As filed with the Securities and Exchange Commission on April 13, 2005
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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NELNET, INC.
(Exact name of registrant as specified in its charter)
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Nebraska 84-0748903
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
Terry J. Heimes
Chief Financial Officer
Nelnet, Inc.
121 South 13th Street, Suite 201
121 South 13th Street, Suite 201 Lincoln, Nebraska 68508
Lincoln, Nebraska 68508 Telephone: (402) 458-2303
Telephone: (402) 458-2370 Facsimile: (402) 458-2294
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code, of registrant's principal number, including area code, of agent for service)
executive office)
Copies to:
Gerald S. Tanenbaum, Esq. Daniel F. Kaplan, Esq.
Cahill Gordon & Reindel LLP Perry, Guthery, Haase & Gessford,
80 Pine Street P.C., L.L.O.
New York, New York 10005 233 South 13th Street, Suite 1400
Telephone: (212) 701-3000 Lincoln, Nebraska 68508
Facsimile: (212) 269-5420 Telephone: (402) 476-9200
Facsimile: (402) 476-0094
Approximate date of commencement of proposed sale to the public: From time
to time after the registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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CALCULATION OF REGISTRATION FEE
Proposed
Maximum Proposed
Offering Maximum
Title of Each Class Amount to Be Price Per Aggregate Amount of
of Securities to Be Registered Registered Security Offering Price Registration Fee
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. Class A common stock, par value
U.S. $0.01 per share (1).................. (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. preferred stock, par value U.S.
$0.01 per share (2)....................... (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. unsecured debt
securities (3) ........................... (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. warrants to
purchase common stock..................... (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. warrants to
purchase preferred stock.................. (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. warrants to purchase debt
securities................................ (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. stock purchase contracts........ (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Nelnet, Inc. stock purchase units (7)........ (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Units consisting of two or more of the above. (4)(5) (5)(6) (4)(5)(6) (6)
-------------------------------------------------- -------------- ---------------- --------------------- -------------------
Total..................................... $750,000,000 $88,275 (6)
================================================== ============== ================ ===================== ===================
(1) Also includes such presently indeterminate number of shares of Nelnet, Inc.
Class A common stock into which certain series of Nelnet, Inc. debt
securities and Nelnet, Inc. preferred stock may be converted and for which
no separate consideration will be received and for which Nelnet, Inc.
warrants to purchase Nelnet, Inc. Class A common stock may be exercised.
(2) Also includes such presently indeterminate number of shares of Nelnet, Inc.
preferred stock into which certain series of Nelnet, Inc. debt securities
may be converted and for which no separate consideration will be received
and for which Nelnet, Inc. warrants to purchase Nelnet, Inc. preferred
stock may be exercised.
(3) Also includes presently indeterminate number of Nelnet, Inc. debt
securities for which certain shares of Nelnet, Inc. preferred stock may be
exchanged and for which no separate consideration will be received.
(4) There are being registered under this registration statement such
indeterminate numbers of securities of Nelnet, Inc. as will have an
aggregate initial offering price not to exceed $750,000,000. The initial
public offering price of any securities denominated in any foreign
currencies or currency units will be the U.S. dollar equivalent thereof
based on the prevailing exchange rates at the respective times such
securities are first offered. In addition, pursuant to Rule 416 under the
Securities Act of 1933, this registration statement will cover such
indeterminate number of shares of Nelnet, Inc. Class A common stock that
may be issued with respect to stock splits, stock dividends and similar
transactions.
(5) Pursuant to General Instruction II.D to Form S-3, the amounts to be
registered, proposed maximum aggregate offering price per security and
proposed maximum aggregate offering price have been omitted for each class
of securities that is offered hereby by the registrant.
(6) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act of 1933 and reflects the maximum offering price of
the securities that may be issued.
(7) Each Nelnet, Inc. stock purchase unit consists of (a) a Nelnet, Inc. Class
A common stock purchase contract, under which the holder or Nelnet, Inc.,
upon settlement, will purchase a fixed or varying number of shares of
Nelnet, Inc. Class A common stock, and (b) a beneficial interest in either
Nelnet, Inc. debt securities, Nelnet, Inc. preferred stock or debt or
equity obligations of third parties, including U.S. Treasury securities,
purchased with the proceeds from the sale of the Nelnet, Inc. stock
purchase units. No separate consideration will be received for the Nelnet,
Inc. stock purchase contracts or the related beneficial interests.
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Subject to Completion, Dated April 13, 2005
PROSPECTUS
$750,000,000
Nelnet, Inc.
Class A Common Stock, Preferred Stock, Debt Securities, Warrants to Purchase
Class A Common Stock, Preferred Stock or Debt Securities, Stock Purchase
Contracts and Stock Purchase Units
The following are types of securities that may be offered and sold by Nelnet,
Inc. under this prospectus up to an aggregate initial public offering price of
$750,000,000:
o Nelnet, Inc. Class A common stock;
o Nelnet, Inc. preferred stock;
o Nelnet, Inc. unsecured debt securities;
o Nelnet, Inc. warrants to purchase Class A common stock, preferred
stock or debt securities; and
o Nelnet, Inc. stock purchase contracts and stock purchase units.
A prospectus supplement, which must accompany this prospectus, will describe the
securities being offered and sold, as well as their specific terms. Those terms
may include, among others, as applicable:
o aggregate number of shares or principal amount;
o issue price;
o denomination;
o currency or composite currency;
o maturity;
o interest rate;
o dividend rate;
o sinking fund terms;
o ranking;
o redemption terms;
o conversion terms;
o listing on a securities exchange;
o amount payable at maturity; and
o liquidation preference.
The prospectus supplement may also supplement or update information contained in
this prospectus; provided that such information does not constitute material
changes to the information herein such that it alters the nature of the offering
or the securities offered.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Shares of Nelnet, Inc. Class A common stock are traded on the New York Stock
Exchange under the symbol "NNI." The closing price of Nelnet, Inc. Class A
common stock was $[ ] per share on April [ ], 2005.
INVESTING IN OUR SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 4.
, 2005
TABLE OF CONTENTS
Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS..........................2
NELNET, INC...................................................................3
RISK FACTORS..................................................................4
USE OF PROCEEDS..............................................................15
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS.............16
GENERAL DESCRIPTION OF THE OFFERED SECURITIES................................17
DESCRIPTION OF NELNET, INC. CAPITAL STOCK....................................18
DESCRIPTION OF NELNET, INC. PREFERRED STOCK..................................19
DESCRIPTION OF NELNET, INC. DEBT SECURITIES..................................21
DESCRIPTION OF NELNET, INC. WARRANTS TO PURCHASE CLASS A COMMON
STOCK OR PREFERRED STOCK...................................................34
DESCRIPTION OF NELNET, INC. WARRANTS TO PURCHASE DEBT SECURITIES.............36
DESCRIPTION OF NELNET, INC. STOCK PURCHASE CONTRACTS AND STOCK
PURCHASE UNITS.............................................................38
PLAN OF DISTRIBUTION.........................................................40
WHERE YOU CAN FIND MORE INFORMATION..........................................41
INCORPORATION OF DOCUMENTS BY REFERENCE......................................41
ABOUT THIS PROSPECTUS........................................................42
LEGAL MATTERS................................................................42
EXPERTS......................................................................42
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements and information that
are based on management's current expectations as of the date of this document.
When used in this prospectus, the words "anticipate," "believe," "estimate,"
"intend" and "expect" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are subject to
risks, uncertainties, assumptions and other factors that may cause the actual
results to be materially different from those reflected in such forward looking
statements. These factors include, among others, changes in the terms of student
loans and the educational credit marketplace arising from the implementation of
applicable laws and regulations and from changes in these laws and regulations,
which may reduce the volume, average term and costs of yields on student loans
under the Federal Family Education Loan Program of the U.S. Department of
Education, or result in loans being originated or refinanced under non-FFELP
programs or may affect the terms upon which banks and others agree to sell FFELP
loans to us. We could also be affected by changes in the demand for educational
financing or in financing preferences of lenders, educational institutions,
students and their families; changes in the general interest rate environment
and in the securitization markets for education loans, which may increase the
costs or limit the availability of financings necessary to initiate, purchase or
carry education loans; losses from loan defaults; and changes in prepayment
rates and credit spreads. References to "we," "us," "our," "Nelnet" and "the
Company" refer to Nelnet, Inc. and its subsidiaries.
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Nelnet, Inc.
We are one of the leading education finance companies in the United States
and are focused on providing quality student loan products and services to
students and schools nationwide. We rank among the nation's leaders in terms of
total net student loan assets with $13.5 billion as of December 31, 2004.
Headquartered in Lincoln, Nebraska, we originate, consolidate, securitize, hold
and service student loans, principally loans originated under the Federal Family
Education Loan Program, which we refer to as the FFEL Program or FFELP.
We offer a broad range of financial services and technology-based products.
Our products are designed to simplify the student loan process by automating
financial aid delivery, loan processing and funds disbursement. Our
infrastructure, technological expertise and breadth of product and service
offerings connect the key constituents of the student loan process, including
lenders, financial aid officers, guaranty agencies, governmental agencies,
student and parent borrowers, servicers and the capital markets, thereby
streamlining the education finance process.
Our business is comprised of three primary product and service offerings:
o Asset Management, Including Student Loan Originations and
Acquisitions. We provide student loan marketing, origination,
acquisition and portfolio management. We own a large portfolio of
student loan assets through a series of education lending
subsidiaries. The education lending subsidiaries primarily invest in
student loans, through an eligible lender trustee, made under Title IV
of the Higher Education Act of 1965, as amended, or the Higher
Education Act. Certain of our subsidiaries also invest in
non-federally insured student loans. We obtain loans through direct
origination or through acquisition of loans. We also provide
marketing, sales, managerial and administrative support related to our
asset generation activities.
o Student Loan and Guarantee Servicing. We service our student loan
portfolio and the portfolios of third parties. Servicing activities
include loan origination activities, application processing, borrower
updates, payment processing, due diligence procedures and claim
processing. In December 2004, we purchased EDULINX Canada Corporation,
or EDULINX. EDULINX is a Canadian corporation that engages in
servicing Canadian student loans. As of December 31, 2004, we serviced
or provided to third parties complete outsourcing of servicing
activities as follows:
Nelnet % Third Party % Total
------ - ----------- - -----
(dollars in millions)
FFELP and private loans $11,888 56% $9,188 44% $21,076
Canadian loans -- -- 7,213 100% 7,213
_______ ____ ______ ___ ______
Total $11,888 42% $16,401 58% $28,289
=========== === ======= === =======
We also provide servicing support to guaranty agencies, which includes
system software, hardware and telecommunication support, borrower and
loan updates, default aversion tracking services, claim processing
services and post-default collection services. As of December 31,
2004, we provided servicing support to agencies that guarantee more
than $19 billion of FFELP loans.
o Servicing Software. We use internally developed student loan servicing
software and also provide this software to third-party student loan
holders and servicers. As of December 31, 2004, our software was used
to service more than $50 billion in student loans, which included $29
billion serviced by third parties using our software.
-3-
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before investing in our securities.
Investing in our securities involves a high degree of risk. If any of the
following risks actually occurs, our business, financial condition and results
of operations could be materially and adversely affected. In that event, the
trading price of our securities could decline and you may lose part or all of
your investment.
Failure to comply with governmental regulations or guaranty agency rules
could harm our business.
Our principal business is comprised of originating, acquiring, holding and
servicing student loans made and guaranteed pursuant to the FFEL Program, which
was created by the Higher Education Act. The Higher Education Act governs most
significant aspects of our lines of business. We are also subject to rules and
regulations of the agencies that act as guarantors of the student loans, known
as guaranty agencies. In addition, we are subject to certain federal and state
banking laws, regulations and examinations, as well as federal and state
consumer protection laws and regulations, including, specifically with respect
to our non-federally insured loan portfolio, certain state usury laws and
related regulations and the Federal Truth in Lending Act. Also, Canadian laws
and regulations govern our Canadian loan servicing operations. These laws and
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Failure to comply with these laws and regulations could
result in liability to borrowers, the imposition of civil penalties and
potential class action suits.
Our failure to comply with regulatory regimes described above may arise
from:
o breaches of our internal control systems, such as a failure to adjust
manual or automated servicing functions following a change in
regulatory requirements;
o technological defects, such as a malfunction in or destruction of our
computer systems; or
o fraud by our employees or other persons in activities such as borrower
payment processing.
Such failure to comply, irrespective of the reason, could subject us to
loss of the federal guarantee on FFELP loans, costs of curing servicing
deficiencies or remedial servicing, suspension or termination of our right to
participate in the FFEL Program or to participate as a servicer, negative
publicity and potential legal claims or actions brought by our servicing
customers and borrowers.
We must satisfy certain requirements necessary to maintain the federal
guarantees of our FFELP loans, and we may incur penalties or lose our
guarantees if we fail to meet these requirements.
We must meet various requirements in order to maintain the federal
guarantee on our FFELP loans. These requirements establish servicing
requirements and procedural guidelines and specify school and borrower
eligibility criteria. The federal guarantee on our FFELP loans is conditioned on
compliance with origination, servicing and collection standards set by the U.S.
Department of Education, or the Department, and guaranty agencies. FFELP loans
that are not originated, disbursed or serviced in accordance with the
Department's regulations risk partial or complete loss of the guarantee thereof.
If we experience a high rate of servicing deficiencies or costs associated with
remedial servicing, and if we are unsuccessful in curing such deficiencies, the
eventual losses on the loans that are not cured could be material.
A guaranty agency may reject a loan for claim payment due to a violation of
the FFEL Program due diligence servicing requirements. In addition, a guaranty
agency may reject claims under other circumstances, including, for example, if a
claim is not timely filed or adequate documentation is not maintained. Once a
loan ceases to be guaranteed, it is ineligible for federal interest subsidies
and special allowance payments. If a loan is rejected for claim payment by a
guaranty agency, we continue to pursue the borrower for payment and/or institute
a process to reinstate the guarantee.
Rejections of claims as to portions of interest may be made by guaranty
agencies for certain violations of the due diligence collection and servicing
requirements, even though the remainder of a claim may be paid. Examples of
errors that cause claim rejections include isolated missed collection calls or
failures to send collection letters as required.
-4-
The Department has implemented school eligibility requirements, which
include default rate limits. In order to maintain eligibility in the FFEL
Program, schools must maintain default rates below specified levels, and both
guaranty agencies and lenders are required to ensure that loans are made only to
or on behalf of students attending schools that do not exceed the default rate
limits.
If we fail to comply with any of the above requirements, we could incur
penalties or lose the federal guarantee on some or all of our FFELP loans. If
our actual loss experience on denied guarantees were to increase substantially
in future periods the impact could be material to our operations.
Failure to comply with restrictions on inducements under the Higher
Education Act could harm our business.
The Higher Education Act generally prohibits a lender from providing
certain inducements to educational institutions or individuals in order to
secure applicants for FFELP loans. We have entered into arrangements with
various schools pursuant to which the schools become lenders of FFELP loans to
graduate students, and we provide funding, loan origination and servicing to the
schools with respect to such loans. The Department challenged a similar
"school-as-lender" arrangement that SLM Corporation, the parent company of
Sallie Mae, previously had in place, but a federal court decision determined the
arrangement fell within the parameters of regulatory guidelines established by
the Department. SLM Corporation also has come under scrutiny as a result of
recent claims that it makes non-federally insured loans available to students of
a school only if the school, in return, promises to leave the Federal Direct
Lending, or FDL, Program and market SLM Corporation's FFELP loans to its
students. The Department has stated that non-federally insured loans are legal
and permissible if offered simply as a benefit to schools. We offer
non-federally insured loans to student borrowers on a regular basis, but do so
without requiring anything in return from the schools that these borrowers
attend. In addition, because guidance from the Department permits de minimis
gifts in connection with marketing of FFELP loans, from time to time we
entertain school financial aid officers at student loan industry conferences and
functions and sponsor promotional events such as lunches and golf outings. If
the Department were to change its position on any of these matters, we may have
to change the way we market non-federally insured and FFELP loans and a new
marketing strategy may not be as effective as is our current strategy. If we
fail to respond to the Department's change in position, the Department could
potentially impose sanctions upon us that could negatively impact our business.
We have also entered into various agreements to acquire marketing lists of
prospective FFELP loan borrowers from sources such as college alumni
associations. We pay to acquire these lists and for the completed applications
for loans resulting therefrom. We believe that such arrangements are permissible
and do not violate restrictions on inducements, as they fit within a regulatory
exception recognized by the Department for generalized marketing and advertising
activities. The Department has provided informal guidance to us that such
arrangements are not improper inducements, since such arrangements fall within
the generalized marketing exception. If the Department were to change its
position, this could harm our reputation and marketing efforts and, if we fail
to adjust our practices to such change, could potentially result in the
Department imposing sanctions on us. Such sanctions could negatively impact our
business.
Possible changes in legislation and regulations could have a negative
impact upon our business.
Pursuant to the terms of the Higher Education Act, the FFEL Program is
periodically amended, and the Higher Education Act must be reauthorized by
Congress every five to six years in order to prevent sunset of that Act. Changes
in the Higher Education Act made in the two most recent reauthorizations have
included reductions in student loan yields paid to lenders, increased fees paid
by lenders and a decreased level of federal guarantee. Future changes could
result in further negative impacts on our business. Moreover, there can be no
assurance that the provisions of the Higher Education Act, which is scheduled to
expire on September 30, 2005, will be reauthorized. While Congress has
consistently extended the effective date of the Higher Education Act, it may
elect not to reauthorize the Department's ability to provide interest subsidies,
special allowance payments and federal guarantees for student loans. A failure
to reauthorize such provisions of the Higher Education Act would reduce the
number of FFELP loans available for us to originate or acquire in the future.
With respect to EDULINX, changes in the Canada Student Loans Program, or the
CSLP, which governs the majority of the loans serviced by EDULINX, could result
in a similar negative impact on EDULINX's business.
Some of the highlights of specific proposed legislation and President
Bush's fiscal year 2006 budget proposals that, if enacted, could have an adverse
effect on our operations, in no particular order, include:
-5-
o allowing refinancing of consolidation loans, which would open
approximately 59% of our portfolio to such refinancing;
o increasing origination fees paid by lenders in connection with making
or holding loans;
o allowing for variable-rate consolidation loans and extended repayment
terms of Stafford loans, which would lead to fewer loans lost through
consolidation of our portfolio, but would also decrease consolidation
opportunities;
o changes to the FFEL Program guarantee rates and terms, including
proposals for a decrease in insurance on portfolios receiving the
benefit of the Exceptional Performance designation from 100% to 97% or
greater of principal and accrued interest and a decrease in insurance
on portfolios not subject to the Exceptional Performance designation
from 98% to 95% of principal and accrued interest;
o eliminating variable-rate floor income, including prospectively and
permanently eliminating the 9.5% floor interest rate on loans
refinanced with funds from pre-1993 tax-exempt financings, or the 9.5%
Floor, and eliminating rebate of excess earnings on loans where the
borrower rate is in excess of the lender rate;
o limiting and/or preventing a FFEL Program lender from making a
consolidation loan consisting of only FDL loans; and
o initiatives aimed at promoting the FDL Program to the detriment of the
FFEL Program.
In addition, Senator Edward M. Kennedy of Massachusetts and others have
been proponents of legislation which could act to retroactively remove
eligibility for the 9.5% Floor from FFELP loans that have, prior to September
30, 2004, been refinanced with proceeds of taxable obligations. We cannot
predict whether such legislation will be advanced in the future. If such
retroactive legislation were to be enacted and withstand legal challenge, it
would have a material adverse effect upon our financial condition and results of
operations. Senator Kennedy called for such retroactive legislation during
congressional debate in October 2004. However, the Department has indicated that
receipt of the 9.5% Floor income is permissible under current law and previous
interpretations thereof. We cannot predict whether the Department will maintain
its position in the future on the permissibility of the 9.5% Floor.
We cannot predict whether the above legislative or budget proposals will be
enacted into law, but they may form some of the framework utilized by Congress
in negotiating the fiscal year 2006 budget resolution and reauthorization of the
Higher Education Act. In addition, the Department oversees and implements the
Higher Education Act and periodically issues regulations and interpretations of
that Act. Changes in such regulations and interpretations could negatively
impact our business.
Variation in the maturities, timing of rate reset and variation of indices
of our assets and liabilities may pose risks to us.
Because we generate the majority of our earnings from the spread between
the yield received on our portfolio of student loans and the cost of financing
these loans, the interest rate sensitivity of the balance sheet could have a
material effect on our results of operations. The majority of our student loans
have variable-rate characteristics in interest rate environments where the
special allowance payment formula exceeds the borrower rate. Some of our student
loans, primarily consolidation loans, include fixed-rate components depending
upon loan terms and the rate reset provisions set by the Department. We have
financed the majority of our student loan portfolio with variable-rate debt.
Absent utilization of derivative instruments to match the interest rate
characteristics and duration of the assets and liabilities, fluctuations in the
interest rate environment will affect our results of operations. Such
fluctuations may be adverse and may be material.
In the current low interest rate environment, our FFELP loan portfolio is
yielding excess income due to variable-rate liabilities financing student loans
at a fixed borrower rate. Absent the use of derivative instruments, a rise in
interest rates will have an adverse effect on earnings and fair values due to
interest margin compression caused by increasing financing costs, until such
time as the FFELP loans earn interest at a variable rate in accordance with the
special allowance payment formula. In higher interest rate environments, where
the interest rate rises above the borrower rate and fixed-rate loans become
variable, the impact of the rate fluctuations is reduced. Loans that reset
annually on each July 1 can generate excess spread income as compared to the
rate based on the special
-6-
allowance payment formula in declining interest rate environments where the
borrower rate establishes a floor on our variable-rate assets. We refer to this
additional income as variable-rate floor income, and it is included in loan
interest income. Historically, we have earned variable-rate floor income in
declining interest rate environments. Since the rates are reset annually, we
view these earnings as temporary and not necessarily sustainable. Our ability to
earn variable-rate floor income in future periods is dependent upon the interest
rate environment following the annual reset of borrower rates, and we cannot
assure that a favorable interest rate environment for us will exist in the
future.
Due to the variability in duration of our assets and varying market
conditions, we do not attempt to perfectly match the interest rate
characteristics of our entire loan portfolio with the underlying debt
instruments. This mismatch in duration and interest rate characteristics could
have a negative impact on our results of operations. We have employed various
derivative instruments to somewhat offset this mismatch. Changes in interest
rates and the composition of our student loan portfolio and derivative
instruments will impact the effect of interest rates on our earnings, and we
cannot predict any such impact with any level of certainty.
Market risks to which we are subject may have an adverse impact upon our
business and operations.
Our primary market risk exposure arises from fluctuations in our borrowing
and lending rates, the spread between which could be impacted by shifts in
market interest rates. The borrower rates on FFELP loans are generally reset by
the Department each July 1 based on a formula determined by the date of the
origination of the loan, with the exception of rates on consolidation loans,
which are fixed to term. The interest rate we actually receive on FFELP loans is
the greater of the borrower rate and a rate determined by a formula based on a
spread to either the 91-day Treasury Bill index or the 90-day commercial paper
index, depending on when the loans were originated and the current repayment
status of the loans.
We issue asset-backed securities, both fixed- and variable-rate, to fund
our student loan assets. The variable-rate debt is generally indexed to 90-day
LIBOR or set by auction. The income generated by our student loan assets is
generally driven by different short-term indices than our liabilities, which
creates interest rate risk. We have historically borne this risk internally
through the net spread on our portfolio while continuing to monitor this
interest rate risk.
We purchased EDULINX in December 2004. EDULINX is a Canadian corporation
that engages in servicing Canadian student loans. As a result of this
acquisition, we are also exposed to market risk related to fluctuations in
foreign currency exchange rates between the U.S. and Canadian dollars. We have
not entered into any foreign currency derivative instruments to hedge this risk.
Fluctuations in foreign currency exchange rates may have an adverse effect on
our financial position, results of operations and cash flows.
Our derivative instruments may not be successful in managing our interest
rate risks.
When we utilize derivative instruments, we utilize them to manage interest
rate sensitivity. Although we do not use derivative instruments for speculative
purposes, the majority of our derivative instruments do not qualify for hedge
accounting under Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, or SFAS No. 133;
consequently, the change in fair value of these derivative instruments is
included in our operating results. Changes or shifts in the forward yield curve
can significantly impact the valuation of our derivatives. Accordingly, changes
or shifts to the forward yield curve will impact our financial position, results
of operations and cash flows. The derivative instruments used by us are
typically in the form of interest rate swaps, basis swaps and interest rate
caps. Interest rate swaps effectively convert variable-rate debt obligations to
a fixed rate or fixed-rate debt obligations to a variable rate. Basis swaps
effectively convert variable-rate debt obligations to a variable rate based on a
different index. Interest rate caps effectively limit the maximum interest on
variable-rate debt obligations.
Developing an effective strategy for dealing with movements in interest
rates is complex, and no strategy can completely insulate us from risks
associated with such fluctuations. In addition, a counterparty to a derivative
instrument could default on its obligation, thereby exposing us to credit risk.
Further, we may have to repay certain costs, such as transaction fees or
brokerage costs, if we terminate a derivative instrument. Finally, our interest
rate risk management activities could expose us to substantial losses if
interest rates move materially differently from management's expectations. As a
result, we cannot assure that our economic hedging activities will effectively
manage our interest rate sensitivity or have the desired beneficial impact on
our results of operations or financial condition.
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When the fair value of a derivative instrument is negative, we owe the
counterparty and, therefore, have no credit risk. However, if the value of
derivatives with a counterparty exceeds a specified threshold, we may have to
pay a collateral deposit to the counterparty. If interest rates move materially
differently from management's expectations, we could be required to deposit a
significant amount of collateral with our derivative instrument counterparties.
The collateral deposits, if significant, could negatively impact our capital
resources and liquidity. We manage market risks associated with interest rates
by establishing and monitoring limits as to the types and degree of risk that
may be undertaken.
We face liquidity risks due to the fact that our operating and warehouse
financing needs are substantially provided by third-party sources.
Our primary funding needs are those required to finance our student loan
portfolio and satisfy our cash requirements for new student loan originations
and acquisitions, operating expenses and technological development. Our
operating and warehouse financings are substantially provided by third parties,
over which we have no control. Unavailability of such financing sources may
subject us to the risk that we may be unable to meet our financial commitments
to creditors, branding partners, forward flow lenders or borrowers when due
unless we find alternative funding mechanisms.
We rely upon conduit warehouse loan financing vehicles to support our
funding needs on a short-term basis. There can be no assurance that we will be
able to maintain such warehouse financing in the future. As of December 31,
2004, we had a student loan warehousing capacity of $4.3 billion, of which $2.5
billion was outstanding, through 364-day commercial paper conduit programs.
These conduit programs mature in 2005 through 2009; however, they must be
renewed annually by underlying liquidity providers and may be terminated at any
time for cause. There can be no assurance we will be able to maintain such
conduit facilities, find alternative funding or increase the commitment level of
such facilities, if necessary. While our conduit facilities have historically
been renewed for successive terms, there can be no assurance that this will
continue in the future. We have two general operating lines of credit that are
for terms of less than one year each, are renewable at the option of the lenders
and may be terminated at any time for cause. In addition, we have a credit
facility agreement with a Canadian financial institution that is cancelable by
either party upon demand.
Characteristics unique to asset-backed securitization pose risks to our
continued liquidity.
We have historically relied upon, and expect to continue to rely upon,
asset-backed securitizations as our most significant source of funding for
student loans on a long-term basis. As of December 31, 2004 and 2003, $11.8
billion and $9.3 billion, respectively, of our student loans were funded by
long-term asset-backed securitizations. The net cash flow we receive from the
securitized student loans generally represents the excess amounts, if any,
generated by the underlying student loans over the amounts required to be paid
to the bondholders, after deducting servicing fees and any other expenses
relating to the securitizations. In addition, some of the residual interests in
these securitizations have been pledged to secure additional bond obligations.
Our rights to cash flow from securitized student loans are subordinate to
bondholder interests, and these loans may fail to generate any cash flow beyond
what is due to pay bondholders.
The interest rates on certain of our asset-backed securities are set and
periodically reset via a "dutch auction" utilizing remarketing agents for
varying intervals ranging from seven to 91 days. Investors and potential
investors submit orders through a broker-dealer as to the principal amount of
notes they wish to buy, hold or sell at various interest rates. The
broker-dealers submit their clients' orders to the auction agent or remarketing
agent, who determines the interest rate for the upcoming period. If there are
insufficient potential bid orders to purchase all of the notes offered for sale
or being repriced, we could be subject to interest costs substantially above the
anticipated and historical rates paid on these types of securities. A failed
auction or remarketing could also reduce the investor base of our other
financing and debt instruments.
In addition, rising interest rates existing at the time our asset-backed
securities are remarketed may cause other competing investments to become more
attractive to investors than our securities, which may decrease our liquidity.
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Future losses due to defaults on loans held by us present credit risk which
could adversely affect our earnings.
As of December 31, 2004, more than 99% of our student loan portfolio was
comprised of FFELP loans. These loans benefit from a federal guarantee of
between 98% and 100% of their principal balance and accrued interest.
In June 2004, we were designated as an Exceptional Performer by the
Department in recognition of our exceptional level of performance in servicing
FFEL Program loans. As a result of this designation, we are not subject to the
2% risk sharing loss for eligible claims submitted during a 12-month period. We
are entitled to receive this benefit as long as we and/or our other service
providers designated as Exceptional Performers continue to meet the required
servicing standards published by the Department. Compliance with such standards
is assessed on a quarterly basis. We bear full risk of losses experienced with
respect to the unguaranteed portion of our FFELP loans (those loans not serviced
by a service provider designated as an Exceptional Performer). If we or a
third-party service provider were to lose its Exceptional Performance
designation, either by the Department discontinuing the program or us or the
third party not meeting the required servicing standards, loans serviced by us
or the third party would become subject to the 2% risk sharing loss for all
claims submitted after any loss of the Exceptional Performance designation. If
the Department discontinued the program, we would have to establish a provision
for loan losses related to the 2% risk sharing. Based on the balance of FFELP
loans outstanding as of December 31, 2004, this provision would be approximately
$9.0 million. In addition, President Bush's fiscal year 2006 budget proposals
provide for a decrease in insurance (i) under the Exceptional Performer
designation from 100% to 97% or greater and (ii) on portfolios not subject to
the Exceptional Performer designation from 98% to 95% of principal and accrued
interest. We cannot predict whether the budget proposals will be enacted into
law, but they may form some of the framework for Congress as it negotiates the
fiscal year 2006 budget resolution.
Losses on our non-federally insured loans are borne by us, with the
exception of certain privately insured loans. Privately insured loans constitute
a minority of our non-federally insured loan portfolio. The loan loss pattern on
our non-federally insured loan portfolio is not as developed as that on our
FFELP loan portfolio. As of December 31, 2004, the aggregate principal balance
of non-federally insured loans comprised less than 1% of our entire student loan
portfolio; however, it is expected to increase to between 3% and 5% over the
next three to five years. There can be no assurance that this percentage will
not further increase over the long term. The performance of student loans in the
portfolio is affected by the economy, and a prolonged economic downturn may have
an adverse effect on the credit performance of these loans.
While we have provided allowances estimated to cover losses that may be
experienced in both our FFELP and non-federally insured loan portfolios, there
can be no assurance that such allowances will be sufficient to cover actual
losses in the future.
We could experience cash flow problems if a guaranty agency defaults on its
guarantee obligation.
A deterioration in the financial status of a guaranty agency and its
ability to honor guarantee claims on defaulted student loans could result in a
failure of that guaranty agency to make its guarantee payments in a timely
manner, if at all. The financial condition of a guaranty agency can be adversely
affected if it submits a large number of reimbursement claims to the Department,
which results in a reduction of the amount of reimbursement that the Department
is obligated to pay the guaranty agency. The Department may also require a
guaranty agency to return its reserve funds to the Department upon a finding
that the reserves are unnecessary for the guaranty agency to pay its FFEL
Program expenses or to serve the best interests of the FFEL Program.
If the Department has determined that a guaranty agency is unable to meet
its guarantee obligations, the loan holder may submit claims directly to the
Department, and the Department is required to pay the full guarantee claim.
However, the Department's obligation to pay guarantee claims directly in this
fashion is contingent upon the Department making the determination that a
guaranty agency is unable to meet its guarantee obligations. The Department may
not ever make this determination with respect to a guaranty agency and, even if
the Department does make this determination, payment of the guarantee claims may
not be made in a timely manner, which could result in us experiencing cash
shortfalls.
Failure of counterparties to perform under credit enhancement agreements
could harm our business.
In connection with our securitizations, we periodically utilize credit
enhancements or other support agreements such as letters of credit, bond
insurance and interest rate swap agreements. We utilize these credit enhance-
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ment agreements in order to improve the marketability of certain of our
asset-backed securities when such enhancements will lower the overall costs with
respect to these securities. We cannot assure performance of the counterparties
to these various agreements, and failure of such counterparties to perform their
obligations under these agreements could impair the viability of the underlying
debt or securitization structures, which in turn could adversely impact our
results of operations and financial condition.
Competition created by the FDL Program and from other lenders and servicers
may adversely impact our business.
Under the FDL Program, the Department makes loans directly to student
borrowers through the educational institutions they attend. The volume of
student loans made under the FFEL Program and available for us to originate or
acquire may be reduced to the extent loans are made to students under the FDL
Program. In addition, if the FDL Program expands, to the extent the volume of
loans serviced by us is reduced, we may experience reduced economies of scale,
which could adversely affect earnings. Loan volume reductions could further
reduce amounts received by the guaranty agencies available to pay claims on
defaulted student loans.
In the FFEL Program market, we face significant competition from SLM
Corporation. SLM Corporation services nearly half of all outstanding FFELP loans
and is the largest holder of student loans. We also face intense competition
from other existing lenders and servicers. As we expand our student loan
origination and acquisition activities, that expansion may result in increased
competition with some of our servicing customers. This has in the past resulted
in servicing customers terminating their contractual relationships with us, and
we could in the future lose more servicing customers as a result. As we seek to
further expand our business, we will face numerous other competitors, many of
which will be well established in the markets we seek to penetrate. Some of our
competitors are much larger than us, have better name recognition and have
greater financial and other resources. In addition, several competitors have
large market capitalizations or cash reserves and are better positioned to
acquire companies or portfolios in order to gain market share. Furthermore, many
of the institutions with which we compete have significantly more equity
relative to their asset bases. Consequently, such competitors may have more
flexibility to address the risks inherent in the student loan business. Finally,
some of our competitors are tax-exempt organizations which do not pay federal or
state income taxes and which generally receive floor income on certain
tax-exempt obligations on a greater percentage of their student loan portfolio
because they have financed a greater percentage of their student loans with
tax-exempt obligations issued prior to October 1, 1993. These factors could give
our competitors a strategic advantage.
Higher rates of prepayments of student loans could reduce our profits.
Pursuant to the Higher Education Act, borrowers may prepay loans made under
the FFEL Program at any time. Prepayments may result from consolidating student
loans, which tends to occur more frequently in low interest rate environments,
from borrower defaults, which will result in the receipt of a guarantee payment,
and from voluntary full or partial prepayments, among other things. High
prepayment rates will have the most impact on our asset-backed securitization
transactions priced in relation to LIBOR. The rate of prepayments of student
loans may be influenced by a variety of economic, social and other factors
affecting borrowers, including interest rates and the availability of
alternative financing. Our profits could be adversely affected by higher
prepayments, which would reduce the amount of interest we receive and expose us
to reinvestment risk.
Increases in consolidation loan activity by us and our competitors present
a risk to our loan portfolio and profitability.
Our portfolio of FFELP loans is subject to refinancing through the use of
consolidation loans, which are expressly permitted by the Higher Education Act.
Consolidation loan activity may result in three detrimental effects. First, when
we consolidate loans in our portfolio, the new consolidation loans have a lower
yield than the loans being refinanced due to the statutorily mandated
consolidation loan rebate fee of 1.05% per year. Although consolidation loans
generally feature higher average balances, longer average lives and slightly
higher special allowance payments, such attributes may not be sufficient to
counterbalance the cost of the rebate fees. Second, and more significantly, we
may lose student loans in our portfolio that are consolidated away by competing
lenders. Increased consolidations of student loans by our competitors may result
in a negative return on loans, when considering the origination costs or
acquisition premiums paid with respect to these loans. Additionally,
consolidation of loans away by competing lenders can result in a decrease of our
servicing portfolio, thereby decreasing fee-based servicing income. Third,
increased consolidations of our own student loans create cash flow risk because
we incur upfront consolidation costs, which are in addition to the origination
or acquisition costs incurred in connection with the underlying student loans,
while extending the repayment schedule of the consolidated loans.
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Our student loan origination and lending activities could be significantly
impacted by the reauthorization of the Higher Education Act relative to the
single holder rule. For example, if the single holder rule, which generally
restricts a competitor from consolidating loans away from a holder that owns all
of a student's loans, were abolished, a substantial portion of our
non-consolidated portfolio would be at risk of being consolidated away by a
competitor. On the other hand, abolition of the rule would also open up a
portion of the rest of the market and provide us with the potential to gain
market share. Other potential changes to the Higher Education Act relating to
consolidation loans that could adversely impact us include allowing refinancing
of consolidation loans, which would open approximately 59% of our portfolio to
such refinancing, and increasing origination fees paid by lenders in connection
with making consolidation loans.
The volume of available student loans may decrease in the future and may
adversely affect our income.
Our student loan originations generally are limited to students attending
eligible educational institutions in the United States. Volumes of originations
are greater at some schools than others, and our ability to remain an active
lender at a particular school with concentrated volumes is subject to a variety
of risks, including the fact that each school has the option to remove us from
its "preferred lender" list or to add other lenders to its "preferred lender"
list, the risk that a school may enter the FDL Program or the risk that a school
may begin making student loans itself. We acquire student loans through forward
flow commitments with other student loan lenders, but each of these commitments
has a finite term. There can be no assurance that these lenders will renew or
extend their existing forward flow commitments on terms that are favorable to
us, if at all, following their expiration.
In addition, as of December 31, 2004, third parties owned approximately 58%
of the loans we serviced. To the extent that third-party servicing clients
reduce the volume of student loans that we process on their behalf, our income
would be reduced, and, to the extent the related costs could not be reduced
correspondingly, net income could be materially adversely affected. Such volume
reductions occur for a variety of reasons, including if third-party servicing
clients commence or increase internal servicing activities, shift volume to
another service provider, perhaps because such other service provider does not
compete with the client in student loan originations and acquisitions, or exit
the FFEL Program completely.
Special allowance payments on student loans originated or acquired with the
proceeds of certain tax-exempt obligations may limit the interest rate on
certain student loans to our detriment.
Student loans originated or acquired with the proceeds of tax-exempt
obligations issued prior to October 1, 1993, as well as student loans acquired
with the sale proceeds of those student loans, receive only a portion of the
special allowance payment which they would otherwise be entitled to receive, but
those made prior to October 30, 2004 are guaranteed a minimum rate of return of
9.5% per year, less the applicable interest rate for the student loan.
As of December 31, 2004, approximately $3.0 billion of our student loan
portfolio was comprised of loans that were previously financed with the proceeds
of tax-exempt obligations issued prior to October 1, 1993. Based upon provisions
of the Higher Education Act and related interpretations by the Department, we
believe that, for each of these student loans, we will receive partial special
allowance payments, subject to the 9.5% Floor. However, the Department may
change its regulations or its interpretations of existing regulations, or the
Higher Education Act may be amended, to eliminate this special allowance payment
treatment. In this event, we would receive regular special allowance payments,
but with no minimum rate of return.
In the current low interest rate environment, we generally receive partial
special allowance payments and the 9.5% Floor with respect to our eligible
student loans originated or acquired with qualifying tax-exempt proceeds. In a
higher interest rate environment, however, the regular special allowance
payments on loans not originated or acquired with qualifying tax-exempt proceeds
may exceed the total subsidy to holders of eligible loans originated or acquired
with qualifying tax-exempt proceeds. Thus, in a higher interest rate
environment, these loans could have an adverse effect upon our earnings.
Failures in our information technology system could materially disrupt our
business.
Our servicing and operating processes are highly dependent upon our
information technology system infrastructure, and we face the risk of business
disruption if failures in our information systems occur, which could have a
material impact upon our business and operations. We depend heavily on our own
computer-based data processing systems in servicing both our own student loans
and those of third-party servicing customers. If servicing errors do occur, they
may result in a loss of the federal guarantee on the FFELP loans serviced or in
a failure to collect
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amounts due on the student loans that we serviced. In addition, although we
regularly back up our data and maintain detailed disaster recovery plans, we do
not maintain fully redundant information systems. A major physical disaster or
other calamity that causes significant damage to information systems could
adversely affect our business. Additionally, loss of information systems for a
sustained period of time could have a negative impact on our performance and
ultimately on cash flow in the event we were unable to process borrower
payments.
Transactions with affiliates and potential conflicts of interest of certain
of our officers and directors, including one of our co-chief executive
officers, pose risks to our shareholders.
We have entered into certain contractual arrangements with entities
controlled by Michael S. Dunlap, our Chairman and Co-Chief Executive Officer and
a principal shareholder, and members of his family and, to a lesser extent, with
entities in which other directors and members of management hold equity
interests or board or management positions. Such arrangements constitute a
significant portion of our business and include, among other things:
o performance of servicing duties;
o sales of student loans by such affiliates to us; and
o sales of student loan origination rights by such affiliates to us.
These arrangements may present potential conflicts of interest.
Many of these arrangements are with Union Bank and Trust Company, or Union
Bank, in which Michael S. Dunlap owns an indirect interest and of which he
serves as non-executive chairman. Union Bank is a significant source of student
loans to us and a servicing customer of ours.
In 2004 and 2003, approximately 9.5% and 10.4%, respectively, of the
principal amount of our student loan channel acquisitions was acquired from
Union Bank, a portion of which loans were originated by Union Bank and a portion
of which were originated by third parties. We believe that the acquisitions were
made on terms similar to those made from unrelated entities. We intend to
maintain our relationship with Union Bank, which provides substantial benefits
to us, although there can be no assurance that all transactions engaged in with
Union Bank are, or in the future will be, on terms that are no less favorable
than what could be obtained from an unrelated third party.
Material problems affecting Union Bank could have a material adverse effect
on us.
Although we have taken over student loan marketing and origination
functions from Union Bank, the ability of Union Bank to continue to do business
with us will depend on the development of Union Bank's own business, financial
condition and results of operations, which will be affected by competitive and
other factors beyond our control or knowledge. Because Union Bank is a privately
held company, an investor in our securities might have little advance warning of
problems affecting Union Bank, even though these problems could have a material
adverse effect on us.
Imposition of personal holding company tax would decrease our net income.
A corporation is considered to be a "personal holding company" under the
U.S. Internal Revenue Code of 1986, as amended, or the Code, if (1) at least 60%
of its adjusted ordinary gross income is "personal holding company income"
(generally, passive income) and (2) at any time during the last half of the
taxable year more than half, by value, of its stock is owned by five or fewer
individuals, as determined under attribution rules of the Code. If both of these
tests are met, a personal holding company is subject to an additional tax on its
undistributed personal holding company income, currently at a 15% rate. Five or
fewer individuals hold more than half the value of our stock. In June 2003, we
submitted a request for a private letter ruling from the Internal Revenue
Service seeking a determination that our FFELP loans qualify as assets of a
"lending or finance business," as defined in the Code. Such a determination
would have enabled us to establish that a company holding such loans does not
constitute a personal holding company. Based on its historical practice of not
issuing private letter rulings concerning matters that it considers to be
primarily factual, the Internal Revenue Service has indicated that it will not
issue the requested ruling, taking no position on the merits of the legal issue.
So long as more than half of our value continues to be held by five or fewer
individuals, if it were to be determined that some portion of our FFELP loans do
not qualify as assets of a "lending or finance business," as defined in the
Code, we could become subject to personal holding com-
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pany tax on our undistributed personal holding company income. We continue to
believe that neither we nor any of our subsidiaries is a personal holding
company. However, even we or one of our subsidiaries was determined to be a
personal holding company, we believe that by utilizing intercompany
distributions, we can eliminate or substantially eliminate our exposure to
personal holding company taxes, although we cannot assure that this will be the
case.
"Do not call" registries limit our ability to market our products and
services.
Our direct marketing operations are or may become subject to various
federal and state "do not call" laws and requirements. In January 2003, the
Federal Trade Commission amended its rules to provide for a national "do not
call" registry. Under these new federal regulations, which are currently being
challenged in court, consumers may have their phone numbers added to the
national "do not call" registry. Generally, we are prohibited from calling
anyone on that registry. In September 2003, telemarketers first obtained access
to the registry and since that time have been required to compare their call
lists against the national "do not call" registry at least once every 90 days.
We are also required to pay a fee to access the registry on a quarterly basis.
Enforcement of the federal "do not call" provisions began in the fall of 2003,
and the rule provides for fines of up to $11,000 per violation and other
possible penalties. This and similar state laws may restrict our ability to
effectively market our products and services to new customers. Furthermore,
compliance with this rule may prove difficult, and we may incur penalties for
improperly conducting our marketing activities.
Our inability to maintain our relationships with significant branding
partners and/or customers could have an adverse impact on our business.
Our inability to maintain strong relationships with significant schools,
branding partners, servicing customers, guaranty agencies and software licensees
could result in loss of:
o loan origination volume with borrowers attending certain schools;
o loan origination volume generated by some of our branding partners;
o loan and guarantee servicing volume generated by some of our loan
servicing customers and guaranty agencies; and
o software licensing volume generated by some of our licensees.
We cannot assure that our forward flow channel lenders or our branding
partners will continue their relationships with us. Loss of a strong
relationship, such as that with a significant branding partner or with schools
from which a significant volume of student loans is directly or indirectly
acquired, could result in an adverse effect on our business.
The business of servicing Canadian student loans by EDULINX is limited to
four servicing customers and the agreement with the largest of such customers,
which accounts for a significant portion of EDULINX's business, is currently
scheduled to expire in February 2006. EDULINX cannot guarantee that it will
obtain a renewal of this largest servicing agreement or that it will maintain
its other servicing agreements, and the termination of any such servicing
agreements could result in an adverse effect on its business.
We cannot predict with certainty the outcome of the SEC informal
investigation.
Following our disclosures related to recognition of 9.5% Floor income,
Senator Edward M. Kennedy of Massachusetts, by letter to the Secretary of
Education dated August 26, 2004, requested information as to whether the
Department had approved of our receipt of the 9.5% Floor income and, if not, why
the Department had not sought to recover claimed subsidies under the 9.5% Floor.
By letter dated September 10, 2004, we furnished to the Department certain
background information concerning the growth of the 9.5% Floor loans in our
portfolio, which information had been requested by the Department. Senator
Kennedy, in a letter to the SEC dated September 21, 2004, requested that the SEC
investigate our activities related to the 9.5% Floor. More specifically, Senator
Kennedy raised concerns about our disclosures in connection with our decision to
recognize the previously deferred income and trading of our securities by our
executives following such disclosures. On September 27, 2004, we voluntarily
contacted the SEC to request a meeting with the SEC Staff. Our request was
granted, and our representatives met with representatives of the SEC Staff on
October 12, 2004. Our representatives offered to provide to the SEC
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information that the SEC Staff wished to have relating to the issues raised in
Senator Kennedy's letter. By letter dated October 14, 2004, the SEC Staff
requested that, in connection with an informal investigation, we provide certain
identified information. We have furnished to the SEC Staff the information it
has requested and are fully cooperating with the SEC Staff in its informal
investigation. We continue to believe that the concerns expressed to the SEC by
Senator Kennedy are entirely unfounded, but it is not appropriate or feasible to
determine or predict the ultimate outcome of the SEC's informal investigation.
Our costs related to the SEC's informal investigation are being expensed as
incurred. Additional costs, if any, associated with an adverse outcome or
resolution of that matter, in a manner that is currently indeterminate and
inherently unpredictable, could adversely affect our financial condition and
results of operations. Although it is possible that an adverse outcome in
certain circumstances could have a material adverse effect, based on information
currently known by our management, in our opinion, the outcome of such pending
informal investigation is not likely to have such an effect.
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USE OF PROCEEDS
Except as may otherwise be described in the prospectus supplement relating
to an offering of securities, the net proceeds from the sale of the securities
included in this prospectus will be used for general corporate purposes. Any
specific allocation of the net proceeds of an offering of securities to a
specific purpose will be determined at the time of such offering and will be
described in the related prospectus supplement.
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RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The ratio of earnings to fixed charges for each of the years set forth
below is as follows:
Year Ended December 31,
2004 2003 2002 2001 2000
Ratio of earnings to fixed
charges(1)(2)....................... 1.92 1.23 1.32 1.06 1.03
(1) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings from continuing operations before income
taxes, minority interest and income or loss from equity investments, plus
distributed income of equity investments and fixed charges. Fixed charges
include interest expense on indebtedness and rental expense on operating
leases representing that portion of rental expense deemed to be interest.
(2) Because we had no preferred stock outstanding during any of the periods
presented, the ratio of earnings to combined fixed charges and preferred
stock dividends is identical to the ratio of earnings to fixed charges for
each of the years presented.
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GENERAL DESCRIPTION OF THE OFFERED SECURITIES
We may offer from time to time under this prospectus, separately or
together:
o Class A common stock;
o preferred stock;
o unsecured senior or subordinated debt securities;
o warrants to purchase Class A common stock, preferred stock or debt
securities;
o stock purchase contracts to purchase shares of Class A common stock;
and
o stock purchase units, each consisting of (a) a Nelnet Class A common
stock purchase contract, under which the holder or Nelnet, upon
settlement, will purchase a fixed or varying number of shares of
Nelnet Class A common stock, and (b) a beneficial interest in either
Nelnet debt securities, Nelnet preferred stock or debt or equity
obligations of third parties, including U.S. Treasury securities,
purchased with the proceeds from the sale of the Nelnet stock purchase
units.
Material U.S. federal income tax considerations pertaining to an investment
in the securities offered will be described in the applicable prospectus
supplement.
References to "Nelnet," "we," "our" or "us" in "Description of Nelnet, Inc.
Capital Stock," "Description of Nelnet, Inc. Preferred Stock," "Description of
Nelnet, Inc. Debt Securities," "Description of Nelnet, Inc. Warrants to Purchase
Class A Common Stock or Preferred Stock," "Description of Nelnet, Inc. Warrants
to Purchase Debt Securities" and "Description of Nelnet, Inc. Stock Purchase
Contracts and Stock Purchase Units" refer solely to Nelnet, Inc. and not its
subsidiaries.
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DESCRIPTION OF NELNET, INC. CAPITAL STOCK
Our amended and restated articles of incorporation, which we refer to as
our articles of incorporation, provide that we have the authority to issue
615,000,000 shares of common stock, par value $0.01 per share. The common stock
is divided into two classes, consisting of 600,000,000 shares of Class A common
stock and 15,000,000 shares of Class B common stock. As of December 31, 2004,
39,687,037 shares of Class A common stock and 13,983,454 shares of Class B
common stock were issued and outstanding.
Voting Rights
To the extent permitted by law, holders of Class A common stock are
entitled to one vote per share and holders of Class B common stock are entitled
to ten votes per share on all matters submitted to a vote of shareholders.
Except as otherwise required by law, Class A common stock and Class B common
stock shall vote as a single class on all matters to be voted on by our
shareholders, including, without limitation, any consolidation or merger of us
into or with any other corporation or the sale or transfer by us of all or
substantially all of our assets. With the approval of a majority of the shares
of Class B common stock, voting separately as a class, we may lower the number
of votes per share each share of Class B common stock shall be entitled to have.
Dividends
Holders of common stock are entitled to receive ratably dividends payable
in cash, in stock or otherwise if, as and when declared by the board of
directors out of assets legally available therefor, subject to any preferential
rights of any outstanding preferred stock.
Conversion
Each share of Class B common stock shall automatically be converted into
one share of Class A common stock, without any action by us or further action by
the holder thereof, upon the transfer of such share, other than the following
transfers:
o to any other holder of Class B common stock or an affiliate of a
holder of Class B common stock which holder is a natural person or a
"business organization," as defined in our articles of incorporation;
o to a spouse, sibling, parent, grandparent or descendant, whether
natural or adopted, of a holder of Class B common stock;
o to a trust for the sole benefit of:
- a holder of Class B common stock who is a natural person,
- a spouse, sibling, parent, grandparent or descendent, whether
natural or adopted, of a holder of Class B common stock, and/or
- a charitable foundation or other organization qualified under
Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended;
o by will to:
- a spouse, sibling, parent, grandparent or descendent, whether
natural or adopted, of a holder of Class B common stock,
- a charitable foundation or other organization qualified under
Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended, or
- a trust as described above;
o pursuant to the laws of descent and distribution to a spouse, sibling,
parent, grandparent or descendant, whether natural or adopted, of a
holder of Class B common stock;
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o to any charitable foundation or other organization qualified under
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended; or
o to us.
Notwithstanding the foregoing, Class B common stock shall automatically
convert into Class A common stock upon any transfer pursuant to a divorce or
separation agreement or order.
For purposes of this paragraph, "affiliate" means, with respect to any
business organization, any natural person or business organization that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such business organization.
Each share of Class B common stock shall, at the option of the holder
thereof, be convertible into one share of Class A common stock at any time.
In the event at any time the shares of Class B common stock outstanding
constitute less than 50% of the Class B common stock outstanding on December 16,
2003, the date of our initial public offering of Class A common stock, each
remaining share of Class B common stock outstanding shall automatically be
converted into one share of Class A common stock.
Other Rights
On liquidation, dissolution or winding up of Nelnet, after payment in full
of the amounts required to be paid to the holders of any outstanding preferred
stock, all holders of common stock are entitled to receive ratably any assets
available for distribution to holders of common stock after the payment of all
of our debts and other liabilities. No shares of common stock have preemptive
rights to purchase additional shares of common stock. All the outstanding shares
of common stock are, and any shares sold hereunder will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
will be subject to and may be adversely affected by the rights of holders of any
preferred stock that may be issued in the future. All shares of Class A common
stock and Class B common stock which are acquired by us shall become authorized
but no longer outstanding, and may be reissued by us at any time.
DESCRIPTION OF NELNET, INC. PREFERRED STOCK
General
The following summary of terms of our preferred stock is not complete. You
should refer to the provisions of our articles of incorporation and by-laws and
the terms of each class or series of the preferred stock, which will be filed
with the SEC at or prior to the time of issuance of such class or series of
preferred stock and described in the applicable prospectus supplement. The
applicable prospectus supplement may also state that any of the terms set forth
herein are inapplicable to such series of preferred stock; provided that the
information set forth in such prospectus supplement does not constitute material
changes to the information herein such that it alters the nature of the offering
or the securities offered.
Our articles of incorporation also provide that we have authority to issue
50,000,000 shares of preferred stock, par value $0.01 per share. Our board of
directors may fix the relative rights and preferences of each series of
preferred stock in a resolution of the board of directors.
Issuances of shares of preferred stock are subject to the applicable rules
of the New York Stock Exchange or other organizations on whose systems our
preferred stock may then be quoted or listed. Depending upon the terms of the
preferred stock established by our board of directors, any or all series of
preferred stock could have preferences over the common stock with respect to
dividends and other distributions and upon our liquidation. Issuance of any such
shares with voting powers, or issuance of additional shares of common stock,
would dilute the voting power of the outstanding common shares.
Terms
The terms of each series of preferred stock will be described in any
prospectus supplement related to such series of preferred stock.
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The board of directors in approving the issuance of a series of preferred
stock has authority to determine, and the applicable prospectus supplement may
set forth with respect to such series, the following terms, among others:
o the number of shares constituting that series and the distinctive
designation of that series;
o the dividend rate on the shares of that series, if any, whether
dividends will be cumulative and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on
shares of that series;
o the voting rights for shares of the series, if any, in addition to the
voting rights provided by law, and the terms of such voting rights;
o the conversion or exchange privileges for shares of the series, if
any, including, without limitation, conversion into shares of common
stock, and the terms and conditions of such conversion or exchange,
including provisions for adjustment of the conversion or exchange rate
in such events as the board will determine;
o whether or not the shares of that series will be redeemable and, if
so, the terms and conditions of such redemption, including the manner
of selecting shares for redemption if less than all shares are to be
redeemed, the date or dates upon or after which they will be
redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates;
o any sinking fund for the redemption or purchase of shares of that
series and the terms and amount of such sinking fund;
o the rights of the shares of that series to the benefit of conditions
and restrictions upon the creation of our indebtedness or that of any
of our subsidiaries, upon the issue of any additional shares,
including additional shares of such series or any other series, and
upon the payment of dividends or the making of other distributions on,
and the purchase, redemption or other acquisition by us or any of our
subsidiaries of, any of our outstanding shares;
o the rights of the shares of that series in the event of our voluntary
or involuntary liquidation, dissolution or winding up, and the
relative rights of priority, if any, of payment of shares of that
series; and
o any other relevant participating, optional or other special rights,
qualifications, limitations or restrictions of that series.
Non-U.S. Currency
If the purchase price of any shares of capital stock is payable in a
currency other than U.S. dollars, the specific terms with respect to such
capital stock and such foreign currency will be specified in the applicable
prospectus supplement.
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DESCRIPTION OF NELNET, INC. DEBT SECURITIES
General
We may issue debt securities from time to time in one or more series, under
one or more indentures, each dated as of a date on or prior to the issuance of
the debt securities to which it relates. Senior debt securities and subordinated
debt securities may be issued pursuant to separate indentures, a senior
indenture and a subordinated indenture, respectively, in each case between us
and a trustee qualified under the Trust Indenture Act. The forms of such
indentures have been filed as exhibits to the registration statement of which
this prospectus is a part, subject to such amendments or supplements as may be
adopted from time to time. The senior indenture and the subordinated indenture,
as amended or supplemented from time to time, are sometimes referred to
individually as an indenture and collectively as the indentures. Each indenture
will be subject to and governed by the Trust Indenture Act. The aggregate
principal amount of debt securities which may be issued under each indenture
will be unlimited, and each indenture will set forth the specific terms of any
series of debt securities or provide that such terms will be set forth in, or
determined pursuant to, an authorizing resolution, as defined in the applicable
prospectus supplement, and/or a supplemental indenture, if any, relating to such
series.
The statements made below relating to the debt securities and the
indentures are summaries of the anticipated provisions thereof, do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the applicable indenture and any
applicable U.S. federal income tax considerations as well as any applicable
modifications of or additions to the general terms described below in the
applicable prospectus supplement. The applicable prospectus supplement may also
state that any of the terms set forth herein are inapplicable to such series of
debt securities; provided that the information set forth in such prospectus
supplement does not constitute material changes to the information herein such
that it alters the nature of the offering or the securities offered.
Terms
The debt securities will be our unsecured obligations.
The senior debt securities will rank equal in right of payment with all our
other unsecured and unsubordinated indebtedness.
The subordinated debt securities will be subordinated in right of payment
to the prior payment in full of all our senior indebtedness, which is defined in
the section called "--Ranking of Debt Securities" below.
The specific terms of each series of debt securities will be set forth in
the applicable prospectus supplement relating thereto, including the following,
as applicable:
(1) any limit upon the aggregate principal amount of such debt securities
which may be authenticated and delivered under the indenture (except
for debt securities authenticated and delivered upon certain
registrations of transfer of, or in exchange for, or in lieu of, other
such debt securities);
(2) the issue price, expressed as a percentage of the aggregate principal
amount;
(3) the date or dates on which the principal of such debt securities is
payable;
(4) the rate or rates at which such debt securities shall bear interest,
if any, the date or dates from which such interest shall accrue, the
interest payment dates on which such interest shall be payable and the
regular record date for the interest payable on the interest payment
date;
(5) our obligation, if any, to redeem or purchase such debt securities
pursuant to any sinking fund or analogous provisions or at the option
of a holder thereof and the period or periods within which, the price
or prices at which and the terms and conditions upon which such debt
securities shall be redeemed or purchased, in whole or in part,
pursuant to such obligation;
(6) the period or periods within which, the price or prices or ratios at
which and the terms and conditions upon which such debt securities may
be redeemed, converted or exchanged, in whole or in part;
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(7) if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which such debt securities shall be
issuable;
(8) if other than the full principal amount, the portion of the principal
amount of such debt securities which will be payable upon declaration
of acceleration or provable in bankruptcy;
(9) any events of default not set forth in the indenture;
(10) the currency or currencies, including composite currencies, in which
payment of the principal of (and premium, if any) and interest, if
any, on such debt securities shall be payable (if other than the
currency of the United States of America), which unless otherwise
specified shall be the currency of the United States of America as at
the time of payment is legal tender for payment of public or private
debts;
(11) if the principal of (and premium, if any) or interest, if any, on such
debt securities is to be payable, at our election or the election of
any holder thereof, in a coin or currency other than that in which
debt securities are stated to be payable, then the period or periods
within which, and the terms and conditions upon which, such election
may be made;
(12) whether interest will be payable in cash or additional debt securities
at our or the holders' option and the terms and conditions upon which
the election may be made;
(13) if such debt securities are to be denominated in a currency or
currencies, including composite currencies, other than the currency of
the United States of America, the equivalent price in the currency of
the United States of America for purposes of determining the voting
rights of holders of such debt securities as outstanding securities
under the indenture;
(14) if the amount of payments of principal of (and premium, if any), or
portions thereof, or interest, if any, on such debt securities may be
determined with reference to an index, formula or other method based
on a coin or currency other than that in which such debt securities
are stated to be payable, the manner in which such amounts shall be
determined;
(15) any additional restrictive covenants or other material terms relating
to such debt securities, which covenants and terms shall not be
inconsistent with the provisions of the indenture;
(16) whether such debt securities shall be issued in whole or in part in
the form of a global security or securities; the terms and conditions,
if any, upon which such global security or securities may be exchanged
in whole or in part for other certificated debt securities and the
depositary for such global security or securities;
(17) any listing of such debt securities on any securities exchange;
(18) additional or alternative provisions, if any, related to defeasance or
discharge of such debt securities;
(19) the applicability of any guarantees;
(20) if convertible into shares of our common stock or preferred stock, the
terms on which such debt securities are convertible, including the
initial conversion price, the conversion period, any events requiring
an adjustment of the applicable conversion price and any requirements
relating to the reservation of such shares of our common stock or
preferred stock for purposes of conversion;
(21) provisions, if any, granting special rights to the holders of such
debt securities upon the occurrence of such events as may be
specified;
(22) each initial place of payment; and
(23) any other terms of such debt securities, which terms shall not be
inconsistent with the provisions of the indenture.
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The debt securities, if convertible or exchangeable, will not be
convertible into or exchangeable for securities of a third party.
If the applicable prospectus supplement provides, the debt securities may
be issued at a discount below their principal amount and provide for less than
the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof.
Except as may be set forth in the applicable prospectus supplement, the
debt securities will not contain any provisions that would limit our ability to
incur indebtedness or that would afford holders of debt securities protections
against transactions involving us, including a highly leveraged transaction
involving us or a change of control. The applicable prospectus supplement will
contain information with respect to any deletions from, modifications of or
additions to the events of default or covenants described below, including any
addition of a covenant or other provision providing event risk or similar
protection.
Denomination, Interest, Registration and Transfer
We will issue the debt securities of each series only in registered form,
without coupons, in denominations of $1,000, or in such other currencies or
denominations as may be set forth in the applicable supplemental indenture or
specified in, or pursuant to, an authorizing resolution and/or supplemental
indenture, if any, relating to such series of debt securities.
The principal of and interest, if any, on any series of debt securities
will be payable at the corporate trust office of the trustee, the address of
which will be stated in the applicable prospectus supplement. However, at our
option, interest payments may be made by check mailed to the address of the
person entitled thereto as it appears in the applicable register for such debt
securities.
Subject to certain limitations imposed upon debt securities issued in
book-entry form, the debt securities of any series:
o will be exchangeable for any authorized denomination of other debt
securities of the same series and of a like aggregate principal amount
and tenor upon surrender of such debt securities at the trustee's
corporate trust office or at the office of any registrar designated by
us for such purpose; and
o may be surrendered for registration of transfer or exchange thereof at
the corporate trust office of the trustee or at the office of any
registrar designated by us for such purpose.
No service charge will be made for any registration of transfer or
exchange, but we may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with certain transfers and
exchanges. We may act as registrar and may change any registrar without notice.
Certain Covenants
The applicable prospectus supplement will describe any material covenants
in respect of a series of debt securities that are not described in this
prospectus.
Senior debt securities will include the provision described below.
Restriction on Liens on Capital Stock of National Education Loan Network, Inc.
In the indenture relating to senior debt, we agree we will not create or
guarantee any debt for borrowed money that is secured by a lien on the capital
stock of our wholly owned subsidiary, National Education Loan Network, Inc.,
unless we also secure the senior debt securities on an equal or priority basis
with the other secured debt. This agreement, however, is subject to an important
exception; we may grant liens on that stock without securing the senior debt
securities if our board of directors determines that the liens do not materially
detract from or interfere with the fair market value or control of that stock.
Except as noted above, neither indenture restricts our ability to put liens
on our interests in our subsidiaries, and they do not restrict our ability to
sell or otherwise dispose of our interests in any of our subsidiaries, including
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National Education Loan Network, Inc., or our ability to borrow at the
subsidiary level, either on a secured or unsecured basis.
Senior debt securities and the subordinated debt securities will include
the provisions described below.
Merger, Consolidation or Sale of Assets
We may not (1) consolidate with or merge into any other person or convey,
transfer, sell or lease all or substantially all of our properties and assets as
an entirety to any other person or (2) permit any person (other than a
subsidiary) to consolidate with or merge into us unless:
o if we are not the surviving person, the surviving person is organized
and existing under the laws of a domestic jurisdiction and assumes the
payment of the principal of, premium, if any, and interest on the debt
securities and the performance of our other covenants under the
applicable indenture;
o immediately after giving effect to the transaction, no event of
default, and no event that, after notice or lapse of time or both,
would become an event of default, will have occurred and be
continuing; and
o we have delivered to the trustee an officer's certificate and an
opinion of counsel stating that all conditions precedent to such
transaction have been complied with.
Payment of Principal, Premium and Interest
We will duly and punctually pay the principal of and premium, if any, and
interest on the debt securities in accordance with the terms of such debt
securities.
Maintenance of Office or Agency
We will maintain an office or agency where the debt securities may be
presented or surrendered for registration of transfer or exchange and where
notices and demands to or upon us in respect of the debt securities may be made.
Money for Securities; Payments to Be Held in Trust
If we will at any time act as our own paying agent with respect to any debt
securities, we will, on or before each due date of the principal of and premium,
if any, or interest on any of the debt securities, segregate and hold in trust
for the benefit of the persons entitled thereto a sum sufficient to pay the
principal and premium, if any, or interest so becoming due until such sums will
be paid to such persons or otherwise disposed of as provided in the indentures
and will promptly notify the trustee of our action or failure so to act.
Corporate Existence
Except as permitted under "--Merger, Consolidation or Sale of Assets"
above, we will do or cause to be done all things necessary to preserve and keep
in full force and effect our corporate existence, rights (charter and statutory)
and franchises; provided that we will not be required to preserve any such right
or franchise if our board of directors or senior management determines that the
preservation thereof is no longer desirable in the conduct of our business and
that the loss thereof is not disadvantageous in any material respect to the
holders.
Maintenance of Properties
We will use our reasonable efforts to cause all material properties used or
useful in the conduct of our business to be maintained and kept in good
condition, repair and working order (subject to wear and tear) and supplied with
all necessary material equipment and will use our reasonable efforts to cause to
be made all necessary material repairs, renewals, replacements, betterments and
improvements thereof, all as in our judgment may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided that nothing will prevent us from discontinuing
the operation or maintenance of any of such properties if such discontinuance
is, in our judgment, desirable in the conduct of our business and not
disadvantageous in any material respect to the holders.
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Statement by Officers as to Default
We will deliver to the trustee, within 120 days after the end of each of
our fiscal years, a certificate of our principal executive officer, principal
financial officer or principal accounting officer stating whether or not to the
best knowledge of the signer thereof we are in default in the performance and
observance of any of the terms, provisions and conditions of the indenture, and
if we are in default, specifying all such defaults and the nature and status
thereof of which they may have knowledge.
Waiver of Certain Covenants
In respect of any series of debt securities, we may omit in any particular
instance to comply with any term, provision or condition of the foregoing
covenants if before or after the time for such compliance the holders of at
least a majority in principal amount of the outstanding debt securities of such
series will, by act of such holders, either waive such compliance in such
instance or generally waive compliance with such term, provision or condition
except to the extent so expressly waived, and, until such waiver will become
effective, our obligations and the duties of the trustee in respect of any such
term, provision or condition will remain in full force and effect.
Ranking of Debt Securities
General
We currently conduct our asset management operations through certain of our
subsidiaries and these subsidiaries generate a significant portion of our
operating income and cash flow. As a result, distributions and advances from our
subsidiaries will be a principal source of funds necessary to meet our debt
service obligations. Contractual provisions or laws, as well as our
subsidiaries' financial condition and operating and regulatory requirements, may
limit our ability to obtain cash from our subsidiaries that we require to pay
our debt service obligations. Holders of the debt securities will have a junior
position to the claims of creditors of our subsidiaries on their assets and
earnings.
Senior Debt Securities
The senior debt securities will be our unsecured unsubordinated obligations
and will:
o rank equal in right of payment with all our other unsecured and
unsubordinated indebtedness;
o be effectively subordinated in right of payment to all our secured
indebtedness to the extent of the value of the assets securing such
indebtedness; and
o be effectively subordinated to all of our subsidiaries' indebtedness.
As of December 31, 2004, the aggregate amount of our outstanding
consolidated indebtedness for money borrowed was approximately $14.3 billion,
substantially all of which was secured and substantially all of which
represented obligations of our subsidiaries.
Except as otherwise set forth in the applicable senior indenture or
specified in an authorizing resolution and/or supplemental indenture, if any,
relating to a series of senior debt securities to be issued, there will be no
limitations in any senior indenture on the amount of additional indebtedness
which may rank equal with the senior debt securities or on the amount of
indebtedness, secured or otherwise, which may be incurred by any of our
subsidiaries.
Subordinated Debt Securities
The subordinated debt securities will be our unsecured subordinated
obligations. Unless otherwise provided in the applicable prospectus supplement,
the payment of principal of, interest on and all other amounts owing in respect
of the subordinated debt securities will be subordinated in right of payment to
the prior payment in full in cash of principal of, interest on and all other
amounts owing in respect of all of our senior indebtedness. Upon any payment or
distribution of our assets of any kind or character, whether in cash, property
or securities, to creditors upon any total or partial liquidation, dissolution,
winding up, reorganization, assignment for the benefit of creditors or
marshaling of our assets or in a bankruptcy, reorganization, insolvency,
receivership or other similar proceeding relating to us or our property, whether
voluntary or involuntary, all principal of, interest on and all other amounts
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due or to become due will be paid, first, to all senior indebtedness in full in
cash, or such payment duly provided for to the satisfaction of the holders of
senior indebtedness, before any payment or distribution of any kind or character
is made on account of any principal of, interest on or other amounts owing in
respect of the subordinated debt securities (other than in permitted junior
securities), or for the acquisition of any of the subordinated debt securities
for cash, property or otherwise.
If any default occurs and is continuing in the payment when due, whether at
maturity, upon any redemption, by declaration or otherwise, of any principal of,
interest on, unpaid drawings for letters of credit issued in respect of, or
regularly accruing fees with respect to, any senior indebtedness, no payment of
any kind or character will be made by or on behalf of us or any other person on
our or their behalf with respect to any principal of, interest on or other
amounts owing in respect of the subordinated debt securities (other than in
permitted junior securities) or to acquire any of the subordinated debt
securities for cash, property or otherwise.
As of December 31, 2004, the aggregate amount of our consolidated
indebtedness for money borrowed was approximately $14.3 billion, substantially
all of which represents obligations of our subsidiaries and all of which would
be senior in right of payment to the subordinated debt securities.
If any other event of default occurs and is continuing with respect to any
designated senior indebtedness, as such event of default is defined in the
instrument creating or evidencing such designated senior indebtedness,
permitting the holders of such designated senior indebtedness then outstanding
to accelerate the maturity thereof and if the representative (as defined in the
applicable indenture) for the respective issue of designated senior indebtedness
gives written notice of the event of default to the trustee, or a default
notice, then, unless and until all events of default have been cured or waived
or have ceased to exist or the trustee receives notice from the representative
for the respective issue of designated senior indebtedness terminating the
blockage period (as defined below), during the 179 days after the delivery of
such default notice, or the blockage period, neither we nor any other person on
our behalf will:
(1) make any payment of any kind or character with respect to any
principal of, interest on or other amounts owing in respect of the
subordinated debt securities (other than in permitted junior
securities); or
(2) acquire any of the subordinated debt securities for cash, property or
otherwise.
Notwithstanding anything herein to the contrary, in no event will a
blockage period extend beyond 179 days from the date the payment on the
subordinated debt securities was due and only one such blockage period may be
commenced within any 360 consecutive days. No event of default which existed or
was continuing on the date of the commencement of any blockage period with
respect to the designated senior indebtedness will be, or be made, the basis for
commencement of a second blockage period by the representative of such
designated senior indebtedness whether or not within a period of 360 consecutive
days unless such event of default will have been cured or waived for a period of
not less than 90 consecutive days (it being acknowledged that any subsequent
action, or any breach of any financial covenants for a period commencing after
the date of commencement of such blockage period that, in either case, would
give rise to an event of default pursuant to any provisions under which an event
of default previously existed or was continuing will constitute a new event of
default for this purpose).
As a result of the foregoing provisions, in the event of our insolvency,
holders of the subordinated debt securities may recover ratably less than our
general creditors.
"Senior indebtedness," unless otherwise specified in one or more applicable
supplemental indentures or approved pursuant to a board resolution in accordance
with the applicable indenture, means, with respect to us,
(1) the principal, including redemption payments, premium, if any,
interest and other payment obligations in respect of (a) our
indebtedness for money borrowed and (b) our indebtedness evidenced by
securities, debentures, bonds, notes or other similar instruments
issued by us, including any such securities issued under any deed,
indenture or other instrument to which we are a party, including, for
the avoidance of doubt, indentures pursuant to which senior debt
securities have been or may be issued;
(2) all of our capital lease obligations;
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(3) all of our obligations issued or assumed as the deferred purchase
price of property, all of our conditional sale obligations, all of our
hedging agreements and agreements of a similar nature thereto and all
agreements relating to any such agreements, and all of our obligations
under any title retention agreement, but excluding trade accounts
payable arising in the ordinary course of business;
(4) all of our obligations for reimbursement on any letter of credit,
banker's acceptance, security purchase facility or similar credit
transaction;
(5) all obligations of the type referred to in clauses (1) through (4)
above of other persons for the payment of which we are responsible or
liable as obligor, guarantor or otherwise;
(6) all obligations of the type referred to in clauses (1) through (5)
above of other persons secured by any lien on any of our property or
asset, whether or not such obligation is assumed by us; and
(7) any deferrals, amendments, renewals, extensions, modifications and
refundings of all obligations of the type referred to in clauses (1)
through (6) above, in each case whether or not contingent and whether
outstanding at the date of effectiveness of the applicable indenture
or thereafter incurred,
except, in each case, for the subordinated debt securities and any such other
indebtedness or deferral, amendment, renewal, extension, modification or
refunding that contains express terms, or is issued under a deed, indenture or
other instrument, which contains express terms, providing that it is subordinate
to or ranks equal with the subordinated debt securities.
Such senior indebtedness will continue to be senior indebtedness and be
entitled to the benefits of the subordination provisions of the applicable
indenture irrespective of any amendment, modification or waiver of any term of
such senior indebtedness and notwithstanding that no express written
subordination agreement may have been entered into between the holders of such
senior indebtedness and the trustee or any of the holders.
"Permitted junior securities" means:
(1) our capital stock; or
(2) debt securities issued pursuant to a confirmed plan of reorganization
that are subordinated in right of payment to all senior indebtedness
and any debt securities issued in exchange for senior indebtedness to
substantially the same extent as, or to a greater extent than, the
subordinated debt securities are subordinated to the senior
indebtedness under the indenture governing the subordinated debt
securities.
"Designated senior indebtedness" means any senior indebtedness which we are
permitted to incur under any subordinated debt securities indenture, the
principal amount of which is at least $20.0 million or more at the time we
designate such senior indebtedness as designated senior indebtedness in a
writing delivered to the trustee.
Discharge and Defeasance
Under the terms of the indentures, we will be discharged from any and all
obligations in respect of the debt securities of any series and the applicable
indenture, except in each case for certain obligations to register the transfer
or exchange of debt securities, replace stolen, lost or mutilated debt
securities, maintain paying agencies and hold moneys for payment in trust, if,
among other things:
o either all such debt securities previously authenticated and delivered
have been delivered to the trustee for cancellation or all such debt
securities not theretofore delivered to the trustee for cancellation
have become due and payable, will become due and payable within one
year or are to be called for redemption within one year under
arrangements satisfactory to the trustee; and
o we deposit with the applicable trustee, in trust, moneys or U.S.
government obligations in an amount sufficient to pay all the
principal of, and interest on, the debt securities of such series on
the dates such payments are due in accordance with the terms of such
debt securities.
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In addition, unless the applicable prospectus supplement and
supplemental indenture provide otherwise, we may elect either (1) to defease and
be discharged from any and all obligations with respect to such debt securities
("defeasance") or (2) to be released from our obligations with respect to such
debt securities under certain covenants in the applicable indenture, and any
omission to comply with such obligations will not constitute a default or an
event of default with respect to such debt securities ("covenant defeasance"):
I. by delivering all outstanding debt securities of such series to the
trustee for cancellation and paying all sums payable by it under such debt
securities and the indenture with respect to such series; or
II. after giving notice to the trustee of our intention to defease all
of the debt securities of such series, by irrevocably depositing with the
trustee or a paying agent.
A. money in U.S. Dollars (or if the debt securities are
denominated in a currency other than U.S. dollars, an amount of the
applicable currency) in an amount sufficient, or
B. (a) U.S. Government Obligations which through the payment of
interest and principal in respect thereof in accordance with their
terms will provide not later than one day before the due date of any
interest or principal money in an amount, or (b) a combination of such
money and such U.S. Government Obligations, sufficient, in the opinion
of a nationally recognized independent registered public accounting
firm expressed in a written certification thereof delivered to the
Trustee,
to pay and discharge (i) the principal of (and premium, if any) and each
installment of principal of (and premium, if any) and interest on the debt
securities on the maturity date of such principal or installment of
principal or interest or on the applicable date of redemption and (ii) any
mandatory sinking fund payments applicable to the debt securities on the
day on which such payments are due and payable in accordance with the terms
of the indenture and the debt securities;
Such a trust may only be established if, among other things:
I. the applicable defeasance or covenant defeasance does not result in
a breach or violation of, or constitute a default under or any material
agreement or instrument to which we are a party or by which we are bound;
II. no event of default or event which with notice or lapse of time or
both would become an event of default with respect to the debt securities
to be defeased will have occurred and be continuing on the date of
establishment of such a trust after giving effect to such establishment;
and
III. we have delivered to the trustee an opinion of counsel (as
specified in the applicable supplemental indenture) to the effect that the
holders will not recognize income, gain or loss for United States federal
income tax purposes as a result of such defeasance or covenant defeasance
and will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such defeasance or covenant defeasance had not occurred, and such
opinion of counsel, in the case of defeasance, must refer to and be based
upon a letter ruling of the Internal Revenue Service received by us, a
Revenue Ruling published by the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of
the applicable supplemental indenture.
In the event we effect covenant defeasance with respect to any debt
securities and such debt securities are declared due and payable because of the
occurrence of any event of default, other than an event of default with respect
to any covenant as to which there has been covenant defeasance, the government
obligations on deposit with the trustee will be sufficient to pay amounts due on
such debt securities at the time of the stated maturity but may not be
sufficient to pay amounts due on such debt securities at the time of the
acceleration resulting from such event of default.
Modification and Waiver
We, when authorized by a board resolution, and the trustee may modify,
amend and/or supplement the applicable indenture and the applicable debt
securities with the consent of the holders of not less than a majority in
principal amount of the outstanding debt securities of all series affected
thereby, voting as a single class; provided
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that such modification, amendment or supplement may not, without the consent of
each holder of the debt securities affected thereby:
(1) change the stated maturity of the principal of (or premium, if any) or
any installment of interest with respect to the debt securities;
(2) reduce the principal amount of, or the rate of interest on, the debt
securities;
(3) change the currency of payment of principal of or interest on the debt
securities;
(4) impair the right to institute suit for the enforcement of any payment
on or with respect to the debt securities;
(5) reduce the above-stated percentage of holders of the debt securities
of any series necessary to modify or amend the indenture relating to
such series;
(6) modify the foregoing requirements or reduce the percentage of
outstanding debt securities necessary to waive any covenant or past
default; or
(7) in the case of any convertible debt securities, adversely affect the
right to convert the debt securities into shares of common stock or
preferred stock in accordance with the provisions of the applicable
indenture.
Holders of not less than a majority in principal amount of the outstanding
debt securities of all series affected thereby, voting as a single class, may
waive certain past defaults and may waive compliance by us with any provision of
the indenture relating to such debt securities; provided that:
(1) without the consent of each holder of debt securities affected
thereby, no waiver may be made of a default in the payment of the
principal of (or premium, if any) or interest on any debt security or
in respect of a covenant or provision of the indenture that expressly
states that it cannot be modified or amended without the consent of
each holder affected; and
(2) only the holders of a majority in principal amount of debt securities
of a particular series may waive compliance with a provision of the
indenture relating to such series or the debt securities of such
series having applicability solely to such series.
We, when authorized by a board resolution, and the trustee may amend or
supplement the indentures or waive any provision of such indentures and the debt
securities without the consent of any holders of debt securities in some
circumstances, including:
o to cure any ambiguity, omission, defect or inconsistency;
o to make any modifications or amendments that do not, in the good faith
opinion of our board of directors and the trustee, adversely affect
the interests of holders of such debt securities in any material
respect;
o to provide for the assumption of our obligations under the applicable
indenture by a successor upon any merger, consolidation or asset
transfer permitted under the applicable indenture;
o to provide any security for or guarantees of such debt securities;
o to add events of default with respect to such debt securities;
o to add covenants that would benefit the holders of such debt
securities or to surrender any rights or powers we have under the
applicable indenture;
o to make any change necessary to comply with the Trust Indenture Act of
1939, or any amendment thereto, or to comply with any requirement of
the SEC in connection with the qualification of the applicable
indenture under the Trust Indenture Act of 1939; provided that such
modification or
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amendment does not, in the good faith opinion of our board of
directors and the trustee, adversely affect the interests of the
holders of such debt securities in any material respect;
o to provide for uncertificated debt securities in addition to or in
place of certificated debt securities or to provide for bearer debt
securities;
o to add to or change any of the provisions of the applicable indenture
to such extent as will be necessary to permit or facilitate the
issuance of the debt securities in bearer form, registrable or not
registrable as to principal, and with or without interest coupons;
o to change or eliminate any of the provisions of the applicable
indenture; provided that any such change or elimination will become
effective only when there is no debt security outstanding of any
series created prior to the execution of such supplemental indenture
which is entitled to the benefit of such provision;
o to establish the form or terms of debt securities of any series as
permitted by the applicable indenture; or
o to evidence and provide for the acceptance of appointment by a
successor trustee with respect to the debt securities of one or more
series and to add to or change any of the provisions of the applicable
indenture as will be necessary to provide for or facilitate the
administration of the trusts under the applicable indenture by more
than one trustee, pursuant to the requirements of the applicable
indenture.
Events of Default and Notice Thereof
The following are events that we anticipate will constitute "events of
default" with respect to any series of debt securities issued thereunder:
(1) default in the payment of any interest upon any debt securities of
that series when it becomes due and payable, and continuance of such
default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any, on)
any debt securities of that series when due; or
(3) default in the deposit of any sinking fund payment, when and as due by
the terms of any debt securities of that series; or
(4) default in the performance, or breach, by us of any material covenant
or warranty in the indenture (other than a covenant or warranty added
to the indenture solely for the benefit of another series of debt
securities) for a period of 60 days after there has been given, by
registered or certified mail, to us by the trustee or to us and the
trustee by the holders of at least 25% in principal amount of the
outstanding debt securities a written notice specifying such default
or breach and requiring it to be remedied and stating that such notice
is a notice of default under the indenture; or
(5) certain events of bankruptcy, insolvency or reorganization.
Additional or different events of default, if any, applicable to the series
of debt securities in respect of which this prospectus is being delivered will
be specified in the applicable prospectus supplement.
The trustee under such indenture will, within 60 days after the occurrence
of any default (the term "default" to include the events specified above without
grace or notice) with respect to any series of debt securities actually known to
it, give to the holders of such debt securities notice of such default; provided
that, except in the case of a default in the payment of principal of or interest
on any of the debt securities of such series or in the payment of a sinking fund
installment, the trustee for such series will be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interest of the holders of such debt securities, and provided, further, that
in the case of any default of the character specified in clause (2) above with
respect to debt securities of such series, no such notice to holders of such
debt securities will be given until at least 30 days after the occurrence
thereof. We will certify to the trustee quarterly as to whether any default
exists.
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If an event of default, other than an event of default resulting from
bankruptcy, insolvency or reorganization, with respect to any series of debt
securities will occur and be continuing, the trustee for such series or the
holders of at least 25% in aggregate principal amount of the debt securities of
such series then outstanding, by notice in writing to us (and to the trustee for
such series if given by the holders of the debt securities of such series), will
be entitled to declare all unpaid principal of and accrued interest on such debt
securities then outstanding to be due and payable immediately.
In the case of an event of default resulting from certain events of
bankruptcy, insolvency or reorganization, all unpaid principal of and accrued
interest on all debt securities of such series then outstanding will be due and
payable immediately without any declaration or other act on the part of the
trustee for such series or the holders of any debt securities of such series.
Such acceleration may be annulled and past defaults (except, unless
theretofore cured, a default in payment of principal of or interest on the debt
securities of such series) may be waived by the holders of a majority in
aggregate principal amount of the debt securities of such series then
outstanding upon the conditions provided in the applicable indenture.
No holder of the debt securities of any series issued thereunder may pursue
any remedy under such indenture unless the trustee for such series will have
failed to act after, among other things, notice of an event of default and
request by holders of at least 25% in principal amount of the debt securities of
such series of which the event of default has occurred and the offer to the
trustee for such series of indemnity satisfactory to it; provided that such
provision does not affect the right to sue for enforcement of any overdue
payment on such debt securities.
Conversion and Exchange Rights
The terms and conditions, if any, upon which the debt securities of any
series will be convertible into common stock or preferred stock or upon which
the senior debt securities of any series will be exchangeable into another
series of debt securities will be set forth in the prospectus supplement
relating thereto. Such terms will include the conversion or exchange price, or
manner of calculation thereof, the conversion or exchange period, provisions as
to whether conversion or exchange will be at the option of the holders of such
series of debt securities or at our option or automatic, the events requiring an
adjustment of the conversion or exchange price and provisions affecting
conversion or exchange in the event of the redemption of such series of debt
securities. The debt securities, if convertible or exchangeable, will not be
convertible into or exchangeable for securities of a third party.
The Trustee
Subject to the terms of the applicable indenture, the trustee for each
series of debt securities will be named in the prospectus supplement relating to
each issuance of debt securities. Each indenture will contain certain
limitations on a right of the trustee, as our creditor, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The trustee will be permitted to
engage in other transactions; provided that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
Subject to the terms of the applicable indenture, the holders of a majority
in principal amount of all outstanding debt securities of a series (or if more
than one series is affected thereby, of all series so affected, voting as a
single class) will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy or power available to the
trustee for such series or all such series so affected.
In case an event of default will occur, and will not be cured, under any
indenture relating to a series of debt securities and is actually known to a
responsible officer of the trustee for such series, such trustee will exercise
such of the rights and powers vested in it by such indenture and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of his own affairs. Subject to such
provisions, the trustee will not be under any obligation to exercise any of its
rights or powers under the applicable indenture at the request of any of the
holders of debt securities unless they will have offered to the trustee security
and indemnity satisfactory to it.
Governing Law
The indentures and the debt securities will be governed by the laws of the
State of New York.
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Global Securities; Book-Entry System
We may issue the debt securities of any series in whole or in part in the
form of one or more global securities to be deposited with, or on behalf of, a
depository identified in the prospectus supplement relating to such series.
Global securities represent in the aggregate the total principal or face amount
of the securities and once on deposit with a depository, allow trading of the
securities through the depository's book-entry system as further described
below. Global securities, if any, issued in the United States are expected to be
deposited with The Depository Trust Company, or DTC, as depository. Global
securities will be issued in fully registered form and may be issued in either
temporary or permanent form. Unless and until it is exchanged in whole or in
part for the individual debt securities represented thereby, a global security
may not be transferred except as a whole by the depository for such global
security to a nominee of such depository or by a nominee of such depository to
such depository or another nominee of such depository or by such depository or
any nominee of such depository to a successor depository or any nominee of such
successor.
The specific terms of the depository arrangement with respect to any series
of debt securities will be described in the prospectus supplement relating to
such series. We expect that unless otherwise indicated in the applicable
prospectus supplement, the following provisions will apply to depository
arrangements.
Upon the issuance of a global security, the depository for such global
security or its nominee will credit on its book-entry registration and transfer
system the respective principal amounts of the individual debt securities
represented by such global security to the accounts of persons that have
accounts with such depository, which we refer to as participants. Such accounts
will be designated by the underwriters, dealers or agents with respect to such
debt securities or by us if such debt securities are offered directly by us.
Ownership of beneficial interests in such global security will be limited to
participants or persons that may hold interests through participants.
We expect that, pursuant to procedures established by DTC, ownership of
beneficial interests in any global security with respect to which DTC is the
depository will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
beneficial interests of participants) and records of participants (with respect
to beneficial interests of persons who hold through participants). Neither we
nor the trustee will have any responsibility or liability for any aspect of the
records of DTC or for maintaining, supervising or reviewing any records of DTC
or any of its participants relating to beneficial ownership interests in the
debt securities. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability to own, pledge or transfer beneficial
interest in a global security.
So long as the depository for a global security or its nominee is the
registered owner of such global security, such depository or such nominee, as
the case may be, will be considered the sole owner or holder of the debt
securities represented by such global security for all purposes under the
applicable indenture. Except as described below or in the applicable prospectus
supplement, owners of beneficial interest in a global security will not be
entitled to have any of the individual debt securities represented by such
global security registered in their names, will not receive or be entitled to
receive physical delivery of any such debt securities in definitive form and
will not be considered the owners or holders thereof under the applicable
indenture. Beneficial owners of debt securities evidenced by a global security
will not be considered the owners or holders thereof under the applicable
indenture for any purpose, including with respect to the giving of any
direction, instructions or approvals to the trustee thereunder. Accordingly,
each person owning a beneficial interest in a global security with respect to
which DTC is the depository must rely on the procedures of DTC and, if such
person is not a participant, on the procedures of the participant through which
such person owns its interests, to exercise any rights of a holder under the
applicable indenture. We understand that, under existing industry practice, if
it requests any action of holders or if an owner of a beneficial interest in a
global security desires to give or take any action which a holder is entitled to
give or take under the applicable indenture, DTC would authorize the
participants holding the relevant beneficial interest to give or take such
action, and such participants would authorize beneficial owners through such
participants to give or take such actions or would otherwise act upon the
instructions of beneficial owners holding through them.
Payments of principal of, and any interest on, individual debt securities
represented by a global security registered in the name of a depository or its
nominee will be made to or at the direction of the depository or its nominee, as
the case may be, as the registered owner of the global security under the
applicable indenture. Under the terms of the applicable indenture, we and the
trustee may treat the persons in whose name debt securities, including a global
security, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither we nor the trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of debt securities (including principal and interest). We believe, however, that
it is currently the
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policy of DTC to immediately credit the accounts of relevant participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant global security as shown on the records of
DTC or its nominee. We also expect that payments by participants to owners of
beneficial interests in such global security held through such participants will
be governed by standing instructions and customary practices, as is the case
with securities held for the account of customers in bearer form or registered
in street name, and will be the responsibility of such participants. Redemption
notices with respect to any debt securities represented by a global security
will be sent to the depository or its nominee. If less than all of the debt
securities of any series are to be redeemed, we expect the depository to
determine the amount of the interest of each participant in such debt securities
to be redeemed to be determined by lot. None of us, the trustee, any paying
agent or the registrar for such debt securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the global security for such debt
securities or for maintaining any records with respect thereto.
Neither we nor the trustee will be liable for any delay by the holders of a
global security or the depository in identifying the beneficial owners of debt
securities and we and the trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of a global security or
the depository for all purposes. The rules applicable to DTC and its
participants are on file with the SEC.
If a depository for any debt securities is at any time unwilling, unable or
ineligible to continue as depository and a successor depository is not appointed
by us within 90 days, we will issue individual debt securities in exchange for
the global security representing such debt securities. In addition, we may at
any time and in our sole discretion, subject to any limitations described in the
prospectus supplement relating to such debt securities, determine not to have
any of such debt securities represented by one or more global securities and in
such event we will issue individual debt securities in exchange for the global
security or securities representing such debt securities. Individual debt
securities so issued will be issued in denominations of $1,000 and integral
multiples thereof.
All moneys paid by us to a paying agent or a trustee for the payment of the
principal of or interest on any debt security which remain unclaimed at the end
of two years after such payment has become due and payable will be repaid to us,
and the holder of such debt security thereafter may look only to us for payment
thereof.
Non-U.S. Currency
If the purchase price of any debt securities is payable in a currency other
than U.S. dollars, the specific terms with respect to such debt securities and
such foreign currency will be specified in the applicable prospectus supplement.
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DESCRIPTION OF NELNET, INC. WARRANTS TO PURCHASE
CLASS A COMMON STOCK OR PREFERRED STOCK
General
We may issue warrants to purchase Class A common stock or preferred stock
independently or together with any securities offered by any prospectus
supplement and such Class A common stock warrants or preferred stock warrants
may be attached to or separate from such securities. Each series of stock
warrants will be issued under a separate warrant agreement to be entered into
between us and a bank or trust company, as warrant agent, all as set forth in
the applicable prospectus supplement. The warrant agent will act solely as our
agent in connection with the certificates representing the stock warrants and
will not assume any obligation or relationship of agency or trust for or with
any holders of stock warrant certificates or beneficial owners of stock
warrants.
The following summaries of certain provisions of the warrant agreement and
stock warrant certificate are not complete. You should look at the warrant
agreement relating to, and the applicable stock warrant certificate
representing, the applicable series of common stock warrants or preferred stock
warrants.
The applicable prospectus supplement may also state that any of the terms
set forth herein are inapplicable to such series; provided that the information
set forth in such prospectus supplement does not constitute material changes to
the information herein such that it alters the nature of the offering or the
securities offered. Warrants for the purchase of shares of common stock or
shares of preferred stock will be offered and exercisable for U.S. dollars only
and will be in registered form only.
Terms
An applicable prospectus supplement will set forth and describe other
specific terms regarding each series of common stock warrants or preferred stock
warrants offered hereby, including:
(1) the offering price;
(2) the number of shares of Class A common stock or preferred stock
purchasable upon exercise of each such Class A common stock warrant or
preferred stock warrant and the price at which such number of shares
of Class A common stock or preferred stock may be purchased upon such
exercise;
(3) the date on which the right to exercise such stock warrants will
commence and the date on which such right will expire; and
(4) any other terms of such stock warrants.
Exercise of Stock Warrants
Each stock warrant will entitle the holder thereof to purchase shares of
Class A common stock or shares of preferred stock, as the case may be, at such
exercise price as will in each case be set forth in, or calculable from, the
prospectus supplement relating to the offered stock warrants. After the close of
business on the expiration date of each stock warrant or such later date to
which such expiration date may be extended by us, unexercised stock warrants
will become void.
Stock warrants may be exercised by delivering to the warrant agent payment
as provided in the applicable prospectus supplement of the amount required to
purchase shares of Class A common stock or shares of preferred stock purchasable
upon such exercise, together with certain information set forth on the reverse
side of the stock warrant certificate. Upon receipt of such payment and the
stock warrant certificate properly completed and duly executed at the corporate
trust office of the warrant agent or any other office indicated in the
applicable prospectus supplement, we will, as soon as practicable, issue and
deliver the shares of Class A common stock or shares of preferred stock
purchasable upon such exercise. If fewer than all of the stock warrants
represented by such certificate are exercised, a new stock warrant certificate
will be issued for the remaining amount of stock warrants.
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Amendments and Supplements to Warrant Agreement
The warrant agreement for a series of stock warrants may be amended or
supplemented without the consent of the holders of the stock warrants issued
thereunder to effect changes that are not inconsistent with the provisions of
the stock warrants and that do not adversely affect the interests of the holders
of the stock warrants.
Anti-dilution and Other Provisions
Unless otherwise indicated in the applicable prospectus supplement, the
exercise price of, and the number of shares of Class A common stock or shares of
preferred stock covered by, each stock warrant is subject to adjustment in
certain events, including:
(1) the issuance of shares of Class A common stock or shares of preferred
stock as a dividend or distribution on the common stock or preferred
stock;
(2) certain subdivisions and combinations of the Class A common stock or
preferred stock;
(3) the issuance to all holders of Class A common stock or preferred stock
of certain rights or warrants entitling them to subscribe for or
purchase Class A common stock or preferred stock, at less than the
current market value, as defined in the applicable stock warrant
agreement for such series of stock warrants; and
(4) the distribution to all holders of Class A common stock or preferred
stock of certain evidences of our indebtedness or assets, other than
certain cash dividends and distributions described below.
No adjustment in the exercise price of, and the number of shares covered
by, the stock warrant will be made for regular quarterly or other periodic or
recurring cash dividends or distributions or for cash dividends or distributions
to the extent paid from retained earnings. No adjustment will be required unless
such adjustment would require a change of at least one percent in the exercise
price and exercise rate then in effect; provided that any such adjustment not so
made will be carried forward and taken into account in any subsequent
adjustment; provided, further, that any such adjustment not so made will be made
no later than three years after the occurrence of the event requiring such
adjustment to be made or carried forward. Except as stated above, the exercise
price of, and the number of shares of Class A common stock or shares of
preferred stock covered by, a stock warrant will not be adjusted for the
issuance of Class A common stock or preferred stock or any securities
convertible into or exchangeable for Class A common stock or preferred stock, or
securities carrying the right to purchase any of the foregoing.
In the case of:
(1) a reclassification or change of the Class A common stock or preferred
stock;
(2) certain consolidation or merger events involving us; or
(3) a sale or conveyance to another corporation of our property and assets
as an entirety or substantially as an entirety,
in each case as a result of which holders of our Class A common stock or
preferred stock will be entitled to receive stock, securities, other property or
assets (including cash) with respect to or in exchange for such shares, the
holders of the stock warrants then outstanding will be entitled thereafter to
convert such stock warrants into the kind and amount of Class A common stock,
preferred stock and other securities or property which they would have received
upon such reclassification, change, consolidation, merger, sale or conveyance
had such stock warrants been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance.
Non-U.S. Currency
If the purchase price of any warrants to purchase Class A common stock or
preferred stock is payable in a currency other than U.S. dollars, the specific
terms with respect to such warrants to purchase Class A common stock or
preferred stock and such foreign currency will be specified in the applicable
prospectus supplement.
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DESCRIPTION OF NELNET, INC. WARRANTS TO PURCHASE DEBT SECURITIES
General
We may issue debt warrants independently or together with any securities
offered by any prospectus supplement and such debt warrants may be attached to
or separate from such securities. Each series of debt warrants will be issued
under a separate debt warrant agreement to be entered into between us and a debt
warrant agent, all as set forth in the applicable prospectus supplement. The
debt warrant agent will act solely as our agent in connection with the
certificates representing the debt warrants and will not assume any obligation
or relationship of agency or trust for or with any holders of debt warrant
certificates or beneficial owners of debt warrants.
The following summaries of certain provisions of the debt warrant agreement
and debt warrant certificate are not complete. You should look at the debt
warrant agreement relating to, and the debt warrant certificate representing, a
series of debt warrants.
The applicable prospectus supplement may also state that any of the terms
set forth herein are inapplicable to such series; provided that the information
set forth in such prospectus supplement does not constitute material changes to
the information herein such that it alters the nature of the offering or the
securities offered. Debt warrants for the purchase of shares of common stock or
shares of preferred stock will be offered and exercisable for U.S. dollars only
and will be in registered form only.
Terms
An applicable prospectus supplement will set forth and describe other
specific terms regarding each series of debt warrants offered hereby, including:
(1) the offering price;
(2) the designation, aggregate principal amount and the terms of the debt
securities purchasable upon exercise of the debt warrants;
(3) the date on which the right to exercise such debt warrants will
commence and the date on which such right will expire; and
(4) any other terms of such debt warrants.
Warrant holders will not have any of the rights of holders of debt
securities, including the right to receive the payment of principal of, any
premium or interest on, or any additional amounts with respect to, the debt
securities or to enforce any of the covenants of the debt securities or the
applicable indenture except as otherwise provided in the applicable indenture.
Exercise of Debt Warrants
Debt warrants may be exercised by delivering to the debt warrant agent
payment as provided in the applicable prospectus supplement, together with
certain information set forth on the reverse side of the debt warrant
certificate. Upon receipt of such payment and the debt warrant certificate
properly completed and duly executed at the corporate trust office of the debt
warrant agent or any other office indicated in the applicable prospectus
supplement, we will, as soon as practicable, issue and deliver the debt
securities purchasable upon such exercise. If fewer than all of the debt
warrants represented by such debt warrant certificate are exercised, a new debt
warrant certificate will be issued for the remaining amount of debt warrants.
Amendments and Supplements to Warrant Agreement
The debt warrant agreement for a series of debt warrants may be amended or
supplemented without the consent of the holders of the debt warrants issued
thereunder to effect changes that are not inconsistent with the provisions of
the debt warrants and that do not adversely affect the interests of the holders
of the debt warrants.
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Non-U.S. Currency
If the purchase price of any warrants to purchase debt securities is
payable in a currency other than U.S. dollars, the specific terms with respect
to such warrants to purchase debt securities and such foreign currency will be
specified in the applicable prospectus supplement.
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DESCRIPTION OF NELNET, INC.
STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
We may issue stock purchase contracts, representing contracts obligating
holders to purchase from Nelnet and obligating us to sell to the holders, or
holders to sell to us and us to purchase from the holders, a fixed or varying
number of shares of Class A common stock at a future date or dates. The price
per share of Class A common stock may be fixed at the time the stock purchase
contracts are entered into or may be determined by reference to a specific
formula set forth in the stock purchase contracts. Any stock purchase contract
may include anti-dilution provisions to adjust the number of shares to be
delivered pursuant to such stock purchase contract upon the occurrence of
certain events. The stock purchase contracts may be entered into separately or
as a part of stock purchase units consisting of one or more stock purchase
contracts and any one or more of:
(1) our debt securities;
(2) our preferred stock; or
(3) debt or equity obligations of third parties, including U.S. Treasury
securities.
The stock purchase contracts may require us to make periodic payments to
the holders of the stock purchase units or vice versa, and such payments may be
unsecured or pre-funded and may be paid on a current or on a deferred basis. The
stock purchase contracts may require holders to secure their obligations in a
specified manner and in certain circumstances we may deliver newly issued
prepaid stock purchase contracts upon release to a holder of any collateral
securing such holder's obligations under the original stock purchase contract.
Any one or more of the above securities, shares of common stock or the stock
purchase contracts or other collateral may be pledged as security for the
holders' obligations to purchase or sell, as the case may be, the Class A common
stock under the stock purchase contracts. The stock purchase contracts may also
allow the holders, under certain circumstances, to obtain the release of the
security for their obligations under such contracts by depositing with the
collateral agent, as substitute collateral, treasury securities with a principal
amount at maturity equal to the collateral so released or the maximum number of
shares of common stock deliverable by such holders under common stock purchase
contracts requiring the holders to sell such shares of Class A common stock to
us.
The applicable prospectus supplement may contain, where applicable, the
following information about the stock purchase contracts and stock purchase
units, as the case may be:
o whether the stock purchase contracts obligate the holder to purchase
or sell, or both purchase and sell, our shares of Class A common stock
and the nature and amount of the shares of Class A common stock, or
the method of determining those amounts;
o whether the stock purchase contracts are to be prepaid or not;
o whether the stock purchase contracts are to be settled by delivery, or
by reference or linkage to the value, performance or level of our
shares of our Class A common stock;
o any acceleration, cancellation, termination or other provisions
relating to the settlement of the stock purchase contracts;
o the designation and terms of the units and of the securities composing
the units, including whether and under what circumstances those
securities may be held or transferred separately;
o any provisions for the issuance, payment, settlement, transfer or
exchange of the units or of the securities comprising the units; and
o whether the stock purchase contracts and/or stock purchase units will
be issued fully registered or global form.
The applicable prospectus supplement will describe the terms of any stock
purchase contracts or stock purchase units and, if applicable, prepaid stock
purchase contracts. The description in the prospectus supplement will be
qualified in its entirety by reference to the stock purchase contracts, the
collateral arrangements and depositary arrangements, if applicable, relating to
such stock purchase contracts or stock purchase units and, if applicable, the
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prepaid stock purchase contracts and the document pursuant to which such prepaid
stock purchase contracts will be issued.
Non-U.S. Currency
If the purchase price of any stock purchase contract is payable in a
currency other than U.S. dollars, the specific terms with respect to such stock
purchase contract and such foreign currency will be specified in the applicable
prospectus supplement.
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PLAN OF DISTRIBUTION
We may sell our Class A common stock, preferred stock, debt securities,
warrants to purchase Class A common stock, preferred stock or debt securities,
stock purchase contracts and stock purchase units through underwriters, agents,
dealers, or directly without the use of any underwriter, agent or dealer to one
or more purchasers. We may distribute these securities from time to time in one
or more transactions, including, but not limited to, block transactions,
privately negotiated transactions, transactions on the New York Stock Exchange
or any other organized market where the securities may be traded, through the
writing of options on securities, short sales or any combination of these
methods. The securities may be sold at a fixed price or prices, at market prices
prevailing at the times of sale, at prices related to these prevailing market
prices or at negotiated prices. Any such price may be changed from time to time.
In addition, we may enter into derivative transactions with third parties
(including the writing of options), or sell securities not covered by this
prospectus to third parties in privately negotiated transactions. If the
applicable prospectus supplement indicates, in connection with such a
transaction the third parties may, pursuant to this prospectus and the
applicable prospectus supplement, sell securities covered by this prospectus and
the applicable prospectus supplement. If so, the third party may use securities
borrowed from us or others to settle such sales and may use securities received
from us to close out any related short positions. We may also loan or pledge
securities covered by this prospectus and the applicable prospectus supplement
to third parties, who may sell the loaned securities or, in an event of default
in the case of a pledge, sell the pledged securities pursuant to this prospectus
and the applicable prospectus supplement.
The terms of the offering of the securities with respect to which this
prospectus is being delivered will be set forth in the applicable prospectus
supplement and will include:
o the identity of any underwriters, dealers or agents who purchase
securities, as required;
o the amount of securities sold, the public offering price and
consideration paid, and the proceeds we will receive from that sale;
o whether or not the securities will trade on the New York Stock
Exchange or on any other organized market;
o the amount of any indemnification provisions, including
indemnification from liabilities under the federal securities laws;
and
o any other material terms of the distribution of securities.
We may offer the securities to the public through one or more underwriting
syndicates represented by one or more managing underwriters, or through one or
more underwriters without a syndicate. If underwriters are used in the sale, we
will execute an underwriting agreement with those underwriters relating to the
securities that we will offer and will name the underwriters and describe the
terms of the transaction in the prospectus supplement. The securities subject to
the underwriting agreement will be acquired by the underwriters for their own
account and may be resold by them, or their donees, pledgees, or transferees,
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Subject to the conditions specified in the underwriting
agreement, underwriters will be obligated to purchase all of these securities if
they are purchased or will act on a best efforts basis to solicit purchases for
the period of their appointment, unless stated otherwise in the prospectus
supplement.
We may authorize underwriters to solicit offers by institutions to purchase
the securities subject to the underwriting agreement from us at the public
offering price stated in the prospectus supplement under delayed delivery
contracts providing for payment and delivery on a specified date in the future.
If we sell securities under delayed delivery contracts, the prospectus
supplement will state that as well as the conditions to which these delayed
delivery contracts will be subject and the commissions payable for that
solicitation.
Underwriters may sell these securities to or through dealers.
Alternatively, we may sell the securities in this offering to one or more
dealers, who would act as a principal or principals. Dealers may resell such
securities to the public at varying prices to be determined by the dealers at
the time of the resale.
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We may also sell the securities offered with this prospectus through other
agents designated by them from time to time. We will identify any agent involved
in the offer and sale of these securities who may be deemed to be an underwriter
under the federal securities laws, and describe any commissions or discounts
payable by us to these agents, in the prospectus supplement. Any such agents
will be obligated to purchase all of these securities if any are purchased or
will act on a best efforts basis to solicit purchases for the period of their
appointment, unless stated otherwise in the prospectus supplement.
In connection with the sale of securities offered with this prospectus,
underwriters, dealers or agents may receive compensation from us or from
purchasers of the securities for whom they may act as agents, in the form of
discounts, concessions or commissions. These discounts, concessions or
commissions may be changed from time to time. Underwriters, dealers and/or
agents may engage in transactions with us, or perform services for us, in the
ordinary course of business, and may receive compensation in connection with
those arrangements. In the event any underwriter, dealer or agent who is a
member of the NASD participates in a public offering of these securities, the
maximum commission or discount to be received by any such NASD member or
independent broker-dealer will not be greater than 8% of the offering proceeds
from securities offered with this prospectus.
Underwriters, dealers, agents or purchasers that participate in the
distribution of the securities may be deemed to be underwriters under the
Securities Act. Broker-dealers or other persons acting on behalf of parties that
participate in the distribution of securities may also be deemed underwriters.
Any discounts or commissions received by them and any profit on the resale of
the securities received by them may be deemed to be underwriting discounts and
commissions under the Securities Act.
Underwriters and purchasers that are deemed underwriters under the
Securities Act may engage in transactions that stabilize, maintain or otherwise
affect the price of the securities, including the entry of stabilizing bids or
syndicate covering transactions or the imposition of penalty bids. Such
purchasers will be subject to the applicable provisions of the Securities Act
and Exchange Act and the rules and regulations thereunder, including Rule 10b-5
and Regulation M. Regulation M may restrict the ability of any person engaged in
the distribution of the securities to engage in market-making activities with
respect to those securities. In addition, the anti-manipulation rules under the
Exchange Act may apply to sales of the securities in the market. All of the
foregoing may affect the marketability of the securities and the ability of any
person to engage in market-making activities with respect to the securities.
We may provide underwriters, agents, dealers or purchasers with
indemnification against civil liabilities, including liabilities under the
Securities Act, or contribution with respect to payments that the underwriters,
agents, dealers or purchasers may make with respect to such liabilities.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC under the Securities Act a combined registration
statement on Form S-3 relating to the offered securities.
We are subject to the informational requirements of the Exchange Act, and
in accordance therewith file reports, proxy statements and other information
with the SEC. These reports, proxy statements and other information contain
additional information about us. You can inspect and copy these materials at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. You can obtain information about the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website
that contains reports, proxy and information statements and other information
regarding companies that file electronically with the SEC. The SEC's Internet
address is http://www.sec.gov. You can also inspect these materials at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information by referring
you to another document filed separately with the SEC. This prospectus
incorporates by reference the documents listed below which have been filed by us
with the SEC and any future filings with the SEC under Section 13(a), 13(c), 14
or 15(d) of the Exchange Act:
o annual report on Form 10-K for the year ended December 31, 2004;
o current report on Form 8-K dated March 31, 2005; and
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o the description of the shares of Class A common stock contained in our
registration statement on Form 8-A filed on December 8, 2003 pursuant
to Section 12 of the Exchange Act, including any amendment or report
filed for the purpose of updating such description.
We are also incorporating by reference the information contained in all
other documents that we file with the SEC between the date of the initial filing
of the registration statement of which this prospectus is a part and the
effectiveness of the registration statement, as well as between the date of this
prospectus and the time that all of the securities registered under the
registration statement are sold. The information contained in any of these
documents will be considered part of this prospectus from the date these
documents are filed.
If you would like to receive a copy of any document incorporated by
reference into this prospectus (which will not include any of the exhibits to
the document other than those exhibits that are themselves specifically
incorporated by reference into this prospectus) or our constitutional documents,
you should call or write to us at 121 South 13th Street, Suite 201, Lincoln,
Nebraska 68508 (telephone (402) 458-2370). We will provide these documents,
without charge, by first class mail.
We have not authorized anyone to give any information or make any
representation about us that is different from, or in addition to, that
contained in this prospectus or in any of the materials that have incorporated
by reference into this prospectus. Therefore, if anyone does give you
information of this sort, you should not rely on it. If you are in a
jurisdiction where offers to exchange or sell, or solicitations of offers to
exchange or purchase, the securities offered by this document or the
solicitation of proxies is unlawful, or if you are a person to whom it is
unlawful to direct these types of activities, then the offer presented in this
prospectus does not extend to you. The information contained in this prospectus
speaks only as of the date of this document, unless the information specifically
indicates that another date applies.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the SEC utilizing a "shelf" registration process. Under this shelf process, we
may sell the securities described in this prospectus in one or more offerings
for up to an aggregate initial offering price of $750,000,000. This prospectus
provides you with a general description of the securities that we may offer.
This prospectus does not contain all of the information set forth in the
registration statement as permitted by the rules and regulations of the SEC. For
additional information regarding us and the offered securities, please refer to
the registration statement. Each time we sell securities, we will file a
prospectus supplement with the SEC that will contain specific information about
the terms of that offering. You should read both this prospectus and any
prospectus supplement together with additional information described under the
heading "Where You Can Find More Information."
In this prospectus and in the accompanying prospectus supplement, except as
specified otherwise or unless the context requires otherwise, "we," "us," "our,"
the "Company" and "Nelnet" refer to Nelnet, Inc. and its subsidiaries.
LEGAL MATTERS
Certain legal matters with respect to the Class A common stock and the
preferred stock will be passed upon by Perry, Guthery, Haase & Gessford, P.C.,
L.L.O., Lincoln, Nebraska. Certain legal matters with respect to the unsecured
debt securities, warrants to purchase Class A common stock, preferred stock or
debt securities and stock purchase contracts and stock purchase units will be
passed upon for us by Cahill Gordon & Reindel LLP, New York, New York. Attorneys
employed by, and an Of Counsel to, Perry, Guthery, Haase & Gessford, P.C.,
L.L.O. owned an aggregate of 184,376.9 shares of Class A common stock of Nelnet
as of April 1, 2005.
EXPERTS
The consolidated financial statements of Nelnet, Inc. and subsidiaries as
of December 31, 2004 and 2003, and for each of the years in the three-year
period ended December 31, 2004, and management's assessment of the effectiveness
of internal control over financial reporting as of December 31, 2004 have been
incorporated by reference herein in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, incurred in connection with the
distribution of the securities being registered (all amounts are estimated
except the SEC registration fee).
SEC registration fee................................ $117,700
Printing and engraving expenses..................... 200,000
Legal fees and expenses............................. 250,000
Rating Agency fees.................................. 200,000
Accounting fees and expenses........................ 250,000
Trustees and transfer agents fees................... 100,000
Miscellaneous....................................... 50,00
------------
Total............................................... $1,167,700*
==========
* All expenses, except the SEC registration fee, are estimated.
Item 15. Indemnification of Directors and Officers.
Under the Nebraska Business Corporation Act, a Nebraska corporation may
provide indemnification to directors and officers for judgments, fines,
settlements and expenses, including attorney's fees, incurred in connection with
any threatened, pending or completed action, suit or proceeding other than an
action by or in the right of the corporation. This applies to any civil,
criminal, investigative or administrative action provided that the director or
officer involved acted in good faith, in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The corporation may also provide indemnification to
directors and officers for judgments, fines, settlements and expenses, including
attorney's fees, incurred in connection with any threatened, pending or
completed action or suit by or in the right of the corporation if such director
or officer acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation. However, no
indemnification shall be made in respect of any claim, issue or matter in which
such person is adjudged to be liable for negligence or misconduct in the
performance of his duties to the corporation unless the court in which the
action is brought deems indemnity proper. The grant of indemnification to a
director or officer shall be determined by a majority of a quorum of
disinterested directors, by a written opinion from independent legal counsel or
by the shareholders. Indemnification shall be provided to any directors and
officers for expenses, including attorney's fees, actually and reasonably
incurred in the defense of any action, suit or proceeding to the extent that he
or she has been successful on the merits.
The registrant's amended and restated articles of incorporation provide
that the registrant shall, to the maximum extent and in the manner permitted by
the Nebraska Business Corporation Act, indemnify each of its directors,
officers, employees and agents against expenses, including attorney's fees,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding arising by reason of the fact that such person
is or was an agent of the registrant. The registrant shall pay expenses incurred
in defending any civil or criminal action or proceeding for which
indemnification is available in advance of the final disposition of such action
or proceeding, following authorization thereof by the board of directors in the
case of an employee or agent, upon receipt of an undertaking by or on behalf of
the indemnified party to repay such amount if it shall be ultimately determined
by final judicial
In addition, the registrant's amended and restated articles of
incorporation provide that the registrant may purchase and maintain insurance on
behalf of any person who is or was an agent of the registrant against any
liability asserted against or incurred by such person in such capacity arising
out of such person's status as such, whether or not the registrant would have
the power to indemnify him or her against such liability under the registrant's
amended and restated articles of incorporation and the Nebraska Business
Corporation Act. The registrant has obtained insurance for the benefit of its
officers and directors insuring such persons against liabilities, including
liabilities under the securities laws.
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The registrant's amended and restated articles of incorporation also limit
the personal liability of the directors and officers of the registrant for
breaches of fiduciary duty to the registrant or its shareholders, except in
certain circumstances including (1) breach of the duty of loyalty to the
registrant or its shareholders, (2) acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law, (3) acts or
omissions for which the Nebraska Business Corporation Act does not permit
indemnity for directors under Section 21-2018(2)(e) of the Nebraska Business
Corporation Act, which include intentional infliction of harm on the registrant
or its shareholders, voting for or assenting to an unlawful distribution and
intentional violation of criminal law, or (4) any transaction from which the
director derived an improper personal benefit.
Item 16. Exhibits.
See Exhibit Index immediately preceding the Exhibits.
Item 17. Undertakings.
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of the prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (1)(a) and (1)(b) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time will
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement will
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time will be deemed to be the initial bona fide offering thereof.
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(5) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934;
and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to
deliver, or cause to be delivered, to each person to whom the
prospectus is sent or given the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide
such interim financial information.
(6) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of a registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act will be
deemed to be part of this registration statement as of the time it was
declared effective.
(7) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus will be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering
thereof.
(8) To file an application for the purpose of determining the eligibility
of the trustee to act under subsection (a) of section 310 of the Trust
Indenture Act in accordance with the rules and regulations prescribed
by the SEC under section 305(b)(2) of the Trust Indenture Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Lincoln, Nebraska on April 13, 2005.
NELNET, INC.
By: /s/ Michael S. Dunlap
-----------------------------------------
Name: Michael S. Dunlap
Title: Chairman and Co-Chief Executive
Officer
We, the undersigned directors and officers of Nelnet, Inc., do hereby
constitute and appoint Michael S. Dunlap, Stephen F. Butterfield and Terry J.
Heimes, and each and any of them, our true and lawful attorneys-in-fact and
agents to do any and all acts and things in our names and our behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our name in the capacities indicated below, which said attorneys and
agents, or any of them, may deem necessary or advisable to enable Nelnet, Inc.
to comply with the Securities Act of 1933 and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with this
registration statement or any registration statement for this offering of
securities that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, including specifically, but without limitation, any and
all amendments (including post-effective amendments) hereto, and we hereby
ratify and confirm all that said attorneys and agents, or any of them, shall do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
------------------------------------------------ --------------------------------------------------- -------------------
Chairman and
/s/ Michael S. Dunlap Co-Chief Executive Officer April 13, 2005
------------------------------------------------ (Co-Principal Executive Officer)
Michael S. Dunlap
Vice Chairman and Co-Chief
/s/ Stephen F. Butterfield Executive Officer April 13, 2005
------------------------------------------------ (Co-Principal Executive Officer)
Stephen F. Butterfield
Chief Financial Officer
/s/ Terry J. Heimes (Principal Financial Officer and Principal April 13, 2005
------------------------------------------------ Accounting Officer)
Terry J. Heimes
/s/ Don R. Bouc Director April 13, 2005
------------------------------------------------
Don R. Bouc
Director April 13,2005
-----------------------------------------------
James P. Abel
/s/ Michael D. Reardon Director April 13, 2005
------------------------------------------------
Michael D. Reardon
/s/ Arturo Moreno Director April 13, 2005
------------------------------------------------
Arturo Moreno
/s/ Brian J. O'Connor Director April 13, 2005
------------------------------------------------
Brian J. O'Connor
/s/ Thomas E. Henning Director April 13, 2005
------------------------------------------------
Thomas E. Henning
/s/ James H. VanHorn Director April 13, 2005
------------------------------------------------
James H. VanHorn
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EXHIBITS
Exhibit
Number Description
1.1* Form of Underwriting Agreement (Nelnet, Inc. Equity)
1.2* Form of Underwriting Agreement (Nelnet, Inc. Debt)
1.3* Form of Underwriting Agreement (Nelnet, Inc. Stock Purchase
Contracts)
1.4* Form of Underwriting Agreement (Nelnet, Inc. Stock Purchase Units)
4.1** Form of Nelnet, Inc. Senior Debt Securities Indenture
4.2* Form of Nelnet, Inc. Senior Debt Security
4.3** Form of Nelnet, Inc. Subordinated Debt Securities Indenture
4.4* Form of Nelnet, Inc. Subordinated Debt Security
4.5* Form of Nelnet, Inc. Standard Stock Warrant Agreement
4.6* Form of Nelnet, Inc. Standard Stock Warrant Certificate
4.7* Form of Standard Stock Purchase Contract Agreement
5.1** Opinion of Perry, Guthery, Haase & Gessford, P.C., L.L.O.
regarding legality of certain securities being offered
5.2** Opinion of Cahill Gordon & Reindel LLP regarding legality of
certain securities being offered
12.1** Statement of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends
23.1** Consent of Perry, Guthery, Haase & Gessford, P.C., L.L.O.
(included as part of Exhibit 5.1)
23.2** Consent of Cahill Gordon & Reindel LLP (included as part of
Exhibit 5.2)
23.3** Consent of KPMG LLP, Independent Registered Public Accounting Firm
24.1 Powers of Attorney authorizing execution of registration statement
on Form S-3 on behalf of certain directors and officers of
Nelnet, Inc. (included on the signature page to this
registration statement)
25.1* Form T-1 Statement of Eligibility of Trustee (Nelnet, Inc. Senior
Debt Securities Indenture, Nelnet, Inc. Subordinated Debt
Securities Indenture)
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* To be filed as an amendment to this registration statement or as an
exhibit to an Exchange Act report of the registrant and incorporated
herein by reference.
** Filed herewith.