##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark one) þ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
 For the Quarter Ended March 31, 2005 o
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to ____________ Commission file number: 000-50846 Collegiate Funding Services, Inc.  Delaware
    
    04-3649118(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)
 10304 Spotsylvania Avenue
Suite 100
Fredericksburg, Virginia 22408
(540) 374-1600
(Name, Address, Including Zip Code and Telephone Number, Including Area Code of Agent for Service) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ Indicate the number of share outstanding of each of the issuers classes of common stock, as of the
latest practicable date 31,105,184 Shares of Common Stock, par value $.001 per share, were outstanding as of May 1, 2005.




---



##### 



Table of Contents PagePART I.  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II.  OTHER INFORMATION
    
    
    33Item 1. Legal Proceedings
    
    
    33Item 2. Unregulated Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Signature
    
    
    34Exhibit Index
 2




---



##### 



PART I.  FINANCIAL INFORMATION Item 1. Financial Statements COLLEGIATE FUNDING SERVICES, INC. CONSOLIDATED BALANCE SHEETS
(dollars in thousands) March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)AssetsCash and cash equivalents
    
    $
    23,980
    
    
    $
    12,925Restricted cash
    
    
    156,427
    
    
    
    80,128Accounts receivable, net
    
    
    7,239
    
    
    
    10,353Student loans, net of allowance of $5,544 and $4,961, respectively
    
    
    5,111,559
    
    
    
    4,659,842Accrued interest receivable
    
    
    52,234
    
    
    
    42,844Income taxes receivable
    
    
    1,078
    
    
    
    6,588Property and equipment, net
    
    
    13,707
    
    
    
    14,622Goodwill
    
    
    188,729
    
    
    
    188,729Deferred financing costs, net
    
    
    20,225
    
    
    
    15,560Other assets
    
    
    11,614
    
    
    
    11,200Total assets
    
    $
    5,586,792
    
    
    $
    5,042,791Liabilities and stockholders equityLiabilitiesAsset-backed notes and lines of credit
    
    $
    5,313,877
    
    
    $
    4,782,670Other debt obligations, net
    
    
    14,538
    
    
    
    14,486Capital lease obligations
    
    
    1,629
    
    
    
    1,749Accounts payable
    
    
    4,145
    
    
    
    2,315Accrued interest payable
    
    
    9,015
    
    
    
    5,116Other accrued liabilities
    
    
    22,862
    
    
    
    26,074Deferred income taxes, net
    
    
    20,655
    
    
    
    18,669Total liabilities
    
    
    5,386,721
    
    
    
    4,851,079Stockholders equityCommon stock  par value $0.001, 120,000,000 shares authorized,
30,969,048 and 30,764,848 shares issued and outstanding as of
March 31, 2005 and December 31, 2004, respectively
    
    
    31
    
    
    
    30Additional paid-in capital
    
    
    158,312
    
    
    
    157,823Retained earnings
    
    
    41,728
    
    
    
    33,859Total stockholders equity
    
    
    200,071
    
    
    
    191,712Total liabilities and stockholders equity
    
    $
    5,586,792
    
    
    $
    5,042,791
 See accompanying notes. 3




---



##### 



COLLEGIATE FUNDING SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data) (unaudited) For the three monthsended March 31,2005
    
    
    2004Net revenueInterest income
    
    $
    54,074
    
    
    $
    26,864Interest expense
    
    
    37,114
    
    
    
    13,078Net interest income
    
    
    16,960
    
    
    
    13,786Provision for loan losses
    
    
    583
    
    
    
    927Net interest income after provision for loan losses
    
    
    16,377
    
    
    
    12,859Fee income
    
    
    30,626
    
    
    
    21,773Net revenue
    
    
    47,003
    
    
    
    34,632ExpensesSalaries and related benefits
    
    
    16,011
    
    
    
    13,981Other selling, general and administrative expenses:Marketing and mailing costs
    
    
    10,560
    
    
    
    6,425Communications and data processing
    
    
    1,931
    
    
    
    1,708Management and consulting fees
    
    
    600
    
    
    
    938Professional fees
    
    
    1,673
    
    
    
    1,055Depreciation and amortization
    
    
    1,829
    
    

    
    1,250Other general and administrative
    
    
    2,739
    
    
    
    2,409Total other selling, general and administrative
expenses
    
    
    19,332
    
    
    
    13,785Swap interest (income) expense
    
    
    (1,121
    )
    
    
    1,582Derivative and investment mark-to-market (income)
    
    
    (306
    )
    
    
    (226
    )Total expenses
    
    
    33,916
    
    
    
    29,122Income before income tax provision and accretion
of dividends on preferred stock
    
    
    13,087
    
    
    
    5,510Income tax provision
    
    
    5,218
    
    
    
    2,204Income before accretion of dividends
    
    
    7,869
    
    
    
    3,306Accretion of dividends on preferred stock
    
    
    
    
    
    
    2,116Net income
    
    $
    7,869
    
    
    $
    1,190Earnings per common share, basic
    
    $
    0.26
    
    
    $
    0.06Earnings per common share, diluted
    
    $
    0.24
    
    
    $
    0.05Weighted average common shares outstanding, basic
    
    
    30,645,713
    
    
    
    21,071,523Weighted average common shares outstanding, diluted
    
    
    32,379,960
    
    
    
    22,912,108
 See accompanying notes. 4




---



##### 



COLLEGIATE FUNDING SERVICES, INC. CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands) (unaudited) AdditionalCommon
    
    
    paid-in
    
    
    RetainedStock
    
    
    capital
    
    
    earnings
    
    
    TotalBalance, December 31, 2004
    
    $
    30
    
    
    $
    157,823
    
    
    $
    33,859
    
    
    $
    191,712Exercise of warrants
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    Deferred compensation
    
    
    
    
    
    
    490
    
    
    
    
    
    
    
    490Net income  January 1, 2005 through March 31, 2005
    
    
    
    
    
    
    
    
    
    
    7,869
    
    
    
    7,869Balance, March 31, 2005
    
    $
    31
    
    
    $
    158,312
    
    
    $
    41,728
    
    
    $
    200,071
 See accompanying notes. 5




---



##### 



COLLEGIATE FUNDING SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) (unaudited) Three months endedMarch 31,2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    7,869
    
    
    $
    1,190Adjustments to reconcile net income to net cash provided by operating activities:Accretion of dividends on preferred stock
    
    
    
    
    
    
    2,116Depreciation and amortization
    
    
    1,829
    
    
    
    1,250Loss on disposal of property and equipment
    
    
    163
    
    
    
    Reversal of loss on early lease termination
    
    
    (119
    )
    
    
    Deferred income tax provision
    
    
    1,986
    
    
    
    2,176Amortization of deferred costs
    
    
    2,450
    
    
    
    1,092Provision for loan losses
    
    
    583
    
    
    
    927Provision for doubtful accounts
    
    
    40
    
    
    
    Changes in:Accrued interest receivable
    
    
    (9,390
    )
    
    
    (4,243
    )Accounts receivable and other assets
    
    
    2,416
    
    
    
    (1,652
    )Income taxes receivable
    
    
    5,510
    
    
    
    Accounts payable
    
    
    1,830
    
    
    
    (363
    )Accrued interest payable
    
    
    3,899
    
    
    
    (389
    )Other accrued liabilities
    
    
    (3,093
    )
    
    
    (1,263
    )Net cash provided by operating activities
    
    
    15,973
    
    
    
    841Cash flows from investing activitiesOriginations and purchases of student loans
    
    
    (572,174
    )
    
    
    (640,859
    )Net proceeds from student loan principal payments
    
    
    118,542
    
    
    
    46,649Net proceeds from disposals of property and equipment
    
    
    6
    
    
    
    Purchases of property and equipment
    
    
    (839
    )
    
    
    (1,715
    )Net cash used in investing activities
    
    
    (454,465
    )
    
    
    (595,925
    )Cash flows from financing activitiesProceeds from asset-backed notes and lines of credit
    
    
    1,916,900
    
    
    
    623,300Payments on asset-backed notes and lines of credit
    
    
    (1,385,693
    )
    
    
    (49,986
    )Payments on other debt obligations
    
    
    
    
    
    
    (3,750
    )Payments on capital lease obligations
    
    
    (120
    )
    
    
    (67
    )Payment of financing costs
    
    
    (5,241
    )
    
    
    (159
    )Proceeds from notes receivable
    
    
    
    
    
    
    181Change in restricted cash
    
    
    (76,299
    )
    
    
    25,984Net cash provided by financing activities
    
    
    449,547
    
    
    
    595,503Net increase in cash and cash equivalents
    
    
    11,055
    
    
    
    419Cash and cash equivalents:Beginning
    
    
    12,925
    
    
    
    14,436Ending
    
    $
    23,980
    
    
    $
    14,855Supplemental disclosures:Cash payments for interest
    
    $
    32,622
    
    
    $
    11,655Cash payments for income taxes, net
    
    $
    1,060
    
    
    $
    28
 See accompanying notes. 6




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   UNAUDITED
(dollars in thousands, except per share data) 1. Nature of the Business Collegiate Funding Services, Inc., formerly CFSL Holdings Corp. (the Company), established in
2002, is a Delaware Corporation. The Company and a wholly-owned subsidiary, CFSL Acquisition Corp.
(CFSL Acquisition) were established for the purpose of acquiring the operations of Collegiate
Funding Services, LLC (Predecessor of CFS). The Company continues the business of the Predecessor,
which was established in 1998. Collegiate Funding Services, Inc. is a vertically integrated education finance company that
markets, originates, finances and services education loans. The Company markets education loans
primarily through direct-to-consumer programs, including targeted direct mail, telemarketing and
the internet. Using its direct-to-consumer platform, or DTC, along with other distribution
channels, and its origination capabilities, the Company assists consumers in financing and
refinancing the cost of undergraduate, graduate, professional, career and continuing education
training. The DTC marketing strategy is supplemented with marketing through channels created by
relationships with membership organizations, alumni associations, universities and other entities
to reach customers and promote the Companys products under private label and co-branded offerings.
The Company finances, retains and services a substantial portion of the loans it originates. Certain completed loan applications are sold to, and funded by, third party lenders whereby
the Company receives a fee for its services. Other completed consolidation loan applications are
funded through a subsidiary of the Company and held and serviced by the Company. The Company has
call centers located in Virginia and Florida. The Company also has a loan-servicing center in
Mississippi and an affinity marketing subsidiary in Boston. In April, 2004, the Company acquired Members Connect Inc. d/b/a Youth Media & Marketing
Networks, (Y2M), a company that provides affinity marketing of products and services, with a focus
on education finance products targeted at college students and recent college graduates. The
purchase price was $35,890. The operating results of Y2M have been included in the Companys
consolidated financial statements since April 21, 2004. The following table summarizes the estimated fair values of the acquired assets and assumed
liabilities of Y2M at the date of acquisition: Cash and cash equivalents
    
    $
    705Accounts receivable
    
    
    1,034Property and equipment
    
    
    83Contractual relationships
    
    
    2,900Trademarks, copyrights, and domain names
    
    
    1,700Deferred income tax asset
    
    
    2,768Other assets
    
    
    1,198Total assets acquired
    
    
    10,388Accounts payable and other liabilities
    
    
    (2,523
    )Net assets acquired
    
    $
    7,865Allocation of the purchase price:Net assets acquired
    
    $
    7,865Goodwill
    
    
    28,025Total purchase price
    
    $
    35,890
 7




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED(Continued) 2. Initial Public Offering In July 2004, the Company completed its initial public offering of common stock issuing
9,375,000 shares of common stock at $16.00 per share. The net proceeds of the offering of $135,596
were used to pay the $93,951 liquidation preference of all shares of the preferred stock issued by
a subsidiary, and the remaining $41,645 was used to repay a portion of the amounts outstanding
under the revolving line of credit. Immediately prior to the consummation of the offering, the
Company amended its amended and restated certificate of incorporation to eliminate the Class A
Common Stock and Class B Common Stock in order to create a single class of common stock. As of the
closing of the offering, the Companys authorized capital stock consisted of 120,000,000 shares of
common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001
per share, of which 30,446,523 shares of common stock were issued and outstanding and no shares of
preferred stock were issued and outstanding. In addition, the Company issued 318,325 shares of
restricted and unrestricted stock and options for 636,312 shares to management in connection with
the initial public offering. As of the closing of the offering the Company had warrants
outstanding to purchase 1,430,099 shares at an exercise price of $0.007 per share. Also, options
to purchase a total of 1,317,033 shares were outstanding as of the closing of the offering. Of
this total, there were options to purchase 450,481 shares at an exercise price of $0.91 per share
and 866,552 shares at an exercise price of $16.00 per share. 3. Summary of Significant Accounting Policies Unaudited Interim Financial Statements The accompanying consolidated balance sheet as of March 31, 2005, consolidated statements of
income for the three months ended March 31, 2005 and 2004, the consolidated statement of cash flows
for the three months ended March 31, 2005 and 2004 and the consolidated statement of equity for the
three months ended March 31, 2005, are unaudited. The unaudited financial statements include all
adjustments (consisting of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of such financial statements. The information disclosed in the
notes to the financial statements for these periods is unaudited. The results of operations for the
three months ended March 31, 2005, are not necessarily indicative of the results to be expected for
the entire fiscal year or for any future period and should be read in conjunction with the
Companys annual audited consolidated financial statements and notes included in our Annual Report
on Form 10-K dated March 29, 2005. The Companys quarterly results of operations have varied significantly in the past and are
expected to continue to vary in the future. Quarterly results of operations in any period will be
particularly affected by the amount and timing of loan sales. We give borrowers who complete loan
applications during the second quarter the option to fund their loans prior to July 1, when the new
rate is effective. Accordingly, if any years borrower rate increases from the prior years
borrower rate, a higher percentage of completed applications will likely be originated in the
second quarter, conversely, if any years borrower rate decreases over the prior years borrower
rate, the origination of a significant portion of the loan applications completed in the second
quarter will be shifted to the third quarter. Stock Split In June 2004, the Company declared a 1.430099-for-one stock split in the form of a stock
dividend. Accordingly, all share and per share amounts have been retroactively adjusted to give
effect to this event. Estimates and assumptions The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Management believes that the
estimates utilized in preparing the financial statements are reasonable and prudent. Actual results
could differ from those estimates. 8




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED(Continued) Other accounting polices The remainder of our accounting policies are described in the Companys annual audited
consolidated financial statements. 4. Earnings Per Share SFAS No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings per
share. Basic earnings per common share is computed by dividing income attributable to common
stockholders by the weighted average number of common shares outstanding for the period. The
diluted earnings per common share data is computed using the weighted average number of common
shares outstanding plus the dilutive effect of common stock equivalents, unless the common stock
equivalents are anti-dilutive. The following details the computation of earnings per common share: Three months endedMarch 31,2005
    
    
    2004Net income
    
    $
    7,869
    
    
    $
    1,190Weighted average common shares calculation:Weighted average common shares outstanding,
    
    
    30,645,713
    
    
    
    21,071,523Treasury stock effect of warrants and options
    
    
    1,734,247
    
    
    
    1,840,585Weighted average common shares outstanding, diluted
    
    
    32,379,960
    
    
    
    22,912,108Earnings per common share:Earnings per common share, basic
    
    $
    0.26
    
    
    $
    0.06Earnings per common share, diluted
    
    $
    0.24
    
    
    $
    0.05
 At March 31, 2005, there were 866,562 stock options that were anti-dilutive and thus excluded
from the diluted earnings per share computations, due to the fact that their exercise price was
greater than the average market price per share of the quarter. 5. Student Loans The Companys current loan portfolio consists of loans originated under the Federal Family
Education Loan Program (FFEL Program or FFELP). The FFEL Program is subject to comprehensive
reauthorization every five years and to statutory and regulatory changes. The most recent
reauthorization was the Higher Education Amendments of 1998, which are scheduled to expire on
September 30, 2005. There are three principal categories of FFELP loans: consolidation loans, Parent Loans for
Undergraduate Students (PLUS) loans and Stafford loans. Generally, Stafford loans and PLUS loans
have repayment periods of between five and ten years. Consolidation loans have repayment periods
ranging from 12 to 30 years. At March 31, 2005 and December 31, 2004, the Company retained only
FFELP loans in its portfolio. The Companys FFELP loans are guaranteed against the borrowers default, death, disability or
bankruptcy. The guarantee on FFELP loans is provided by certain state or nonprofit guarantee
agencies, which are reinsured by the federal government. The loans are 100% guaranteed in cases of
death, disability and bankruptcy and are guaranteed for 98% to 100% in other cases. The Company
accrues interest until receipt of proceeds from the guarantor. 9




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED(Continued) The FFELP loans are also subject to regulatory requirements relating to origination and
servicing. In the event of default or the borrowers death, disability or bankruptcy, the Company
files a claim with the insurer or guarantor of the loan, who, provided the loan has been properly
originated and serviced, pays the Company the unpaid principal balance and accrued interest on the
loan, less risk-sharing (in the case of defaults). Claims not immediately honored by the guarantor because of servicing or origination defects
are returned for remedial servicing, during which period income is not earned. The Companys
servicing experience with FFELP loans resulted in zero rejected claims in both the three months
ended March 31, 2005 and the three months ended March 31, 2004. There were three net rejected
claims outstanding as of March 31, 2005 and December 31, 2004, respectively. The Company had no
non-accrual loans at March 31, 2005 or December 31, 2004. The weighted average remaining term of student loans in the Companys portfolio was
approximately 22 years at both March 31, 2005 and December 31, 2004. 6. Allowance for Loan Losses The allowance for loan losses represents the amount estimated to absorb probable losses
inherent in the portfolio. The evaluation of the allowance for loan losses is inherently
subjective, as it requires material estimates that may be susceptible to significant changes. The
key estimates used to determine the level of the allowance, include the probability of default and
the related loss severity. In assessing the probabilities of default, management considers the
performance of the Companys portfolio, including delinquency and charge-off trends. In addition,
because the portfolio has not matured to a point where predictable loss patterns have developed,
management reviews the published Department of Education statistics and performance characteristics
of the other lenders in developing the Companys estimates of the probabilities of default. The
primary factor impacting our risk sharing rate is the existence of the 98% guarantee of principal
and interest on our loans. Generally, our loans carry a 98% guarantee of principal and accrued
interest. In May 2004, the Company was notified by the Department of Education that it had been
awarded Exceptional Performance status as a servicer and thus its loss claims on loans it services
at SunTech, its loan servicing center, will be paid to 100% of the unpaid principal and interest
for the twelve month period June 1, 2004 to May 31, 2005. As a result, the average risk-sharing
rate used in our allowance computation at March 31, 2005, was 1.76%, compared to 2.00% at March 31,
2004. If this designation is not renewed at the end of May 2005, the average risk-sharing rate
used in the allowance computation will increase. The following table details the allowance for loan losses: Three months endedMarch 31, 2005
    
    
    March 31, 2004Beginning balance
    
    $
    4,961
    
    
    $
    4,136Provision
    
    
    583
    
    
    
    927Charge-offs
    
    
    
    
    
    
    (68
    )Ending balance
    
    $
    5,544
    
    
    $
    4,995
 A loan is placed on non-accrual status at the point at which a guarantee claim is more than 60
days past due or it is concluded that collection of the claim is in doubt. Loans are charged off
upon receipt of the final claim payment from the respective guarantor. 10




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED(Continued) 7. Debt Asset-backed notes and lines of credit The Company finances its loan originations through the sale of asset-backed notes in the
capital markets, using both public offerings and private placements. Approximately 97% of the
notes issued to date by the Company have been structured to a AAA credit rating. The notes issued
are indexed to three month LIBOR or are auction rate based. After the initial issuance, interest
rates on the auction rate notes are reset every 28 days. Fees are incurred at a rate equal to 0.26%
per annum in connection with each monthly auction. These fees are recorded as a component of
interest expense. The Company utilizes a warehouse credit facility principally to fund its
retention of FFELP loan originations, of which such loans collateralize the associated borrowings.
The Company pays the warehouse credit facility a credit spread over the commercial paper rate,
typically a 30-day rate. On December 1, 2004, the Company received a temporary increase in the
warehouse facility to permit financing up to $1.4 billion through the end of February 2005, after
which the facility returned to $1.0 billion. The principal balances outstanding, interest rates
and maturity dates are as follows: March 31, 2005
    
    
    December 31, 2004Principal
    
    
    
    
    
    
    Principaloutstanding
    
    
    Interest rate
    
    
    outstanding
    
    
    Interest rate
    
    
    Type
    
    Maturity date2005A SeriesClass A-1
    
    $
    330,000
    
    
    
    2.92
    %
    
    $
    
    
    
    
    
    %
    
    LIBOR
    
    September 2014Class A-2
    
    
    422,000
    
    
    
    2.99
    
    
    
    
    
    
    
    
    
    
    LIBOR
    
    December 2021Class A-3
    
    
    310,000
    
    
    
    3.03
    
    
    
    
    
    
    
    
    
    
    LIBOR
    
    March 2027Class A-4
    
    
    282,000
    
    
    
    3.10
    
    
    
    
    
    
    
    
    
    
    LIBOR
    
    March 2035Class B
    
    
    56,000
    
    
    
    3.20
    
    
    
    
    
    
    
    
    
    
    LIBOR
    
    December 20372004A SeriesClass A-1
    
    
    164,056
    
    
    
    3.14
    
    
    
    192,298
    
    
    
    2.60
    
    
    LIBOR
    
    December 2013Class A-2
    
    
    350,000
    
    
    
    3.26
    
    
    
    350,000
    
    
    
    2.72
    
    
    LIBOR
    
    June 2021Class A-3
    
    
    207,000
    
    
    
    3.30
    
    
    
    207,000
    
    
    
    2.76
    
    
    LIBOR
    
    September 2026Class A-4
    
    
    140,000
    
    
    
    3.43
    
    
    
    140,000
    
    
    
    2.89
    
    
    LIBOR
    
    September 2030Class A-5  6
    
    
    111,700
    
    
    
    2.78
    
    
    
    111,700
    
    
    
    2.35-2.37
    
    
    Auction
    
    December 2043Class B
    
    
    55,700
    
    
    
    2.75
    
    
    
    55,700
    
    
    
    2.50
    
    
    Auction
    
    December 20432003B SeriesClass A-1
    
    
    156,016
    
    
    
    3.19
    
    
    
    177,936
    
    
    
    2.65
    
    
    LIBOR
    
    September 2013Class A-2
    
    
    250,000
    
    
    
    3.35
    
    
    
    250,000
    
    
    
    2.81
    
    
    LIBOR
    
    March 2021Class A-3  7
    
    
    485,000
    
    
    
    2.78-3.15
    
    
    
    485,000
    
    
    
    2.33-2.45
    
    
    Auction
    
    December 2043Class B1-2
    
    
    52,000
    
    
    
    2.85-3.35
    
    
    
    52,000
    
    
    
    2.45-2.50
    
    
    Auction
    
    December 20432003A SeriesClass A-1
    
    
    
    
    
    
    
    
    
    
    5,261
    
    
    
    2.61
    
    
    LIBOR
    
    March 2012Class A-2
    
    
    308,205
    
    
    
    3.39
    
    
    
    319,025
    
    
    
    2.85
    
    
    LIBOR
    
    September 2020Class A-3  6
    
    
    352,400
    
    
    
    2.77-3.16
    
    
    
    352,400
    
    
    
    2.33-2.50
    
    
    Auction
    
    March 2042Class B
    
    
    42,350
    
    
    
    3.00
    
    
    
    42,350
    
    
    
    2.58
    
    
    Auction
    
    March 20422002 SeriesClass A-8  15
    
    
    442,650
    
    
    
    2.80-3.28
    
    
    
    461,100
    
    
    
    2.28-2.50
    
    
    Auction
    
    July 2042Class B
    
    
    30,000
    
    
    
    3.07
    
    
    
    30,000
    
    
    
    2.58
    
    
    Auction
    
    July 20422001 SeriesClass A-1  7
    
    
    430,500
    
    
    
    2.83-3.28
    
    
    
    430,500
    
    
    
    2.35-2.52
    
    
    Auction
    
    December 2041Class B
    
    
    31,600
    
    
    
    2.93
    
    
    
    31,600
    
    
    
    2.53
    
    
    Auction
    
    December 2041Warehouse Facility
    
    
    304,700
    
    
    
    3.02
    
    
    
    1,088,800
    
    
    
    2.55
    
    
    
    
    July 2006Total
    
    $
    5,313,877
    
    
    
    
    
    
    $
    4,782,670
 11




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED(Continued) Other debt The Company entered into a revolving credit agreement on October 30, 2003. Borrowings under
this line bear interest at either LIBOR or prime rate at the Companys option. On May 17, 2002,
the Company also issued a fixed-rate note for $15,000 related to the acquisition of the predecessor
company by Lightyear Fund, L.P. (Lightyear) and its affiliates. March 31, 2005
    
    
    December 31, 2004Principal
    
    
    Interest
    
    
    Principal
    
    
    Interestoutstanding
    
    
    rate
    
    
    outstanding
    
    
    rate
    
    
    Maturity dateFixed-rate note
    
    $
    14,538
    
    
    
    4.47
    %
    
    $
    14,486
    
    
    
    4.47
    %
    
    June 2007Revolving line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 2005Total
    
    $
    14,538
    
    
    
    
    
    
    $
    14,486
 In July 2004, the Company repaid $42,109 of the revolving line of credit and the
commitments were reduced to $30,000. 8. Derivative Financial Instruments The Company has not designated any of its derivatives as SFAS No. 133 hedge relationships and
therefore records changes in their value as derivative mark-to-market on the statement of income.
The impact of the cash payments and accruals are reported as swap interest on the consolidated
statements of income. The fair value of the derivatives that are positive is included with other
assets on the balance sheet and the fair value of the derivatives that are negative is included in
accrued liabilities on the balance sheet. The Company is exposed to interest rate risk as its asset-backed debt notes are indexed to
short-term indices (LIBOR and auction rates) and the assets behave as fixed rate assets in the
current interest rate environment. Derivative instruments are utilized to reduce the Companys
interest rate risk. The key terms of the derivatives are as follows: March 31, 2005
    
    
    December 31, 2004Notional
    
    
    Maturity
    
    
    Pay
    
    
    Receivefloating
    
    
    
    
    
    
    ReceivefloatingDerivative type
    
    amount
    
    
    date
    
    
    fixed rate
    
    
    rate (LIBOR)
    
    
    Fair value
    
    
    rate (LIBOR)
    
    
    Fair valueSwap
    
    $
    250,000
    
    
    
    01/26/2005
    
    
    
    1.89
    %
    
    
    
    %
    
    $
    
    
    
    
    2.42
    %
    
    $
    96Cap (Sold)
    
    
    250,000
    
    
    
    01/26/2005
    
    
    
    2.09
    
    
    
    
    
    
    
    
    
    
    
    2.23
    
    
    
    (82
    )Swap
    
    
    550,000
    
    
    
    04/28/2005
    
    
    
    1.55
    
    
    
    2.85
    
    
    
    614
    
    
    
    2.42
    
    
    
    1,945Swap
    
    
    450,000
    
    
    
    01/25/2006
    
    
    
    3.23
    
    
    
    2.85
    
    
    
    1,473
    
    
    
    
    
    
    
    Total, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,087
    
    
    
    
    
    
    $
    1,959
 12




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED(Continued) 9. Major Business Customers and Sources of Revenue Certain business customers generated significant amounts of the Companys fee income. Fee
income from our top two customers was: Three months endedMarch 31,Customer
    
    2005
    
    
    2004First
    
    $
    22,281
    
    
    $
    11,689Second
    
    
    2,680
    
    
    
    4,187
 10. Stock Incentive Plan Effective May 17, 2002, the Company initiated the 2002 Stock Incentive Plan to provide
additional incentives to key personnel. The maximum aggregate number of shares of common stock that
be issued is 1,001,070 shares of common stock. On May 17, 2002, the Company granted 450,481 stock
options with an exercise price of $0.91 per common share, the fair market value of a share of
common stock at issuance. Subject to certain conditions, portions of the options may have
accelerated vesting to vest on the anniversary dates of the grants. For any year that the
specified conditions are not met, the options not then vesting will vest in 2009. In connection
with the execution of employment agreements with management entered into at the time of the initial
public offering, options to purchase 184,697 shares of common stock vested in July of 2004. At
March 31, 2005 and March 31, 2004, 265,784 and 81,087 shares were vested, respectively. In
addition, in connection with the initial public offering, the Company amended and restated its
stock incentive plan and increased the maximum number of shares which may be issued to 2,788,250
shares of common stock. In July 2004, the Company granted options to purchase 866,552 shares of
common stock with an exercise price of $16.00 per share. The Company also granted 262,075 shares
of restricted stock, with a fair value of $4,193. The fair value of the options granted in 2002 under the Black-Scholes option pricing model
assumed: an interest rate of approximately 3%; no dividends; volatility of approximately 25%; and
an expected life of seven years. This options pricing model requires the input of subjective
assumptions. Using this model, the fair value of the options as of the grant date was approximately
$140. The fair value of the options granted in 2004 under the Black-Scholes option pricing model
assumed an interest rate of approximately 4%; 0.80% dividend yield; volatility of approximately
29%; and an expected life of 4.5 years. Using this model, the fair value of the options as of the
grant date was $4,020. In accordance with SFAS No. 123, the Company recognized the fair value of the stock options
and restricted stock as compensation expense, allocated over the vesting period. Stock
compensation expense related to these stock options and restricted stock was $490 for the first
quarter of 2005 and $5 for the first quarter of 2004. In addition, upon the successful completion of the initial public offering, executive officers
were paid a one-time bonus of $500 in cash and $900 in non-cash stock compensation. The executives
are restricted from selling the stock for one year following the completion of the initial public
offering. 13




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED(Continued) 11. Segment Data The Companys reportable segments are its loan origination operations and its loan servicing
operations. The Companys accounting policies for segments are the same as those described in the
Summary of Significant Accounting Policies. The following table presents segment data for the three months ended March 31, 2005: Loan
    
    
    Loanorigination
    
    
    servicing
    
    
    Eliminations
    
    
    ConsolidatedNet revenueInterest income
    
    $
    53,867
    
    
    $
    207
    
    
    $
    
    
    
    $
    54,074Interest expense
    
    
    37,114
    
    
    
    
    
    
    
    
    
    
    
    37,114Net interest income
    
    
    16,753
    
    
    
    207
    
    
    
    
    
    
    
    16,960Provision for loan losses
    
    
    583
    
    
    
    
    
    
    
    
    
    
    
    583Net interest income after provision for loan losses
    
    
    16,170
    
    
    
    207
    
    
    
    
    
    
    
    16,377Fee income
    
    
    27,418
    
    
    
    5,141
    
    
    
    (1,933
    )
    
    
    30,626Net revenue
    
    
    43,588
    
    
    
    5,348
    
    
    
    (1,933
    )
    
    
    47,003ExpensesSalaries and related benefits
    
    
    13,410
    
    
    
    2,601
    
    
    
    
    
    
    
    16,011Other selling, general and administrative expenses:Marketing and mailing costs
    
    
    10,559
    
    
    
    1
    
    
    
    
    
    
    
    10,560Communications and data processing
    
    
    1,316
    
    
    
    615
    
    
    
    
    
    
    
    1,931Management and consulting fees
    
    
    313
    
    
    
    287
    
    
    
    
    
    
    
    600Professional fees
    
    
    1,462
    
    
    
    211
    
    
    
    
    
    
    
    1,673Depreciation and amortization
    
    
    1,377
    
    
    
    452
    
    
    
    
    
    
    
    1,829Other general and administrative
    
    
    4,203
    
    
    
    469
    
    
    
    (1,933
    )
    
    
    2,739Total other selling, general and administrative expenses
    
    
    19,230
    
    
    
    2,035
    
    
    
    (1,933
    )
    
    
    19,332Swap interest (income)
    
    
    (1,121
    )
    
    
    
    
    
    
    
    
    
    
    (1,121
    )Derivative and investment mark-to-market (income)
    
    
    (306
    )
    
    
    
    
    
    
    
    
    
    
    (306
    )Total expenses
    
    
    31,213
    
    
    
    4,636
    
    
    
    (1,933
    )
    
    
    33,916Income before income taxes and accretion of dividends
on preferred stock
    
    $
    12,375
    
    
    $
    712
    
    
    $
    
    
    
    $
    13,087Total assets  March 31, 2005
    
    $
    5,569,440
    
    
    $
    17,352
    
    
    $
    
    
    
    $

    5,586,792Total assets  December 31, 2004
    
    $
    5,025,992
    
    
    $
    16,799
    
    
    $
    
    
    
    $
    5,042,791
 Intercompany transactions of $1,933 in other operating expenses in the loan origination
segment were paid as fee income to the loan servicing segment and are eliminated in the
consolidated financial statements. 14




---



##### 



COLLEGIATE FUNDING SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED(Continued) The following table presents segment data for the three months ended March 31, 2004: Loan
    
    
    Loanorigination
    
    
    servicing
    
    
    Eliminations
    
    
    ConsolidatedNet revenueInterest income
    
    $
    26,698
    
    
    $
    166
    
    
    $
    
    
    
    $
    26,864Interest expense
    
    
    13,078
    
    
    
    
    
    
    
    
    
    
    
    13,078Net interest income
    
    
    13,620
    
    
    
    166
    
    
    
    
    
    
    
    13,786Provision for loan losses
    
    
    927
    
    
    
    
    
    
    
    
    
    
    
    927Net interest income after provision for loan losses
    
    
    12,693
    
    
    
    166
    
    
    
    
    
    
    
    12,859Fee income
    
    
    18,573
    
    
    
    4,597
    
    
    
    (1,397
    )
    
    
    21,773Net revenue
    
    
    31,266
    
    
    
    4,763
    
    
    
    (1,397
    )
    
    
    34,632ExpensesSalaries and related benefits
    
    
    11,658
    
    
    
    2,323
    
    
    
    
    
    
    
    13,981Other selling, general and administrative expenses:Marketing and mailing costs
    
    
    6,425
    
    
    
    
    
    
    
    
    
    
    
    6,425Communications and data processing
    
    
    1,256
    
    
    
    452
    
    
    
    
    
    
    
    1,708Management and consulting fees
    
    
    563
    
    
    
    375
    
    
    
    
    
    
    
    938Professional fees
    
    
    966
    
    
    
    89
    
    
    
    
    
    
    
    1,055Depreciation and amortization
    
    
    772
    
    
    
    478
    
    
    
    
    
    
    
    1,250Other general and administrative
    
    
    3,372
    
    
    
    434
    
    
    
    (1,397
    )
    
    
    2,409Total other selling, general and administrative expenses
    
    
    13,354
    
    
    
    1,828
    
    
    
    (1,397
    )
    
    
    13,785Swap interest expense
    
    
    1,582
    
    
    
    
    
    
    
    
    
    
    
    1,582Derivative and investment mark-to-market (income)
    
    
    (226
    )
    
    
    
    
    
    
    
    
    
    
    (226
    )Total expenses
    
    $
    26,368
    
    
    $
    4,151
    
    
    $
    (1,397
    )
    
    $
    29,122Income before income taxes and accretion of dividends
on preferred stock
    
    $
    4,898
    
    
    $
    612
    
    
    $
    
    
    
    $
    5,510
 Intercompany transactions of $1,397 in other operating expenses in the loan origination
segment were paid as fee income to the loan servicing segment and are eliminated in the
consolidated financial statements. 15




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion and analysis of our results of operations and financial condition for
the three months ended March 31, 2005 and 2004 should be read in conjunction with the Companys
unaudited consolidated financial statements and the notes to those statements included in this
report. Our discussion contains forward-looking statements based upon current expectations that
involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors. Our results of operations, our
financial condition, and the price of our common stock may be affected by many factors, some of
which are outside of our control. For a discussion of certain of these factors, see Exhibit 99.1
to this report, which is incorporated herein by reference. Overview We are a vertically integrated education finance company that markets, originates, finances
and services education loans. We originated or facilitated the origination of $4.4 billion and $1.0
billion in education loans in the full year 2004 and the first three months of 2005, respectively.
We believe we are one of the more significant originators of federal and private education loans in
the United States. Of our total loan originations for the full year 2004 and the three months ended
March 31, 2005, $4.0 billion and $0.9 billion, respectively, were federally guaranteed
consolidation student loans made through the Federal Family Education Loan Program, which we refer
to as the FFEL Program or FFELP. Beginning in May 2003, we increased our focus on private
education loans and, for the full year 2004 and the three months ended March 31, 2005, we
originated or facilitated the origination of $417.1 million and $82.0 million, respectively, of
these loans. As of March 31, 2005, we also serviced approximately $11.5 billion in student loans
made to over 445,000 customers. In 2002, we adopted a strategy of retaining a larger portion of the federally guaranteed loans
we originate, which has resulted in our holding a portfolio of loans that has grown from $973.1
million at December 31, 2002, to $5.1 billion at March 31, 2005. Prior to 2002, we sold
substantially all of our completed loan applications to third parties and received fees for those
applications at the time of sale. We believe that retaining FFELP loans in our portfolio benefits the Company because it
generally provides greater long-term value to the Company than selling these loans, although our
net income in current periods has been lower than it would have been had we sold a larger
percentage of the FFELP loans we originate. Among the benefits of retaining loans is our ability to
take advantage of these loans limited credit risk and other characteristics which allow us to
realize a greater revenue stream over the life of the loan. Selling the remainder of our originated
loan applications permits us to maintain a diversified source of funding for loan processing and
origination and build our relationships with financial institutions that purchase our loans. We
have sold and will continue to sell a portion of the FFELP loan applications we originate in order
to capitalize upon market opportunities, provide sources of funding for loan processing and
origination expenses and generate additional operating cash flow. We do not currently fund,
purchase or retain any private loans; however, if we determine that retaining private loans would
benefit the Company, we may do so in the future. During the first quarter of 2005, the Company continued to expand its marketing channels
bringing its total relationships with colleges and universities and other affinity partners to
1,090 at March 31, 2005, an increase of 42 since December 31, 2004. 16




---



##### 



The following table sets forth for the three months ended March 31, 2005 and 2004 our loan
applications sold and retained and the loans in our portfolio. Loan Originations and Portfolio Three months ended March 31,2005
    
    
    2004Dollars
    
    
    %
    
    
    Dollars
    
    
    %(dollars in millions)FFELP consolidation, PLUS, Stafford loans:Sold(1)
    
    $
    400.3
    
    
    
    42.3
    %
    
    $
    380.4
    
    
    
    38.7
    %Retained
    
    
    545.1
    
    
    
    57.7
    
    
    
    601.6
    
    
    
    61.3Total FFELP loans originated(2)
    
    
    945.4
    
    
    
    100.0
    %
    
    
    982.0
    
    
    
    100.0
    %Private loans:Sold(3)(4)
    
    
    82.0
    
    
    
    100.0
    %
    
    
    46.0
    
    
    
    100.0
    %Retained
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total private loans originated
    
    
    82.0
    
    
    
    100.0
    %
    
    
    46.0
    
    
    
    100.0
    %Total loans originated
    
    $
    1,027.4
    
    
    
    
    
    
    $
    1,028.0Portfolio of loans (all FFELP):(5)Monthly average for period
    
    $
    4,825.5
    
    
    
    
    
    
    $
    3,123.2Period end
    
    $
    5,055.7
    
    
    
    
    
    
    $
    3,420.6
   (1)
    
    Reflects the principal balance of loans with respect to which we sold the originated
applications.(2)
    
    The three months ended March 31, 2005 and
2004, include $936.7 million and $980.9
million, respectively, of FFELP consolidation loans.(3)
    
    Reflects the principal balance of loans with respect to which we facilitated the
origination by third party lenders.(4)
    
    Includes Health Education Assistance consolidation loans which equaled $0 and $0.5
million for the three months ended March 31, 2005 and 2004, respectively.(5)
    
    Substantially all the loans in our portfolio are FFELP consolidation loans.
Currently, our portfolio does not contain any private loans. Amounts reflect principal balance
of loans without adjustments for deferred loan costs which, as of March 31, 2005 and 2004,
totaled $61.4 million and $33.4 million, respectively. Amounts also do not reflect the
allowance for loan losses of $5.5 million and $5.0 million as of March 31, 2005 and 2004,
respectively. In April 2004, we acquired Members Connect Inc. d/b/a Youth Media & Marketing Networks
(Y2M). Y2M provides affinity marketing of products and services, with a focus on education finance
products and services targeted at college students and recent college graduates. Y2M uses direct
mail, the internet and print media in its marketing efforts, which it complements by publishing
online college newspapers. From the acquisition of Y2M in April 2004 to December 31, 2004, and for
the three months ended March 31, 2005, Y2M facilitated the origination of $358 million and $115
million of FFELP consolidation loans, respectively. Y2M generates revenue from the loans originated
through affinity marketing agreements and advertising fees from its online college newspaper
publishing operations. Y2M supplements our affinity marketing strategy through which we market and
originate loans through relationships with certain alumni associations and industry groups with
whom we co-brand our loan products. We finance the loans in our portfolio through asset-backed securitizations and a secured
warehouse facility and we record the obligations related to these facilities as debt on our
consolidated balance sheet. To date, we have completed six securitizations that have provided $5.4
billion of funding, including our most recent securitization of $1.4 billion completed in February
2005. We also have several forward purchase agreements, under which financial institutions have
agreed to purchase, or require that we sell to them, a portion of the loans we market and
originate. 17




---



##### 



We currently operate in two reportable segments as follows: Loan origination.Includes marketing, origination and financing of loans, including Youth
Media & Marketing Networks since its acquisition in April 2004. Loan servicing.Includes servicing for our portfolio of loans and third-party loans. We generate revenue primarily from three sources, which are described in greater detail below.
In our loan origination segment, we generate revenue from fees we receive from the sale of
originated loan applications and for marketing loans for third parties, which we refer to
collectively as fees on loan sales. We also generate net interest income on our loan portfolio and
cash balances in our loan origination segment. In our loan servicing segment, we primarily generate
revenue from fees we receive for disbursement on loan applications and for servicing loans. Our revenue in any period is directly affected by the amount of loans we originate and
service, as well as the percentage of those originated loan applications that we decide to retain.
We currently plan to retain in our portfolio approximately 50% of the FFELP loans we originate this
year. We will periodically review our allocation of FFELP loan originations between loans we retain
and loan applications we sell, and, accordingly, our allocation may change from period to period.
Our reasons for altering our loan retention target may include the characteristics of the loans we
originate, the interest rate environment, the requirements under our arrangements with financial
institutions which acquire loan applications from us and the volume of consolidation loan
applications originated during the period. Moreover, because we set this targeted allocation on an
annual, rather than quarterly, basis, our quarterly allocations may fluctuate, sometimes
significantly. Our fee income in any period will be directly affected by the volume of originated loan
applications we are able to complete and that we elect to sell to third parties and the pricing we
receive on those sales. We expect that the percentage of our net revenue earned from fees on loan
applications we sell to decrease as we continue to retain in our portfolio a significant percentage
of the loans we originate. We expect the amount of our fees on loan applications we sell from
private education loans to increase as a result of an increase in the number of private education
loans that we originate or facilitate for origination; however, if we were to retain education
loans in the future, we will not receive fees for the loans we retain and the total amount of our
fees for sales of private loan application could decrease. Our net interest income in any period will be affected by the size of our retained loan
portfolio and by the extent to which the interest income we earn on our loan portfolio and cash
balances exceeds our interest expense on the debt we incur to finance our portfolio of loans and
operating expenses. In general, increases in interest rates will decrease our interest income,
while decreases in interest rates will increase our interest income. More specifically, should
interest rates rise, we will receive less of the additional yield on our loans which we refer to as
fixed rate floor income. Fixed rate floor income is the additional net interest income we earn as a
result of a decline in short-term interest rates from the rates used to fix the borrowers rate on
a consolidation loan. As a result of the decline in short-term interest rates over the last three
years, we have earned fixed rate floor income during the past three years. We believe that a significant driver of the growth in consolidation loan originations during
the past three years has been the increased awareness of consolidation loans on the part of many
borrowers who have been out of school for more than one year, as well as on the part of more recent
graduates. This recent increase in awareness is a result of extensive marketing efforts by us and
other lenders in this market coupled with the effects of the recent low interest rate environment
that has heightened interest in these products among both borrowers and lenders. We believe that a
substantial percentage of borrowers who have been out of school for more than one year have
consolidated their loans in the past several years and, as a result, the pool of borrowers seeking
to consolidate their loans in the short-term may decrease. We also believe that the decrease should
be offset by the growing numbers of graduates entering repayment in 2006 and 2007. Nevertheless,
our ability to maintain or grow our consolidation loan origination volume depends heavily upon our
ability to increase our share of the consolidation loan origination market. We believe that our
recent addition of Youth Media & Marketing Networks should contribute to our ability to increase
our market share. We also expect that as the demand grows in financing to bridge the gap between
the cost of higher education and government-backed financial aid, the amount of private loans we
market or originate in the future will increase through expanded use of our direct-to-consumer
marketing platform. The most significant components of our operating expenses in our loan origination segment are
salaries and benefits and marketing expenses. Substantially all of our marketing expenses and a
majority of our salaries and benefits in this segment are incurred in anticipation of generating
loan originations. Although such expenses are variable, we may require one to two quarters to
reduce expenses. Our results of future operations could be lower due to these expenditures. 18




---



##### 



We increased our marketing expenses from $6.4 million for the first three months of 2004 to
$10.6 million for the first three months of 2005. We expect our marketing expenses to be higher in
2005 than in 2004, in part as a result of our marketing of new products and our acquisition of Y2M.
We expect that our expenses will also increase as a result of being a public company. Quarterly Fluctuations Our quarterly results of operations have varied significantly in the past and are expected to
continue to vary significantly in the future. Our quarterly results of operations in any period
will be particularly affected by the amount and timing of our loan application referrals. Because
we target a percentage of our loan originations to be retained on an annual, rather than quarterly
basis, our quarterly results of operations will fluctuate. A number of additional factors, some of
which are outside of our control, will cause our quarterly results to fluctuate, including:  
    an increase in loan consolidation in November and December, as a result of
the expiration of the six-month grace period for spring graduates;
    the effects of the July 1 reset in borrower interest rates. We give
borrowers who complete loan applications during the second quarter the option to fund
their loans prior to July 1, when the old rate is effective, or after July 1, when the
new rate is effective. Accordingly, if any years borrower rate increases from the
prior years borrower rate, a higher percentage of completed applications will be
originated in the second quarter; conversely, if any years borrower rate decreases
over the prior years borrower rate, the origination of a significant portion of the
loan applications completed in the second quarter will be shifted to the third quarter.
In light of recent increase in interest rates generally, we expect that borrower
interest rates will increase before July 1.
    seasonal patterns affecting private in-school loans, primarily an increase
in private in-school loan originations in the third and fourth quarter as students
obtain loans to pay tuition and a decrease in private in-school loan activity in the
second quarter;
    seasonal patterns affecting marketing expenses, as we generally market most
heavily in the second and third quarters of the year in an effort to inform recent
college graduates of their consolidation options and offer private in-school loans to
students paying tuition;
    the impact of general economic conditions;
    changes in interest rates; and
    the introduction of new product offerings. Components of Net Revenue We have two primary categories of revenue: net interest income and fee income, which since
April 2003 has included servicing fee income and since April 2004 has included advertising income. Net Interest Income Our net interest income is the excess of interest income we earn on our loan portfolio and
cash balances over our interest expense on the debt we incur to finance our portfolio of loans and
for general operating purposes. Net portfolio margin equals the weighted average yield on our loans
and restricted cash less the interest expense on the debt we incur to finance our retained loans.
The current and future interest rate environment can and will affect our net interest income and
net portfolio margin. Interest income.Substantially all the loans in our portfolio currently are FFELP
consolidation loans that bear interest at a fixed rate. In addition, in certain interest rate
environments we may earn amounts on FFELP loans in excess of the fixed rate of interest due from
the borrower. Specifically, the Department of Education will pay us the amount by which a federally
determined floating rate exceeds the fixed borrower rate. This amount is a Special Allowance
Payment, or SAP, and is based on a formula with respect to FFELP loans held in our portfolio. SAPs,
with respect to our FFELP consolidation loans, are generally paid whenever the average of the
91-day financial commercial paper rate in a calendar quarter plus a spread of 2.64% exceeds the
rate of interest which the borrower is obligated to pay. With respect to the Stafford loans in
repayment status and PLUS loans in our portfolio, SAPs are generally paid whenever the average of
the 91-day financial commercial paper rate in a calendar quarter plus a
spread of 2.34% or 2.64%, respectively exceeds the borrower rate. Should interest rates rise,
we would receive SAPs on loans in our portfolio. 19




---



##### 



Our interest income is presented net of amortized origination fees. We pay a one-time loan fee
of 0.50% to the Department of Education on origination of consolidation, Stafford and PLUS loans,
which is amortized over the expected life of the loan. This origination fee is required by the
Department of Education to be paid by all lenders upon the origination of FFELP loans. Our interest
income is also reduced by a rebate fee, which is required by the Department of Education to be paid
to the Department of Education by all holders of FFELP consolidation loans on a monthly basis at a
rate equal to 1.05% per annum on the FFELP consolidation loans we hold at the end of the month. Our
interest income will also be reduced by incentives we offer to borrowers that are designed to
attract new borrowers and improve their payment behavior. One incentive program reduces a
borrowers interest rate by 0.25% per annum for so long as the borrower makes monthly payments
through automatic deductions from his or her checking or savings
account. Approximately 30% of our
borrowers currently participate in this program. In addition, we offer borrowers an on-time
incentive program that reduces their interest rates by 1.00% per annum after as they make their
first 36 payments on time and for so long as they continue to make subsequent payments on time.
Because we have implemented this program only recently, it has not resulted to date in any
significant reduction in interest income. However, we expect the on-time incentive program to
reduce the interest income we earn on our loan portfolio commencing in 2005, particularly with
respect to loans of borrowers participating in the automatic deduction programs. We also earn interest income from unrestricted cash as well as restricted cash held in our
special purpose entities for our asset-backed securitizations. Interest expense.We have three categories of interest expense: interest on our warehouse
facility, interest on our asset-backed securitizations and interest on our other debt obligations. Interest on our warehouse facility is based on the amount outstanding under the facility plus
a fee on unused capacity under the facility. The amount outstanding under the warehouse facility is
affected by the amount of loans we originate in such period and the timing of securitizations.
Deferred financing costs associated with the warehouse facility are amortized using a method that
approximates the effective interest method and are recorded as interest expense. Interest on our asset-backed securitizations is based on the principal amount of notes
outstanding under the facilities as well as the method of determining the interest rate for each
securitization tranche. All of our asset-backed securitizations accrue interest at a variable rate.
The rate varies based upon when the notes were issued, the fixed spread above an index, the index
used and, in certain cases, auction results. The notes issued are either indexed off of three-month
LIBOR or at a rate determined at auction. Interest rates on the auction rate notes are generally
reset every 28 days. The relative proportion of our asset-back securitizations that accrue interest
based on auction rates and on fixed spreads above an index will affect our cost of funds.
Broker-dealer and auction agent fees are incurred monthly at a rate per annum of 0.26% in
connection with the periodic auction for the auction rate notes and are reflected in interest
expense. Deferred financing costs associated with issuing the asset-backed notes are amortized
using the effective interest method and are recorded as interest expense. Interest expense on other obligations relates to interest expense on items not associated with
financing our loan portfolio. Net portfolio margin and net interest income.In certain interest rate environments, part of
our net portfolio margin includes fixed-rate floor income. Fixed-ate floor income is the additional
net portfolio margin we receive as a result of a decline in short-term interest rates from the
rates used to fix the borrowers rate on a consolidation loan. Fixed-rate floor income represents
the amount by which interest income, determined at the borrowers fixed rate, exceeds the amount
determined using the Department of Education computed variable rate. As a result of the decline in
short-term interest rates over the last three years, we have earned fixed-rate floor income during
the past three years. Fixed-rate floor income is reduced, and can be eliminated, in a rising
interest rate environment. Provision for loan losses.We record periodic provisions for loan losses to maintain an
allowance for loan losses which management believes is sufficient to cover probable losses in the
portfolio. The allowance is an estimate based on the level of guarantee on our loans, the
historical experience of losses and the delinquency rates on our portfolio. Moreover, since our
portfolio is relatively new, we also review industry loss data in assessing probabilities of loan
default. 20




---



##### 



In May 2004, we were notified by the Department of Education that we had been awarded
Exceptional Performance status as a servicer and thus our loss claims on loans we service at
SunTech will be paid to 100% of the unpaid principal and interest for the twelve month period June
1, 2004 to May 31, 2005. Our loan loss allowance at March 31, 2005 reflects this status. If the
Exceptional Performance status is not continued after May 31, 2005, then loss claims will be paid
to 98% of the unpaid principal and interest and loan losses reserved would need to be increased to
reflect this change in status. The evaluation of the allowance for loan losses is inherently subjective, as it requires
material estimates that may be subject to significant changes. The provision for loan losses
reflects activity for the applicable period and provides an allowance at a level that our
management believes is adequate to cover probable losses inherent in the loan portfolio. A loan is placed on non-accrual status at the point at which its guarantee claim is more than
60 days past due or it is concluded that collection of the claim is in doubt. Through March 31,
2005, no loans had been placed on non-accrual status. Fee Income Fees on loan application sales.In our loan origination segment, we receive fees for selling
FFELP consolidation and private consolidation loan applications to third parties and for marketing
private in-school loans for third parties. We receive a fixed fee for each completed FFELP
application we sell to third parties. Generally, the amount of the fee is set forth in forward
purchase agreements with third parties which are negotiated for between one- and three-year terms
and apply to an aggregate number of loan applications sold during each year of the agreement. We
also receive fee income from third parties to whom we sell completed private consolidation loan
applications and for whom we market private in-school loans. We are paid when a private lender
funds a loan that we referred to that lender or its originating partner. Generally, the fee is
calculated based on a percentage of the funded amount of the loan. This rate is set forth in
agreements with the third parties which have a term of one year, with respect to private
consolidation loans, and three years, with respect to private loans, and applies to an aggregate
amount of loans funded each year. We recognize revenue from the loan application sales when the
loans are funded. Fees for servicing.Since acquiring SunTech in April 2003, we have received fee income for
performing loan servicing activities for third parties pursuant to servicing agreements. Servicing
fees under these agreements are calculated based on the number of accounts serviced for each client
and specific activities such as disbursement or filing claims with guarantee agencies. The fees are
billed monthly. The terms of the agreements vary from one year to the life of the applicable loan
portfolio. The intracompany servicing fees paid to our servicer for servicing our own portfolio are
eliminated in our consolidated financial statements. Servicing rights recorded on our balance sheet
total $0.6 million at March 31, 2005 and relate to the remaining unamortized balance recorded in
connection with our acquisition of SunTech. Because we were not the owner of any loans that we
currently service for third parties, nor have we paid for the right to service any other loan, we
do not have any other servicing rights recorded on our balance sheet. Advertising income.Since acquiring Y2M in April 2004, we have received advertising income
associated with its national network of college newspapers. Income is recorded as contracted, with
the heaviest volume occurring in the third quarter as advertisers target students returning to
school in the fall. Expenses The majority of our operating expenses consist of salaries and related benefits and marketing
expenses. Salaries and related benefits include expenses related to granting incentive stock
options to our employees, which we expense in accordance with SFAS No. 123. Marketing expenses
include the cost of direct mail campaigns, postage, list development, collateral printing, internet
marketing, affinity partner fees and school channel expenditures. The amount of marketing expenses
and a portion of the amount of salaries and benefits is directly affected by the scope of our
marketing campaigns and the amount of loans we originate or facilitate for origination by other
lenders. In addition, our expenses include communications and data processing expenses,
professional fees, management and consulting fees, depreciation and amortization and other general
and administrative expenses. 21




---



##### 



Derivatives.In connection with financing our portfolio, we enter into interest rate swap and
cap agreements from time to time. Generally, these agreements have maturities of no more than 24
months. We record expenses relating to payments we make under the swaps and caps and mark-to-market
gains and losses based on changes in their fair values from period to period. These expenses and
gains and losses are not reflected as part of net interest income. Critical Accounting Policies Our significant accounting policies are described in Note 3 to the Consolidated Financial
Statements. We prepare our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States, which require us to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the year. Actual
results could differ from those estimates. In Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December
31, 2004, we summarized the policies and estimates that we believe to be most critical in
understanding the judgments involved in preparing our financial statements and the uncertainties
that could affect our results of operations, financial condition and cash flows. There have been
no material changes on such policies or estimates since we filed our Annual Report on Form 10-K for
the year ended December 31, 2004. Recent Accounting Pronouncements Share-based payment In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment.
This statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensationand
establishes standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services and for the recording of liabilities that are based on the
fair-value of these equity instruments. The approach is similar to Statement 123; however the
revised statement requires all share-based payments to employees be expensed based on fair value,
with pro forma disclosure no longer an option. Since we currently expenses costs related to its
options issued to employees using the fair-value method as outlined in the original FASB No. 123,
the impact of the new statement is expected to be immaterial. We are evaluating the impact of other
differences, including recording incremental compensation costs/credits related to modification of
terms or conditions of awards and recording the effect of possible future forfeitures. Per a
recent SEC announcement, the effective date of this statement has been deferred for non-small
business registrants with fiscal years ended December 31 to the beginning of the first interim or
annual reporting period that begins after January 1, 2006. Results of Operations Three months ended March 31, 2005 compared to three months ended March 31, 2004 Net revenue.Net revenue was $47.0 million for the three months ended March 31, 2005, an
increase of 35.8% from net revenue of $34.6 million for the three months ended March 31, 2004. The
increase in net revenue was primarily the result of increases in net interest income on the
expanding student loan portfolio and fee income on loan originations, offset in part by an increase
in interest expense on asset-backed securitizations. Net interest income Interest income.Interest income increased by $27.2 million, or 101.1%, to $54.1 million for
the three months ended March 31, 2005 compared with $26.9 million for the three months ended March
31, 2004. This increase was the result of an increase in the average balance of loans in our
portfolio, which grew to $4.9 billion in the three months ended March 31, 2005 from $3.1 billion
for the comparable period of 2004. We retained $545.1 million of loan originations in the first
quarter of 2005. The average yield on our loan portfolio increased to 5.49% for the three months
ended March 31, 2005 from 4.44% for the comparable period of 2004 due to increases in short-term
interest rates. We received SAPs totaling $15.9 million and $1.1 million for the 2005 and 2004
periods, respectively. We received fixed rate floor income of $2.1 million and $6.5 million for the
three months ended March 31, 2005 and March 31, 2004, respectively. The decrease in fixed rate
floor income was primarily the result of the decrease in the average balance of loans in our
portfolio earning fixed rate floor income, as a result of increasing short-term interest rates.
Interest income on restricted cash increased $0.7 million to $0.9 million for the 2005 period
compared to $0.2 million for the 2004 period. Other interest income was $0.3 million for the three
months ended March 31, 2005 and $0.2 million for the three months ended March 31, 2004. We expect
interest rates will increase in the short-term and, as a result our average yield and SAPs should
increase, while our floor income should decrease or be eliminated entirely. 22




---



##### 



Interest expense.Interest expense increased by $24.0 million, or 183.2%, to $37.1 million
for the three months ended March 31, 2005 from $13.1 million for the comparable period of 2004 as a
result of increased debt balances and higher interest rates. Our average debt balance under our
warehouse and asset-backed securitizations increased by $1.8 billion to $5.1 billion for the 2005
period from $3.3 billion for the 2004 period. Interest expense on this debt increased $24.2
million to $36.6 million in the three months ended March 31, 2005 compared with $12.4 million in
the three months ended March 31, 2004. Our average cost of funds was 2.96% for the 2005 period and
1.54% for the 2004 period. Interest expense on other debt obligations decreased to $0.5 million in
the three months ended March 31, 2005 compared with $0.6 million in the comparable three months of
2004, primarily as a result of having no outstanding balance on our revolving line of credit during
the first quarter of 2005. We expect interest rates to rise and interest expense to increase. Provision for loan losses.We recorded a provision of $0.6 million for the three months ended
March 31, 2005 compared with a provision of $0.9 million in the three months ended March 31, 2004.
The reduced provision in 2005 resulted from the Company being awarded in May 2004, Exceptional
Performance status by the Department of Education and claims with respect to FFELP loans being
guaranteed at 100% for the period June 1, 2004 to May 31, 2005. If not renewed, our provision for
loan losses would be increased. Net portfolio margin and net interest income after provision for loan losses.Net portfolio
margin decreased to 1.38% for the three months ended March 31, 2005 from 1.77% for the three months
ended March 31, 2004,primarily due to an increase in our average cost of funds, partly offset by a
rise in yield on earnings assets. Net portfolio margin is a non-GAAP financial measure. We
believe that net portfolio margin is useful in evaluating the earnings performance of our
portfolio. A reconciliation of net portfolio margin to the most comparable information which has
been prepared in accordance with GAAP is provided below. See -Net Portfolio Margin Analysis. As
a result of the foregoing, net interest income after provision for loan losses increased by $3.5
million to $16.4 million for the 2005 period compared to $12.9 million for the 2004 period. Fee income The table below describes the increases in the components of fee income for the period ended
March 31, 2005 compared with the period ended March 31, 2004. Three months ended
    
    
    IncreaseMarch 31,
    
    
    (Decrease)2005
    
    
    2004
    
    
    Dollars
    
    
    %(dollars in millions)Fee Income:Fees on loan application sales
    
    $
    26.0
    
    
    $
    18.6
    
    
    $
    7.4
    
    
    
    39.8
    %Fees for servicing
    
    
    3.2
    
    
    
    3.2
    
    
    
    
    
    
    
    Advertising income
    
    
    1.4
    
    
    
    
    
    
    
    1.4
    
    
    
    N/ATotal
    
    $
    30.6
    
    
    $
    21.8
    
    
    $
    8.8
    
    
    
    40.4
    %
 Fees on loan application sales.The increase in fees on loan application sales reflects
the higher percentage and increased volume of loans originated and sold to third parties during the
2005 period compared with the 2004 period, as well as better pricing for the sale of completed loan
applications under our forward purchase agreements. The amount of loans originated that were sold
to, or marketed for, third parties increased to $482.3 million in the 2005 period from $426.4
million for the 2004 period. Included in fees on loan application sales was a one-time payment of
$0.8 million as a result of our contract with a liquidity provider. Also, included in our
fees on loan application sales were fees for marketing private in-school loans, which increased to
$2.7 million for the 2005 period from $1.5 million in the comparable period of 2004, as the volume
of private loan applications originated for the quarter increased 78.3% to $82.0 million from $46.0
million a year ago. Fees for servicing.On a separate segment basis, we recorded loan servicing income for the
2005 and 2004 periods of $5.1 million and $4.6 million, respectively, including $1.9 million and
$1.4 million, respectively from the servicing of loans in our portfolio. As of March 31, 2005,
SunTech serviced $11.5 billion of loans, an increase of 5.0% from the amount of loans serviced at
December 31, 2004 and an increase of 20.4% from the amount of loans serviced at March 31, 2004. Advertising income.The increase in advertising income reflects the online college newspaper
publishing operations of Y2M, which was acquired in April 2004. 23




---



##### 



Expenses.Total expenses, excluding derivative related (income) expense, increased $7.5
million, or 27.0%, to $35.3 million for the three months ended March 31, 2005 compared to $27.8
million for the three months ended March 31, 2004, primarily as a result of higher marketing
expenses and the April 2004 acquisition of Y2M. Salaries and benefits increased $2.0 million, or 14.3%, to $16.0 million for the 2005 period
compared to $14.0 million for the 2004 period due to increased salaries and benefits in our loan
origination segment primarily from the acquisition of Y2M, increased bonuses and incentives and
higher health care costs. Marketing expenses increased $4.2 million to $10.6 million for the three months ended March
31, 2005 compared to $6.4 million for the three months ended March 31, 2004, due to an increase in
marketing activities across all of our product lines, including an increased focus on marketing
private loans, increased direct mail and internet advertising in response to the national do not
call list introduced in September 2003, and the acquisition of Y2M in April 2004. Communications and data processing expenses increased $0.2 million for the three months ended
March 31, 2005 compared to the comparable period of 2004 primarily due to higher postage and
delivery expenses and increased systems maintenance expenses. Management and consulting fees
decreased by $0.3 million to $0.6 million for the 2005 period from $0.9 million for the 2004
period. Professional fees increased $0.6 million to $1.7 million for the three months ended March
31, 2005 compared to $1.1 million for the three months ended March 31, 2004 as a result of an
increase in external consultant expenses. Other general and administrative expenses increased $0.3
million, or 12.5%, for the three months ended March 31, 2005 compared to the same period of 2004 as
a result of increased travel, recruiting, corporate insurance and disposals of property and
equipment. Depreciation and amortization increased $0.5 million to $1.8 million in the 2005 period
compared to $1.3 million in the 2004 period, primarily as a result of the acquisition of additional
computer equipment, software and other property in 2004 and 2005. Derivatives and investments.Our interest rate swaps and cap resulted in aggregate swap
interest income of $1.1 million for the three months ended March 31, 2005 compared to $1.6 million
of swap interest expense for the three months ended March 31, 2004, and derivative mark-to-market
income of $0.3 million for the 2005 period compared to income of $0.2 million for the comparable
2004 period. The increase in aggregate swap interest income and derivative mark-to-market income
is primarily the as a result of rising short-term interest rates. Income tax provision.Income tax provision increased by $3.0 million to $5.2 million for the
three months ended March 31, 2005 compared to a $2.2 million for the three months ended March 31,
2004, reflecting higher earnings. Net income.Net income increased to $7.9 million for the three months ended March 31, 2005
from $1.2 million for the three months ended March 31, 2004, primarily as result of the increase
in interest and fee income, offset in part by higher selling, general and administrative expenses.
Net income for 2004 included a $2.1 million charge for the accretion of dividends on preferred
stock compared with no charge in 2005, as a result of the payment of the liquidation preference of
the preferred stock with proceeds of the initial public offering in July 2004. Financial Condition At March 31, 2005 compared to December 31, 2004 Total assets increased $0.6 billion to $5.6 billion at March 31, 2005 from $5.0 billion at
December 31, 2004. This was primarily due to an increase in our loan portfolio of approximately
$0.4 billion, to $5.1 billion at March 31, 2005 from $4.7 billion at December 31, 2004. All of the
loans in our portfolio are FFELP loans and over 99% are consolidation loans. Total liabilities increased $0.5 billion to $5.4 billion at March 31, 2005 from $4.9 billion
at December 31, 2004. The growth in liabilities was the result of an increase in debt incurred to
finance our loan portfolio. Stockholders equity increased $8.4 million to $200.1 million at March 31, 2005 from $191.7
million at December 31, 2004 primarily as a result of net income for the first three months of
2005. 24




---



##### 



Liquidity and Capital Resources We finance our operations through operating cash flow and borrowings under a warehouse
facility, asset-backed securitizations and a revolving line of credit. Operating activities
provided net cash of $16.0 million in the first three months of 2005, an increase of $15.2 million
from the net cash provided by operating activities of $0.8 million in the first three months of
2004. This increase in the 2005 period compared with the 2004 period was due in part to an
increase in net income of $6.7 million, a decrease in income taxes receivable of $5.5 million and
an increase in accrued interest payable of $3.9 million. Net cash used in investing activities
decreased to $454.5 million in the first three months of 2005 from $595.9 million in the first
three months of 2004 primarily as a result of the lower originations and purchases of student loans
in our portfolio and higher net proceeds from student loan principal payments. Net cash provided
by financing activities decreased to $449.5 million in the first three months of 2005 from $595.5
million in the first three months of 2004, primarily as a result of a decrease in the net
difference between proceeds from and payments on asset-backed notes and lines of credit and an
increase in the restricted cash balance. We believe that the use of our warehousing capacity,
continued access to the asset-backed securitization market and forward purchase agreements will
provide adequate liquidity to fund our operations, loan processing and originations and capital
expenditures for the foreseeable future. We have a $3.0 million revolving credit facility maturing in July 2005. The revolving line of
credit bears interest, payable quarterly, at LIBOR plus 3.50%. We are also required to pay a
commitment fee of 0.50% on undrawn amounts under the facility. The facility is secured by
substantially all of our non-student loan assets, including the outstanding capital stock or
limited liability company membership interests of all of our wholly-owned operating subsidiaries
other than subsidiaries that hold our loan portfolio. The credit facility contains certain
mandatory prepayment and commitment reduction provisions and event of default provisions (including
relating to a change of control), as well as affirmative and negative covenants, which include
restrictions on the payment of dividends, incurrence of additional debt and capital expenditures.
In addition, we are subject to, and in compliance with, certain financial covenants, including
ratios related to fixed charges coverage, interest coverage and leverage. We and certain of our
subsidiaries have guaranteed all of our obligations under the credit agreement. As of March 31,
2005, there was no outstanding balance on this revolving line of credit. In July 2003, we obtained a one-year, $500.0 million conduit warehouse financing facility to
fund our loan originations. In February 2004, we requested and received a temporary increase in
this facility to permit financing up to $1.0 billion to permit us to finance additional loans prior
to issuing asset-backed securities in April 2004, and as of the end of April 2004 capacity under
the facility returned to $500.0 million. In November, 2004, we permanently increased this facility
to $1.0 billion. We use the warehouse facility to fund our loan originations until such time as we
accumulate sufficient loans to effectively access the asset-backed securitization market, and we
may seek to expand our warehouse availability from time to time to continue to most efficiently
access that market, although we do not have a contractual right to increase this facility at this
time. We pay a fee of 0.14% per annum on the unused portion of the facility and, accordingly, have
maintained availability at levels we believe are appropriate to fund our loan originations. The
ability to draw on the $1.0 billion warehouse facility expires in July 2005 unless extended. It
must be repaid in full by July 2006 unless extended. The $1.0 billion warehouse facility is
provided by five commercial paper conduits with liquidity support provided by two national
financial institutions. The facility is secured by our portfolio of loans financed under the
facility. The interest rate on funds advanced by the conduit lender is calculated based on the
commercial paper rate plus a margin and for funds advanced by the liquidity provider at the
Eurodollar rate plus 1.0% or the alternate base rate. The interest rate on amounts outstanding
under the warehouse facility on March 31, 2005 was 3.02%. As of March 31, 2005, $304.7 million was
outstanding under our warehouse facility. The conduit facility contains certain affirmative and
negative covenants as well as reporting requirements and covenants relating to loan servicing. The
affirmative covenants require us to, among other things, preserve the federal guarantee on our
FFELP loan portfolio. An event of default under the conduit facility will occur if, among other
things, the federal guarantee on FFELP loans is reduced, the excess spread on the loans in our
portfolio drops below a certain rate or the default rate of loans in our portfolio exceeds a
certain percentage. The Company expects to extend or replace this facility. In February 2005 and in 2004, 2003 and 2002 we issued $1.4 billion, $1.1 billion, $1.9 billion
and $500.0 million, respectively, of asset-backed notes in order to retain loans on our balance
sheet. These secured financings were issued primarily in the domestic capital markets and are
secured by separate pools of FFELP loans. Securities issued in our securitizations accrue interest
based on a rate of a spread to LIBOR or set under an auction procedure related to the securities as
more fully described below. The securitization transactions require certain levels of cash
reserves and require that we distribute cash flows to the bondholders on a priority basis. Other
than cash paid for servicing and administration, all of the cash flows from our securitized assets
have been paid to the bondholders and, therefore, have not been available to us for business
operations. 25




---



##### 



As part of our securitization transactions, we borrowed funds in excess of the principal
balance of the loans included in the applicable securitization transactions. A portion of these
additional funds was used to repay our other indebtedness and fund our operations. The timing of
future cash flows may be affected by the amount of loans in our portfolio in grace or deferment
status or for which we have granted forbearance and the level of delinquencies. In the first three
months of 2005, we made $84.7 million in principal payments and in the comparable 2004 period, we
made $35.0 million in principal payments on our asset-backed securitizations. Our rights to cash
flows from securitized loans are subordinate to noteholders interests and these loans may fail to
generate any cash flows beyond what is due to be paid to the noteholders. We anticipate continuing
to access the domestic asset-backed securitization market in 2005 and subsequent years. The timing
of future issuances will depend on market conditions. On May 17, 2002, in connection with our acquisition by Lightyear and its affiliates, CFSL
Acquisition Corp. issued a 4.47% subordinated note, due June 30, 2007, in the principal amount of
$15.0 million to the previous owners of the Company. The note may be redeemed at any time at the
option of the Company, and must be redeemed in the event of a change of control of the Company. The following tables summarize our indebtedness and capital leases outstanding as of March 31,
2005 and December 31, 2004: As of March 31, 2005Principal
    
    
    Interestamount
    
    
    Percent of total
    
    
    rate range
    
    Final maturity(2)(dollars in millions)Warehouse facility
    
    $
    304.7
    
    
    
    5.7
    %
    
    3.02%
    
    07/18/06(3)Asset-backed notes: (1)Notes based on LIBOR
    
    
    2,975.3
    
    
    
    55.8
    
    
    2.92% - 3.43%
    
    03/01/12 - 12/28/37Notes based on auction rates
    
    
    2,033.9
    
    
    
    38.2
    
    
    2.58% - 3.35%
    
    12/01/41 - 12/28/43Total asset-backed notes and warehouse facility
    
    
    5,313.9
    
    
    
    99.7Revolving line of credit
    
    
    
    
    
    
    
    
    
    
    
    07/06/05Fixed-rate notes
    
    
    14.5
    (4)
    
    
    0.3
    
    
    4.47%
    
    06/30/07Fixed-rate capital leases
    
    
    1.6
    
    
    
    
    
    
    6.00% - 7.82%
    
    05/10/10Total
    
    $
    5,330.0
    
    
    
    100.0
    %
 As of December 31, 2004Principal
    
    
    Percent
    
    
    Interestamount
    
    
    of total
    
    
    rate range
    
    Final maturity(2)(dollars in millions)Warehouse facility
    
    $
    1,088.8
    
    
    
    22.7
    %
    
    2.55%
    
    07/18/06(3)Asset-backed notes: (1)Notes based on LIBOR
    
    
    1,641.5
    
    
    
    34.2
    
    
    2.60% - 2.85%
    
    03/01/12 - 09/30/30Notes based on auction rates
    
    
    2,052.4
    
    
    
    42.8
    
    
    2.28% - 2.58%
    
    12/01/41 - 12/28/43Total asset-backed notes and warehouse facility
    
    
    4,782.7
    
    
    
    99.7Revolving line of credit
    
    
    
    
    
    
    
    
    
    
    
    07/06/05Fixed-rate notes
    
    
    14.5
    (4)
    
    
    0.3
    
    
    4.47%
    
    06/30/07Fixed-rate capital leases
    
    
    1.7
    
    
    
    
    
    
    6.00% - 7.82%
    
    05/10/10Total
    
    $
    4,798.9
    
    
    
    100.0
    %
   (1)
    
    Issued in securitization transactions.(2)
    
    The final maturity date is the stated legal maturity of the applicable class of
notes. However, the principal of the notes is paid based on the receipt of principal payments
under the applicable pools of loans and is expected to be paid prior to the final maturity
date.(3)
    
    The warehouse facility may be drawn upon to July 2005, unless it is extended, and
must be repaid by July 18, 2006.(4)
    
    Balances are net of unamortized discount of $0.5 million as of both March 31, 2005
and December 31, 2004. 26




---



##### 



Payments on outstanding indebtedness and capital and operating lease obligations are due
after March 31, 2005, in varying amounts as follows: Total
    
    
    < 1 year
    
    
    1 - 3 years
    
    
    3 - 5 years
    
    
    > 5 years(dollars in millions)Warehouse facility
    
    $
    304.7
    
    
    $
    
    
    
    $
    304.7
    
    
    
    
    
    
    $
    Asset-backed notes(1)
    
    
    5,009.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,009.2Other indebtedness(2)
    
    
    14.5
    
    
    
    
    
    
    
    14.5
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    1.6
    
    
    
    0.5
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    Operating lease obligations
    
    
    8.5
    
    
    
    1.9
    
    
    
    2.4
    
    
    
    2.5
    
    
    
    1.7Total
    
    $
    5,338.5
    
    
    $
    2.4
    
    
    $
    322.6
    
    
    $
    2.6
    
    
    $
    5,010.9
   (1)
    
    Principal on our asset-backed notes will be paid based on receipt of principal
payments under the applicable pools of loans and is expected to be paid prior to final
maturity date of the notes.(2)
    
    Fixed- rate note outstanding of $14.5 million, net of unamortized discount. In addition, we have forward purchase agreements under which we are obligated to sell a
minimum amount of FFELP loan applications, refer private education loan applications and sell all
of the funded private consolidation loan applications we originate. These commitments generally run
for between one and three years. As of March 31, 2005 and December 31, 2004, we were obligated to
sell approximately one-third of calendar year 2005 FFELP consolidation volume in loan applications
at contractual rates under various agreements through December 31, 2005. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements. As described above, all of our asset-backed
securitizations are treated as indebtedness on our balance sheet. Loan Portfolio The table below describes the components of our loan portfolio as of March 31, 2005 and
December 31, 2004: As of March 31,
    
    
    As of December 31,2005
    
    
    2004(dollars in millions)Percent
    
    
    
    
    
    
    PercentPrincipal(1)
    
    
    of total
    
    
    Principal(1)
    
    
    of totalFFELP loans:Consolidation
    
    $
    5,041.4
    
    
    
    99.7
    %
    
    $
    4,601.5
    
    
    
    99.8
    %PLUS
    
    
    7.6
    
    
    
    0.2
    
    
    
    6.3
    
    
    
    0.1Stafford
    
    
    6.7
    
    
    
    0.1
    
    
    
    5.1
    
    
    
    0.1Total
    
    $
    5,055.7
    
    
    
    100.0
    %
    
    $
    4,612.9
    
    
    
    100.0
    %
   (1) Amounts reflect principal balance of loans without adjustments for deferred loan
costs which, as of March 31, 2005, totaled $61.4 million and as of December 31, 2004, totaled $51.9
million, respectively. Amounts also exclude the allowance for loan losses of $5.5 million as of
March 31, 2005 and $5.0 million as of December 31, 2004. 27




---



##### 



The table below shows the repayment status of loans and delinquency amounts as of March
31, 2005 and December 31, 2004. Delinquencies have the potential to adversely impact our earnings
through increased servicing and collection costs and write-offs. As of March 31,
    
    
    As of December 31,2005
    
    
    2004Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent ofof loan
    
    
    loans in
    
    
    
    
    
    
    total
    
    
    Loans inPrincipal(1)
    
    
    portfolio
    
    
    repayment
    
    
    Principal(1)
    
    
    loan portfolio
    
    
    repayment(dollars in millions)Loans in school/grace/deferment(2)
    
    $
    617.0
    
    
    
    12.2
    %
    
    
    
    
    
    $
    536.7
    
    
    
    11.6
    %Loans in forbearance(3)
    
    
    392.6
    
    
    
    7.8
    
    
    
    
    
    
    
    335.8
    
    
    
    7.2Loans in repayment status:Current
    
    
    3,734.3
    
    
    
    73.9
    
    
    
    92.3
    %
    
    
    3,457.0
    
    
    
    75.0
    
    
    
    92.4
    %Delinquent 31-60 days(4)
    
    
    133.2
    
    
    
    2.6
    
    
    
    3.3
    
    
    
    110.5
    
    
    
    2.4
    
    
    
    3.0Delinquent 61-90 days
    
    
    54.5
    
    
    
    1.1
    
    
    
    1.3
    
    
    
    40.4
    
    
    
    0.9
    
    
    
    1.1Delinquent over 90 days(5)
    
    
    124.1
    
    
    
    2.4
    
    
    
    3.1
    
    
    
    132.5
    
    
    
    2.9
    
    
    
    3.5Total loans in repayment
    
    
    4,046.1
    
    
    
    80.0
    
    
    
    100.0
    %
    
    
    3,740.4
    
    
    
    81.2
    
    
    
    100.0
    %Total loan portfolio
    
    $
    5,055.7
    
    
    
    100.0
    %
    
    
    
    
    
    $
    4,612.9
    
    
    
    100.0
    %
   (1)
    
    Amounts reflect principal balance of loans without adjustments for deferred loan
costs, which, as of March 31, 2005 and December 31, 2004 totaled $61.4 million, and $51.9
million, respectively. Amounts also do not reflect the allowance for loan losses of $5.5
million and $5.0 million as of March 31, 2005 and December 31, 2004, respectively.(2)
    
    Loans for borrowers who still may be attending school or engaging in other permitted
educational activities and are not yet required to make payments on the loans, e.g., residency
periods for medical students or a grace period for bar exam preparation.(3)
    
    Loans for borrowers who have temporarily ceased making full payments due to hardship
or other factors, according to a schedule approved by the servicer consistent with the
established loan program servicing procedures and policies.(4)
    
    The period of delinquency is based on the number of days scheduled payments are
contractually past due and relate to loans in repayment status, that is, receivables not
charged off, and not in school, grace, deferment or forbearance.(5)
    
    Includes loans of $12.3 million and $13.6 million as of March 31, 2005 and December
31, 2004, respectively, in claim status, which are loans that are more than 270 days past due,
which have gone into default and have been submitted to the guaranty agency for FFELP loans to
process the claim for payment. The following table summarizes our loan portfolio by interest rate ranges as of March 31, 2005
and December 31, 2004.: As of March 31, 2005
    
    
    As of December 31, 2004Current
    
    
    
    
    
    
    Currentprincipal
    
    
    Weighted
    
    
    principal
    
    
    Weightedbalance
    
    
    average
    
    
    balance
    
    
    averageoutstanding(1)
    
    
    maturity
    
    

outstanding(1)
    
    
    maturityInterest rate range
    
    (in millions)
    
    
    (yrs)
    
    
    (in millions)
    
    
    (yrs)2.500%-2.999%
    
    $
    594.4
    
    
    
    22.6
    
    
    $
    553.0
    
    
    
    22.83.000%-3.499%
    
    
    869.9
    
    
    
    22.8
    
    
    
    751.6
    
    
    
    23.23.500%-3.999%
    
    
    1,138.8
    
    
    
    21.9
    
    
    
    1,019.8
    
    
    
    22.04.000%-4.499%
    
    
    939.9
    
    
    
    21.1
    
    
    
    854.5
    
    
    
    21.24.500%-4.999%
    
    
    443.8
    
    
    
    22.2
    
    
    
    400.7
    
    
    
    22.45.000%-5.499%
    
    
    209.3
    
    
    
    22.5
    
    
    
    180.8
    
    
    
    22.95.500%-5.999%
    
    
    191.0
    
    
    
    22.6
    
    
    
    189.4
    
    
    
    22.76.000%-6.499%
    
    
    192.2
    
    
    
    22.0
    
    
    
    209.1
    
    
    
    21.66.500%-6.999%
    
    
    170.3
    
    
    
    21.7
    
    
    
    176.6
    
    
    
    21.27.000%-7.499%
    
    
    88.7
    
    
    
    22.9
    
    
    
    81.9
    
    
    
    22.97.500%-7.999%
    
    
    84.5
    
    
    
    22.6
    
    
    
    77.4
    
    
    
    22.78.000%-8.499%
    
    
    132.9
    
    
    
    22.3
    
    
    
    118.1
    
    
    
    22.3$
    5,055.7
    
    
    
    22.1
    
    
    $
    4,612.9
    
    
    
    22.2
   (1)
    
    Amounts reflect principal balance of loans without adjustments for deferred loan
costs, which, as of March 31, 2005 and December 31, 2004 totaled $61.4 million, and $51.9
million, respectively. Amounts also do not reflect the allowance for loan losses of $5.5
million and $5.0 million as of March 31, 2005 and December 31, 2004, respectively. 28




---



##### 



Net Portfolio Margin Analysis The following table sets forth the net portfolio margin on average student loans and
restricted cash for the periods indicated. Net portfolio margin is a non-GAAP financial measure.
Net portfolio margin equals the weighted average yield on our loans and restricted cash after
amortization of capitalized origination costs and purchase accounting adjustments, less the
weighted average interest expense on the debt we incur to finance our loans. A reconciliation of
net portfolio margin to the most comparable financial measurement that has been prepared in
accordance with GAAP is provided below. Management believes that net portfolio margin provides
investors with information that is useful in evaluating the earnings performance of our loan
portfolio. Three months ended March 31,2005
    
    
    2004Dollars
    
    
    %
    
    
    Dollars
    
    
    %(dollars in thousands)Student loan and restricted cash yield
    
    $
    67,980
    
    
    
    5.49
    %
    
    $
    35,831
    
    
    
    4.44
    %Department of Education rebate(1)
    
    
    (12,904
    )
    
    
    (1.04
    )
    
    
    (8,487
    )
    
    
    (1.05
    )Amortization(2)
    
    
    (1,332
    )
    
    
    (0.11
    )
    
    
    (665
    )
    
    
    (0.08
    )Net student loan and restricted cash yield
    
    
    53,744
    
    
    
    4.34
    
    
    
    26,679
    
    
    
    3.31Asset-backed notes and lines of credit
    
    
    (36,649
    )
    
    
    (2.96
    )
    
    
    (12,406
    )
    
    
    (1.54
    )Net portfolio margin
    
    
    17,095
    
    
    
    1.38
    
    
    
    14,273
    
    
    
    1.77Floor income
    
    
    (2,076
    )
    
    
    (0.17
    )
    
    
    (6,537
    )
    
    
    (0.81
    )Net portfolio margin net of floor income
    
    $
    15,019
    
    
    
    1.21
    %
    
    $
    7,736
    
    
    
    0.96
    %Average balance of student loans and restricted cash
    
    $
    5,021,433
    
    
    
    
    
    
    $
    3,245,276
   (1)
    
    Reflects the 1.05% per annum rebate fee on FFELP consolidation loans that is paid
monthly divided by the average balance of student loans and restricted cash.(2)
    
    Represents the amortization of capitalized origination costs and purchase accounting
adjustments, including the 0.50% fee payable to the Department of Education on the origination
of FFELP loans. 29




---



##### 



The following table sets forth, for the periods indicated, information regarding the
total amounts and rates of interest income from interest-earning assets and interest expense from
interest-bearing liabilities. This table also provides a reconciliation of net portfolio margin to
net interest income, which has been prepared using the interest income and interest expense amounts
included in the Companys historical income statements. Three months ended March 31,2005
    
    
    2004Average
    
    
    
    
    
    
    
    
    
    
    AverageInterest
    
    
    rate
    
    
    
    
    
    
    Interest
    
    
    rateAverage
    
    
    income/
    
    
    earned/
    
    
    Average
    
    
    income/
    
    
    earned/balance
    
    
    expense
    
    
    paid
    
    
    balance
    
    
    expense
    
    
    paid(dollars in thousands)Interest-earning assets:Cash and cash equivalents
    
    $
    20,762
    
    
    $
    330
    
    
    
    6.45
    %
    
    $
    14,745
    
    
    $
    185
    
    
    
    5.05
    %Restricted cash
    
    
    139,503
    
    
    
    905
    
    
    
    2.63
    
    
    
    92,122
    
    
    
    226
    
    
    
    0.99Student loans
    
    
    4,881,930
    
    
    
    67,075
    
    
    
    5.57
    
    
    
    3,153,154
    
    
    
    35,605
    
    
    
    4.54Department of Education rebate(1)
    
    
    
    
    
    
    (12,904
    )
    
    
    (1.07
    )
    
    
    
    
    
    
    (8,487
    )
    
    
    (1.08
    )Amortization(2)
    
    
    
    
    
    
    (1,332
    )
    
    
    (0.11
    )
    
    
    
    
    
    
    (665
    )
    
    
    (0.08
    )Student loans after Department of Education
rebate and amortization
    
    
    4,881,930
    
    
    
    52,839
    
    
    
    4.39
    
    
    
    3,153,154
    
    
    
    26,453
    
    
    
    3.38Total interest-earning assets
    
    $
    5,042,195
    
    
    $
    54,074
    
    
    
    4.35
    %
    
    $
    3,260,021
    
    
    $
    26,864
    
    
    
    3.31
    %Interest-bearing liabilities:Asset-backed notes and lines of credit
    
    $
    5,055,096
    
    
    $
    36,649
    
    
    
    2.94
    %
    
    $
    3,283,244
    
    
    $
    12,406
    
    
    
    1.52
    %Other debt obligations, net
    
    
    14,512
    
    
    
    436
    
    
    
    12.18
    
    
    
    39,606
    
    
    
    639
    
    
    
    6.49Capital lease obligations
    
    
    1,689
    
    
    
    29
    
    
    
    6.96
    
    
    
    1,871
    
    
    
    33
    
    
    
    7.09Total interest-bearing liabilities
    
    $
    5,071,297
    
    
    $
    37,114
    
    
    
    2.97
    
    
    $
    3,324,721
    
    
    $
    13,078
    
    
    
    1.58Net interest income and margin
    
    
    
    
    
    $
    16,960
    
    
    
    1.36
    %(3)
    
    
    
    
    
    $
    13,786
    
    
    
    1.70
    %(3)Reconciliation to net portfolio margin:Net interest income
    
    
    
    
    
    $
    16,960
    
    
    
    
    
    
    
    
    
    
    $
    13,786Less: interest income on cash and cash
equivalents
    
    
    
    
    
    
    (330
    )
    
    
    
    
    
    
    
    
    
    
    (185
    )Plus: interest expense on other debt
obligations, net
    
    
    
    
    
    
    436
    
    
    
    
    
    
    
    
    
    
    
    639Plus: interest expense on capital lease
obligations
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    33Net portfolio margin
    
    
    
    
    
    
    17,095
    
    
    
    
    
    
    
    
    
    
    
    14,273Less: floor income
    
    
    
    
    
    
    (2,076
    )
    
    
    
    
    
    
    
    
    
    
    (6,537
    )Net portfolio margin net of floor income
    
    
    
    
    
    $
    15,019
    
    
    
    
    
    
    
    
    
    
    $
    7,736
   (1)
    
    Reflects the 1.05% per annum rebate fee on FFELP consolidation loans that is paid
monthly divided by the average balance of student loans.(2)
    
    Represents the amortization of capitalized origination costs and purchase accounting
adjustments, including the 0.50% fee payable to the Department of Education on the origination
of FFELP loans.(3)
    
    Net interest margin is net interest income divided by the average total
interest-earning assets. Interest Rate Risk Because we expect to generate a significant portion of our earnings from the difference, or
spread, between the yield we receive on our loan portfolio of student loans and the cost of
financing these loans, our results of operations are sensitive to interest rates. We fund our loan
portfolio with variable-rate debt. Due to the low interest rate environment that existed from 2002
through the present, our loan portfolio is yielding excess net interest income, which is referred
to as fixed rate floor income, as a result of a decline in short-term rates from the rates used to
fix the borrowers rate on a consolidation loan. See Risk Factors described in Exhibit 99.1 to
this report which is incorporated by reference herein. Interest rate sensitivity refers to the change in earnings that may result from changes in the
level of interest rates. Our net interest income is affected by changes in various interest rates,
including LIBOR and the commercial paper rate. In higher interest rate environments, an increasing
portion of the FFELP consolidation loans in our portfolio will earn interest at a variable rate.
Loans in our portfolio earn interest at a variable rate when the floating rate based on the special
allowance payment formula exceeds the fixed borrower rate. At this time, the loans will be
effectively matched with variable-rate debt, and the impact of interest rate fluctuations will be
substantially reduced. We have earned fixed-rate floor income during the past three years. Fixed-rate floor income
is reduced and can be eliminated in a rising interest rate environment. For the three months ended
March 31, 2005, our student loan portfolio had a weighted average interest rate of 4.25% compared
with 4.28% for the year ended December 31, 2004. 30




---



##### 



One objective when financing our loan portfolio is to manage interest rate risk through:  
    match-funding of loan assets with associated secured borrowings and
    utilizing interest rate swaps and other derivative instruments, described
below, to minimize the adverse effect of interest rate fluctuations in the near term. During 2003, 2004 and 2005, we entered into certain derivative instrument contracts to help
manage our interest rate risk. The table below summarizes the derivative instruments to which we
were a party at March 31, 2005: March 31, 2005
    
    
    December 31, 2004Receive
    
    
    
    
    
    
    ReceiveDerivative
    
    Notional
    
    
    Maturity
    
    
    Pay
    
    
    floating
    
    
    Fair
    
    
    floatingtype
    
    amount
    
    
    Date
    
    
    fixed rate
    
    
    rate (LIBOR)
    
    

value(3)
    
    
    rate (LIBOR)
    
    

Fair
value(3)Swap(1)
    
    $
    250,000
    
    
    
    01/26/2005
    
    
    
    1.89
    %
    
    
    
    %
    
    $
    
    
    
    
    2.42
    %
    
    $
    96Cap (Sold)(2)
    
    
    250,000
    
    
    
    01/26/2005
    
    
    
    
    (2)
    
    
    
    
    
    
    
    
    
    
    2.23
    
    
    
    (82
    )Swap(1)
    
    
    550,000
    
    
    
    04/28/2005
    
    
    
    1.55
    
    
    
    2.85
    
    
    
    614
    
    
    
    2.42
    
    
    
    1,945Swap(1)
    
    
    450,000
    
    
    
    01/25/2006
    
    
    
    3.23
    
    
    
    2.85
    
    
    
    1,473
    
    
    
    
    
    
    
    Total, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,087
    
    
    
    
    
    
    $
    1,959
   (1)
    
    Under the interest rate swaps, we agree to pay a fixed rate in exchange for a
floating rate. The interest rate swap effectively converts a portion of our variable-rate debt
to a fixed rate for a period of time thereby fixing the relative spread between a portion of
our loan assets equal to the size of the swap notional amount.(2)
    
    The payments on the cap were to be made only when the 91-day commercial paper rate
exceeded 2.09%. Payments of $74 were made in first quarter 2005 and payments of $54 were made
for the year 2004.(3)
    
    Reflects the value to the Company of the interest rate swaps and the cap assuming
the applicable swap or cap was terminated as of March 31, 2005 or December 31, 2004. We have not designated any of these derivative instruments to met the criteria for hedge
accounting. See Critical Accounting PoliciesAccounting for Derivatives. Forward interest rate sensitivity.The following table shows the changes in net interest
income, swap interest expense, derivative mark-to-market expense and income before tax provision
(benefit) and accretion of dividends on preferred stock for a 12-month period based on an increase
or decrease in interest rates in effect on April 1, 2005, which is maintained for the entire period
shown and applied to our interest-earning assets and interest-bearing liabilities as of March 31,
2005, assuming normal portfolio payment patterns for the periods presented and no additional
originations. We held two derivative contracts as of March 31, 2005, to help mitigate the economic impact of
changing interest rates. With respect to swap interest expense and derivative mark-to-market
expense, we have applied the change to interest rates in effect on April 1, 2005, through the
maturity date of the applicable derivative. Because the derivatives are not accounted for as
accounting hedges under SFAS No. 133, we present their effect in a separate line item, swap
interest (income) expense, in the income statement. 31




---



##### 



Twelve months beginning April 1, 2005Decrease of
    
    
    Increase of
    
    
    Increase of
    
    
    Increase of100 basis
    
    
    100 basis
    
    
    200 basis
    
    
    300 basispoints
    
    
    points
    
    
    points
    
    
    points(dollars in millions)Estimated increase (decrease) in net interest income
    
    $
    12.5
    
    
    $
    (8.7
    )
    
    $
    (14.1
    )
    
    $
    (17.5
    )Estimated decrease (increase) in swap interest expense(1)
    
    
    (4.1
    )
    
    
    4.1
    
    
    
    8.2
    
    
    
    12.4Estimated decrease (increase) in derivative mark-to-market
expense(1)(2)
    
    
    (2.1
    )
    
    
    (2.1
    )
    
    
    (2.1
    )
    
    
    (2.1
    )Increase (decrease) in income before income tax provision
(benefit) and accretion of dividends on preferred stock
    
    $
    6.3
    
    
    $
    (6.7
    )
    
    $
    (8.0
    )
    
    $
    (7.2
    )
   (1)
    
    Our derivative instruments in effect as of March 31, 2005, mature on April 28, 2005,
and January 25, 2006, respectively.(2)
    
    Represents the aggregate mark-to-market liability as of March 31, 2005, based on the
maturity of the derivatives in place at that time. Cautionary Notice Regarding Forward-looking Statements This report on Form 10-Q includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements include statements concerning our plans, objectives,
goals, strategies, future events, future revenue or performance, future loan originations, capital
expenditures, financing needs, plans or intentions relating to acquisitions, business trends and
other information that is not historical information. When used in this report, the words
estimates, expects, anticipates, projects, plans, intends, believes, forecasts, or
future or conditional verbs, such as will, should, could or may, and variations of such
words or similar expressions are intended to identify forward-looking statements. All
forward-looking statements, including, without limitation, managements examination of historical
operating trends and data are based upon our current expectations and various assumptions. Our
expectations, beliefs and projections are expressed in good faith, and we believe there is a
reasonable basis for them. However, we can not assure that our expectations, beliefs and
projections will be achieved. A number of risks and uncertainties could cause our actual results to differ materially from
the forward-looking statements contained in this report. Important factors that could cause our
actual results to differ materially from the forward-looking statements we make in this report are
set forth in Exhibit 99.1 to this report, which is incorporated herein by reference. All
forward-looking statements attributable to us or persons acting on our behalf apply only as of the
date of this report and are expressly qualified in their entirety by the cautionary statements
included in this report. We undertake no obligation to update or revise forward-looking statements
to reflect events or circumstances that arise after the date made or to reflect the occurrence of
unanticipated events unless we have an obligation to do so under the federal securities laws. We
claim the protection of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. Item 3. Quantitative and Qualitative Disclosure about Market Risk Included within Item 2, Managements Discussion and Analysis of Financial Condition and
Results of Operations. Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and our chief financial officer, as appropriate,
to allow timely decisions regarding required disclosures. Any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. Our management, with the participation of our chief executive officer and
chief financial officer, has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2005. Based upon that evaluation and subject to
the foregoing, our chief executive officer and chief
financial officer concluded that the design and operation of our disclosure controls and
procedures provided reasonable assurance that the disclosure controls and procedures are effective
to accomplish their objectives. 32




---



##### 



There was no change in our internal control over financial reporting that occurred during the
quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings We are involved in litigation in the ordinary course of business, both as a defendant and as a
plaintiff. While we cannot predict the outcome of any pending or future litigation, examination or
investigation, we do not believe that any pending matter will have a material adverse effect on our
cash flows, financial condition or results of operations. Item 2. Unregulated Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this quarterly report, which Exhibit Index is incorporated herein by reference. 33




---



##### 



Signature Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. COLLEGIATE FUNDING SERVICES, INC.
(Registrant)Date: May 09, 2005
    
    By: /s/ Kevin A. LandgraverName: Kevin A. LandgraverTitle: Executive Vice President and Chief Financial Officer(on behalf of the Registrant and as Principal Financial Officer)
 34




---



##### 



EXHIBIT INDEX Exhibit No.
    
    Description of Exhibit2.1
    
    Agreement relating to Acquisition of Youth Media & Marketing
Networks, dated as of April 21, 2004, among Collegiate Funding
Services, LLC, Affinity Acquisition Corp., Members Connect Inc.
and the companys stockholders (incorporated by reference to
Exhibit 2.1 to the registration statement on Form S-1 (Reg. No.
333-114466))3.1
    
    Amended and Restated Certificate of Incorporation of Collegiate
Funding Services, Inc. (incorporated by reference to Exhibit 3.1
to the registration statement on Form S-1 (Reg. No. 333-114466))3.2
    
    Amended and Restated By-Laws of Collegiate Funding Services,
Inc. (incorporated by reference to Exhibit 3.2 to the
registration statement on Form S-1 (Reg. No. 333-114466))4.1P
    
    Stockholders Agreement, dated May 17, 2002, by and among CFSL
Holdings Corp., CFSL Acquisition Corp. and the investors listed
on Schedule A thereto (incorporated by reference to Exhibit 4.1
to the registration statement on Form S-1 (Reg. No. 333-114466))4.2
    
    Form of Certificate of Common Stock (incorporated by reference
to Exhibit 4.2 to the registration statement on Form S-1 (Reg.
No. 333-114466))4.3
    
    Indenture of Trust from Collegiate Funding Services Education
Loan Trust I and U.S. Bank National Association, as Eligible
Lender Trustee to U.S. Bank National Association, as Indenture
Trustee, dated as of November 1, 2001, together with First
Supplemental Indenture of Trust, dated November 1, 2001 and
Second Supplemental Indenture of Trust, dated July 1, 2002
(incorporated by reference to Exhibit 4.3 to the registration
statement on Form S-1 (Reg. No. 333-114466))4.4
    
    Indenture of Trust between Collegiate Funding Services Education
Loan Trust 2003-A and U.S. Bank National Association, as
Eligible Lender Trustee and as Trustee, dated as of February 1,
2003 (incorporated by reference to Exhibit 4.4 to the
registration statement on Form S-1 (Reg. No. 333-114466))4.5
    
    Indenture of Trust between Collegiate Funding Services Education
Loan Trust 2003-B and U.S. Bank National Association, as
Eligible Lender Trustee and as Trustee, dated as of November 1,
2003 (incorporated by reference to Exhibit 4.5 to the
registration statement on Form S-1 (Reg. No. 333-114466))4.6
    
    Indenture of Trust between Collegiate Funding Services Education
Loan Trust 2004-A and U.S. Bank National Association, as
Eligible Lender Trustee and as Trustee, dated as of April 1,
2004 (incorporated by reference to Exhibit 4.6 to the
registration statement on Form S-1 (Reg. No. 333-114466))4.6.1
    
    Indenture of Trust between Collegiate Funding Services Education
Loan Trust 2005-A and The Bank of New York, as Eligible Lender
Trustee and as Trustee, dated as of February 1, 2005
(incorporated by reference to Exhibit 4.1 to the current report
on Form 8-K of Collegiate Funding Services Education Loan Trust
2005-A (File No., 333-112232-02))4.7
    
    Subordinated Note of CFSL Acquisition Corp., dated May 17, 2002,
issued to NOBS Capital Ventures, L.L.C. (incorporated by
reference to Exhibit 4.7 to the registration statement on Form
S-1 (Reg. No. 333-114466))10.23*
    
    Amendment No. 1 to Employment Agreement by and between
Collegiate Funding Services, Inc. and J. Barry Morrow10.24*
    
    Form of Amendment No. l to Employment Agreement for Executive Vice Presidents10.25*
    
    Amendment No. 1 to Employment Agreement by and between
Collegiate Funding Services, Inc. and John Reeves.31.1*
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer31.2*
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer32.1**
    
    Section 1350 Certification by Chief Executive Officer32.2**
    
    Section 1350 Certification by Chief Financial Officer99.1*
    
    Risk Factors relating to the Registrant
   P
    
    CFSL Holdings Corp. has subsequently changed its name to Collegiate Funding Services, Inc.
    
    Confidential treatment has been granted for certain portions of this Exhibit pursuant to Rule 406 promulgated under the
Securities Act.*
    
    Filed herewith**
    
    Furnished herewith 35