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>