UNION FINANCIAL SERVICES I INC
10-Q, 1997-05-14
PATENT OWNERS & LESSORS
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                                  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 MARCH 31, 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 May 1, 1997
<PAGE>

                        UNION FINANCIAL SERVICES-1, INC.

                                      INDEX

                                                                        PAGE NO.
                                                                       ---------
PART I. - FINANCIAL INFORMATION

        Item 1.       Financial Statements

                      Balance Sheet as of March 31, 1997 and
                        December 31, 1996......................................5
                      Statement of Operations for the periods ended
                        March 31, 1997 and March 31, 1996......................6
                      Statement of Stockholders' Deficit as of
                        March 31, 1997 and December 31, 1996...................7
                      Statement of Cash Flows as of March 31, 1997 and
                        March 31, 1996.........................................8
                      Notes to Financial Statements............................9

        Item 2.       Management's Discussion and Analysis of
                      Financial Condition and Results of
                      Operations..............................................16

PART II. - OTHER INFORMATION

        Item 1.       Legal Proceedings.......................................20
        Item 2.       Changes in Securities...................................20
        Item 3.       Defaults upon Senior Securities.........................20
        Item 4.       Submission of Matters to a Vote
                      of Security Holders.....................................20
        Item 5.       Other Information.......................................20
        Item 6.       Exhibits and Reports on Form 8-K........................20



<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.



<PAGE>


  ITEM 1. FINANCIAL INFORMATION


        The following financial statements of Union Financial  Services-1,  Inc.
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 Company's  Annual Report on Form 10-K, which
are incorporated by reference.


<PAGE>
<TABLE>
<CAPTION>

UNION FINANCIAL SERVICES-1, INC.
BALANCE SHEET

                             ASSETS                                 March 31,       December 31,
                                                                       1997            1996
                                                                   (Unaudited)       (Audited)
                                                                    -----------     ----------
<S>                                                                    <C>             <C>         
Cash and cash equivalents (note 2)                                 $ 45,437,427    $ 65,402,585
Student loans receivable, including premiums (notes 3, 7 and 8)     518,117,616     491,046,915
Accrued interest receivable (note 3)                                  7,303,025       8,250,825
Debt issuance cost, net of accumulated amortization 
   of $343,045 and $250,992, respectively (note 4)                    3,247,776       3,182,805
Deferred tax asset (note 5)                                              67,546         274,968
Other assets                                                              8,438          13,888
                                                                   ------------    ------------
          Total assets                                             $574,181,828    $568,171,986
                                                                   ============    ============

                LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
          Notes payable (notes 4 and 12)                          $ 571,500,000    $566,000,000
          Accrued interest payable                                    1,864,441       1,493,141
          Other liabilities (note 10)                                   952,604       1,216,703
                                                                   ------------    ------------
               Total liabilities                                  $ 574,317,045    $568,709,844

Stockholders' deficit:
         Common stock, no par value. Authorized 
         1,000 shares; issued 1,000 share                                 1,000           1,000
         Accumulated deficit                                           (136,217)       (538,858)
                                                                      ---------       ---------
               Total stockholders' deficit                             (135,217)       (537,858)

Commitments and contingencies (notes 7, 8 and 9)                           -               -

               Total liabilities and stockholders' deficit        $ 574,181,828     $ 568,171,986
                                                                   =============    =============

              See accompanying notes to financial statements
</TABLE>

<PAGE>

UNION FINANCIAL SERVICES-1, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
UNAUDITED
                                                      1997           1996
                                                      ----           ----
Revenues:
      Loan interest                              $ 10,406,068     $ 489,647
      Investment interest                             703,623       111,147
      Other                                            15,153         -
                                                   ----------    ----------
      Total revenues                               11,124,844       600,794
                                                   ==========    ==========
Expenses:
      Interest on notes                           $ 8,062,424     $ 373,830
      Loan servicing (note 10)                      1,076,761        85,675
      Financing fees to parent (note 10)              116,998       350,000
      Trustee and broker fees                         219,421        25,633
      Amortization of debt issuance costs             121,900         6,252
      Amortization of loan premiums                   290,288        12,752
      Other general and administrative (note 10)      626,989        88,460
                                                   ----------    ----------
               Total expenses                     $10,514,781     $ 942,602
                                                   ==========    ==========

               Income (loss) before income taxes      610,063      (341,808)

       Income tax expense (benefit) (note 5)          207,422      (116,215)
                                                   ----------    ----------

Net Income (loss)                                   $ 402,641    $ (225,593)
                                                   ==========    ==========

Net Income (loss) per common share                   $ 402.64     $ (225.59)
                                                   ==========    ==========

See accompanying notes to financial statements.


<PAGE>

UNION FINANCIAL SERVICES-1, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIODS ENDED MARCH 31, 1997 AND  DECEMBER 31, 1996


                                                                        TOTAL
                                            COMMON     ACCUMULATED  STOCKHOLDERS
                                             STOCK       DEFICIT       DEFICIT

Balances at inception (February 28, 1996)   $  -            -            -

Issuance of common stock                      1,000         -           1,000

Net loss                                       -        (538,858)    (538,858)
                                             -------    --------     -------- 


Balances at December 31, 1996 (Audited)       1,000    (538,858)    (537,858)


Net Income (Unaudited)                          -        402,641      402,641
                                             -------    --------     --------

Balance at March 31, 1997 (Unaudited)       $ 1,000    (136,217)    (135,217)
                                             =======    =======      =======


See accompanying notes to financial statements.


<PAGE>

UNION FINANCIAL SERVICES-1, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
UNAUDITED


                                                            1997         1996
                                                            ----         ----
Net Income (loss)                                        $ 402,641   $ (225,593)

    Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
    Amortization                                           382,341       19,004
    Deferred tax expense (benefit)                         207,422     (116,215)
    (Increase) decrease in accrued interest receivable     947,801     (754,828)
    (Increase) decrease in other assets                      5,449         (962)
    Increase in accrued interest payable                   371,300      228,460
    Increase (decrease) in other liabilities              (264,098)      95,658
                                                        -----------  -----------
           Net cash provided by (used in) 
           operating activities                          2,052,856     (754,476)
                                                        -----------  -----------

    Cash flows used in investing activities:
    Purchase of student loans, including premiums      (41,008,508) (71,276,977)
    Proceeds from student loan principal payments
    and loan consolidations                             13,647,519      607,648
                                                        -----------  -----------
           Net cash used in investing activities       (27,360,989) (70,669,329)
                                                        -----------  -----------
    Cash flows provided by financing activities:
    Proceeds from issuance of common stock                   -            1,000
    Cash paid to defease debt                          (25,300,000)        -
    Proceeds form issuance of notes payable             30,800,000  107,700,000
    Cash paid for debt issuance costs                    (157,025)     (822,808)
                                                        -----------  -----------
           Net cash provided by financing activities     5,342,975  106,878,192
                                                        -----------  -----------

Net increase (decrease) in cash and cash equivalents  (19,965,158)   35,454,387

Cash and cash equivalents, beginning of year            65,402,585        -
                                                        ----------    ----------

Cash and cash equivalents, end of year                $ 45,437,427  $35,454,387
                                                       ===========   ===========

Supplemental disclosures:
    Interest paid                                      $ 7,812,965   $  145,370
                                                       ===========   ===========
    Income taxes paid                                    $ 271,600         -
                                                         =========      ========

See accompanying notes to financial statements.

<PAGE>


UNION FINANCIAL SERVICES - 1, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(CONTINUED)

(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 six 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.

        LOSS PER SHARE

               Net loss per share was calculated by dividing the net 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.

        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:


                                                       March 31,    December 31,
                                                         1997           1996
                                                      (Unaudited)     Audited
                                                       ---------   ------------
LOAN ACCOUNT FUND - Established for the purpose of    $     -       38,459,716
purchasing eligible student loans with proceeds of
the borrowing

RECYCLING  ACCOUNT  FUND -  Established  to  maintain 
excess  funds for  future operating needs, if necessary
and purchases of eligible student loans               27,681,579    14,843,885

RESERVE FUND - Established to cure any deficiencies 
in the debt service requirements
                                                      11,480,366    11,373,233

COST OF ISSUANCE FUND - Established to pay 
administrative and issuance costs incurred with the
issuance of Company debt                                 102,143       253,880

REVENUE FUND - Established for the receipt of 
interest payments on eligible student loans and 
investment securities and to pay fees and                327,490       (13,249)
expenses incurred under the indenture

INTEREST FUND - Established for the payment of
debt service interest requirements.                        -              -

RESTRICTED CASH 97A ESCROW - Established for the       5,092,239          -
retirement of Subordinated 1996 series B-1 and
B-2 bonds.

 Operating Cash and Cash Equivalents                    $753,610       485,120
                                                        --------      --------

        Total Cash and Cash Equivalents              $45,437,427   $65,402,585
                                                     ===========   ===========

(3)     STUDENT LOANS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

        Student  loans  are  recorded  at cost,  which  includes  premiums,  and
        approximates  market  value.  Guaranteed  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.
<PAGE>

        The  following  table  summarizes  notes  payable at March 31,  1997 and
        December 31, 1996 by issue:

                                  March 31, 1997  December 31, 1996
                                     Unaudited        Audited
                                     ---------       --------

                             FINAL     CARRYING     CARRYING       INTEREST
                           MATURITY     AMOUNT        AMOUNT        RANGE
                           --------     ------       ------        -------
1996 Senior Auction Rate    7/01/14   $96,600,000  $96,600,000   5.19% - 6.20%
Notes, Class A-1 and A-2

1996 Subordinate LIBOR      7/01/14            -   $11,100,000   6.13% - 6.25%
Rate Notes, Class B

1996 Senior Auction Rate    7/01/14   128,000,000  128,000,000   5.34% - 5.91%
Notes, Class A-3 and A-4

1996 Subordinate LIBOR      7/01/14            -    14,200,000   6.12% - 6.24%
Rate Notes, Class B-2

1996 Senior Treasury Rate   7/01/05   225,000,000  225,000,000   5.45% - 5.73%
Notes, Class A-5

1996 Senior Auction Rate    7/01/14    75,500,000   75,500,000   5.32% - 6.05%
Notes, Class A-6

1996 Subordinate LIBOR      7/01/25    15,600,000   15,600,000   5.86% - 5.92%
Rate Notes, Class B-3

1997 Subordinate LIBOR      7/01/30    30,800,000          -     5.95% - 5.95%
Rate Notes, Class B-4                  ----------   ----------

                                     $571,500,000 $566,000,000
                                     ============ ============


        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  with all covenants of
        the indenture of trust at March 31, 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 Subordinate  notes and $14.2 million
        of the Series 1996B Class B-2 Subordinate  notes,  respectively,  in May
        1999. These notes are not outstanding  under the Indenture.  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  $596,600,000  has been
        issued.  The Company  has no  immediate  plans to utilize the  remaining
        amount available under the shelf registration.

(5)     INCOME TAXES

        The  income  tax  expense  (benefit)  consists  of a Federal  income tax
        expense of  $207,422  for the period  ended March 31, 1997 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  for  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 March 31, 1997,  Iowa  College  Student Aid  Commission,  Nebraska
        Student Loan  Program,  Inc. and Kentucky  Higher  Education  Assistance
        Authority were the primary  guarantors,  guaranteeing  approximately  81
        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.  The Act will
        expire in September  1997 unless the existing laws are  reauthorized  or
        Congress employs a clause in another federal law, the General  Education
        Provision  Act, to extend the Act until  September  1998.  In the months
        before  such  laws are  reauthorized,  Congress  will  conduct  detailed
        studies of their  programs to determine if the program  should  continue
        and whether adjustments to the program are needed.

        Pending  legislation will likely also include  provisions for additional
        changes in the existing Federal Family Education Loan Program ("FFELP"),
        including  changes  to  interest  rates,   special  allowance  payments,
        guarantee fees and the Federal  Direct  Student Loan Program  ("FDSLP").
        Various factors in the  legislation,  if enacted,  could have a material
        adverse effect on the Company and its operations. These factors include,
        but are not limited to, the  reduction of the interest  rates payable by
        student loan borrowers,  the increase of loan origination fees and other
        provisions included in the pending legislation.

(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  of 1.25,  .90 and .60  percent  of the  student  loan  principal
        balances  in  repay   status,   in  school   status  and   consolidated,
        respectively, calculated monthly. At March 31, 1997, $848,936 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
        $222,000 for the three  months  ended March 31,  1997.  The Company also
        paid  approximately  $117,000  and  $350,000  for the three months ended
        March  31,  1997 and  1996,  respectively  to its  parent  for  services
        provided in connection with the Company's debt financing.


<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 FOR THE PERIOD ENDED MARCH 31, 1997

        REVENUES.  The Company's revenues consist primarily of interest received
on  Eligible  Loans  subject to the  indebtedness  of the Notes.  Revenues  from
interest on Eligible Loans increased by $9,916,421 from $489,647 for the quarter
ended March 31, 1996 to  $10,406,068  for the quarter ended March 31, 1997.  The
increase in revenues is directly  attributable  to the acquisition of additional
Eligible Loans by the Company during the period.  Moreover,  the Company did not
have a full first  quarter  given its  incorporation  on February 28, 1996.  The
amount of interest  reported  for the  quarter  ended March 31, 1997 was derived
from  Eligible  Loans  in  an  aggregate   principal   amount  of  approximately
$510,525,000.  The Company's average net investment in Eligible Loans during the
quarter ended March 31, 1997 was  approximately  $501,422,000  (excluding  funds
held by the Trustee) and the average  effective annual interest rate of interest
income on Eligible  Loans was  approximately  8.089%.  The Company also receives
investment  income and other  income in the  amounts of  $703,623  and  $15,153,
respectively,  for the  quarter  ended  March 31,  1997 and  $111,147  and $-0-,
respectively, for the quarter ended March 31, 1996.

        EXPENSES.  The Company's  expenses consist  primarily of interest due on
the  Company's  outstanding  Notes.  Expenses from interest due on the Company's
outstanding  Notes  increased by $7,688,594  from $373,830 for the quarter ended
March 31, 1996 to $8,062,424 for the quarter ended March 31, 1997. This increase
in expenses is directly  attributable to the issuance of additional Notes during
the  period  and the  interest  rates on all Notes  outstanding.  The  Company's
average debt outstanding was  approximately  $567,833,000 and the average annual
cost of borrowings was approximately 5.60% for the quarter ended March 31, 1997.
The  Company  also  made  payments  for loan  servicing  fees to Union  Bank and
financing  fees to UFS in the amount of $1,076,761  and $116,998,  respectively,
for the quarter  ended  March 31,  1997 as  compared  to $85,675  and  $350,000,
respectively,  for the  quarter  ended  March 31,  1996.  The  increase  in loan
servicing fees is directly related to the servicing of additional Eligible Loans
and the  decrease in  financing  fees is directly  related to reduced  financing
activity.   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 $219,421,  $121,900,  and $290,288,
respectively for the quarter ended March 31, 1997 as compared to $25,633, $6,252
and $12,752 respectively,  for the quarter ended March 31, 1996. The increase in
such fees is directly related to the issuance of additional Notes. Other general
and administrative expenses amounted to $626,989 for the quarter ended March 31,
1997 as compared to $88,460 for the quarter  ended March 31, 1996.  The increase
in  these  expenses  directly  relate  to the  increased  administration  of the
Company's  business.  Income tax expense amounted  to  $207,422  for the quarter
ended March 31, 1997 and an income tax benefit of $116,215 for the quarter ended
March 31,  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 $402,641 for the quarter
ended March 31, 1997 and incurred a net loss of $225,593  for the quarter  ended
March  31,  1996.  The  net  loss  for  the  quarter  ended  March  31,  1996 is
attributable to early startup costs incurred by the Company without  substantial
business operations.

RESULTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1996

        REVENUES.  Revenues  for the period ended  December  31, 1996  consisted
primarily of interest on the Eligible Loans subject to the  indebtedness  of the
Notes, which totaled $15,636,042. The amount of interest reported for the period
ended  December  31,  1996 was  derived  from  Eligible  Loans  in an  aggregate
principal  amount of  $491,046,915.  The  Company's  average net  investment  in
Eligible  Loans  during the period  ended  December  31, 1996 was  approximately
$235,985,000  (excluding  funds held by the Trustee)  and the average  effective
annual  interest  rate of interest  income on Eligible  Loans was  approximately
7.95%.  The Company  also  received  investment  income and other income for the
period  ended  December  31,  1996 in the  amounts of  $1,373,140  and  $17,449,
respectively.

        EXPENSES.  Expenses  for the period ended  December  31, 1996  consisted
primarily  of  interest  on  the  Company's   outstanding  Notes  which  totaled
$11,987,255.  The amount of interest  expense  reported  during the period ended
December 31, 1996 depended primarily upon the amount of Notes outstanding during
that period and the interest  rates on such Notes.  The  Company's  average debt
outstanding  was  approximately  $213,533,000  and the  average  annual  cost of
borrowings  was  approximately  5.61%.  The Company also made  payments for loan
servicing  fees  to  Union  Bank  and  financing  fees to UFS in the  amount  of
$2,255,564  and  $1,919,207,   respectively.  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 for the
period ended  December 31, 1996  amounted to $550,899,  $250,992,  and $438,584,
respectively.  Other  general and  administrative  expenses for the period ended
December 31, 1996 amounted to $437,956.  Income tax benefit for the period ended
December 31, 1996  amounted to $274,968.  The income tax benefit  results from a
carryforward of the Company's net operating loss which is discussed  below.  The
Company's net operating  loss resulted from  financing fees paid to UFS in 1996.
Management  presently  anticipates  that future  earnings  will be sufficient to
offset the net operating loss.

     NET LOSS. The Company  experienced a net loss for the period ended December
31,  1996 in the  amount  of  $538,858.  The net loss is  attributable  to costs
incurred by the Company for services provided by UFS in connection with issuance
of the Notes,  that are  recognized as an expense for the period ended  December
31,  1996.  The  Company  will incur  similar  costs in  connection  with future
financing  transactions  which may  result in a net loss for the period in which
the  transaction is  consummated.  The Company does not believe that such losses
will adversely affect its ability to pay principal or interest on the Notes when
due.

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 February 24, 1997 and March
4, 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.

RESULT OF OPERATIONS

        For the period ended  December 31, 1996 and the quarter  ended March 31,
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 June 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 quarter  ended March 31,
1997, cost increases to the Company were not materially impacted by inflation.



<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.

               On March 19, 1997, the Company held its first annual  sharholders
               meeting.  At the meeting,  all of the Company's  directors   were
               reelected.   The   Company's   directors   are  Messrs;   Dunlap,
               Butterfield, Page, Wilcox and Hoff.

ITEM 5.        OTHER INFORMATION.

               None

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K

               None



<PAGE>

                                   SIGNATURES


               Pursuant  to the  requirements  of  Section  13 or  15(d)  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
                                      Spephen F. Butterfield, President
                                      (Principal Executive Officer)



                                   By: /S/ RONALD W. PAGE
                                      Ronald W. Page, Vice President (Principal
                                      Financial and Accounting Officer)


                                   Date:  May 14, 1997







<TABLE> <S> <C>

<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               MAR-31-1997
<CASH>                                      45,437,427
<SECURITIES>                                         0
<RECEIVABLES>                              518,117,616
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                     0
<PP&E>                                               0
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                             574,181,828
<CURRENT-LIABILITIES>                                0
<BONDS>                                    571,500,000
                                0
                                          0
<COMMON>                                         1,000
<OTHER-SE>                                   (136,217)
<TOTAL-LIABILITY-AND-EQUITY>               574,181,828
<SALES>                                              0
<TOTAL-REVENUES>                            11,124,844
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                             2,452,357
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                           8,062,424
<INCOME-PRETAX>                                610,063
<INCOME-TAX>                                   207,422
<INCOME-CONTINUING>                            402,641
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   402,641
<EPS-PRIMARY>                                   402.64
<EPS-DILUTED>                                   402.64
        

</TABLE>

<TABLE> <S> <C>

<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                      65,402,585
<SECURITIES>                                         0
<RECEIVABLES>                              491,046,915
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                     0
<PP&E>                                               0
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                             568,171,986
<CURRENT-LIABILITIES>                                0
<BONDS>                                    566,000,000
                                0
                                          0
<COMMON>                                         1,000
<OTHER-SE>                                   (538,858)
<TOTAL-LIABILITY-AND-EQUITY>               568,171,986
<SALES>                                              0
<TOTAL-REVENUES>                            17,026,631
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                             5,853,202
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                          11,987,255
<INCOME-PRETAX>                              (813,826)
<INCOME-TAX>                                 (274,968)
<INCOME-CONTINUING>                          (538,858)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 (538,858)
<EPS-PRIMARY>                                 (538.86)
<EPS-DILUTED>                                 (538.86)
        

</TABLE>


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