UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________________________________________
Commission file number__________333-08929________
UNION FINANCIAL SERVICES-1, INC.
(Exact name of registrant as specified in its charter)
NEVADA 86-0817755
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
6991 East Camelback Road, Suite B290, Scottsdale, Arizona 85251
(Address of principal executive offices) (Zip Code)
(602) 947-7703
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Stock Amount Outstanding
Common Stock, No par value 1,000 Shares of Common Stock
as of May 1, 1998
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1.Financial Statements
Balance Sheets as of March 31, 1998 and
December 31, 1997..............................................5
Statements of Operations for the three months ended
March 31, 1998 and 1997........................................6
Statements of Stockholder's Equity for the three
months ended March 31, 1998 and for the year
ended December 31, 1997........................................7
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997........................................8
Note to Financial Statements.....................................9
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................................. ... 16
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings............................................. 20
Item 2. Changes in Securities.........................................20
Item 3. Defaults upon Senior Securities.............................. 20
Item 4.Submission of Matters to a Vote
of Security Holders.................................... 20
Item 5. Other Information............................................ 20
Item 6. Exhibits and Reports on Form 8-K............................. 20
2
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
ASSETS MARCH 31, DECEMBER 31,
1998 1997
(Unaudited)
----------- ----------
Cash and cash equivalents $ 18,141,647 $39,542,382
Student loans receivable including
net premiums, net of allowance for
loan losses 544,994,652 525,005,954
Accrued interest receivable 8,552,799 7,735,292
Debt issuance cost, net of accumulated amortization 2,873,129 2,997,516
Other assets 13,990 11,000
------------ ------------
Total assets $574,576,217 $575,292,144
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes payable $571,500,000 $571,500,000
Accrued interest payable 1,617,897 1,607,350
Income taxes payable 43,319 989,819
Other liabilities 581,412 436,748
------------ ------------
Total liabilities $573,742,628 $574,533,917
============ ============
Stockholder's equity:
Common stock, no par value.
Authorized 1,000 shares; issued
1,000 shares $ 1,000 $ 1,000
Retained earnings 832,589 757,227
---------- -----------
Total stockholder's equity 833,589 758,227
----------- -----------
Total liabilities and
stockholder's equity $574,576,217 $575,292,144
============ ============
See accompanying note to financial statements.
3
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Revenues:
Loan interest $10,722,682 $ 10,406,068
Investment interest 359,177 703,623
Other 11,227 15,153
----------- ------------
Total revenues $11,093,086 $ 11,124,844
=========== ============
Expenses:
Interest on notes $ 8,257,636 $ 8,062,424
Loan servicing 1,324,182 1,076,761
Financing fees to parent 231,212 338,619
Trustee and broker fees 227,133 219,421
Amortization of debt issuance costs 124,387 121,900
Amortization of loan premiums 376,826 290,288
Other general and administrative 433,030 405,368
----------- -----------
Total expenses $10,974,406 $10,514,781
=========== ===========
Income before income taxes 118,680 610,063
Income tax expense 43,318 207,422
------- -----------
Net income $75,362 $ 402,641
======= ===========
Basic and diluted net income per common share $75.36 $402.64
====== =======
See accompanying note to financial statements.
4
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
TOTAL
RETAINED STOCKHOLDER'S
COMMON EARNINGS EQUITY
STOCK (DEFICIT) (DEFICIT)
Balances at December 31, 1997 $1,000 $757,227 $758,227
Net income, three months ended March 31,
1998 (Unaudited) -- 75,362 75,362
------ ------- -------
Balance at March 31, 1998 (Unaudited) $1,000 $832,589 $833,589
====== ======== ========
See accompanying note to financial statements.
5
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Net Income $ 75,362 $ 402,641
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization 501,213 382,341
Deferred tax expense -- 207,422
(Increase) decrease in accrued interest receivable (817,506) 947,801
(Increase) decrease in other assets (2,990) 5,449
Provision for loan losses, net of charge offs 107,796 --
Increase in accrued interest payable 10,545 371,300
Decrease in other liabilities (408,405) (264,098)
Decrease in income taxes payable (393,430) ---
----------- ---------
Net cash provided by (used in)
operating activities ( 927,415) 2,052,856
----------- ---------
Cash flows used in investing activities:
Purchase of student loans, including premiums (35,429,570) (41,008,508)
Net proceeds from student loan principal
payments and loan consolidations 14,956,251 13,647,519
----------- ------------
Net cash used in investing activities (20,473,319) (27,360,989)
----------- ------------
Cash flows provided by financing activities:
Proceeds from issuance of notes payable -- 30,800,000
Payment for debt issuance costs -- (157,025)
Payment to defease notes payable -- (25,300,000)
----------- ------------
Net cash provided by financing activities -- 5,342,975
----------- ------------
Net decrease in cash and cash equivalents (21,400,734) (19,965,158)
Cash and cash equivalents, beginning of period 39,542,382 65,402,585
---------- ----------
Cash and cash equivalents, end of period $18,141,647 $ 45,437,427
=========== ============
See accompanying note to financial statements.
6
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
NOTE TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
(1) BASIS OF PRESENTATION
The accompanying financial statements of Union Financial Services-1, Inc.
(the "Company") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of management,
include all adjustments necessary for a fair statement of income for each period
shown. All such adjustments made are of a normal recurring nature, except when
noted as extraordinary or nonrecurring. The balance sheet at December 31, 1997
is derived from the audited balance sheet as of that date. All other financial
statements are unaudited. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules
and regulations. Management believes that the disclosures made are adequate and
that the information is fairly presented. The results for the interim periods
are not necessarily indicative of the results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto in the Company's Annual Report on Form 10-K, which are incorporated by
reference.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OR OPERATIONS.
GENERAL
Union Financial Services-1, Inc. (the "Company") was incorporated under
the laws of the State of Nevada on February 28, 1996. The Company is a wholly
owned subsidiary of Union Financial Services, Inc., a Nevada corporation
("UFS"). UFS is a privately held corporation. The Company was formed solely for
the purpose of acquiring, from time to time, guaranteed educational loans made
to students and parents of students ("Eligible Loans") under the Higher
Education Act of 1965, as amended (the "Higher Education Act"), and pledging
such Eligible Loans and certain related collateral to a trustee to secure one or
more series of Taxable Student Loan Asset-Backed Notes (the "Notes") that are
issued by the Company from time to time pursuant to a Second Amended and
Restated Indenture of Trust, dated as of November 1, 1996, between the Company
and Norwest Bank Minnesota, National Association (the "Trustee"), as amended and
supplemented from time to time (collectively, the "Indenture"). Since its
inception, the Company has issued four (4) series of Notes consisting of ten
(10) classes. The Notes shown in the financial statements of the Company
represent limited obligations of the Company secured solely by the Eligible
Loans and other assets in the trust estate created under the Indenture.
RESULTS OF OPERATIONS
Three months ended March 31, 1998 compared to three months ended March 31, 1997.
REVENUES. The Company's revenues consist primarily of interest received
on Eligible Loans subject to the indebtedness of the Notes. Revenues from
interest on Eligible Loans increased by $316,614 from $10,406,068 for the three
months ended March 31, 1997 to $10,722,682 for the three months ended March 31,
1998. The increase in revenues is attributable to the acquisition of additional
Eligible Loans by the Company during the period. The amount of interest reported
for the three months ended March 31, 1998 was derived from Eligible Loans in an
aggregate principal amount of approximately $537,671,000. The Company's average
net investment in Eligible Loans during the three months ended March 31, 1998
and March 31, 1997 was approximately $520,408,000 and $501,422,000, respectively
(excluding funds held by the Trustee) and the average effective annual interest
rate of interest income on Eligible Loans during the three months ended March
31, 1998 and March 31, 1997 was approximately 8.24% and 8.09%, respectively. The
Company also received investment income and other income in the amounts of
$359,177 and $11,227, respectively, for the three months ended March 31, 1998
and $703,623 and $15,153, respectively, for the three months ended March 31,
1997.
EXPENSES. The Company's expenses consist primarily of interest due on
the Company's outstanding Notes. Expenses from interest due on the Company's
outstanding Notes increased by $195,212 from $8,062,424 for the three months
ended March 31, 1997 to $8,257,636 for the three months ended March 31, 1998.
This increase in expenses is attributable to the interest rates on all Notes
outstanding. For the three months ended March 31, 1998 and March 31, 1997, the
Company's average debt outstanding was approximately $571,500,000 and
567,833,000, respectively, and the average annual cost of borrowings was
approximately 5.78% and 5.60%, respectively. The Company also made payments for
loan servicing fees to Union Bank and financing fees to UFS in the amount of
$1,324,182 and $231,212, respectively, for the three months ended March 31, 1998
as compared to $1,076,761 and $338,261 respectively, for the three months ended
March 31, 1997. The increase in loan servicing fees is directly related to the
servicing of additional Eligible Loans and the decrease in financing fees is
directly related to reduced financing activity. Income tax expense amounted to
$43,318 for the three months ended March 31, 1998 compared to $207,422 for the
three months ended March 31, 1997. The decrease in tax expense was a result of
lower net income for the three months ended March 31, 1998.
8
<PAGE>
NET INCOME. The Company had net income of $75,362 for the three months
ended March 31, 1998 and $402,641 for the three months ended March 31, 1997. The
reduction in net income resulted from increases in amortization of loan purchase
premiums.
LIQUIDITY AND CAPITAL RESOURCES
Eligible Loans held by the Company are pledged as collateral for payment
of the Notes. Cash flows from payments on the Eligible Loans, together with
proceeds of reinvestment of the income earned on Eligible Loans, are intended to
provide cash sufficient to make all required payments of principal and interest
on each outstanding series of the Notes. If current revenues are insufficient to
pay principal and interest due on the Notes money in the Reserve Fund created
under the Indenture is available for payment of amounts due. The Trustee has
withdrawn money from the Reserve Fund for payment of interest on the Notes. The
Reserve Fund is to be maintained in an amount equal to 2% of the outstanding
principal balance of the Notes under the terms of the Indenture. At March 31,
1998, that amount was $10,753,417 and the balance in the Reserve Fund was
$5,654,977. The Indenture provides that any deficiency in the Reserve Fund is to
be restored from future revenues as funds become available. The Company believes
that revenues will be sufficient to restore the Reserve Fund and that cash flow
from Eligible Loans, together with proceeds of the reinvestment of income from
the Eligible Loans, will be sufficient to pay the principal and interest due on
the Notes.
It is anticipated that regular payments under the terms of the Eligible
Loans, as well as early prepayment, will reduce the number of Eligible Loans
held in the Trust Estate. The Company is authorized under the Indenture to use
principal receipts from Eligible Loans to purchase additional Eligible Loans
until April 1, 1999. Thereafter, principal receipts from Eligible Loans will be
used to reduce the amount of Notes outstanding. The Company also plans to issue
additional Notes the proceeds of which will be used to acquire additional
Eligible Loans.
YEAR 2000 COMPLIANCE.
Although the Company does not itself rely significantly on computer
programs, UNIPAC depends heavily on a computerized student loan servicing
system. To the extent this system is incapable of appropriately interpreting the
upcoming change in the century, some level of modification will be necessary to
become "Year 2000 compliant." UNIPAC has informed the Company that it has
completed major program changes to its student loan servicing mainframe system
and has assured the Company that its system has been modified to process dates
into the next century. However, UNIPAC is continuing to evaluate and upgrade its
operating system and all third party software/products and, to the extent these
systems, software or products are not "Year 2000 compliant," there can be no
assurance that potential systems interruptions would not have a material adverse
effect on the business of the Company.
According to a comprehensive audit report prepared by the Department,
the Department is far behind schedule for becoming "Year 2000 compliant" and for
developing contingency plans in the event its computer systems should fail due
to a lack of "Year 2000 compliance." The Department's failure to become "Year
2000 compliant" could result in the delay of special allowance payments and
payments of interest benefits from the Department to the Company as described
above (see Note 1 to the financial statements herein), and therefor, there can
be no assurance that such failure by the Department would not have a material
adverse effect on the business, financial condition and results of operations of
the Company.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By written consent in lieu of meeting dated April 2, 1998, the
Company's sole shareholder reelected Messrs: Dunlap, Butterfield,
Page, Wilcox and Hoff as directors of the Company.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
UNION FINANCIAL SERVICES-1, INC.
By: /S/ Stephen F. Butterfield
----------------------------------
Stephen F. Butterfield, President
(Principal Executive Officer)
By: /S/ Ronald W. Page
----------------------------------
Ronald W. Page, Vice President (Principal
Financial and Accounting Officer)
Date: May 15, 1998
11
<PAGE>
The following is a complete list of exhibits filed as part of this Form
10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601
of Regulation S-K.
Exhibit No. Description Location
3.1 Articles of Incorporation of the Company *
3.2 Bylaws of the Company *
4.1 Form of Second Amended and Restated Indenture **
4.2 Form of Supplemental Indenture **
10.1 Administrative Services Agreement, dated as of August 1, 1996, by **
and between Union Financial Services, Inc. and the Company
10.1.1 Amendment to Administrative Services Agreement, dated as of **
November 1, 1996, by and between Union Financial Services, Inc.
and the Company
10.2 Amended and Restated Servicing Agreement, dated as of June 19, **
1996, by and between Union Bank and Trust Company and the
Company
27.1 Financial Data Schedule ***
- --------------------
* Incorporated by reference herein to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 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
three months covered by this report.
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 18,141,647
<SECURITIES> 0
<RECEIVABLES> 545,102,448
<ALLOWANCES> (107,776)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 574,576,217
<CURRENT-LIABILITIES> 2,242,628
<BONDS> 571,500,000
0
0
<COMMON> 1,000
<OTHER-SE> 832,589
<TOTAL-LIABILITY-AND-EQUITY> 574,576,217
<SALES> 0
<TOTAL-REVENUES> 11,093,086
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,716,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,257,636
<INCOME-PRETAX> 118,680
<INCOME-TAX> 43,318
<INCOME-CONTINUING> 75,362
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,362
<EPS-PRIMARY> 75.36
<EPS-DILUTED> 75.36
</TABLE>
