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 June 30, 1998
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 August 12, 1998
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1.Financial Statements
Balance Sheets as of June 30, 1998 and
December 31, 1997......................................................3
Statements of Operations for the three months ended and six months ended
June 30, 1998 and 1997.................................................4
Statements of Stockholder's Equity for the six months
ended June 30, 1998....................................................5
Statements of Cash Flows as of June 30, 1998 and
June 30, 1997..........................................................6
Note to Financial Statements.............................................7
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................................8
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings............................................ 12
Item 2.Changes in Securities.........................................12
Item 3.Defaults upon Senior Securities.............................. 12
Item 4.Submission of Matters to a Vote
of Security Holders.......................................... 12
Item 5.Other Information............................................ 12
Item 6.Exhibits and Reports on Form 8-K............................. 12
2
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASSETS JUNE 30, DECEMBER 31,
1998 1997
(Unaudited)
----------------- -----------------
Cash and cash equivalents $ 15,747,485 $39,542,382
Student loans receivable including net premiums, 547,249,130 525,005,954
net of allowance for loan losses
Accrued interest receivable 8,942,150 7,735,292
Debt issuance cost, net of accumulated amortization 2,748,742 2,997,516
Other assets 43,990 11,000
------------- ------------
Total assets $574,731,497 $575,292,144
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes payable $571,500,000 $571,500,000
Accrued interest payable 1,630,364 1,607,350
Income taxes payable 82,517 989,819
Other liabilities 616,833 436,748
------------ ------------
Total liabilities $573,829,714 $574,533,917
============ ============
Stockholder's equity:
Common stock, no par value.
Authorized 1,000 shares;
issued 1,000 shares $ 1,000 $ 1,000
Retained earnings 900,783 757,227
----------- -----------
Total stockholder's equity 901,783 758,227
------------ -----------
Total liabilities and
stockholder's equity $574,731,497 $575,292,144
============ ============
See accompanying note to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES - 1, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
--------------------------- ----------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Loan interest $11,016,122 $ 10,492,446 $21,738,803 $ 20,898,513
Investment interest 294,344 775,584 653,521 1,479,207
Other 35,055 23,676 46,282 38,830
---------- ---------- ---------- ---------
Total revenues 11,345,521 11,291,706 22,438,606 22,416,550
========== ========== ========== ==========
Expenses:
Interest on notes 8,282,127 8,208,438 16,529,763 16,270,861
Loan servicing 1,362,202 1,238,190 2,686,384 2,314,950
Administrative and financing fees to
parent 238,951 282,457 470,163 621,078
Trustee and broker fees 233,863 248,227 460,996 467,648
Amortization of debt issuance costs 124,387 120,222 248,773 242,121
Amortization of loan premiums 583,359 297,186 960,185 587,474
Other general and administrative 413,239 277,329 856,269 682,698
---------- ---------- ---------- ----------
Total expenses 11,238,128 10,672,049 22,212,533 21,186,830
---------- ---------- ---------- ----------
Income before income taxes 107,393 619,657 226,073 1,229,720
Income tax expense $ 39,198 210,684 82,517 418,105
-------- ------- ------ -------
Net Income $68,195 $ 408,973 $143,556 $ 811,615
------- ========= ======== =========
Net Income per common share $68.20 $ 408.97 $143.56 $ 811.62
====== ======== ======= ========
See accompanying note to financial statements.
</TABLE>
4
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
TOTAL
STOCKHOLDER'S
COMMON STOCK RETAINED EARNINGS EQUITY
------------ ----------------- -------------
Balances at December 31, 1997 $1,000 $757,227 $758,227
Net income, six months ended
June 30, 1998 (Unaudited) -- 143,556 143,556
------ -------- --------
Balance at June 30, 1998 (Unaudited) $1,000 $900,783 $901,783
====== ======== ========
See accompanying note to financial statements.
5
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
1998 1997
--------- ---------
Net Income $143,556 $811,615
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization 1,208,958 799,749
Provisions for loan losses 300,000 -
Deferred tax expense - 274,968
(Increase) decrease in accrued
interest receivable (1,206,858) 563,060
Increase in other assets (37,990) (4,263)
Increase in accrued interest payable 23,014 337,603
Increase (decrease) in other liabilities (727,217) 289,490
--------- --------
Net cash provided by (used in)
operating activities (291,538) 3,072,222
--------- ---------
Cash flows used in investing activities:
Purchase of student loans, including premiums (56,338,469) (41,008,761)
Proceeds from student loan principal sales 664,772 157,016
Increase of student loans due to
capitalized interest (20,484,902) (7,298,034)
Proceeds from student loan principal
payments and loan consolidations 52,655,237 35,916,193
---------- ----------
Net cash used in investing activities (23,503,360) (12,233,586)
----------- -----------
Cash flows provided by financing activities:
Cash paid to decease debt - (25,300,000)
Proceeds from issuance of notes payable - 30,800,000
Cash paid for debt issuance costs - (203,971)
------ ---------
Net cash provided by financing activities - 5,296,029
------ ---------
Net decrease in cash and cash equivalents (23,794,847) (3,865,335)
Cash and cash equivalents, beginning of period 39,542,382 65,402,585
Cash and cash equivalents, end of period 15,747,485 $61,537,250
=========== ===========
Supplemental disclosures: 15,867,488 $16,212,904
Interest paid 436,748 -
========= ===========
Income taxes paid
See accompanying note to financial statements.
6
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
NOTE TO FINANCIAL STATEMENTS (Unaudited)
June 30, 1998
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
The accompanying financial statements of Union Financial Services-1,
Inc. (the "Company") have been prepared pursuant to the rules and regulations of
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. The balance sheet at
December 31, 1997 is derived from the audited balance sheet as of that date. All
other financial statements are unaudited. 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.
7
<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. 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 June 30, 1998 compared to three months ended June 30, 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 $523,676 from $10,492,446 for the three
months ended June 30, 1997 to $11,016,122 for the three months ended June 30,
1998. The increase in revenues is attributable to the acquisition of additional
Eligible Loans by the Company during the period. The amount of interest reported
for the three months ended June 30, 1998 was derived from Eligible Loans in an
aggregate principal amount of approximately $540,243,000. The Company's average
net investment in Eligible Loans during the three months ended June 30, 1998 and
June 30, 1997 was approximately $531,851,000 and $500,151,000, respectively
(excluding funds held by the Trustee) and the average effective annual interest
rate of interest income on Eligible Loans during the three months ended June 30,
1998 and June 30, 1997 was approximately 8.29% and 8.39%, respectively. The
Company also received investment income and other income in the amounts of
$294,344 and $35,055, respectively, for the three months ended June 30, 1998 and
$775,584 and $23,676, respectively, for the three months ended June 30, 1997.
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 $73,689 from $8,208,438 for the three months
ended June 30, 1997 to $8,282,127 for the three months ended June 30, 1998. This
increase in expenses is attributable to the interest rates on all Notes
outstanding. For the three months ended June 30, 1998 and June 30, 1997, the
Company's average debt outstanding was approximately $571,500,000 and
$571,500,000, respectively, and the average annual cost of borrowings was
approximately 5.80% and 5.75%, respectively. The Company also made payments for
loan servicing fees to Union Bank and financing fees to UFS in the amount of
$1,362,202 and $238,951, respectively, for the three months ended June 30, 1998
as compared to $1,238,190 and $282,457 respectively, for the three months ended
June 30, 1997. The increase in loan servicing fees is directly related to the
8
<PAGE>
servicing of additional Eligible Loans and the decrease in financing fees is
directly related to reduced financing activity. Trustee and broker fees,
amortization of debt issuance costs and amortization of loan premiums amounted
to $233,863, $124,387, and $583,359, respectively, for the three months ended
June 30, 1998 as compared to $248,227, $120,222 and $297,186, respectively, for
the three months ended June 30, 1997. Other general and administrative expenses
amounted to $413,239 for the three months ended June 30, 1998 as compared to
$277,329 for the three months ended June 30, 1997. The increase in these
expenses directly relate to the increased activity of the Company's business.
Income tax expense amounted to $39,198 for the three months ended June
30, 1998 compared to $210,684 for the three months ended June 30, 1997. The
decrease in tax expense was a result of lower net income for the three months
ended June 30, 1998.
NET INCOME. The Company had net income of $68,195 for the three months
ended June 30, 1998 and $408,973 for the three months ended June 30, 1997. The
reduction in net income resulted from an increase in amortization of loan
purchase premiums, from an increase in the provision for loan loss reserves and
from a reduction in the interest rate spread between rates for interest revenue
and interest expense.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 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 approximately $840,290 from $20,898,513
for the six months ended June 30, 1997 to $21,738,803 for the six months ended
June 30, 1998. The increase in revenues is directly attributable to the
acquisition of additional Eligible Loans by the Company during the period. The
amount of interest reported for the six months ended June 30, 1998 was derived
from Eligible Loans in an aggregate principal amount of approximately
$540,213,392. The Company's average net investment in Eligible Loans during the
six months ended June 30, 1998 and June 30, 1997 was approximately $526,130,000
and $500,803,000, respectively (excluding funds held by the Trustee) and the
average effective annual interest rate of interest income on Eligible Loans
during the six months ended June 30, 1998 and June 30, 1997 was approximately
8.26% and 8.35%, respectively. The Company also earned investment income and
other income in the amounts of $653,521 and $46,282, respectively, for the six
months ended June 30, 1998 and $1,479,207 and $38,830, respectively, for the six
months ended June 30, 1997.
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 $258,902 from $16,270,861 for the six months ended June 30,
1997 to $16,529,763 for the six months ended June 30, 1998. This increase in
expenses is directly attributable to 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 5.79%
for the six months ended June 30, 1998. The Company also made payments for loan
servicing fees to Union Bank administration and financing fees to UFS in the
amount of $2,686,384 and $470,163, respectively, for the six months ended June
30, 1998 as compared to $2,314,950 and $621,078, respectively, for the six
months ended June 30, 1997. The increase in loan servicing fees is directly
related to the servicing of additional Eligible Loans and the decrease in
administration and financing fees is directly related to reduced financing
activity. Trustee and broker fees, amortization of debt issuance costs and
amortization of loan premiums amounted to $460,996, $248,773 and $960,185,
respectively, for the six months ended June 30, 1998 as compared to $467,648,
$242,121 and $587,474, respectively, for the six months ended June 30, 1997.
Other general and administrative expenses amounted to $856,269 for the six
months ended June 30, 1998 as compared to $682,698 for the six months ended June
30, 1997. The increase in these expenses directly relate to the increased
activity of the Company's business. Income tax expense amounted to $82,517 for
the six months ended June 30, 1998 as compared to $418,105 for the six months
ended June 30, 1997.
9
<PAGE>
NET INCOME/LOSS. The Company had net income of $143,556 for the six
months ended June 30, 1998 and as compared to $811,615 for the six months ended
June 30, 1997. The reduction in net income resulted from an increase in
amortization of loan purchase premiums, from an increase in the provision for
loan loss reserves and from a reduction in the interest rate spread between
rates for interest revenue and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Eligible Loans held by the Company are pledged as collateral for payment
of the Notes. Cash flows from payments on the Eligible Loans, together with
proceeds of reinvestment of the income earned on Eligible Loans, are intended to
provide cash sufficient to make all required payments of principal and interest
on each outstanding series of the Notes. If current revenues are insufficient to
pay principal and interest due on the Notes money in the Reserve Fund created
under the Indenture is available for payment of amounts due. The Trustee has
withdrawn money from the Reserve Fund for payment of interest on the Notes. The
Reserve Fund is to be maintained in an amount equal to 2% of the outstanding
principal balance of the Notes under the terms of the Indenture. At June 30,
1998, that amount was $10,804,868 and the balance in the Reserve Fund was
$3,938,381. The Indenture provides that any deficiency in the Reserve Fund is to
be restored from future revenues as funds become available. The Company believes
that revenues will be sufficient to restore the Reserve Fund and that cash flow
from Eligible Loans, together with proceeds of the reinvestment of income from
the Eligible Loans, will be sufficient to pay the principal and interest due on
the 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, 1997 and the six months ended June 30,
1998, 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.
YEAR 2000 COMPLIANCE.
Although the Company does not itself rely significantly on computer
programs, UNIPAC depends heavily on a computerized student loan servicing
system. To the extent this system is incapable of appropriately interpreting the
upcoming change in the century, some level of modification will be necessary to
become "Year 2000 compliant." UNIPAC has informed the Company that it has
completed major program changes to its student loan servicing mainframe system
and has assured the Company that its system has been modified to process dates
into the next century. However, UNIPAC is continuing to evaluate and upgrade its
operating system and all third party software/products and, to the extent these
systems, software or products are not "Year 2000 compliant," there can be no
assurance that potential systems interruptions would not have a material adverse
effect on the business of the Company.
10
<PAGE>
According to a comprehensive audit report prepared by the Department,
the Department is far behind schedule for becoming "Year 2000 compliant" and for
developing contingency plans in the event its computer systems should fail due
to a lack of "Year 2000 compliance." The Department's failure to become "Year
2000 compliant" could result in the delay of special allowance payments and
payments of interest benefits from the Department to the Company, and therefore,
there can be no assurance that such failure by the Department would not have a
material adverse effect on the business, financial condition and results of
operations of the Company.
11
<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.
By written consent in lieu of meeting dated April 2, 1998, the
Company's sole shareholder reelected Messrs: Dunlap, Butterfield,
Page, Wilcox and Hoff as directors of the Company.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
12
<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: August 13, 1998
<PAGE>
The following is a complete list of exhibits filed as part of this Form
10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601
of Regulation S-K.
- ---------------- -------------------------------------------------- -----------
Exhibit No. Description Location
- ---------------- -------------------------------------------------- -----------
3.1 Articles of Incorporation of the Company *
3.2 Bylaws of the Company *
4.1 Form of Second Amended and Restated Indenture **
4.2 Form of Supplemental Indenture **
10.1 Administrative Services Agreement, dated as of August 1, 1996, **
by and between Union Financial Services, Inc. and the Company
10.1.1 Amendment to Administrative Services Agreement, dated as of **
November 1, 1996, by and between Union Financial Services, Inc.
and the Company
10.2 Amended and Restated Servicing Agreement, dated as of June 19,
** 1996, by and between Union Bank and Trust Company and the
Company
27.1 Financial Data Schedule ***
- ---------------
* Incorporated by reference herein to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
** Incorporated by reference herein to the Company's Registration Statement
on Form S-3 (File No. 333-28551).
*** Filed herewith.
REPORTS ON FORM 8-K
The Company has not filed any reports on Form 8-K during the
three months covered by this report.
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,747,485
<SECURITIES> 0
<RECEIVABLES> 547,459,713
<ALLOWANCES> (210,583)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 574,731,497
<CURRENT-LIABILITIES> 2,329,714
<BONDS> 571,500,000
0
0
<COMMON> 1,000
<OTHER-SE> 900,783
<TOTAL-LIABILITY-AND-EQUITY> 574,731,497
<SALES> 0
<TOTAL-REVENUES> 22,438,606
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,682,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,529,763
<INCOME-PRETAX> 226,073
<INCOME-TAX> 82,517
<INCOME-CONTINUING> 143,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,556
<EPS-PRIMARY> 143.56
<EPS-DILUTED> 143.56
</TABLE>
