April 30, 2007
BY FACSIMILE AND EDGAR
Ms. Sharon Virga
Senior Staff Accountant
Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 3720
100 F Street, N.E.
Washington, D.C. 20549
Re: NELNET, INC.
FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2006
FILED MARCH 1, 2007
FILE NO. 1-31924
Dear Ms. Virga:
On behalf of Nelnet, Inc. (the "Company"), submitted below are the
Company's responses to the comments (the "Comments") of the staff (the "Staff")
of the Securities and Exchange Commission (the "Commission") set forth in the
Commission's letter dated April 2, 2007, concerning the above referenced filing
made pursuant to the Securities Exchange Act of 1934 (the "Exchange Act").
For your convenience, the responses set forth below have been placed in
the order in which the Staff presented the Comments and the text of each Comment
is presented in bold italics before each response.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS, PAGE F-6
1. WE NOTE THAT YOU REPORT CASH FLOWS FROM SALES OF STUDENT LOANS AS
INVESTING ACTIVITIES. PLEASE ADDRESS THE FOLLOWING REGARDING THAT
PRESENTATION:
Securities and Exchange Commission
April 30, 2007
Page 2
o GIVEN YOUR HISTORY OF SELLING SUCH RECEIVABLES, PLEASE TELL US
HOW YOU DETERMINED THAT THESE CASH FLOWS SHOULD BE REPORTED AS
INVESTING, RATHER THAN OPERATING ACTIVITIES.
o TELL US THE NATURE OF THE RECEIVABLES AND WHEN YOU MAKE THE
DETERMINATION TO SELL THE RECEIVABLES, SPECIFICALLY, AT OR
SUBSEQUENT TO ACQUISITION.
o PLEASE TELL US HOW YOU APPLIED THE GUIDANCE OF PARAGRAPH .08A OF
SOP 01-6 AND PARAGRAPH 9 OF SFAS 102.
When the Company originates or purchases student loans, management has
the intent and ability to hold the loans for the foreseeable future or until
maturity or payoff. Accordingly, pursuant to paragraph .08a of SOP 01-6, these
loans are held for investment and reported in the consolidated balance sheet at
outstanding principal adjusted for any chargeoffs, the allowance for loan
losses, any deferred fees or costs on originated loans, and any unamortized
premiums or discounts on purchased loans. Pursuant to paragraph .08c of SOP
01-6, once a decision has been made to sell loans not previously classified as
held for sale, such loans are transferred into the held-for-sale classification
and carried at the lower of cost or fair value.
Prior to 2006, the Company had immaterial loan sales of which the
proceeds were reported as investing activities in the consolidated statements of
cash flows and classified within "net proceeds from student loan repayments,
claims, capitalized interest, and other." At the time these loans were
originated or purchased by the Company, management had the intent and ability to
hold the loans for the foreseeable future or until maturity or payoff.
Accordingly, pursuant to the provisions of paragraph 9 of SFAS 102, the proceeds
from the sale of these loans were properly classified as investing cash inflows
in the consolidated statements of cash flows.
Paragraph 9 of SFAS 102 states,
"Cash receipts resulting from sales of loans that were not
specifically acquired for resale shall be classified as investing
cash inflows. That is, if loans were acquired as investments,
cash receipts from sales of those loans shall be classified as
investing cash inflows regardless of a change in the purpose for
holding those loans."
During 2006, the Company sold loans primarily under two scenarios
described below:
(i) Certain loans owned by the Company were not serviced by the
Company and as such were at a greater risk of being consolidated
away from the Company by third parties. When these loans were
originated or purchased by the Company, management had the
intent and ability to hold the loans for the foreseeable future
or until maturity or payoff. Subsequent to the origination or
purchase of these loans, the Company determined to sell these
loans to minimize the risk of losing these loans via
consolidation to other lenders and entered into agreements with
unrelated third parties to sell these loans.
Securities and Exchange Commission
April 30, 2007
Page 3
(ii) As part of the agreement for the acquisition of the capital
stock of LoanSTAR Funding Group, Inc. from the Greater Texas
Foundation (the "Texas Foundation") completed in October 2005,
the Company agreed to sell student loans in an aggregate amount
sufficient to permit the Texas Foundation to maintain a
portfolio of loans equal to no less than $200 million through
October 2010. To satisfy this obligation, the Company sells
loans to the Texas Foundation on a quarterly basis. Loans are
not specifically acquired or purchased by the Company with the
intent to resell them to the Texas Foundation under this loan
sale agreement. Prior to each quarterly sale to the Texas
Foundation, the Company determines which loans in its existing
student loan portfolio will be sold.
The proceeds from all loan sales in 2006 were classified as investing
cash inflows in the consolidated statements of cash flows as these loans were
originated or purchased as investments and management determined to sell the
loans subsequent to the origination or purchase of such loans. Pursuant to
paragraph 9 of SFAS 102, the cash receipts from sales of loans shall be
classified as investing cash inflows regardless of a change in the purpose of
holding such loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BUSINESS AND CERTAIN ASSET ACQUISITIONS, PAGE F-14
2. PLEASE REFER TO PRIOR COMMENT NUMBER 13. WE NOTE ON ATTACHMENT B THAT
YOU HAVE AMORTIZABLE INTANGIBLES RELATED TO CUSTOMER RELATIONSHIPS. WE
ALSO NOTE THAT $19,632 RELATED TO THE FACTS ACQUISITION IS BEING
AMORTIZED OVER A PERIOD OF 240 MONTHS USING THE ACCELERATED STRAIGHT
LINE METHOD AND THAT THIS PERIOD IS SIGNIFICANTLY LONGER THAN THE
PERIODS USED FOR AMORTIZING OTHER CUSTOMER RELATIONSHIPS. TELL US IN
DETAIL, CITING THE ACCOUNTING LITERATURE UPON WHICH YOU RELIED, HOW YOU
DETERMINED THE 240 MONTH AMORTIZATION PERIOD.
On June 10, 2005, the Company purchased 80% of the capital stock of
FACTS Management Co. ("FACTS") and on February 17, 2006, the Company purchased
the remaining 20% of the stock of FACTS. At the time of the acquisition, FACTS
primarily provided actively managed tuition payment plans to K-12 and post
secondary educational institutions. This acquisition was accounted for under
purchase accounting. Accordingly, the Company allocated the purchase price based
on the fair values of the assets acquired and liabilities assumed at the date of
acquisition. As part of this allocation process, the Company assigned $19.6
million to customer relationships.
Securities and Exchange Commission
April 30, 2007
Page 4
The value assigned to the customer relationships intangible asset is
being amortized over the period of projected revenues and expenses (cash flows)
attributable to this asset as of the date of acquisition. The useful life of
this intangible asset was determined by management to be 20 years, which
represents the period over which this asset is expected to contribute to the
future cash flows of the Company. Because of customer attrition, the estimated
annual cash flows related to customer relationships diminish as time extends
from the date of acquisition. As such, the Company uses an accelerated
amortization method that reflects the pattern in which the estimated economic
benefits of this acquired asset are used by the Company. The following table
summarizes the accelerated amortization of the customer relationships intangible
asset:
Percent of asset
amortized
----------------
Years 1 - 4 42%
Years 5 - 8 29
Years 9 - 12 16
Years 13 - 16 9
Years 17 - 20 4
----------------
Total 100%
In determining the estimated useful life of the customer relationships
intangible asset, the Company based its analysis of all pertinent factors
described in paragraph 11 of SFAS 142. The factors used by the Company included:
o THE EXPECTED USE OF THE ASSET BY THE COMPANY. Although FACTS
does not have contracts with 20 year terms to provide services
to their customers (most contracts are renewed annually), the
Company plans to provide services to FACTS' existing customers
into the foreseeable future.
o ANY LEGAL, REGULATORY, OR CONTRACTUAL PROVISIONS THAT MAY LIMIT
THE USEFUL LIFE AND/OR ENABLE RENEWAL OR EXTENSION OF THE
ASSET'S LEGAL OR CONTRACTUAL LIFE WITHOUT SUBSTANTIAL COST. As
stated above, most of FACTS' contracts are renewed annually. The
renewal or extension of the contracts has historically been
accomplished by incurring minimal to no incremental costs and
without material modifications to the existing terms and
conditions.
o THE EFFECTS OF OBSOLESCENCE, DEMAND, COMPETITION, AND OTHER
ECONOMIC FACTORS (SUCH AS THE STABILITY OF THE INDUSTRY, KNOWN
TECHNOLOGICAL ADVANCES, LEGISLATIVE ACTION THAT RESULTS IN AN
UNCERTAIN OR CHANGING REGULATORY ENVIRONMENT, AND EXPECTED
CHANGES IN DISTRIBUTION CHANNELS). FACTS began providing
services to customers in 1987. The Company used historical
retention rates for school customers to determine a historical
attrition rate. Based on this analysis, the calculated
historical annual attrition rate for school customers was less
than 5%. The majority of school customers lost have been due to
school closures rather than competitive factors and/or
technological changes. The Company determined a reasonable
useful life for the customer relationships of 20 years by
dividing 1 by a 5% annual attrition rate. Although the
historical attrition rate related to school customers was less
than 5%, the Company believed a 5% attrition rate reflects
potential for higher attrition in the future due to potential
competitive pressures and/or technological changes.
Securities and Exchange Commission
April 30, 2007
Page 5
The Company does not foresee any changes in the demand for this
service from its customers or any legislative action that would
result in an uncertain or changing regulatory environment related
to the services provided.
o THE LEVEL OF MAINTENANCE EXPENDITURES REQUIRED TO OBTAIN THE
EXPECTED FUTURE CASH FLOWS FROM THE ASSET. The excess earnings
method was used by the Company to value the customer
relationships intangible asset. The excess earnings method is
based on the premise that the subject asset enables the Company
to earn an excess return on other assets employed. An allowance
is made for a fair return on, and of, other assets employed and
the excess earnings attributable to the subject asset are then
capitalized to determine its value. As such, the Company
obtained an estimate of after-tax cash flow attributable to the
customer relationships, factoring in all projected expenses
(including any costs to maintain and/or update computer hardware
and software) to earn the projected revenue and also deducted
"returns on" those assets (e.g., tangible property, assembled
workforce, other identified intangible assets, etc.) supporting
the customers. The resulting after-tax cash flow was then
discounted to arrive at the value of the customer relationships.
In using this valuation method, management believes all
expenditures required to obtain the expected future cash flows
for the asset were considered.
FORMS 10-Q FOR MARCH 31, 2006 AND JUNE 30, 2006 AND FORM 10-Q/A FOR
SEPTEMBER 30, 2006
GENERAL
3. PLEASE REVISE, AS APPROPRIATE FOR COMMENTS ISSUED REGARDING FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006.
In future Form 10-Q filings our disclosures will reflect, as
appropriate, any changes to disclosures emanating from our responses to the
comments issued regarding our Form 10-K for the year ended December 31, 2006.
* * * * *
On behalf of the Company, the undersigned acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosures in our filings;
Securities and Exchange Commission
April 30, 2007
Page 6
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action
with respect to our filings; and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
We believe that the foregoing is responsive to the Comments. If you need
further information, you may contact the undersigned at (402) 458.2303.
Sincerely,
/s/ TERRY J. HEIMES
Terry J. Heimes
Chief Financial Officer
cc: Mr. Brian J. O'Connor, Chairman, Audit Committee of the Board of Directors,
Nelnet, Inc.