.20	 	
Variable-rate floor income, net of settlements on derivatives	 	 	(0.02	)	 	 	(0.23	)	 	 	(0.01	)	 	 	(0.17	)	 	 	—	 	

Core student loan spread	 	 	1.02	%	 	 	1.07	%	 	 	1.05	%	 	 	0.93	%	 	 	1.20	 	

Average balance of student loans	 	$	26,035,006	 	 	 	25,767,123	 	 	 	25,866,660	 	 	 	26,220,486	 	 	 	24,799,585	 	
Average balance of debt outstanding	 	 	26,769,955	 	 	 	26,767,459	 	 	 	27,321,874	 	 	 	27,120,342	 	 	 	26,293,342	 	
Operating Expenses
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended September 30,	 	 	Nine months ended September 30,	 	
 	 	2007	 	 	2008	 	 	$ Change	 	 	2007	 	 	2008	 	 	$ Change	 	
 	 	(dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	$	55,757	 	 	 	44,744	 	 	 	(11,013	)	 	 	177,222	 	 	 	136,422	 	 	 	(40,800	)	
Other expenses	 	 	63,228	 	 	 	58,930	 	 	 	(4,298	)	 	 	183,638	 	 	 	168,065	 	 	 	(15,573	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses, excluding impairment of assets and restructure charges	 	 	118,985	 	 	 	103,674	 	 	$	(15,311	)	 	 	360,860	 	 	 	304,487	 	 	$	(56,373	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Impairment of assets	 	 	39,444	 	 	 	—	 	 	 	 	 	 	 	39,444	 	 	 	18,834	 	 	 	 	 	
Restructure charges	 	 	15,016	 	 	 	(5	)	 	 	 	 	 	 	15,016	 	 	 	7,107	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	$	173,445	 	 	 	103,669	 	 	 	 	 	 	 	415,320	 	 	 	330,428	 	 	 	 	 	

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