UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .............. to ..............
Commission file number 333-08929
------------------------------
UNION FINANCIAL SERVICES-1, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
86-0817755
(I.R.S. Employer 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 ___
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS
PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT ON DECEMBER 31, 1997: NONE
THE NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS
OF MARCH 16, 1998 WAS 1,000.
-----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document is incorporated in Parts I and IV of this
report by reference: The Registrant's Registration Statement on Form S-3 (File
No. 333-28551), as amended and supplemented, as filed with the Securities and
Exchange Commission on June 5, July 21, and October 14, 1997.
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 15
ITEM 3. LEGAL PROCEEDINGS.............................................. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 16
ITEM 6. SELECTED FINANCIAL DATA........................................ 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................. 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 21
ITEM 11. EXECUTIVE COMPENSATION......................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K....................................................... 24
SIGNATURES
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
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 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").
BUSINESS OF COMPANY
RECENT REGISTRATION. A registration statement on Form S-3,
Registration No. 333-28551 (the "Registration Statement"), was filed with the
Securities and Exchange Commission (the "SEC") by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), for $500,000,000 of
notes (the "Offered Notes"), and was declared effective by order of the SEC in
October 1997. For a more detailed discussion of the terms of the Offered Notes,
please see the caption entitled "DESCRIPTION OF THE NOTES" in the Company's base
prospectus as set forth in the Registration Statement (the "Base Prospectus").
ISSUANCE OF PRIOR NOTES AND PRIVATE NOTES. Prior to the
registration of the Offered Notes under the Securities Act, the Company issued
Taxable Student Loan Asset-Backed Notes, in the aggregate principal amount of
$346,700,000, pursuant to a registration statement on Form S-3 which was
declared effective in October 1996 (the "Prior Notes"). The Prior Notes included
in the Series 1996C (the "Series 1996C Notes") consisting of (i) Senior Treasury
Rate Class A-5 Notes in the principal amount of $225,000,000 (the "Class A-5
Notes"), (ii) Senior Auction Rate Class A-6 Notes in the principal amount of
$75,500,000 (the "Class A-6 Notes") and (iii) Subordinate LIBOR Rate Class B-3
Notes in the principal amount of $15,600,000 (the "Class B-3 Notes"); and the
Series 1997A (the "Series 1997A Notes") consisting of Subordinated Class 1997B-4
LIBOR Rate Notes in the principal amount of $30,600,000 (the "Class B-4 Notes").
In March and June of 1996, the Company issued Taxable Student Loan Asset-Backed
Notes in two series in the aggregate principal amount of $249,900,000 in
transactions exempt from the registration requirements of the Securities Act
(the "Private Notes"). The Private Notes were designated as (i) the Taxable
Student Loan Asset-Backed Notes, Series 1996A (the "Series 1996A Notes"),
consisting of $48,300,000 of its Senior Auction Rate Class A-1 Notes (the "Class
A-1 Notes"), $48,300,000 of its Senior Auction Rate Class A-2 Notes (the "Class
A-2 Notes") and $11,100,000 of its Subordinate LIBOR Rate Class B Notes (the
"Class B-1 Notes"), and (ii) the Taxable Student Loan Asset-Backed Notes, Series
1996B (the "Series 1996B Notes"), consisting of $73,700,000 of its Senior
Auction Rate Class A-3 Notes (the "Class A-3 Notes"), $54,300,000 of its Senior
Auction Rate Class A-4 Notes (the "Class A-4 Notes") and $14,200,000 of its
Subordinate LIBOR Rate Class B-2 Notes (the "Class B-2 Notes"). The Class A-1,
Class A-2, Class A-3 and Class A-4 Notes are collectively referred to herein as
the "Private Class A Notes," and the Class B-1 and Class B-2 Notes are
collectively referred to herein as the "Private Class B Notes." The Prior Notes,
the
1
<PAGE>
Private Notes, the Offered Notes and any additional notes that may be issued in
the future are referred to collectively herein as the "Notes." The Notes are and
will be secured by the same pool of Eligible Loans to the extent described in
the Indenture.
TRUST ESTATE. The Notes are secured by a revolving pool of
Eligible Loans and certain other property held for the benefit of the registered
owners of the Notes (the "Trust Estate"). For a more detailed discussion of the
Trust Estate, please see the captions entitled "SUMMARY OF THE OFFERING--Trust
Estate" and "SECURITY AND SOURCES OF PAYMENT FOR THE NOTES" in the Company's
Base Prospectus.
SUBORDINATION OF VARIOUS CLASSES. The Offered Notes and the Prior
Notes that are designated as Class B Notes (the "Class B Notes") and the Private
Notes that have been designated as Private Class B Notes are subordinated in
certain respects to the Offered Notes and the Prior Notes that are designated as
Class A Notes and the Private Notes that have been designated as Private Class A
Notes, and the Notes of any series that are designated as Class C Notes (the
"Class C Notes") are subordinated in certain respects to the Offered Notes and
the Prior Notes that are designated as Class A Notes and Class B Notes and the
Private Notes that have been designated as Private Class A Notes and Private
Class B Notes, as more fully described in the Base Prospectus. Currently there
are no Class C Notes.
NOTES ISSUED. The following table summarizes the various series
and classes of Notes issued by the Company since its inception.
- --------------------------------------------------------------------------------
NOTES ISSUED BY THE COMPANY
Series Class Date Issued Maturity Dates Original Principal Amount
1996A A-1 March 8, 1996 July 1, 2014 $ 48,300,000
1996A A-2 March 8, 1996 July 1, 2014 48,300,000
1996A B-1(*) March 8, 1996 July 1, 2014 11,100,000
1996B A-3 June 18, 1996 July 1, 2014 73,700,000
1996B A-4 June 18, 1996 July 1, 2014 54,300,000
1996B B-2(*) June 18, 1996 July 1, 2014 14,200,000
1996C A-5 October 31, 1996 July 1, 2005 225,000,000
1996C A-6 October 31, 1996 July 1, 2014 75,500,000
1996C B-3 October 31, 1996 July 1, 2025 15,600,000
1997A B-4 March 20, 1997 July 1, 2030 30,800,000
----------
$ 596,800,000
- ------------
(*) These Notes were defeased with the proceeds of the Series 1997A Notes and as
of March 20, 1997 are no longer deemed to be outstanding under the Indenture.
- --------------------------------------------------------------------------------
PURCHASE OF ELIGIBLE LOANS. The Company has purchased and expects
to purchase Eligible Loans from Union Bank pursuant to the terms and conditions
stated in student loan purchase agreements (such agreements, together with
similar agreements entered into by other eligible lenders, each a "Student Loan
Purchase Agreement"). The Company will only acquire Eligible Loans from Union
Bank or from other eligible lenders as defined under the Higher Education Act
("Eligible Lenders" and, together with Union Bank,
2
<PAGE>
each, a "Seller" and collectively, the "Sellers"). Eligible Loans consist of
federal loans originated pursuant to the Federal Family Education Loan Program
(defined below).
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM. The Higher Education
Act provides for a program of (a) direct federal insurance of student loans
("FISLP") and (b) reinsurance of student loans guaranteed or insured by a state
agency or private non-profit corporation (collectively, "Federal Family
Education Loans," with such program referred to herein as the "Federal Family
Education Loan Program"). Several types of loans are currently authorized as
Federal Family Education Loans pursuant to the Federal Family Education Loan
Program. These include: (a) loans to students with respect to which the federal
government makes interest payments available to reduce student interest cost
during periods of enrollment ("Subsidized Federal Stafford Loans"); (b) loans to
students with respect to which the federal government does not make such
interest payments ("Unsubsidized Federal Stafford Loans" and, collectively with
Subsidized Federal Stafford Loans, "Federal Stafford Loans"); (c) supplemental
loans to parents of dependent students ("Federal PLUS Loans"); and (d) loans to
fund payment and consolidation of certain of the borrower's obligations
("Federal Consolidation Loans"). Prior to July 1, 1994, the Federal Family
Education Loan Program also included a separate type of loan to graduate and
professional students and independent undergraduate students and, under certain
circumstances, dependent undergraduate students, to supplement their Stafford
Loans ("Federal Supplemental Loans for Students" or "Federal SLS Loans"). For a
more detailed discussion of the Federal Family Education Loan Program, please
see the caption entitled "DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN
PROGRAM" in the Company's Base Prospectus.
GUARANTEE AGENCIES. Each Eligible Loan is guaranteed as to the
payment of principal and interest by a state or private non-profit guarantor
(each, a "Guarantee Agency"). Eligible Loans originated prior to October 1, 1993
are fully guaranteed as to the principal amount of such loans and accrued
interest by the applicable Guarantee Agency. Eligible Loans originated on or
after October 1, 1993 are guaranteed as to 98% of the principal amount of such
loans and accrued interest by the applicable Guarantee Agency. Each of the
Guarantee Agencies has a reinsurance contract with the Department of Education
(the "Department"). The Department reimburses the Guarantee Agencies for claims
paid by the Guarantee Agencies. The amount of such reinsurance payment is
calculated annually and is subject to reduction based upon the annual claims
rate of the Guarantee Agency to the Department. Regardless of the level of
reinsurance that the applicable Guarantee Agency receives from the Department,
the Trustee will continue to be entitled to reimbursement for the applicable
guaranteed portion of an Eligible Loan (either 98% or 100%, as applicable) from
such Guarantee Agency. The obligations of each of the Guarantee Agencies to the
holders of Eligible Loans reinsured by the Department (the "Federal Loans"),
such as the Trustee, are payable from the general funds available to such
Guarantee Agency, including cash on deposit therewith, reimbursements received
from the Department and reserve funds maintained by such Guarantee Agency as
required by the Higher Education Act. The Higher Education Act provides that,
subject to the provisions thereof including the proper origination and servicing
of Eligible Loans, the full faith and credit of the United States is pledged to
the reinsurance payments by the Department to the Guarantee Agencies. In
addition, the Higher Education Act provides that if a Guarantee Agency is unable
to meet its obligations to holders of Federal Loans, such as the Trustee, then
the holders of Federal Loans may submit guarantee claims directly to the
Department and the Department is required to pay to the holders the full
insurance obligation of such Guarantee Agency until such time as the obligations
are transferred by the Department to a new Guarantee Agency capable of meeting
such obligations or until a qualified successor Guarantee Agency assumes such
obligations. Certain delays in receiving reimbursement could occur if a
Guarantee Agency fails to meet its obligations. In addition, failure to properly
originate or service an Eligible Loan can cause an Eligible Loan to lose its
guarantee. For a more detailed discussion of the Guarantee Agencies, please see
the caption entitled "DESCRIPTION OF
3
<PAGE>
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM--Federal Insurance and Reimbursement
of Guarantee Agencies" in the Company's Base Prospectus.
SERVICING OF ELIGIBLE LOANS. Union Bank acts as servicer (the
"Servicer") of the Eligible Loans in accordance with an Amended and Restated
Servicing Agreement, dated as of June 19, 1996 (the "Servicing Agreement").
UNIPAC Service Corporation, a Nebraska corporation ("UNIPAC"), acts as
subservicer (the "Subservicer") and custodian (the "Custodian") of the Eligible
Loans in accordance with a Subservicing Agreement (the "Subservicing Agreement")
between Union Bank and UNIPAC. The Company may appoint other entities to act as
a servicer or subservicer if approved by the rating agencies which rate the
Notes. UNIPAC began its education loan servicing operations on January 1, 1978,
and provides education loan servicing, time sharing, administration and other
services to lenders, secondary market purchasers and Guarantee Agencies
throughout the United States. UNIPAC is a privately held corporation, owned
primarily by Union Bank, with a minority ownership interest held by Packers
Service Group, Inc., Lincoln, Nebraska. UNIPAC's corporate headquarters is
located in Aurora, Colorado.
INFORMATION ON THE NOTES AND ELIGIBLE LOANS
In accordance with the Indenture, the Company is required to
provide information periodically to the Trustee regarding the Notes and Eligible
Loans, which information is then forwarded to registered holders of the Notes.
The following unaudited information was reported to registered holders of the
Notes on March 16, 1998 and represents figures as of the last business day of
February 1998. Although the information set forth below has not been
independently verified by third parties, the Company believes it to be accurate
to the best of its knowledge. Undefined capitalized terms used in the Tables and
narrative herein have the meanings set forth in the Company's Registration
Statement.
The principal balance of Eligible Loans as of February 28, 1998
was $509,345,400.99. Set forth in Table A below is the aggregate outstanding
principal amount of Notes of each Class as of February 28, 1998.
4
<PAGE>
- ----------------------------------------------------------------
TABLE A
OUTSTANDING AGGREGATE PRINCIPAL AMOUNT PER CLASS
(February 28, 1998)
Class Principal outstanding*
----- ---------------------
A-1 $48,300,000
A-2 48,300,000
A-3 73,700,000
A-4 54,300,000
A-5 225,000,000
A-6 75,500,000
B-1 --
B-2 --
B-3 15,600,000
B-4 30,800,000
- -----------------
* The principal amounts reflect the issuance of the
Series 1997A Notes in the amount of $30,800,000, the
proceeds of which were used to defease the Class B-1 Notes
and Class B-2 Notes.
- ----------------------------------------------------------------
Set forth in Table B below is the interest rate for the
applicable Class of Notes, indicating whether such interest rate is calculated
based on the Net Loan Rate or based on the applicable Auction Rate (for each
Class of the Auction Rate Notes only), LIBOR Rate (for each class of the LIBOR
Rate Notes only), or Treasury Rate (for each Class of the Treasury Rate Notes
only), as the case may be, and specifying what each such interest would have
been using the alternate basis for such calculation.
5
<PAGE>
- -------------------------------------------------------------------
TABLE B
APPLICABLE INTEREST RATE PER CLASS
(February 1998)
CLASS CALCULATION METHOD
AUCTION RATE
A-1 5.5928%
A-2 5.6036%
A-3 5.6001%
A-4 5.5616%
A-6 5.5766%
TREASURY RATE*
A-5 6.0689%
LIBOR RATE*
B-3 6.1050%
B-4 5.9814%
- --------------------
(*) Treasury Bill Rate based on average rate and LIBOR Rate based on the
Smith Barney stated rate.
- -------------------------------------------------------------------
Set forth in Table C below is the number and principal amount of
financed student loans as of the close of business on the last day of February
1998 that are (i) 30 to 60 days delinquent, (ii) 61 to 90 days delinquent, (iii)
91 to 120 days delinquent, (iv) more than 120 days delinquent and (v) for which
claims have been filed with the appropriate Guarantee Agency and which are
awaiting payment.
- ----------------------------------------------------------------
TABLE C
DELINQUENCY RATES
(February 28, 1998)
Delinquencies
30 - 60 Days $20,267,525
61 - 90 Days 12,322,672
91 - 120 Days 5,572,883
Greater than 120 Days 5,941,820
Claims outstanding 5,104,829
- ----------------------------------------------------------------
Set forth in Table D below is the Program Equity in the Trust
Estate and the outstanding principal amount of the Notes as of February 28,
1998.
6
<PAGE>
- ----------------------------------------------------------------
TABLE D
PROGRAM EQUITY
(February 28, 1998)
ASSETS
Cash and Cash Equivalents $ 8,523,353
Student Loan Receivable 509,345,401
Debt Service Reserve 7,693,031
Recycling Account 36,938,765
---------------
Total 562,500,550
LIABILITIES
Series 1996 A-1 $ 48,300,000
Series 1996 A-2 48,300,000
Series 1996 A-3 73,700,000
Series 1996 A-4 54,300,000
Series 1996 A-5 225,000,000
Series 1996 A-6 75,500,000
Series 1996 B-3 15,600,000
Series 1997 B-4 30,800,000
-------------
Total $571,500,000
Program Equity $(8,999,450)
Parity Ratio 98.4%
Senior Parity Ratio 107.1%
- ----------------------------------------------------------------
CHARACTERISTICS OF ELIGIBLE LOANS.
Set forth in the tables below are the characteristics of Eligible
Loans held in the Trust Estate on February 28, 1998. Although the unaudited
information set forth below has not been independently verified by third
parties, the Company believes it to be accurate to the best of its knowledge.
7
<PAGE>
CHARACTERISTICS OF THE
ELIGIBLE LOANS
- --------------------------------------------------------------------------------
TABLE E
COMPOSITION OF THE ELIGIBLE LOANS
(February 28, 1998)
Aggregate Outstanding Principal Balance......................... $509,345,400
Number of Borrowers............................................. 67,916
Average Outstanding Principal Balance Per Borrower.............. 7,500
Number of Loans................................................. 145,648
Average Outstanding Principal Balance Per Loan.................. 3,497
Approximate Weighted Average Remaining Term (months) (does not
include school, grace, deferment or forbearance)................ 102
Weighted Average Borrower Interest Rate......................... 8.09%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE F
DISTRIBUTION OF THE ELIGIBLE LOANS BY LOAN TYPE
(February 28, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
Consolidated 10,867 $144,884,157 28.45%
PLUS 786 1,834,743 .36
SLS 214 628,222 .12
Stafford-Subsidized 107,898 256,796,005 50.42
Stafford-Unsubsidized 25,883 105,202,273 20.65
------ ----------- -----
Total 145,648 $509,345,400 100.00%
======= ============= ======
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
TABLE G
DISTRIBUTION OF THE ELIGIBLE LOANS BY INTEREST RATE
(February 28, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range Loans Balance Balance
Less than 7.50% 5,622 $41,243,522 8.10%
7.50% to 8.49% 131,523 390,989,274 76.76
8.50% to 9.49% 8,269 74,442,093 14.62
9.50% or greater 234 2,670,511 .52
--- --------- ---
Total 145,648 $509,345,400 100.00%
======= ============ ======
- -----------------------------------------------------------------------------
-------------------------------------------------------------------
TABLE H
DISTRIBUTION OF THE ELIGIBLE LOANS BY SCHOOL TYPES
(February 28, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
2-Year 10,506 $25,545,335 5.02%
4-Year 123,312 433,370,460 85.08
Proprietary 9,579 29,072,471 5.71
Consolidation 2,251 21,357,134 4.19
----- ---------- ----
Total 145,648 $509,345,400 100.00%
======= ============ ======
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
TABLE I
DISTRIBUTION OF THE ELIGIBLE LOANS BY BORROWER PAYMENT STATUS
(February 28, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
Borrower Payment Status Loans Balance Balance
Claim 1,639 $5,104,829 1.00%
Deferment 11,461 38,987,218 7.65
Grace 5,823 23,461,782 4.61
School 26,596 103,752,296 20.37
Repayment 100,129 338,039,275 66.37
------- ----------- -----
Total 145,648 $509,345,400 100.00%
======= ============ ======
- ------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
TABLE J
GEOGRAPHIC DISTRIBUTION OF THE ELIGIBLE LOANS
(February 27, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
Location(1) Borrowers Balance Balance
Alabama 12,797 69,503,744 13.65%
Alaska 119 1,201,670 0.24
Arizona 5,427 39,053,164 7.67
Arkansas 216 1,838,754 0.36
California 3,462 27,649,282 5.43
Colorado 3,031 29,223,726 5.74
Connecticut 116 1,041,163 0.20
Delaware 29 371,353 0.07
District of Columbia 100 784,943 0.15
Florida 1,568 10,961,667 2.15
Foreign Country 109 1,454,822 0.29
Georgia 1,486 9,675,301 1.90
Guam 4 22,240 0.00
Hawaii 177 1,382,692 0.27
Idaho 131 1,110,738 0.22
Illinois 1,870 17,956,461 3.53
Indiana 379 3,720,728 0.73
Iowa 10,163 80,566,878 15.82
Kansas 4,854 40,383,459 7.93
Kentucky 274 2,615,359 0.51
Louisiana 469 2,835,817 0.56
Maine 57 840,676 0.17
Maryland 314 2,303,177 0.45
Massachusetts 261 3,340,360 0.66
Michigan 620 6,356,677 1.25
Military (Atlantic) 4 19,302 0.00
Military (Europe) 97 612,446 0.12
Military (Pacific) 23 175,676 0.03
Minnesota 5,368 31,116,834 6.11
Mississippi 331 2,154,177 0.42
Missouri 1,171 10,246,089 2.01
Montana 121 1,088,611 0.21
Nebraska 567 4,326,410 0.85
Nevada 1,610 9,922,939 1.95
New Hampshire 55 482,990 0.09
New Jersey 260 2,804,191 0.55
New Mexico 535 4,005,771 0.79
New York 578 6,816,438 1.34
North Carolina 478 3,874,985 0.76
North Dakota 215 1,322,861 0.26
Ohio 548 6,447,064 1.27
Oklahoma 1,451 10,346,457 2.03
Oregon 326 2,435,856 0.48
Pennsylvania 444 6,114,602 1.20
Puerto Rico 36 268,144 0.05
Rhode Island 37 361,167 0.07
South Carolina 229 2,102,973 0.41
South Dakota 265 2,082,083 0.41
Tennessee 844 6,221,022 1.22
Texas 1,912 15,588,780 3.06
Utah 216 1,804,641 0.35
Vermont 22 401,904 0.08
Virgin Islands 5 6,307 0.00
Virginia 493 3,918,121 0.77
Washington 573 5,178,168 1.02
West Virginia 127 1,373,237 0.27
Wisconsin 810 8,540,553 1.68
Wyoming 132 989,751 0.19
--- ------- ----
Total 67,916 509,345,400 100.00%
====== =========== =======
- ---------------
(1) Based on the permanent billing addresses of the borrowers of the
Eligible Loans shown on the Servicer's records.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
TABLE K
DISTRIBUTION OF THE ELIGIBLE LOANS BY DATE OF DISBURSEMENT
(February 28, 1998)
Outstanding Percent of Loans
Disbursement Number of Principal by Outstanding
Date Loans Balance Balance
Pre 10/01/93 68,869 $146,414,547 28.75%
Post 10/01/93 76,779 362,930,853 71.25
------ ----------- -----
Total 145,648 $509,345,400 100.00%
======= =========== ======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE L
DISTRIBUTION OF THE ELIGIBLE LOANS BY GUARANTEE AGENCY
(February 28, 1998)
Percent
Outstanding of Loans by
Number of Principal Outstanding
Guarantee Agencies(1) Loans Balance Balance
------------------ ----- ------- -------
AELP 8,244 $31,420,411 6.17%
ALAB 26 41,694 .00
ICSAC 42,929 136,619,298 26.82
KHEAA 42,452 97,290,333 19.10
NORTHSTAR 7,385 12,729,291 2.50
NSLP 22,850 146,891,708 28.84
OGSLP 3,003 8,181,859 1.61
USAF 15,580 60,275,743 11.83
U.S. Dept. of Education 787 645,935 .13
COLO 2,382 15,229,832 3.00
TGAI 10 19,296 .00
------- ----------- ------
Total 145,648 $509,345,400 100.00%
======= ============ =======
(1) As defined herein and in the Company's Prospectus Supplement.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
TABLE M
DISTRIBUTION OF THE ELIGIBLE LOANS BY RANGE OF PRINCIPAL BALANCE
(February 28, 1998)
Percent
Outstanding of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
Less than $1,000 6,196 $2,664,014 0.52%
$1,000-$1,999 7,639 11,445,077 2.25
$2,000-$2,999 10,294 26,024,245 5.11
$3,000-$3,999 6,411 22,251,307 4.37
$4,000-$4,999 4,799 21,503,249 4.22
$5,000-$5,999 5,070 27,693,493 5.44
$6,000-$6,999 3,984 25,705,195 5.05
$7,000-$7,999 3,188 23,310,302 4.58
$8,000-$8,999 2,752 23,314,090 4.58
$9,000-$9,999 2,160 20,458,456 4.02
$10,000-$10,999 2,036 21,417,083 4.20
$11,000-$11,999 1,960 22,476,003 4.41
$12,000-$12,999 1,272 15,868,500 3.12
$13,000-$13,999 1,106 14,912,285 2.92
$14,000-$14,999 1,030 14,934,254 2.93
$15,000 or greater 8,089 214,367,847 42.28
----- ----------- -----
Total 67,916 $ 509,345,400 100%
====== =========== ====
- --------------------------------------------------------------------------------
13
<PAGE>
COMPETITION
The Company experiences competition from other private companies,
non-profit companies, trusts and financial firms issuing debt securities the
proceeds of which are used to purchase pools of student loans. Many of these
entities have greater financial, technical, management and other resources than
does the Company. The Company believes that key factors in its ability to
compete will be its ability to purchase Eligible Loans and its ability to
structure notes or other securities in a manner which will be competitive with
securities offered by competitors.
EMPLOYEES
The Company does not employ any employees. The Company and UFS
have entered into an Administrative Services Agreement which is more fully
described in ITEM 13 hereof. The Company does not plan to hire any employees in
the next fiscal year.
FORWARD LOOKING STATEMENTS
Statements regarding the Company's expectations as to its ability
to purchase Eligible 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. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. In addition to matters
affecting the economy and the asset-backed securities industry generally,
factors which could cause actual results to differ from expectations include the
following:
NATURE OF THE NOTES. The Company is a special purpose
corporation and the Notes represent obligations solely of the Company.
The Notes are not insured or guaranteed by any government agency or
instrumentality, by any affiliate of the Company, by any insurance
company or by any other person or entity. The Company will have no
significant assets other than its interest in the Eligible Loans and the
other property granted to the Trustee for the benefit of the registered
owners of the Notes. Payments on the Notes will depend solely on the
amount and timing of payments and collections in respect of the Eligible
Loans, interest paid or earnings on the various accounts established
pursuant to the Indenture, the payment priority of Notes previously
issued and any Additional Notes to be issued in the future, and amounts
on deposit with the Trustee. There will be no additional recourse to the
Company or any other person if such proceeds are insufficient. As a
result, registered owners of Notes must depend on the cash flow with
respect to the Eligible Loans and funds on deposit with the Trustee for
payment of principal of and interest on the Notes.
FAILURE TO COMPLY WITH LOAN ORIGINATION AND SERVICING
PROCEDURES FOR ELIGIBLE LOANS. The Higher Education Act, including the
implementing regulations thereunder, require lenders and their assignees
making and servicing Eligible Loans and guarantors guaranteeing Eligible
Loans to follow specified procedures, including certain due diligence
procedures, to ensure that the Eligible Loans are properly made and
disbursed to, and repaid on a timely basis by or on behalf of,
borrowers. The Servicer has agreed pursuant to the Servicing Agreement
to perform (or provide for a third party servicer to perform) servicing
and collection procedures on behalf of the Company. However, failure to
follow these procedures or failure of any Seller or any other originator
of the Eligible Loans to follow procedures relating to the origination
of any Eligible Loans may result in the Department's refusal to make
reinsurance payments to the Guarantee Agencies or to make special
allowance payments to the Trustee with respect to such Eligible Loans or
in the Guarantee Agencies' refusal to honor their Guarantee Agreements
with the Trustee with respect to such Eligible Loans. Failure of the
Guarantee Agencies to receive reinsurance payments from the Department
could
14
<PAGE>
adversely affect the Guarantee Agencies' ability or legal obligation to
make payments under the Guarantee Agreements ("Guarantee Payments") to
the Trustee. Loss of any such Guarantee Payments, Special Allowance
Payments or Federal Interest Subsidy Payments with respect to Eligible
Loans, could adversely affect the amount of revenues and the Company's
ability to pay principal and interest on the Notes.
RELIANCE UPON SELLERS. The Company expects to acquire
additional Eligible Loans from the Sellers from time to time, all
pursuant to the Student Loan Purchase Agreements under which each Seller
will sell to the Company Eligible Loans which comply with certain
representations and warranties with respect to each Eligible Loan and
certain overall portfolio characteristics in connection with such
acquisitions. No assurance can be given that the Company will be able to
acquire Eligible Loans from Sellers on terms or conditions acceptable to
the Company.
YEAR 2000 COMPLIANCE.
Although the Company does not itself rely significantly on
computer programs, the Subservicer 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." The Subservicer 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. Given the Subservicer's
determination that its mainframe system is "Year 2000 compliant," the Company
does not anticipate that "Year 2000" issues will have any material adverse
impact on the Company's business, financial condition or results of operations.
However, the Subservicer 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.
CHANGES IN LEGISLATION.
On July 1, 1998, an amendment to the Higher Education Act will
take effect that is expected to reduce the amount of interest payable on
Eligible Loans originated after that date. Under the current formula for
calculating Eligible Loan interest rates, lenders receive the bond-equivalent of
the 3 month Treasury Bill plus 2.5% for in-school loans and 3.1% on loans in
repayment. Loans are reset annually for borrowers, with an 8.25% cap on the
borrower's rate. For Eligible Loans originated after July 1, 1998, lenders will
receive the bond-equivalent yield of Treasury securities with a maturity
comparable to that of Eligible Loans as established by the Secretary of
Education, plus 1%. Several lenders have indicated that they will not continue
to originate Eligible Loans once the new interest rate takes effect. Any
reduction in the originations of Eligible Loans could have an adverse impact on
the ability of the Company to purchase Eligible Loans in the future. There can
be no assurance that the Higher Education Act or other relevant federal or state
laws, rules and regulations and the programs implemented thereunder will not be
amended or modified in the future in a matter that will adversely impact the
programs described herein and the loans made thereunder, including the Eligible
Loans, or the Guarantee Agencies.
For a description of additional risks which may affect the
Company's operations, please see the caption entitled "RISK FACTORS" in the
Company's Base Prospectus.
ITEM 2. PROPERTIES
The Company has no physical properties.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company is a wholly owned subsidiary of UFS. UFS is a
privately held corporation and there is no market for its common stock. The
minority owners of UFS include certain employees of Union Bank and certain
relatives of such employees. The minority owners of UFS also indirectly own
Union Bank.
As of December 31, 1997, UFS was the only record holder of the
Company's outstanding shares of common stock. The Company has not paid dividends
to date and does not intend to pay dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected financial
data as of and for the period ended December 31, 1997, which was derived from
the financial statements of the Company which have been audited by KPMG Peat
Marwick LLP. The information below should be read in conjunction with the
Financial Statements and notes thereto appearing elsewhere in this document.
16
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES-1, INC.
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------
Period Ended Year Ended
STATEMENT OF INCOME DATA: December 31, December 31,
1996 (1) 1997
Revenues:
<S> <C> <C>
Loan interest................................. $ 15,636,042 $42,757,006
Investment interest........................... 1,373,140 2,268,878
Other......................................... 17,449 195,084
----------- -----------
Total revenues......................... 17,026,631 45,220,968
----------- -----------
Expenses:
Interest on Notes............................. 11,987,255 32,782,396
Loan Servicing (2)............................ 2,255,564 4,917,318
Financing fees to parent (2).................. 1,919,207 423,112
Trustee and broker fees....................... 550,899 915,380
Amortization of debt issuance costs........... 250,992 494,106
Amortization of loan premiums................. 438,584 1,441,526
Other general and administrative (2).......... 437,956 2,240,328
------------ -----------
Total expenses 17,840,457 43,214,166
Income (loss) before income taxes...... (813,826) 2,006,802
Income tax expense (benefit) (2)...................... 274,968 710,717
------------ -----------
Net income (loss) ..................... $ (538,858) $ 1,296,085
============= ==========
Per common share:
Income (loss) from continuing operations...... $ (538.86) $ 1,296.09
Net income (loss)............................. $ (538.86) $ 1,296.09
Shares used to compute per share amounts.............. 1,000 1,000
BALANCE SHEET DATA:
Cash and cash equivalents (2)......................... $ 65,402,585 39,542,382
Student loans receivable, including premiums (2)...... 491,046,915 525,005,954
Total Assets.......................................... 568,171,986 575,292,144
Notes payable (2)..................................... 566,000,000 571,500,000
Total liabilities..................................... 568,709,844 574,533,917
Shareholders' equity (deficit)........................ (537,858) 758,227
(1) The Company was incorporated on February 28, 1996. Accordingly, selected
financial data for prior fiscal years is not available.
(2) See ITEM 14 for the Company's audited financial statements and
accompanying notes.
- --------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the information set forth under the caption entitled "ITEM
6.--SELECTED FINANCIAL DATA" and the financial statements and notes thereto
included elsewhere herein. Moreover, any forward looking statements should be
read in conjunction with information set forth in "ITEM 1 -- Forward Looking
Statements."
GENERAL
The Company was formed on February 28, 1996 solely for the
purpose of acquiring, from time to time, Eligible Loans and issuing notes, such
as the Notes, secured by such Eligible Loans. Since its inception, the Company
has issued four (4) series of Notes consisting of ten (10) classes. The Notes
shown in the audited financial statements of the Company represent limited
obligations of the Company secured solely by the Eligible Loans and other assets
in the Trust Estate.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD ENDED DECEMBER 31, 1996
REVENUES. Revenues for the year ended December 31, 1997
consisted primarily of interest on the Eligible Loans subject to the
indebtedness of the Notes, which totaled $42,757,006, compared to $15,636,042
for the period ended December 31, 1996, an increase of 173%. The amount of
interest reported for the year ended December 31, 1997 was derived from Eligible
Loans in an aggregate principal amount of $525,005,954, compared to $491,046,915
as of December 31, 1996. The Company's average net investment in Eligible Loans
during the year ended December 31, 1997 was approximately $509,142,849
(excluding funds held by the Trustee), compared to $235,985,000 for the period
ended December 31, 1996, and the average effective annual interest rate of
interest income on Eligible Loans was approximately 8.40% for the year ended
December 31, 1997, compared to 7.95% for the period ended December 31, 1996. The
Company also received investment income and other income for the year ended
December 31, 1997 in the amounts of $2,268,878 and $195,084, respectively,
compared to $1,373,140 and $17,449, respectively, for the period ended December
31, 1996.
EXPENSES. Expenses for the year ended December 31, 1997
consisted primarily of interest on the Company's outstanding Notes which totaled
$32,782,396, compared to $11,987,255 for the period ended December 31, 1996, an
increase of 173%. The amount of interest expense reported during the year ended
December 31, 1997 depended primarily upon the amount of Notes outstanding during
that year and the interest rates on such Notes. The Company's average debt
outstanding was approximately $525,737,324 for the year ended December 31, 1997,
compared to $213,533,000 for the period ended December 31, 1996, and the average
annual cost of borrowings was approximately 6.24% for the year ended December
31, 1997, compared to approximately 5.61% for the period ended December 31,
1996. The Company also incurred loan servicing fees to Union Bank and financing
fees to UFS in the amounts of $4,917,318 and $423,112, respectively, compared to
$2,255,564 and $1,919,207, respectively, for the period ended December 31, 1996.
See "ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" 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 year ended December 31, 1997
amounted to $915,380, $494,106 and $1,441,526, respectively, compared to
$550,899, $250,992 and $438,584, respectively, for the period ended December 31,
1996. Other general and administrative expenses for the year ended December 31,
1997 amounted to $2,240,328, compared to $437,956 for the period ended December
31, 1996. Income tax expense for the year ended December 31, 1997 amounted to
$710,717, compared to an income tax benefit in the amount of $274,968 for the
period ended December 31, 1996, which resulted from the Company's net operating
loss.
18
<PAGE>
For the year ended December 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.
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. Withdrawals were made from the
Reserve Fund in the Trust Estate during 1997 to cover shortages in the Revenue
Fund caused by slow payment to the Company of interest due on the Company's
Eligible Loans. The Reserve Fund is fully funded under the terms of the
Indenture and 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.
IMPACT OF INFLATION
For the year ended December 31, 1997, cost increases to the
Company were not materially impacted by inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The interest rates with respect to the Notes may fluctuate from
one interest period to another in response to changes in benchmark rates or
general market conditions. The Company can make no representation as to what
such rates may be in the future. The interest rates on each series of Auction
Rate Notes will be based generally on the outcome of each Auction of such series
of Notes. The interest rates on each series of LIBOR Rate Notes and Treasury
Rate Notes will based generally on the LIBOR Rate or Treasury Rate then in
effect for the applicable interest rate period. The Eligible Loans, however,
generally bear interest at an effective rate (taking into account any Special
Allowance Payments, the "Loan Rates") equal to the average bond equivalent rates
of weekly auctions of 91-day Treasury bills for each quarter (the "91-day
Treasury Bill Rate") (or, in certain circumstances, 52-week Treasury bills) plus
margins specified for such Eligible Loans. As a result of differences between
the indices used to determine the Loan Rates and the interest rates on the
Notes, there could be periods of time when the Loan Rates are inadequate to
cover the interest on the Notes and the expenses required to be paid under the
Indenture. Additionally, in a period of rapidly rising interest rates, the Loan
Rate may not increase as quickly as the variable interest rates with respect to
the Notes. If there is a decline in the Loan Rates, the amount of funds
representing interest deposited into the Trust Estate may be reduced and, even
if there is a similar reduction in the variable interest rates applicable to any
series of Notes, there may not necessarily be a similar reduction in the other
amounts required to be funded out of such funds (such as certain administrative
expenses). In addition, proceeds of and revenues relating to the Notes in the
Reserve Fund and in other accounts created under the Indenture will be used to
acquire investment agreements that pay interest at fluctuating rates. Although
the Company will structure such investment agreements to minimize such risk,
there can be no assurance that the interest rates on such investment agreements
will keep pace with the fluctuating interest rates on the Notes.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data
required by this ITEM 8 are set forth in ITEM 14 of this Form 10-K. All
information which has been omitted is either inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no adverse opinions or disclaimers of opinion, nor
were there any modifications as to uncertainty, audit scope, or accounting
principles rendered by the current accounting firm. There were no disagreements
with the current accounting firm on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
The accounting firm of KPMG Peat Marwick LLP was engaged to
perform the annual audit of the Company for the year ended December 31, 1997.
There are no other changes in or disagreements on accounting and
financial statement disclosure.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company is governed by a Board of Directors, which is
required by the Company's Articles of Incorporation to include at least three
directors. Directors are required to be elected at each annual meeting of the
shareholders. The present directors and their addresses and principal
occupations or affiliations are as follows:
<TABLE>
<CAPTION>
Principal Officers and
Other Occupation Directors Term
Name of Director Offices Held Age Address or Affiliation From To*
- ---------------- ------------ --- ------- -------------- ------
<S> <C> <C> <C> <C> <C>
Michael S. Chairman 34 4732 Calvert Street Executive Vice February Present
Dunlap Lincoln, Nebraska 68506 President of 1996
Union Bank and
Trust Company
Stephen F. President 45 6991 East Camelback President of February Present
Butterfield Road, Suite B290 Union Financial 1996
Scottsdale, AZ 85251 Services, Inc.
Ronald W. Page Vice President, 49 3015 S. Parker Road Senior Vice February Present
Treasurer and Aurora, CO 80014 President of 1996
Secretary Union Financial
Services, Inc.
Ross Wilcox -- 55 4732 Calvert Street Chief Executive February Present
Lincoln, Nebraska 68506 Officer of Union 1996
Bank and Trust
Company
Dr. Paul R. Hoff -- 63 Hernia Hill, Rural Route 1 Retired Physician February Present
Seward, Nebraska 68434 1996
- -------------
(*) Each director holds office until the next annual meeting of shareholders
following his or her election until such director's successors shall
have been elected and qualified. The Company's next annual meeting is
scheduled for March 31, 1998.
</TABLE>
EXECUTIVE MANAGEMENT
The Board of Directors and executive officers described below are
responsible for overall management of the Company. The Company's officers and
directors are shareholders, officers and directors of business entities that
have engaged in the business of purchasing, holding and selling student loans.
MICHAEL S. DUNLAP, CHAIRMAN OF THE BOARD. As the Chairman of the Board
of Directors, Mr. Dunlap is responsible for the executive direction of the
Company. Mr. Dunlap is also Executive Vice President of Union Bank and Trust
Company, and President of Farmers & Merchants Investment Inc. He has been an
employee of Union Bank and Trust Company for approximately 15 years. Mr. Dunlap
is also a director of Stratus Fund, Inc., Comprehensive Assistance in Student
Lending Corporation, Union Bank and Trust Company, Union Financial Services,
Inc., UNIPAC and various other organizations. Mr. Dunlap received a Bachelor of
Science degree in finance and accounting and a Juris Doctor degree from the
University of Nebraska.
STEPHEN F. BUTTERFIELD, PRESIDENT AND DIRECTOR. As President, Mr.
Butterfield is responsible for the overall management and direction of the
Company. Included in his responsibilities are loan purchasing, marketing of
corporate services and coordination of the Company's capital market activities.
Mr. Butterfield
21
<PAGE>
has been a member of the student loan industry since January 1989, first as
President of a for-profit student loan secondary marketing facility located in
Scottsdale, Arizona and currently as President of a non-profit student loan
secondary marketing facility in Scottsdale, Arizona. Prior to his work in the
student loan industry, Mr. Butterfield spent 15 years as an investment banker
specializing in municipal finance. Mr. Butterfield is a director of Outdoor
Systems, Inc. and Comprehensive Assistance in Student Lending Corporation. Mr.
Butterfield received a Bachelor of Science degree in Business from Arizona State
University.
RONALD W. PAGE, VICE PRESIDENT, TREASURER, SECRETARY AND DIRECTOR. As
Vice President, Treasurer and Secretary, Mr. Page is responsible for the
financial operations and record keeping of the Company. Included in his
responsibilities are financial planning and capital market operations. Mr. Page
spent 20 years as an investment banker specializing in tax-exempt and taxable
asset-backed finance, with a specialty in the securitization of student loans.
Mr. Page received a Bachelor of Science degree in Business Administration from
the University of Colorado, Boulder, Colorado, and a Masters of Public
Administration in Public Policy Analysis from the American University,
Washington, DC.
ROSS WILCOX, DIRECTOR. Mr. Wilcox is the Chief Executive Officer of
Union Bank and Trust Company and has been employed or affiliated with Union Bank
and Trust Company for over 30 years. Mr. Wilcox is the Chairman of the Board for
Mills County State Bank and is on the Board of Directors for UNIPAC, Southeast
Lincoln Insurance Agency and the Lincoln Chamber of Commerce.
DR. R. PAUL HOFF, DIRECTOR. Dr. Hoff is a medical doctor who practiced
as a family physician in Seward, Nebraska for approximately 30 years, until his
retirement three years ago. Dr. Hoff also serves as member of the Board of
Directors of Packers Service Group, Inc. Dr. Hoff has been involved in a number
of business enterprises over the years and currently owns and operates a retail
antique store in Ennis, Montana.
The Company's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The Company's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 is not
applicable to the Company, because the Company has no class of equity securities
registered pursuant to Section 12 thereof.
ITEM 11. EXECUTIVE COMPENSATION
The Company's executive officers are not compensated by the
Company for services rendered by them, although some of the Company's officers
are compensated by UFS, which receives remuneration from the Company pursuant to
an Administrative Services Agreement by and between UFS and the Company. A
detailed description of the Administrative Services Agreement is set forth in
ITEM 13 of this Form 10-K.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES IN 1997
The Company has not issued any options.
LONG-TERM INCENTIVE PLAN -- AWARDS IN 1997
The Company has no long-term incentive plan.
22
<PAGE>
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE IN 1997
The Company has no such benefit plans.
EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements.
DIRECTOR COMPENSATION
Directors of the Company are not compensated as directors, but
may receive reimbursement of out-of-pocket expenses in connection with
attendance at Board meetings.
OFFICER COMPENSATION
The Company has not adopted a compensation plan for officers.
BOARD MEETINGS
During fiscal year 1997, the Board held regular meetings on March
11th and May 3rd. All directors, with the exception of Stephen F. Butterfield,
attended the March 11th meeting. All directors, with the exception of Ross
Wilcox, attended the May 3rd meeting.
COMMITTEES OF THE BOARD
The Board of Directors has not established an Audit Committee or
a Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of March 16, 1998, there were 1,000 shares of the Company's
common stock, no par value, outstanding, all of which were held by UFS. No
director or executive officer owns any shares of the Company and there are no
other beneficial owners.
CHANGES IN CONTROL.
The Company knows of no arrangement, including the pledge by any
person of securities of the Company, which may at a subsequent date result in
change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADMINISTRATIVE SERVICES AGREEMENT. The Company and UFS, the
Company's parent corporation, entered into an Administrative Services Agreement
(the "Agreement") dated as of August 1, 1996. Under the Agreement, UFS provides,
through its officers and employees, the following services to the Company: (i)
to assist the Company in developing and implementing financing transactions to
enable the Company to purchase loans made to borrowers under the Federal Family
Education Loan Program (the "Loans"); (ii) to monitor, and to the extent
required, direct the Servicer in connection with its servicing of the Loans;
(iii) to respond to inquiries and requests made by borrowers, educational
institutions, Guarantee Agencies, the Trustee, and other parties with respect to
the Loans and respond to requests by the Company's independent auditors for
information concerning the Company's financial affairs; (iv) to maintain
financial records concerning the Loans and, if furnished adequate information
with respect to financial affairs not related to the Loans, prepare and maintain
a general ledger and financial statements for the Company; (v) to
23
<PAGE>
furnish or cause to be furnished to the Company or the Trustee
copies of reports received with respect to the Loans, and prepare such
additional reports with respect to the Loans as the Company or the Trustee may
reasonably request from time to time; (vi) to prepare for and furnish to the
Company estimates of Maintenance and Operating Expenses (as defined in the
Indenture) and such statistical reports and cash flow projections as may be
required under the Indenture or requested by the Company; and (vii) to provide
such other services with respect to administration of its program as the Company
may reasonably request. The Agreement expires upon the stated maturity of the
Notes. Pursuant to the Agreement, the Company paid UFS approximately $423,000
and $1,919,000, in 1997 and 1996, respectively, as compensation for services
provided by UFS in connection with issuance of Notes. The Company also pays to
UFS on the first day of each calendar month an amount equal to 0.015% of the
average outstanding balance of the Loans during the preceding month. The
obligation of the Company to pay fees under the Agreement is a limited
obligation to be satisfied solely from distributions made by the Trustee to the
Company under the terms of the Indenture. Although the Company is obligated to
pay to UFS the full amount of all accrued fees, such payments are made
exclusively from amounts deposited in the Operating Fund for payment of the
Company's Maintenance and Operating Expenses (as defined in the Indenture). If
the Company does not have funds on hand to cover the full amount of the fees due
under the Agreement, then payment of the unpaid balance is deferred until there
are sufficient funds available from such sources to satisfy part, or all, of the
outstanding debt. The fee payable to UFS under the Agreement may be revised on
January 1, 1999, and on each January 1 thereafter during the term of the
Agreement. To alter the fee, UFS must provide written notice of the proposed new
fee to the Company ninety (90) days prior to the next January 1. If UFS and the
Company cannot reach an agreement within sixty (60) days of the receipt of the
notice, either party may terminate the Agreement upon thirty (30) day's written
notice to the other party. The Company paid UFS approximately $911,000 and
$216,000 in 1997 and 1996, respectively as compensation for services provided by
UFS in connection with the service agreement. The administrative Services
Agreement has been filed as an Exhibit to this Form 10-K.
SERVICING AGREEMENT. The Company and Union Bank entered into an
Amended and Restated Servicing Agreement (the "Servicing Agreement") dated as of
June 15, 1996. Under the Servicing Agreement, Union Bank services the Eligible
Loans. Although certain officers and directors of the Company are also officers
and directors of Union Bank, which owns 80.5% of UNIPAC, the Company believes
that the terms and conditions of the Servicing Agreement (and the subservicing
arrangement) are comparable to those offered by or available to unrelated
parties. The servicing fee to Union Bank is calculated using an annual
asset-based charge of 1.25 percent of the student loan principal balance,
calculated monthly. The Servicing Agreement has been filed as an Exhibit to this
Form 10-K.
STUDENT LOAN PURCHASE AGREEMENTS. The Company and Union Bank have
entered into, and plan to enter into, Student Loan Purchase Agreements whereby
the Company will purchase Eligible Loans from Union Bank. Although certain
owners and directors of the Company are also officers and directors of Union
Bank, the Company believes that the terms and conditions of the Student Loan
Purchase Agreements are comparable to those offered by or available to unrelated
parties. The Student Loan Purchase Agreements with Union Bank have been filed as
Exhibits to this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The financial statements and financial statement information
required by this Item are included in this report commencing on page F-1. The
Report of Independent Public Accountants appears on page F-1 of this report. All
other schedules have been omitted because they are inapplicable, not required,
or the information is included elsewhere in the financial statements or notes
thereto.
24
<PAGE>
EXHIBITS
All exhibits listed hereunder, unless otherwise indicated, have
previously been filed as exhibits to the Company's Registration Statement
declared effective in October 1997. Such exhibits have been filed with the
Commission pursuant to the requirements of the Acts administered by the
Commission. Such exhibits are incorporated herein by reference under Rule 12b-23
of the Securities Exchange Act of 1934.
25
<PAGE>
The following is a complete list of exhibits filed as part of the
Company's Registration Statement and this Form 10-K. 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
24.1 Consent of KPMG Peat Marwick LLP, Independent Auditors **
27.1 Financial Data Schedule ***
99.1 Loan Sale and Commitment Agreement, dated as of March 1, 1996, by **
and between Union Bank and Trust Company and the Company
99.2 Loan Sale and Commitment Agreement, dated as of June 19, 1996, by **
and between Union Bank and Trust Company and the Company
99.3 Loan Sale and Commitment Agreement, dated as of November 1, 1996, **
by and between Union Bank and Trust Company and the Company
99.4 Risk Factors and Glossary Terms sections of the Company's
Registration * Statement filed in October 1997 (Exhibit 99.4 to
Company's Annual Report on Form 10-K for fiscal year ended
December 31, 1996).
- --------------------
* Incorporated by reference herein to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
** 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 last
quarter of the period covered by this report.
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF UNION FINANCIAL SERVICES-1, INC.
Report of Independent Auditors.......................................... F-1
Balance Sheets as of December 31, 1997 and 1996.......................... F-2
Statements of Operations for the year ended December 31, 1997
and for the period from inception (February 28, 1996)
to December 31, 1996.................................................... F-3
Statements of Stockholders' Equity (Deficit) for the year
ended December 31, 1997 and for the period from inception
(February 28, 1996) to December 31, 1996................................ F-4
Statements of Cash Flows for the year ended December 31, 1997
and for the period from inception (February 28, 1996)
to December 31, 1996.................................................... F-5
Notes to Financial Statements........................................... F-6
27
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Union Financial Services - 1, Inc.:
We have audited the accompanying balance sheets of Union Financial Services -
1, Inc. as of December 31, 1997 and 1996 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Union Financial Services - 1,
Inc. at December 31, 1997 and 1996 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
February 20, 1998
Lincoln, Nebraska
F-1
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Balance Sheets
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
ASSETS 1997 1996
- --------------------------------------------------------------------------------
Cash and cash equivalents (note 2) $ 39,542,382 65,402,585
Student loans receivable, including net
premiums (notes 3, 7 and 8) 525,005,954 491,046,915
Accrued interest receivable (note 3) 7,735,292 8,250,825
Debt issuance cost, net of amortization of
$715,252 in 1997 and $250,992 in 1996 (note 4) 2,997,516 3,182,805
Deferred tax asset (note 5) - 274,968
Other assets 11,000 13,888
- --------------------------------------------------------------------------------
Total assets $575,292,144 568,171,986
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
Liabilities:
Notes payable (note 4) $571,500,000 566,000,000
Accrued interest payable 1,607,350 1,493,141
Income taxes payable 436,748 -
Other liabilities (note 10) 989,819 1,216,703
- --------------------------------------------------------------------------------
Total liabilities 574,533,917 568,709,844
- --------------------------------------------------------------------------------
Stockholders' equity (deficit):
Common stock, no par value.
Authorized 1,000 shares;
issued 1,000 shares 1,000 1,000
Retained earnings (deficit) 757,227 (538,858)
- --------------------------------------------------------------------------------
Total stockholders' equity (deficit) 758,227 (537,858)
Commitments and contingencies (notes 7, 8 and 9)
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity (deficit) $575,292,144 568,171,986
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-2
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Statements of Operations
Years ended December 31, 1997 and 1996
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Revenues:
Loan interest $ 42,757,006 15,636,042
Investment interest 2,268,878 1,373,140
Other 195,084 17,449
- -------------------------------------------------------------------------------
Total revenues 45,220,968 17,026,631
- -------------------------------------------------------------------------------
Expenses:
Interest on notes 32,782,396 11,987,255
Loan servicing (note 10) 4,917,318 2,255,564
Financing fees to parent (note 10) 423,112 1,919,207
Trustee and broker fees 915,380 550,899
Amortization of debt issuance costs 494,106 250,992
Amortization of loan premiums 1,441,526 438,584
Other general and administrative (note 10) 2,240,328 437,956
- -------------------------------------------------------------------------------
Total expenses 43,214,166 17,840,457
- -------------------------------------------------------------------------------
Income (loss) before income taxes 2,006,802 (813,826)
Income tax expense (benefit) (note 5) 710,717 (274,968)
- --------------------------------------------------------------------------------
Net income (loss) $ 1,296,085 (538,858)
- --------------------------------------------------------------------------------
Basic and diluted net income (loss) per common share $ 1,296.09 (538.86)
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
Total
Retained stockholders'
Common earnings equity
stock (deficit) (deficit)
- --------------------------------------------------------------------------------
Balance at inception
(February 28, 1996) $ - - -
Issuance of common stock 1,000 - 1,000
Net loss - (538,858) (538,858)
- -------------------------------------------------------------------------------
Balance at December 31, 1996 1,000 (538,858) (537,858)
Net income - 1,296,085 1,296,085
- --------------------------------------------------------------------------------
Balance at December 31, 1997 $ 1,000 757,227 758,227
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Statements of Cash Flows
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Net income (loss) $ 1,296,085 (538,858)
Adjustments to reconcile net income (loss to net
cash provided by (used in) operating activities:
Amortization 1,935,632 689,576
Deferred tax expense (benefit) 274,968 (274,968)
(Increase) decrease in accrued interest receivable 515,533 (8,250,825)
(Increase) decrease in other assets 2,888 (13,888)
Increase in accrued interest payable 114,209 1,493,141
(Decrease) increase in other liabilities (226,884) 1,216,703
Increase in income taxes payable 436,748 -
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,349,179 (5,679,119)
- --------------------------------------------------------------------------------
Cash flows used in investing activities:
Purchase of student loans, including premiums (101,061,642) (515,058,073)
Proceeds from sale of student loans 6,139,464 -
Net proceeds from student loan principal payments
and loan consolidations 59,491,767 23,572,574
- --------------------------------------------------------------------------------
Net cash used in investing activities (35,430,411) (491,485,499)
- --------------------------------------------------------------------------------
Cash flows provided by financing activities:
Proceeds from issuance of common stock - 1,000
Proceeds from issuance of notes payable 30,800,000 566,000,000
Payment for debt issuance costs (278,971) (3,433,797)
Payment to defease notes payable (25,300,000) -
- --------------------------------------------------------------------------------
Net cash provided by financing activities 5,221,029 562,567,203
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (25,860,203) 65,402,585
Cash and cash equivalents, beginning of year 65,402,585 -
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 39,542,382 65,402,585
- --------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 32,668,187 10,494,114
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
(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 payable 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.
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 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. The adoption of SFAS No. 125
did not have a material impact on the Company's financial statements.
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 sixty 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.
F-6
<PAGE>
CASH EQUIVALENTS
Cash equivalents consist of marketable short-term investment trust and
lockbox receivables in transit. For purposes of the statements of cash
flows, the Company considers all investments with original maturities of
three months or less to be cash equivalents.
INCOME TAXES
The Company and its parent will 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.
INCOME (LOSS) PER COMMON SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE, effective December
31, 1997, which specifies the computation, presentation, and disclosure
requirements for earnings per share. Basic income (loss) per common share
was computed by dividing the net income (loss) by the weighted-average
common shares outstanding, which was 1,000 shares in 1997 and 1996. As
the Company has no stock option program, the diluted income (loss) per
common share are the same as the basic income (loss) per common share in
1997 and 1996.
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 at December 31, 1997 and 1996 are
held by the trustee in various accounts subject to use restrictions as
shown on the following page.
F-7
<PAGE>
1997 1996
- --------------------------------------------------------------------------------
LOAN ACCOUNT FUND - Established for the
purpose of purchasing eligible student
loans with proceeds of the borrowing $ - 38,459,716
RECYCLING ACCOUNT FUND - Established to
maintain excess funds for future
operating needs, if necessary, and
purchases of eligible student loans 27,723,005 14,843,885
RESERVE FUND - Established to cure any
deficiencies in the debt service
requirements 7,706,756 11,373,233
COST OF ISSUANCE FUND - Established to
pay administrative and issuance costs
incurred with the issuance of Company debt - 253,880
REVENUE FUND - Established for the receipt of
interest payments on eligible student loans
and investment securities and to paY fees
and expenses incurred under the indenture 150,768 (13,249)
INTEREST FUND - Established for the payment
of debt service interest requirements - -
RESTRICTED CASH 97A ESCROW - Excess funds
required for potential interest payments
on defeased debt (see note 4) 3,320,995 -
Operating cash and cash equivalents 640,858 485,120
- --------------------------------------------------------------------------------
Total cash and cash equivalents $ 39,542,382 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% to 10% 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% of the
student loans) are insured up to 98%.
F-8
<PAGE>
(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.
<TABLE>
<CAPTION>
The following tables summarize outstanding notes payable at December 31, 1997 and 1996 by
issue:
- -----------------------------------------------------------------------------------------------------
Final Carrying Interest
1997 maturity amount range
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996A Senior Auction Rate Notes, Class A-1 and A-2 7/01/14 $ 96,600,000 5.19% - 6.20%
1996B Senior Auction Rate Notes, Class A-3 and A-4 7/01/14 128,000,000 5.34% - 5.91%
1996C Senior Treasury Rate Notes, Class A-5 7/01/05 225,000,000 5.45% - 5.73%
1996C Senior Auction Rate Notes, Class A-6 7/01/14 75,500,000 5.32% - 6.05%
1996C Subordinate LIBOR Rate Notes, Class B-3 7/01/25 15,600,000 5.86% - 5.92%
- -----------------------------------------------------------------------------------------------------
1997A Subordinate LIBOR Rate Notes, Class B-4 7/01/30 30,800,000 5.95% - 6.14%
- -----------------------------------------------------------------------------------------------------
$571,500,000
- -----------------------------------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------------------------------
1996A Senior Auction Rate Notes, Class A-1 and A-2 7/01/14 $ 96,600,000 5.19% - 6.20%
1996A Subordinate LIBOR Rate Notes, Class B 7/01/14 11,100,000 6.13% - 6.25%
1996B Senior Auction Rate Notes, Class A-3 and A-4 7/01/14 128,000,000 5.34% - 5.91%
1996B Subordinate LIBOR Rate Notes, Class B-2 7/01/14 14,200,000 6.12% - 6.24%
1996C Senior Treasury Rate Notes, Class A-5 7/01/05 225,000,000 5.45% - 5.73%
1996C Senior Auction Rate Notes, Class A-6 7/01/14 75,500,000 5.32% - 6.05%
1996C Subordinate LIBOR Rate Notes, Class B-3 7/01/25 15,600,000 5.86% - 5.92%
- -----------------------------------------------------------------------------------------------------
$566,000,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
Generally, the notes can be redeemed on any interest payment date at par
plus accrued interest. Subject to note provisions, all notes are subject
to redemption prior to maturity at the option of the Company, without a
prepayment penalty.
The indenture of trust contains, among other requirements, covenants
related to the restriction of funds to be maintained in a reserve fund.
Management believes the Company is in compliance with all covenants of
the note agreements at December 31, 1997.
On March 20, 1997, the Company issued $30.8 million of Taxable Student
Loan Asset-Backed 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. As a result of the transaction, the Company recognized an
accounting loss of approximately $145,000 on the defeasance in 1997.
The Company has an existing shelf registration allowing it to issue up to
$700 million in debt securities. In October 1997, the Company's shelf
registration statement for an additional $500 million of debt securities
was declared effective.
F-9
<PAGE>
(5) INCOME TAXES
Components of income tax expense (benefit) in 1997 and 1996 are as
follows:
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Current:
Federal $ 395,099 -
State 40,650 -
- -------------------------------------------------------------------------------
435,749 -
- -------------------------------------------------------------------------------
Deferred:
Federal 256,693 (256,693)
State 18,275 (18,275)
- -------------------------------------------------------------------------------
274,968 (274,968)
- -------------------------------------------------------------------------------
$ 710,717 (274,968)
- -------------------------------------------------------------------------------
The actual income tax expense (benefit) differs from the "expected"
income tax expense, computed by applying the federal statutory corporate
tax rates to income (loss) before income taxes for 1997 and 1996 as shown
below:
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Computed "expected" income tax expense (benefit) $ 682,313 (276,701)
Increase (decrease) in income taxes resulting from:
State taxes, net of federal income tax benefit 26,829 (12,062)
Other 1,575 13,795
- -------------------------------------------------------------------------------
$ 710,717 (274,968)
- -------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
The Company's deferred tax assets at December 31, 1996 resulted primarily
from the future tax benefit of the net operating loss for the year then
ended. There were no deferred tax assets or liabilities at December 31,
1997.
F-10
<PAGE>
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below:
O 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.
O 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% to
3%, depending on the type of loan, balance, payment status, stated
interest rate and other various factors.
O 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 December 31, 1997 and 1996, Iowa College Student Aid Commission,
Nebraska Student Loan Program, Inc. and Kentucky Higher Education
Assistance Authority were the primary guarantors, guaranteeing
approximately 75% and 81%, respectively, 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 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% 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.
F-11
<PAGE>
(10) RELATED PARTIES
Certain owners and directors of the Company are also officers and
directors of UB&T which owns 80.5% of UNIPAC Service Corporation
(UNIPAC). All loans currently held were purchased from UB&T.
Under the terms of an agreement, the Company contracts all loan servicing
through UB&T. UNIPAC has been contracted as the sub-servicer by UB&T.
Fees paid to UB&T are calculated using an annual asset-based charge
ranging from .60% to 1.25% of the student loan principal balance,
calculated monthly. At December 31, 1997 and 1996, $867,066 and
$1,011,488, respectively, was 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% of the average outstanding loan balance to be paid
monthly. These fees amounted to approximately $911,000 and $216,000 in
1997 and 1996, respectively. In 1997 and 1996, the Company also paid
approximately $423,000 and $1,919,000, respectively, to its parent for
services provided in connection with the Company's debt financing
transactions.
F-12
<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/ MICHAEL S. DUNLAP
-------------------------
Michael S. Dunlap, Chairman of the Board
(Principal Executive Officer)
By: /s/ RONALD W. PAGE
-----------------------
Ronald W. Page, Vice President (Principal
Financial and Accounting Officer)
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
By: /s/ MICHAEL S. DUNLAP Chairman of the Board March 30, 1998
---------------------
Michael S. Dunlap (Principal Executive Officer)
By: /s/ STEPHEN F. BUTTERFIELD President and Director March 30, 1998
--------------------------
Stephen F. Butterfield
By: /s/ RONALD W. PAGE Vice-President, Secretary, March 30, 1998
------------------
Ronald W. Page Treasurer and Director
(Principal Financial and
Accounting Officer)
By: /s/ ROSS WILCOX Director March 30, 1998
---------------
Ross Wilcox
By: /s/ DR. PAUL HOFF Director March 30, 1998
-----------------
Dr. Paul Hoff
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 39,542,382
<SECURITIES> 0
<RECEIVABLES> 525,005,954
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 575,292,144
<CURRENT-LIABILITIES> 0
<BONDS> 571,500,000
0
0
<COMMON> 1,000
<OTHER-SE> 757,227
<TOTAL-LIABILITY-AND-EQUITY> 575,292,144
<SALES> 0
<TOTAL-REVENUES> 45,220,968
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,431,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,782,396
<INCOME-PRETAX> 2,006,802
<INCOME-TAX> (710,717)
<INCOME-CONTINUING> 1,296,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,296,085
<EPS-PRIMARY> 1,296.09
<EPS-DILUTED> 1,296.09
</TABLE>
