UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ----------------------------------------
Commission File Number 333-08929
UNION FINANCIAL SERVICES-1, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 86-0817755
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
6991 East Camelback Road, Suite B290, Scottsdale, Arizona 85251
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(602) 947-7703
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class of Stock Amount Outstanding
- -------------------------- ----------------------------
Common Stock, No par value 1,000 Shares of Common Stock
as of November 1, 1997
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 and
December 31, 1996................................................5
Statements of Operations for the three months ended
and nine months ended September 30, 1997 and 1996................6
Statements of Stockholders' Equity (Deficit) as of
September 30, 1997 and December 31, 1996.........................7
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996......................................8
Notes to Financial Statements......................................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 15
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 18
Item 2. Changes in Securities..............................................18
Item 3. Defaults upon Senior Securities................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............... 18
Item 5. Other Information................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................. 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Form 10-Q, including those concerning the
Registrant's expectations as to its ability to purchase eligible student loans,
to structure and issue competitive securities and to compete generally, and
certain of the information presented in this report, constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. As such, actual results may vary materially from such expectations. For a
discussion of the factors which could cause actual results to differ from
expectations, please see the caption entitled "Forward Looking Statements" in
ITEM 1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1996
(the "Form 10-K") on file with the Securities and Exchange Commission. There can
be no assurance that the Registrant's results of operations will not be
adversely affected by such factors.
3
<PAGE>
ITEM 1. FINANCIAL INFORMATION
The following financial statements of the Registrant have been prepared
pursuant to the rules and regulations the Securities and Exchange Commission
("SEC") and, in the opinion of management, include all adjustments necessary for
a fair statement of income for each period shown. All such adjustments made are
of a normal recurring nature except when noted as extraordinary or nonrecurring.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules and regulations.
Management believes that the disclosures made are adequate and that the
information is fairly presented. The results for the interim periods are not
necessarily indicative of the results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto in the Registrant's Annual Report on Form 10-K, which are hereby
incorporated by reference.
4
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES - 1, INC.
BALANCE SHEETS
ASSETS September 30, December 31,
1997 1996
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Cash and cash equivalents (note 2) $ 20,512,036 65,402,585
Student loans receivable, including premiums (notes 3, 7 and 8) 543,051,189 491,046,915
Accrued interest receivable (note 3) 8,288,338 8,250,825
Debt issuance cost, net of accumulated amortization of $ 590,865 3,121,902 3,182,805
and $ 250,992 (note 4)
Deferred tax asset (note 5) - 274,968
Other assets 19,698 13,888
------------ ------------
Total assets $ 574,993,163 568,171,986
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Notes payable (note 4) $ 571,500,000 566,000,000
Accrued interest payable 1,799,957 1,493,141
Other liabilities (note 10) 1,236,018 1,216,703
----------- -----------
Total liabilities $ 574,535,975 568,709,844
Stockholders' equity (deficit):
Common stock, no par value. Authorized 1,000 shares; 1,000 1,000
issued 1,000 shares
Retained earnings (deficit) 456,188 (538,858)
------- ---------
Total stockholders' equity (deficit) 457,188 (537,858)
------- ---------
Commitments and contingencies (notes 7, 8 and 9) - -
------------- -----------
Total liabilities and stockholders' equity (deficit) $ 574,993,163 568,171,986
============= ===========
See accompanying notes to financial statements
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES - 1, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
----------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Loan interest $ 10,796,386 $ 4,856,749 $ 31,694,899 $ 7,205,548
Investment interest 368,562 157,660 1,847,769 761,432
Other 138,710 11,466 177,541 16,117
----------- --------- ---------- ---------
Total revenues 11,303,658 5,025,875 33,720,209 7,983,097
=========== ========= ========== =========
Expenses:
Interest on notes 8,280,987 3,562,143 24,551,849 5,712,114
Loan servicing (note 10) 1,291,119 692,268 3,606,070 1,019,313
Administrative and financing fees to
parent (note 10) 474,823 207,836 1,095,901 924,494
Trustee and broker fees 245,762 159,271 713,410 267,354
Amortization of debt issuance costs 127,598 73,567 369,719 142,370
Amortization of loan premiums 309,581 144,111 897,055 206,130
Other general and
administrative (note 10) 295,862 2,005 978,559 89,972
-------- --------- ---------- ---------
Total expenses 11,025,732 4,841,201 32,212,563 8,361,747
---------- --------- ---------- ---------
Income (loss) before income taxes 277,926 184,674 1,507,646 (378,650)
Income tax expense (benefit) (note 5) 94,495 62,789 512,600 (128,741)
-------- -------- -------- --------
Net Income (loss) $ 183,431 $ 121,885 $ 995,046 $ (249,909)
======== ======== ======== ==========
Net Income (loss) per common share $ 183.43 $ 121.89 $ 995.05 $ (249.91)
======== ======== ======== ==========
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIODS ENDED SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
TOTAL
RETAINED STOCKHOLDERS
COMMON EARNINGS EQUITY (DEFICIT)
STOCK (DEFICIT)
-------- ---------- --------------
Balance at inception (February 28, 1996) $ - - -
Issuance of Common Stock 1,000 - 1,000
Net Loss - (538,858) (538,858)
------ --------- ---------
Balance at December 31, 1996 (Audited) $1,000 (538,858) (537,858)
Net Income (Unaudited) - 995,046 995,046
------ ------- -------
Balance at September 30, 1997 (Unaudited) $1,000 456,188 457,188
====== ======= =======
See accompanying notes to financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES - 1, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
<S> <C> <C>
Net Income (loss) $ 995,046 $ (249,909)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization 1,224,669 348,500
Deferred tax expense (benefit) 274,968 (128,741)
(Increase) in accrued interest receivable (37,511) (3,543,790)
(Increase) decrease in other assets (5,789) 234,674
Increase in accrued interest payable 306,816 583,221
Increase (decrease) in other liabilities 19,293 525,134
--------- ----------
Net cash provided by (used in) operating activities 2,777,492 (2,230,911)
--------- ----------
Cash flows used in investing activities:
Purchase of student loans, including premiums (100,853,496) (240,198,639)
Proceeds from student loan principal sales 5,970,592 -
Increase of student loans due to capitalized interest (12,339,745) (1,945,477)
Proceeds from student loan principal payments and loan
consolidation 54,333,579 10,296,236
---------- ------------
Net cash used in investing activities (52,889,070) (231,847,880)
---------- ------------
Cash flows provided by financing activities:
Proceeds from issuance of common stock - 1,000
Cash paid to decease debt (25,300,000) -
Proceeds form issuance of notes payable 30,800,000 249,900,000
Cash paid for debt issuance costs (278,971) (1,971,944)
--------- -----------
Net cash provided by financing activities 5,221,029 247,929,056
--------- -----------
Net increase (decrease) in cash and cash equivalents (44,890,549) 13,850,265
Cash and cash equivalents, beginning of year 65,402,585 -
---------- -----------
Cash and cash equivalents, end of year $20,512,036 $13,850,265
=========== ===========
Supplemental disclosures:
Interest paid - -
Income taxes paid $24,430,093 $5,129,012
=========== ==========
See accompanying notes to financial statements.
</TABLE>
8
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
DESCRIPTION OF BUSINESS
Union Financial Services - 1, Inc. (the "Company"), a wholly-owned
subsidiary of Union Financial Services, Inc., was organized as a C
Corporation on February 28, 1996 (inception date) to invest in eligible
student loans issued under Title IV of the Higher Education Act of 1965
as amended (the "Act"). Student loans beneficially owned by the Company
include those originated under the Stafford Loan Program ("SLP"), the
Parent Loan Program for Undergraduate Students ("PLUS") program, the
Supplemental Loans for Students ("SLS") program and loans which
consolidate certain borrower obligations ("Consolidation"). Title to the
loans is held by an eligible lender trustee under the Act for the
benefit of the Company. The majority of the financed eligible loan
borrowers are geographically concentrated in the midwest area and are in
school or their first year of repayment.
The notes outstanding are payable primarily from interest and principal
payments on the student loans receivable as specified in the bond
offering statements.
Union Financial Services, Inc., the parent, is a holding company
organized for the purpose of establishing and owning the stock of
corporations like the Company engaged in the securitization of financial
assets. The parent also provides managerial and administrative support
to the Company.
STUDENT LOANS RECEIVABLE
Investments in student loans, including premiums, are recorded at cost,
net of premium amortization. Premiums are amortized over the estimated
principal life of the related loans.
INTEREST ON STUDENT LOANS
Interest on student loans is accrued when earned and is either paid by
the Department of Education or the borrower depending on the status of
the loan at the time of accrual. In addition, the Department of
Education makes quarterly interest subsidy payments on certain qualified
Title IV loans until the student is required under the provisions of the
Act to begin repayment. Repayment on guaranteed student loans normally
begins within nine months after completion of their course of study,
leaving school or ceasing to carry at least one-half the normal
full-time academic load as determined by the educational institution.
Repayment of PLUS loans normally begins within 60 days from the date of
loan disbursement and repayment of SLS loans begins within one month
after completion of course study, leaving school or ceasing to carry at
least the normal full-time academic load as determined by the
educational institution.
CASH EQUIVALENTS
Cash equivalents consist of marketable short-term investment trust and
lockbox receivables in transit. For purposes of the statement of cash
flows, the Company considers all investments with original maturities of
three months or less to be cash equivalents.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share was calculated by dividing the net income
(loss) by the weighted-average number of shares outstanding, which was
1,000 shares in 1997 and 1996.
The Company and its parent file a consolidated Federal tax return. The
financial statements reflect income taxes computed as if the Company
filed a separate tax return. Income tax payments are made by the Company
to its parent as if the Company were a separate tax paying entity.
9
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents are held by the trustee in
various accounts subject to use restrictions as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
(Unaudited) (Audited)
------------------ ------------------
<S> <C> <C>
LOAN ACCOUNT FUND - Established for the purpose of purchasing $ - 38,459,716
eligible student loans with proceeds of the borrowing
RECYCLING ACCOUNT FUND - Established to maintain excess 6,360,401 14,843,885
funds for future operating needs, if necessary and purchases of
eligible student loans
RESERVE FUND - Established to cure any deficiencies in the debt 8,633,214 11,373,233
service requirements
COST OF ISSUANCE FUND - Established to pay administrative and - 253,880
issuance costs incurred with the issuance of Company debt
REVENUE FUND - Established for the receipt of interest payments on 598,039 (13,249)
eligible student loans and investment securities and to pay fees and expenses
incurred under the indenture
INTEREST FUND - Established for the payment of debt service interest - -
requirements.
RESTRICTED CASH 97A ESCROW - Established for the retirement of 4,269,671 -
Subordinated Series 1996 Class B-1 and B-2 bonds.
SENIOR INTEREST ACCOUNT FUND - Established for payments of 2,347 -
interest on Senior Series 1996 Class A-1, A-2, A-3 and A-4 bonds.
Operating Cash and Cash Equivalents 648,364 485,120
------- -------
Total Cash and Cash Equivalents $20,512,036 $65,402,585
=========== ===========
</TABLE>
10
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(3) STUDENT LOANS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Guaranteed student loans may be made under this program by certain
lenders as defined by the Act. These loans, including related accrued
interest, are guaranteed at their maximum level permitted under the Act
by an authorized guarantee agency which has a contract of reinsurance
with the Department of Education. The terms of the loans, which vary on
an individual basis, generally provide for repayment in monthly
installments of principal and interest over a period of up to twenty
years. Interest rates on loans may be fixed or variable, and will vary
based on the average of the 91-day U.S. Treasury bill rate, and
currently range from 7 percent to 10 percent dependent upon type, terms
of loan agreements and date of origination. For Title IV loans, the
Company has entered into a trust agreement in which an unrelated
financial institution will serve as the eligible lender trustee. As an
eligible lender trustee, the financial institution acts as the eligible
lender in acquiring certain eligible student loans as an accommodation
to the Company who holds a beneficial interest in the student loan
assets as the beneficiary of such trust.
Substantially all student loan principal and related accrued interest
are guaranteed as defined by the Act. These guarantees are made subject
to the performance of certain loan servicing procedures stipulated by
applicable regulations. If these procedures are not met, affected loans
may not be covered by the guarantees should the borrower default. The
Company retains and enforces recourse provisions against servicers and
lenders under certain circumstances. Should loans lose their guaranteed
status and recourse provisions prove unenforceable, the unguaranteed
portion has been reserved in a trustee account ("Reserve Fund"). Such
loans are subject to cure procedures and reinstatement of the guarantee
under certain circumstances. Also, in accordance with Student Loan
Reform Act of 1993, loans disbursed prior to October 1, 1993 are fully
insured and loans disbursed subsequent to October 1, 1993 (approximately
60 percent of the student loans) are insured up to 98 percent.
(4) NOTES PAYABLE
The Company periodically issues taxable student loan asset-backed notes
to finance the acquisition of student loans. All notes are primarily
secured by the student loans receivable, related accrued interest, and
other property and funds held in trust. All notes are variable rate
notes with interest rates reset from time to time based upon auction
rates and national indices.
11
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
The following table summarizes outstanding notes payable at September
30, 1997 and December 31, 1996 by issue:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
Unaudited Audited
FINAL CARRYING CARRYING INTEREST
MATURITY AMOUNT AMOUNT RATE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
1996 Senior Auction Rate Notes, 7/01/14 $96,600,000 $96,600,000 5.19% - 6.20%
Class A-1 and A-2
1996 Subordinate LIBOR Rate 7/01/14 - 11,100,000 6.13% - 6.44%
Notes, Class B-1
1996 Senior Auction Rate Notes, 7/01/14 128,000,000 128,000,000 5.34% - 5.91%
Class A-3 and A-4
1996 Subordinate LIBOR Rate 7/01/14 - 14,200,000 6.12% - 6.43%
Notes, Class B-2
1996 Senior Treasury Rate Notes, 7/01/05 225,000,000 225,000,000 5.45% - 5.97%
Class A-5
1996 Senior Auction Rate Notes, 7/01/14 75,500,000 75,500,000 5.32% - 6.05%
Class A-6
1996 Subordinate LIBOR Rate 7/01/25 15,600,000 15,600,000 5.86% - 6.17%
Notes, Class B-3
1997 Subordinate LIBOR Rate 7/01/30 30,800,000 - 5.95% - 6.14%
Notes, Class B-4 ------------ -----------
$571,500,000 $566,000,000
</TABLE>
Generally, the notes can be redeemed on any interest payment date at par
plus accrued interest. Subject to note provisions, all notes are subject
to redemption prior to maturity at the option of the Company, without a
prepayment penalty.
The indenture of trust contains, among other requirements, covenants
related to the restriction of funds to be maintained in a reserve fund.
Management believes the Company is in compliance in all material
respects with all covenants of the indenture of trust at September 30,
1997.
On March 20, 1997, the Company issued $30.8 million of Taxable Student
Loan Asset-Back Notes, Series 1997A, due July 1, 2030. The proceeds were
deposited in an escrow fund to provide for the defeasance of the $11.1
million of the Series 1996A Class B-1 Subordinate notes and $14.2
million of the Series 1996B Class B-2 Subordinate notes, respectively,
in May 1999. As a result of the transaction, the Company recognized an
accounting loss of approximately $145,000 on the defeasance.
The Company has an existing shelf registration allowing it to issue up
to $700 million in debt securities, of which $346,900,000 has been
issued. In October of 1997, the Company's shelf registration statement
for an additional $500,000,000 of debt securities was declared
effective.
12
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(5) INCOME TAXES
The income tax expense consists of a Federal income tax expense of
$94,495 and $512,600 for the three months ended September 30, 1997 and
the nine months ended September 30, 1997, respectively, and a Federal
income tax benefit of $274,968 for the period ended December 31, 1996.
The deferred tax asset results from the future tax benefit of the net
operating loss at December 31, 1996. No valuation allowance is
considered necessary as management anticipates future earnings will be
sufficient to offset the net operating loss.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below.
ACCRUED INTEREST RECEIVABLE/PAYABLE, OTHER ASSETS AND ACCOUNTS PAYABLE
The carrying value of certain asset and liability accounts including
accrued interest receivable, other assets, accrued interest payable and
other liabilities approximate fair value due to their short maturities.
STUDENT LOANS
The fair value of net student loans approximates carrying value.
Premiums paid for student loans purchased which have a higher than
market rate of interest would typically range from 1 percent to 3
percent, depending on the type of loan, balance, payment status, stated
interest rate, and other various factors.
NOTES PAYABLE
The fair value of the notes payable approximates carrying value due to
the nature of the financing arrangement. The terms of the arrangement
specify that the outstanding debt is callable at par at specified
interest payment
dates.
(7) GUARANTEE AGENCIES
As of September 30, 1997, Iowa College Student Aid Commission, Nebraska
Student Loan Program, Inc. and Kentucky Higher Education Assistance
Authority were the primary guarantors, guaranteeing approximately 76
percent of the total student loans beneficially owned by the Company.
Management periodically reviews the financial condition of its
guarantors and does not believe the level of concentration creates an
unusual or unanticipated credit risk. In addition, management believes
that based on the Higher Education Amendments of 1992, the security for
and payment of any of the Company's obligations would not be materially
adversely affected as a result of legislative action or other failure to
perform on its obligations on the part of any guarantee agency. The
Company, however, offers no assurances to that effect.
(8) RECENT STUDENT LOAN LEGISLATION
Legislative changes to the Act affecting competition, loan asset
characteristics, debt structure provisions and regulatory compliance may
from time to time affect the operations of the Company. Recent
legislation has included provisions revising the Federal Family
Education Loan Program ("FFELP"), including changes to interest rates,
special allowance payments, guarantee fees and guarantee payments, and
creating the Federal Direct Student Loan Program ("FDSLP"). Future
legislation affecting the FFELP and FDSLP, if enacted, could have a
material adverse effect on the Company and its operations.
13
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(9) PURCHASE COMMITMENTS
The Company has entered into a put option agreement with Union Bank and
Trust Company ("UB&T") to purchase up to $3 million of eligible student
loans at 101 percent of the principal amount. These eligible loans may
consist of loans owned by UB&T in its individual capacity or in its
capacity as trustee of certain grantor trusts in its trust department.
No amounts were purchased under this agreement in 1997 and 1996.
(10) RELATED PARTIES
Certain owners and directors of the Company are also officers and
directors of UB&T which owns 80.5 percent of UNIPAC Service Corporation
("UNIPAC"). All loans currently held were purchased from UB&T.
Under the terms of an agreement, the Company contracts all loan
servicing through UB&T. UNIPAC has been contracted as the sub-servicer
by UB&T. Fees paid to UB&T are calculated using an annual asset-based
charge ranging from .60 - 1.25 percent, dependent upon loan type and
loan status, of the student loan principal balance, calculated monthly.
At September 30, 1997 and December 31, 1996, $876,847 and $1,011,488,
respectively is payable to UB&T for loan servicing and is included in
other liabilities.
The Company incurred fees to its parent for managerial and
administrative support for the operations of the Company based on a
service agreement that requires .015 percent of the average outstanding
loan balance to be paid monthly. These fees amounted to approximately
$674,000 and $55,000 for the nine months ended September 30, 1997 and
1996, respectively. The Company also paid approximately $422,000 and
$869,000 for the nine months ended September 30, 1997 and 1996,
respectively to its parent for services provided in connection with the
Company's debt financing.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OR OPERATIONS.
GENERAL
Union Financial Services-1, Inc. (the "Company") was incorporated under
the laws of the State of Nevada on February 28, 1996. The Company is a wholly
owned subsidiary of Union Financial Services, Inc., a Nevada corporation
("UFS"). UFS is a privately held corporation and is affiliated with Union Bank
and Trust Company, a Nebraska corporation and state bank ("Union Bank"). The
Company was formed solely for the purpose of acquiring, from time to time,
guaranteed educational loans made to students and parents of students ("Eligible
Loans") under the Higher Education Act of 1965, as amended (the "Higher
Education Act"), and pledging such Eligible Loans and certain related collateral
to a trustee to secure one or more series of Taxable Student Loan Asset-Backed
Notes (the "Notes") that are issued by the Company from time to time pursuant to
a Second Amended and Restated Indenture of Trust, dated as of November 1, 1996,
between the Company and Norwest Bank Minnesota, National Association (the
"Trustee"), as amended and supplemented from time to time (collectively, the
"Indenture"). Since its inception, the Company has issued four (4) series of
Notes consisting of ten (10) classes. The Notes shown in the financial
statements of the Company represent limited obligations of the Company secured
solely by the Eligible Loans and other assets in the trust estate created under
the Indenture.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES. The Company's revenues consist primarily of interest earned on
Eligible Loans subject to the indebtedness of the Notes. Revenues from interest
on Eligible Loans increased by $5,939,637 from $4,856,749 for the three months
ended September 30, 1996 to $10,796,386 for the three months ended September 30,
1997. The increase in revenues is directly attributable to the acquisition of
additional Eligible Loans by the Company between the two periods. The amount of
interest reported for the three months ended September 30, 1997 was derived from
Eligible Loans in an aggregate principal amount of approximately $535,345,000.
The Company's average net investment in Eligible Loans during the three months
ended September 30, 1997 was approximately $512,355,000 (excluding funds held by
the Trustee) and the average effective annual interest rate of interest income
on Eligible Loans was approximately 8.43%. The Company also earned investment
income and other income in the amounts of $368,562 and $138,710, respectively,
for the three months ended September 30, 1997 and $157,660 and $11,466,
respectively, for the three months ended September 30, 1996.
EXPENSES. The Company's expenses consist primarily of interest due on
the Company's outstanding Notes. Interest expense due on the Company's
outstanding Notes increased by $4,718,844 from $3,562,143 for the three months
ended September 30, 1996 to $8,280,987 for the three months ended September 30,
1997. This increase in expenses is directly attributable to the issuance of
additional Notes between the two periods and the interest rates on all Notes
outstanding. The Company's average debt outstanding was approximately
$571,500,000 and the average annual cost of borrowings was approximately 5.80%
for the three months ended September 30, 1997. The Company also incurred loan
servicing fees to Union Bank and administration and financing fees to UFS in the
amount of $1,291,119 and $474,823, respectively, for the three months ended
September 30, 1997 as compared to $692,268 and $207,836, respectively, for the
three months ended September 30, 1996. The increase in loan servicing fees and
administrative and financing fees is directly related to the servicing of
additional Eligible Loans. See the caption entitled "ITEM 13--CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's Form 10-K for a
description of the Servicing Agreement and Administrative Services Agreement
pursuant to which such fees are owed. Trustee and broker fees, amortization of
debt issuance costs and amortization of loan premiums amounted to $245,762,
$127,598, and $309,581, respectively, for the three months ended September 30,
1997 as compared to $159,271, $73,567 and $144,111, respectively, for the three
months ended September 30, 1996. The increase in such fees is directly related
to the issuance of additional Notes. Other general and administrative expenses
amounted to $295,862 for the three months ended September 30, 1997 as compared
to $2,005 for the three months ended September 30, 1996.
15
<PAGE>
The increase in these expenses directly relate to the increased activity of the
Company's business. Income tax expense amounted to $94,495 for the three months
ended September 30, 1997 and an income tax expense of $62,789 for the three
months ended September 30, 1996.
NET INCOME/LOSS. The Company had net income of $183,431 and $121,885 for
the three months ended September 30, 1997 and 1996, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES. The Company's revenues consist primarily of interest earned on
Eligible Loans subject to the indebtedness of the Notes. Revenues from interest
on Eligible Loans increased by approximately $24,489,351 from $7,205,548 for the
nine months ended September 30, 1996 to $31,694,899 for the nine months ended
September 30, 1997. The increase in revenues is directly attributable to the
acquisition of additional Eligible Loans by the Company after September 30,
1996. Moreover, the Company did not have a full first nine months in 1996 given
its incorporation on February 28, 1996. The amount of interest reported for the
nine months ended September 30, 1997 was derived from Eligible Loans in an
aggregate principal amount of approximately $535,345,000. The Company's average
net investment in Eligible Loans during the nine months ended September 30, 1997
was approximately $504,654,000 (excluding funds held by the Trustee) and the
average effective annual interest rate of interest income on Eligible Loans was
approximately 8.37%. The Company also earned investment income and other income
in the amounts of $1,847,769 and $177,541, respectively, for the nine months
ended September 30, 1997 and $761,432 and $16,117, respectively, for the nine
months ended September 30, 1996.
EXPENSES. The Company's expenses consist primarily of interest due on
the Company's outstanding Notes. Interest expense on the Company's outstanding
Notes increased by $18,839,735 from $5,712,114 for the nine months ended
September 30, 1996 to $24,551,849 for the nine months ended September 30, 1997.
This increase in expenses is directly attributable to the issuance of additional
Notes after September 30, 1996 and the interest rates on all Notes outstanding.
The Company's average debt outstanding was approximately $569,667,000 and the
average annual cost of borrowings was approximately 5.75% for the nine months
ended September 30, 1997. The Company also incurred loan servicing fees to Union
Bank and administration and financing fees to UFS in the amount of $3,606,070
and $1,095,901, respectively, for the nine months ended September 30, 1997 as
compared to $1,019,313 and $924,494, respectively, for the nine months ended
September 30, 1996. The increase in loan servicing fees and administration and
financing fees is directly related to the servicing of additional Eligible
Loans. See the caption entitled "ITEM 13--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" in the Company's Form 10-K for a description of the Servicing
Agreement and Administrative Services Agreement pursuant to which such fees are
owed. Trustee and broker fees, amortization of debt issuance costs and
amortization of loan premiums amounted to $713,410, $369,719, and $897,055,
respectively, for the nine months ended September 30, 1997 as compared to
$267,354, $142,370 and $206,130, respectively, for the nine months ended
September 30, 1996. The increase in such fees is directly related to the
issuance of additional Notes. Other general and administrative expenses amounted
to $978,559 for the nine months ended September 30, 1997 as compared to $89,972
for the nine months ended September 30, 1996. The increase in these expenses
directly relate to the increased activity of the Company's business. Income tax
expense amounted to $512,600 for the nine months ended September 30, 1997 and an
income tax benefit of $128,741 for the nine months ended September 30, 1996. The
income tax benefit results from a carryforward of the Company's net operating
loss which is discussed below.
NET INCOME/LOSS. The Company had net income of $995,046 for the nine
months ended September 30, 1997 and incurred a net loss of $249,909 for the nine
months ended September 30, 1996. The net loss for the nine months ended
September 30, 1996 is attributable to early startup costs incurred by the
Company without substantial business operations.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Eligible Loans held by the Company are pledged as collateral for the
Notes, the terms of which provide for the retirement of all Notes from the
proceeds of the Eligible Loans. Cash flows from payments on the Eligible Loans,
together with proceeds of reinvestment income earned on the Eligible Loans, are
intended to provide cash sufficient to make all required payments of principal
and interest on each outstanding series of Notes. On July 1, 1997, July 11,
1997, July 14, 1997 and August 1, 1997 the Trustee withdrew moneys from the
Reserve Fund created under the Indenture to cover deficiencies of money
available in the Revenue Fund for payment of interest on the Notes. The
deficiencies were created by late payments of interest benefits and special
allowance on the Company's Eligible Loans by the Department of Education. The
Reserve Fund has been replenished to the amount required under the Indenture.
The Company anticipates that it will require no additional funds to meet the
obligation on its outstanding Notes.
It is anticipated that regular payments under the terms of the Eligible
Loans, as well as early prepayment, will reduce the number of Eligible Loans
held in the Trust Estate. The Company is authorized under the Indenture to use
principal receipts from Eligible Loans to purchase additional Eligible Loans
until April 1, 1999. Thereafter, principal receipts from Eligible Loans will be
used to reduce the amount of Notes outstanding. The Company also plans to issue
additional Notes, the proceeds of which will be used, to acquire additional
Eligible Loans.
In October of 1997, the Securities and Exchange Commission declared
effective the Company's Second Registration Statement on Form S-3 (No.
333-28551) for $500,000,000 of Taxable Student Loan Asset-Backed Notes.
Depending upon the availability of eligible loans and market conditions, the
Company may issue additional notes in fiscal year 1998.
RESULTS OF OPERATIONS
For the period ended December 31, 1996 and the nine months ended
September 30, 1997, there were no unusual or infrequent events or transactions
or any significant economic dangers that materially affected the amount of
reported income from continuing operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In September 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS No.
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
applied prospectively. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Management of the Company does
not expect that adoption of SFAS No. 125 will have a material impact on the
Company's financial position, results of operations or liquidity.
IMPACT OF INFLATION
For the period ended December 31, 1996 and the nine months ended
September 30, 1997, cost increases to the Company were not materially impacted
by inflation.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
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 AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously filed with the Securities and
Exchange Commission as required by Item 601 of Regulation
S-K, are incorporated herein by reference in accordance
with provisions of Rule 12b-32
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
UNION FINANCIAL SERVICES-1, INC.
By:/s/ Stephen F. Butterfield
Stephen F. Butterfield, President
(Principal Executive Officer)
By:/s/ Ronald W. Page
Ronald W. Page, Vice President (Principal
Financial and Accounting Officer)
Date: November 12, 1997
19
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