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, 1998
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 86-0817755
(State or other jurisdiction (I.R.S. Employer
of 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)
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, 1998: None
The number of shares outstanding of registrant's common stock as of
March 31, 1999 was 1,000.
-----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated in Parts I and IV of this
report by reference: (i) 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 October 14, 1997, (ii) the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and (iii) the
Registrant's current report on Form 8-K, filed January 6, 1998.
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS.................................................1
ITEM 2. PROPERTIES...............................................8
ITEM 3. LEGAL PROCEEDINGS........................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......8
PART I
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..........................8
ITEM 6. SELECTED FINANCIAL DATA..................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ......................................11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......12
ITEM 11. EXECUTIVE COMPENSATION..................................14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..........................................15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.................................16
SIGNATURES....................................................................19
<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.
Business of Company
General. The Company is a special purpose corporation formed by
UFS to engage in the business of purchasing, financing, holding and selling
guaranteed educational loans made to students and to parents of students
("Eligible Loans") under the Higher Education Act of 1965, as amended (the
"Higher Education Act"). Eligible Loans are purchased by the Company from
qualified leaders under the Higher Education Act pursuant to the terms and
subject to the conditions stated in student loan purchase agreements. The
proceeds of the Eligible Loans are used by the borrowers to pay the costs
associated with attendance at post-secondary educational institutions.
The Company finances its purchases of Eligible Loans through the
issuance of its Taxable Student Loan Asset-Backed Notes (the "Notes"). The Notes
have been issued in several series. Repayment of the Notes is secured by the
pledge of a revolving pool of Eligible Loans and certain other property held for
the benefit of the owners of the Notes (the "Trust Estate"). The Trust Estate is
held by a trustee (the "Trustee") pursuant to the terms of the Indenture of
Trust governing the issuance of the Notes (the "Indenture").
Recent Registration and Issuance of Notes. 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, and was declared effective by order of the
Securities and Exchange Commission ("SEC") in October 1997. A registration
statement on Form S-3, Registration No. 333-68611, was filed with the SEC by the
Company under the Securities Act for $170,660,000 of additional Notes which
became effective in December, 1998. The Company currently has $278,980,000 of
notes left available on its shelf registration.
In December, 1998, the Company issued its Taxable Student Loan
Asset-Backed Notes, Series 1998 (the "Series 1998 Notes") in the aggregate
principal amount of $745,000,000, pursuant to its registration statement. The
Series 1998 Notes consisted of (i) Senior Class 1998 A-7 Notes, Fixed Rate (the
"Class A-7 Notes"), (ii) Senior Class 1998 A-8 Notes, Fixed Rate (the "Class A-8
Notes"), (iii) Senior Class 1998 A-9 Notes, Fixed Rate (the "Class A-9 Notes"),
(iv) Senior Class 1998 A-10 Notes, Auction Rate Securities (the "Class A-10
Notes"), (v) Senior Class 1998 A-11 Notes, Auction Rate Securities (the "Class
A-11 Notes"), (vi) Senior Class A-12 Notes, Auction Rate Securities (the "Class
A-12 Notes"), and (vii) Subordinate Class 1998 B-5 Notes, Auction Rate
Securities (the "Class B-5 Notes").
Notes Issued. The following table summarizes the various series
and classes of Notes issued by the Company since its inception.
1
<PAGE>
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
1998A A-7 December 22, 1998 August 1, 2005 125,000,000
1998A A-8 December 22, 1998 September 1, 2005 125,000,000
1998A A-9 December 22, 1998 December 1, 2005 125,000,000
1998A A-10 December 22, 1998 October 1, 2032 100,000,000
1998A A-11 December 22, 1998 November 1, 2032 100,000,000
1998A A-12 December 22, 1998 December 1, 2032 100,000,000
1998A B-5 December 22, 1998 December 1, 2032 70,000,000
------------
$1,341,800,000
- ------------
(*) 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.
The Federal Family Education Loan Program. The Higher Education
Act provides for a program of direct federal insurance of student loans
("FISLP") and 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").
2
<PAGE>
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 the Secretary of Education
has determined that 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.
Servicing of Eligible Loans. Union Bank and Trust Company,
Lincoln, Nebraska ("Union Bank") acts as servicer (the "Servicer") of the
Company's Eligible Loans in accordance with a second Amended and Restated
Servicing Agreement, dated as of December 18, 1998 (the "Servicing Agreement").
UNIPAC Service Corporation, a Nebraska corporation ("UNIPAC"), and InTuition,
Inc., a Florida corporation ("InTuition") act as subservicers (the
"Subservicers") and custodians (the "Custodians") of the Eligible Loans in
accordance with Subservicing Agreements (the "Subservicing Agreements") between
Union Bank and UNIPAC and Union Bank and InTuition respectively. 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. InTuition is a
privately held corporation that provides student loan servicing for clients
throughout the country under both timeshare and full-service agreements.
InTuition's corporate headquarters is located in Jacksonville, Florida.
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 February 19, 1999 and represents figures as of December 31, 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 December 31, 1998
was $ 631,449,261. Set forth in Table A below is the aggregate outstanding
principal amount of Notes of each Class as of December 31, 1998.
3
<PAGE>
Table A
Outstanding Aggregate Principal Amount Per Class
(December 31, 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
A-7 125,000,000
A-8 125,000,000
A-9 125,000,000
A-10 100,000,000
A-11 100,000,000
A-12 100,000,000
B-1 --
B-2 --
B-3 15,600,000
B-4 30,800,000
B-5 70,000,000
-----------------
* 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 fixed or is
calculated 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.
4
<PAGE>
Table B
Applicable Interest Rate Per Class
(December 31, 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%
A-10 5.80% (2)
A-11 5.75% (2)
A-12 5.75% (2)
B-5 6.15% (2)
Treasury Rate (1)
A-5 6.0689%
Libor Rate (1)
B-3 6.1050%
B-4 5.9814%
Fixed Rate
A-7 5.48%
A-8 5.50%
A-9 5.73%
--------------------
(1) Treasury Bill Rate based on average rate and LIBOR Rate
based on the Smith Barney stated rate.
(2) Indicates the initial rate for this class of Notes.
Set forth in the tables below are the characteristics of Eligible
Loans held in the Trust Estate on December 31, 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.
Table C
Composition of the Eligible Loans
(December 31, 1998)
Aggregate Outstanding Principal Balance......................... $ 631,449,261
Number of Borrowers............................................. 73,775
Average Outstanding Principal Balance Per Borrower.............. 8,569
Number of Loans................................................. 148,458
Average Outstanding Principal Balance Per Loan.................. 4,253
Approximate Weighted Average Remaining Term (months) (does not
include school, grace, deferment or forbearance)................ 153
Weighted Average Borrower Interest Rate......................... 7.56%
5
<PAGE>
Table D
Distribution of the Eligible Loans by Loan Type
(December 31, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
- ------------------------ ------------------- ----------------- -----------------
Consolidated 17,651 $ 266,597,738 42.22%
PLUS 618 1,423,950 .23
SLS 177 533,621 .08
Stafford-Subsidized 100,713 241,963,582 38.32
Stafford-Unsubsidized 29,299 120,930,370 19.15
------ ----------- -----
Total 148,458 $ 631,449,261 100.00%
======== ============= ======
Table E
Distribution of the Eligible Loans by Interest Rate
(December 31, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range Loans Balance Balance
- ------------------------ ------------------ ---------------- -----------------
Less than 7.50% 42,643 $ 279,081,417 44.20%
7.50% to 7.99% 23,185 95,480,603 15.12
8.00% to 8.49% 76,352 216,597,638 34.30
8.50% to 8.99% 794 1,951,200 .31
9.00% to 9.49% 5,123 35,856,911 5.68
9.50% or greater 361 2,481,492 .39
--- --------- -----
Total 148,458 $ 631,449,261 100.00%
======= ============= ======
Table F
Distribution of the Eligible Loans by School Types
(December 31, 1998)
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
- ------------------- --------------- ---------------- -------------------
2-Year 10,516 $ 31,673,517 5.01%
4-Year 126,949 547,531,680 86.71
Proprietary 8,903 32,557,395 5.16
Unknown 2,090 19,666,669 3.12
----- ---------- ----
Total 148,458 $ 631,449,261 100.00%
======= ============== ======
6
<PAGE>
Competition
The Company experiences competition from banks and savings
associations and 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.
Year 2000 Compliance.
The Year 2000 problem arises from the use of software developers
of two digits rather than four to denote year dates in software programs,
computer hardware operating systems and microprocessors - based embedded
controls in automated equipment. As a result, information systems that operate
date sensitive software or automated equipment that contains date sensitive
microprocessors may interpret "00" to signify 1900 rather than 2000, thereby
impairing the ability of the information systems or automated equipment to
correctly calculate, sequence or recognize dates. This could result in serious
malfunctions or even complete failures of affected systems, including an
inability to process transactions, issue securities or checks, or engage in
normal business activities.
We cannot now determine whether the Year 2000 problem will have a
material adverse effect on our business operations. The conduct of our business
in relationship to purchasing loans or administering the loans we own is not
significantly dependent on our own computer programs. However, our loan
servicers, Trustee, the Guarantee Agencies and Department of Education all rely
heavily on computer programs and systems for processing transactions related to
student loans.
We have made inquiry of the Trustee, Union Bank, UNIPAC Service
Corporation and InTuition, Inc. concerning the Year 2000 problem, and have
received assurances that they are, or are working to become, Year 2000
compliant. We are aware that the Guarantee Agencies and Department of Education
are working to address the Year 2000 problem. The Department of Education has
indicated that it expects to complete all Year 2000 work on its Federal Family
Education Loan Program computer systems in March, 1999. However, we cannot
provide any assurance that the Department of Education or the Guarantee Agencies
will become Year 2000 compliant in a timely manner. We cannot influence or
control the efforts of third parties to address the Year 2000 problem, nor can
we terminate our dependence on the servicers, Guarantee Agencies or Department
of Education. Under the reasonably likely worst case scenario, the Year 2000
problem could delay our receipt of principal and interest payments on our
student loans and receipt of claims payments from the Guarantee Agencies. If
that delay continues for a prolonged period, we may be unable to make timely
payments of principal and interest due on our Notes.
7
<PAGE>
Changes in Legislation.
On October 7, 1998, President Clinton signed into law the Higher
Education Amendments of 1998 (the "1998 Amendments"). The 1998 Amendments
enacted significant reforms to the FFELP including changes to the formula for
calculating Eligible Loan interest rates. Under the most recent formula,
interest rates charged to borrowers on Stafford Loans was set at the 91-day
Treasury Bill rate plus 1.7% while a student is in school and the 91-day
Treasury rate plus 2.3% while the loan is in repayment, and the yield for
Stafford Loan holders was set at the 91-day Treasury Bill rate plus 2.2% while
the student is in school and the Treasury Bill rate plus 2.8% while the loan is
in repayment. Federal Consolidation Loan interest rates were revised to equal
the weighted average of the interest rates on the loans consolidated rounded up
to the nearest one-eighth of 1%, capped at 8.25%. The 1998 Amendments also
mandated an additional recall of Guarantee Agency reserve funds by the Secretary
of Education amounting to $85 million in fiscal year 2002, $82.5 million in
fiscal year 2006, and $82.5 million in fiscal year 2007. Certain minimum reserve
levels, however, are protected from recall. The 1998 Amendments also reduced the
federal reinsurance provided to Guarantee Agencies from 98% to 95% for student
loans first disbursed on or after October 1, 1998. The new recall of reserves
and reduced reinsurance for federal Guarantee Agencies increases the risk that
resources available to Guarantee Agencies to meet their guarantee obligation
will be significantly reduced. In addition, under the 1998 Amendments, all
references to a "transition" to full implementation of the Federal Direct
Student Loan Program were deleted from the Higher Education Act, and the Direct
Consolidation Loan interest rate calculation was revised to reflect the rate for
FFELP Consolidation Loans, and is effective for loans on which applications are
received on or after February 1, 1999. The Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder may be further amended or modified in the future in a
manner that will adversely impact the programs described herein and the loans
made thereunder, including the Eligible Loans or the Guarantee Agencies.
ITEM 2. PROPERTIES
The Company has no materially important physical properties.
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 officers of Union Bank and certain
relatives of such officers. The minority owners of UFS also indirectly own Union
Bank.
As of December 31, 1998, 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 December 31, 1998, 1997 and 1996, and for each of the respective
periods ended December 31, 1998, 1997 and 1996, 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.
8
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES-1, INC.
SELECTED FINANCIAL DATA
Period Ended Year Ended Year Ended
Statement of Income Data: December 31, December 31, December 31,
1996 (1) 1997 1998
<S> <C> <C> <C>
Revenues:
Loan interest.......................... $ 15,636,042 $42,757,006 $ 44,800,871
Investment interest.................... 1,373,140 2,268,878 1,962,767
Other.................................. 17,449 195,084 86,366
------ ------- ------
Total revenues................. 17,026,631 45,220,968 46,850,004
---------- ---------- ----------
Expenses:
Interest on Notes...................... 11,987,255 32,782,396 34,076,786
Loan Servicing ........................ 2,255,564 4,917,318 5,475,146
Financing fees to parent .............. 1,919,207 423,112 --
Trustee and broker fees................ 550,899 915,380 950,018
Amortization of debt issuance costs.... 250,992 494,106 558,734
Amortization of loan premiums.......... 438,584 1,441,526 2,008,889
Other general and administrative ...... 437,956 2,240,328 3,317,040
------- --------- ---------
Total expenses 17,840,457 43,214,166 46,386,613
Income (loss) before income taxes (813,826) 2,006,802 463,391
Income tax expense (benefit) .............. 274,968 710,717 169,138
------- ------- -------
Net income (loss) ............. $ (538,858) $ 1,296,085 $ 294,253
=========== ========== =========
Ratio of earnings to fixed charges......... .93% (2) 1.06% 1.01%
Balance Sheet Data:
Cash and cash equivalents ................. $ 65,402,585 39,542,382 $664,815,085
Student loans receivable, including premiums 491,046,915 525,005,954 639,740,073
Total Assets............................... 568,171,986 575,292,144 1,322,564,317
Notes payable ............................. 566,000,000 571,500,000 1,316,500,000
Total liabilities.......................... 568,709,844 574,533,917 1,321,511,837
Shareholders' equity (deficit)............. (537,858) 758,227 1,052,480
-------------
(1) The Company was incorporated on February 28, 1996. Accordingly,
selected financial data for prior fiscal years is not applicable.
(2) Earnings were inadequate to cover fixed charges by $813,826.
</TABLE>
9
<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 five (5) series of Notes consisting of seventeen (17) 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.
The assets of the Company consist primarily of Eligible Loans. At
December 31, 1998, the Company held approximately $631 million in Eligible
Loans. On January 4, 1999, the Company purchased approximately $622 million of
Eligible Loans, including approximately $8.7 million of purchased interest and
$14.9 million of loan premium. Approximately $399 million of those loans were
purchased from related parties at prices equivalent to those available in the
market.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 consisted
primarily of interest on the Eligible Loans subject to the indebtedness of the
Notes, which totaled $44,800,871, compared to $42,757,006 for the year ended
December 31, 1997, an increase of 4.80%. The amount of interest reported for the
year ended December 31, 1998 was derived from Eligible Loans in an aggregate
principal amount of $639,740,073, compared to $525,005,954 for the year ended
December 31, 1997. The Company's average net investment in Eligible Loans during
the year ended December 31, 1998 was approximately $539,082,229 (excluding funds
held by the Trustee), compared to $509,142,849 for the year ended December 31,
1997, and the average effective annual interest rate of interest income on
Eligible Loans was approximately 8.31%, compared to 8.40% for the year ended
December 31, 1997. The Company also received investment income and other income
for the year ended December 31, 1998 in the amounts of $1,962,767 and $86,366,
respectively, compared to $2,268,878 and $195,084 respectively, for the year
ended December 31, 1997.
Expenses. Expenses for the year ended December 31, 1998 consisted
primarily of interest on the Company's outstanding Notes which totaled
$34,076,786, compared to $32,782,396 for the year ended December 31, 1997, an
increase of 3.95%. The amount of interest expense reported during the period
ended December 31, 1998 depended primarily upon the amount of Notes outstanding
during that period and the interest rates on such Notes. The increase in
interest expense was attributable primarily to an increase in the London
InterBank Offered Rate of interest which is an index used by the Company to set
the amount of interest it pays on its LIBOR Rate Notes. The Company's average
debt outstanding was approximately $633,583,333, compared to $525,737,324 for
the year ended December 31, 1997, and the average annual cost of borrowings was
approximately 5.38%, compared to approximately 6.24% for the year ended December
31, 1997. The average annual cost of borrowing was lower in 1998 than in 1997,
even though the amount of debt outstanding at the year end in 1998 was higher
than in 1997, because the Company issued $745 million of its Notes in December,
1998. The Company also incurred loan servicing fees to Union Bank and financing
fees to UFS in the amount of $5,475,146 and $0, respectively, compared to
$4,917,318 and $423,112, respectively, for the year ended December 31, 1997. 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. Loan servicing fees paid by the Company were higher in 1998
because the Company held more student loans in 1998. Trustee and broker fees,
amortization of debt issuance costs and amortization of loan premiums for the
year ended December 31, 1998 amounted to $950,018, $558,734 and $2,008,889
respectively, compared to $915,380, $494,106 and $1,441,526 respectively, for
the year ended December 31, 1997. Other general and administrative expenses for
the year ended December 31, 1998 amounted to $3,317,040, compared to $2,240,328
for the year ended December 31, 1997. The increase in the Company's general and
administrative expense was attributable primarily to the creation of a loan loss
allowance and payment of origination fees on Federal Consolidation Loans. Income
tax expense for the year ended December 31, 1998 amounted to $169,138, compared
to an income tax expense in the amount of $710,717 for the year ended December
31, 1997.
10
<PAGE>
Year Ended December 31, 1997 Compared to Year 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 year 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 for the year ended
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 year ended December 31,
1996, and the average effective annual interest rate of interest income on
Eligible Loans was approximately 8.40%, compared to 7.95% for the year 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 year
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 year 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 period and the interest rates on such Notes. The Company's average debt
outstanding was approximately $525,737,324, compared to $213,533,000 for the
year ended December 31, 1996, and the average annual cost of borrowings was
approximately 6.24%, compared to approximately 5.61% for the year ended December
31, 1996. The Company also incurred loan servicing fees to Union Bank and
financing fees to UFS in the amount of $4,917,318 and $423,112, respectively,
compared to $2,255,564 and $1,919,207, respectively, for the year 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 year 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 year
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 year ended December 31, 1996, which resulted from a
carryforward of the Company's net operating loss.
For the year ended December 31, 1998, there were no unusual or
infrequent events or transactions or any significant economic dangers that
materially affected the amount of reported income.
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 1998 to cover shortages in the Revenue
Fund caused by slow payment to the Company of interest due on the Company's
Eligible Loans and the capitalization of interest to the principal balance of
the Eligible Loans at rates higher than those anticipated by the Company. 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, 2002. 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, 1998, cost increases to the
Company were not materially impacted by inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets consist almost entirely of Eligible Loans.
Those Eligible Loans are subject to market risk in that the cash flows generated
by the Eligible Loans can be affected by changes in interest rates. The Eligible
Loans generally bear interest at a rate equal to the average bond equivalent
rates of weekly auctions of 91-day Treasury bills (the "91 day Treasury Bill
Rate") plus a margin specified for each Eligible Loan. Thus, if interest rates
generally increase, the Company would expect to receive greater interest
payments on its Eligible Loans, and if interest rates generally decrease, the
Company would expect the interest payments it receives to be reduced. The
Company does not hold any of its assets for trading purposes.
11
<PAGE>
The Company attempts to manage its interest rate risk by funding
its portfolio of Eligible Loans with variable rate debt instruments. The
majority of the Notes bear interest at a rate that is reset periodically by
means of auction procedures, or by reference to the London Interbank Offered
Rate ("LIBOR") or a specified Treasury rate, plus an applicable margin. By
funding the Eligible Loan with variable rate Notes, the Company attempts to
maintain a positive "spread" between the interest earned on its Eligible Loans
and its interest payment obligations under the Notes. Thus, in an environment of
generally declining interest rates, the Company should receive lower interest
payments on it Eligible Loans, but the interest payments due on the Notes should
also be lower.
The interest rates on each series of Auction Rate Notes is 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 is 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
the 91-day Treasury Bill Rate plus margins specified for such Eligible Loans. As
a result of the differences between the indices used to determine the interest
rates on Eligible Loans and the interest rates on the Notes, there could be
periods of time when the rates on Eligible Loans are inadequate to generate
sufficient cash flow to cover the interest on the Notes and the expenses
required to be paid under the Indenture. In a period of rapidly rising interest
rates, the interest rates on Eligible Loans may not increase as quickly as the
variable interest rates with respect to the Notes. If there is a decline in the
rates on Eligible Loans, 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).
The Company has conducted a sensitivity analysis to determine
what effect differing changes of the interest rates on Eligible Loans and the
Notes would be on its cash flows and its resulting ability to pay the principal
and interest due on the Notes.
The company's management case cash flow was prepared assuming a
60 basis points spread between Treasury bills and LIBOR. In this analysis the
net present value of the estimated issuer withdrawals at the five-year treasury
bill rate on December 15th, 1998 (4.34%) plus 100 basis points was $27,132,810.
When this spread was increased by 10 basis points to 70, the net present value
of the cash flow was reduced to $23,543,053, or a reduction of $3,589,757 of the
estimated issuer withdrawals.
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, 1998.
There are no other changes in or disagreements on accounting and
financial statement disclosure.
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:
12
<PAGE>
<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 35 4732 Calvert Street Executive February Present
Dunlap Lincoln, Nebraska Vice 1996
68506 President of
Union Bank
and Trust
Company; President
Farmers & Merchants
Investment, Inc.
Stephen F. President 46 6991 East Camelback President of February Present
Butterfield Road, Suite B290 Union 1996
Scottsdale, Arizona Financial
85251 Services, Inc.
Ronald W. Page Vice 50 1801 California Senior Vice February Present
President, Street President of 1996
Treasurer Suite 3920 Union
and Secretary Denver, CO 80202 Financial
Services, Inc.
Investment Banker,
A.G. Edwards & Sons
Inc. 1990-1995
Ross Wilcox -- 56 4732 Calvert Street Chief February Present
Lincoln, Nebraska Executive 1996
68506 Officer of
Union Bank
and Trust
Company
Dr. Paul R. Hoff - 64 Hernia Hill, Rural Retired February Present
Route 1 Physician 1996
Seward, Nebraska
68434
- -------------
(*) 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 __, 2000.
</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., NHELP-II, Inc., Union Bank and Trust
Company and other affiliated banks, Union Financial Services, Inc., UNIPAC,
InTuition Holdings, Inc. and Farmers and Merchants Investment, Inc. 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 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 NHELP-II, Inc. 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 is a director of Union Financial Services, Inc., NHELP-II, Inc. and
Ref-Chem Corporation. 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.
13
<PAGE>
Ross Wilcox, Director. Mr. Wilcox is the Chief Executive Officer
and a Director 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, Union Financial Services, Inc. and Union Insurance Agency.
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 1998
The Company has not issued any options.
Long-Term Incentive Plan -- Awards in 1998
The Company has no long-term incentive plan.
Defined Benefit or Actuarial Plan Disclosure in 1998
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 1998, the Board held 3 regular meetings. All
of the Directors attended all of the meetings of the Board.
Committees Of The Board
The Board of Directors has not established an Audit Committee or
a Compensation Committee.
14
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 11, 1999, 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, as amended November 1, 1998. Under
the Agreement, UFS agreed: (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 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 the sum of $0 during 1998 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 Administrative Services Agreement has been filed
as an Exhibit to this Form 10-K.
Servicing Agreement. The Company and Union Bank entered into a
Second Amended and Restated Servicing Agreement (the "Servicing Agreement")
dated as of December 18, 1998. Under the Servicing Agreement, Union Bank
services the Eligible Loans. Certain of the shareholders of UFS also hold an
interest in the bank holding company that owns and controls Union Bank, and
certain of the officers and directors of the Company are also officers and
directors of Union Bank. Union Bank entered into subservicing agreements with
UNIPAC and InTuitition (the "Subservicing Agreements") dated as of March 1, 1996
and December 18, 1998 respectively. Under the Subservicing Agreements, UNIPAC
and InTuition, as Subservicers, assume substantially all of the duties of the
Servicer under the Servicing Agreement for the term of the Servicing Agreement.
Union Bank owns 80.5% of UNIPAC and its parent corporation also has the right to
vote 50% of the voting stock of the parent corporation of InTuition. The Company
believes that the terms and conditions of the Servicing Agreement (and the
subservicing arrangements) 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 that ranges from 0.60 to 1.25 percent of the student loan
principal balance, depending on the type of loan, calculated monthly. The
Servicing Agreement has been filed as an Exhibit to this Form 10-K.
15
<PAGE>
Student Loan Purchase Agreements. The Company has entered into
Student Loan Purchase Agreements with Union Bank, InTuition Holdings, Inc.,
NHELP-I, Inc., and NEBHELP, INC. pursuant to which the Company has purchased
Eligible Loans. Although Union Bank, InTuition Holdings, Inc., NHELP-I, Inc.,
and NEBHELP, INC. are related to the Company as described in the paragraph
above, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The financial statements and financial statement information and
schedules 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. A schedule of Valuation and Qualifying Accounts appears on page F-14 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.
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.
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 **
4.2.1 1998 Supplemental Indenture by and between the Company and Zions ***
First National Bank
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
10.2.1 Second Amended and Restated Servicing Agreement, dated as of ***
December 18, 1998 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
16
<PAGE>
99.3 Loan Sale and Commitment Agreement, dated as of November 1, **
1996, by and between Union Bank and Trust Company and the
Company
- --------------------
* 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).
*** Incorporated by reference herein to the Company's current report on Form
8-K, filed January 6, 1998
**** Filed herewith.
Reports on Form 8-K
The Company filed reports on Form 8-K during the last quarter of
the period covered by this report:
o Current report on Form 8-K, filed January 6, 1998, copies
of an Underwriting Agreements between Union Financial
Services-1, Inc. and Salomon Smith Barney, LLC dated as of
December 16, 1998 and the 1998 Supplement Indenture of
Trust by and between Union Financial Services-1, Inc. and
Zions First National Bank.
o Current reports on Form 8-K, filed December 16, 1998,
filing a copy of Computational Materials in connection
with the issuance by Union Financial Services-1, Inc. of
its Taxable Student Loan Asset-backed Notes Series 1998.
o Current report on Form 8-K filed December 14, 1998, filing
a copy of Computational Materials, in connection with the
issuance by Union Financial Services-1, Inc. of its
Taxable Student Loan Asset-backed Notes Series 1998.
17
<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, 1998 and 1997 ............................ F-2
Statements of Operations for the years ended December 31, 1998 and 1997
and the period from inception (February 28, 1996) to December 31, 1996... F-3
Statement of Stockholders' Equity/Deficit for the years ended
December 31, 1998 and 1997 and the period from inception
(February 28, 1996) to December 31, 1996................................. F-4
Statement of Cash Flows for the years ended December 31, 1998 and 1997
and the period from inception (February 28, 1996) to December 31, 1996... F-5
Notes to Financial Statements............................................... F-6
Valuation and Qualifying Accounts and Independent Auditors Report.......... F-14
18
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Financial Statements
December 31, 1998 and 1997
(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, 1998 and 1997 and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997 and the period from inception (February 26, 1996) to December 31, 1996.
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, 1998 and 1997 and the results of its operations and its
cash flows for the years ended December 31, 1998 and 1997 and the period from
inception (February 26, 1996) to December 31, 1996, in conformity with generally
accepted accounting principles.
February 19, 1999
Lincoln, Nebraska
F-1
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES - 1, INC.
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
---------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 664,815,085 39,542,382
Student loans receivable, net of allowance of $416,801 in 1998 639,740,073 525,005,954
Accrued interest receivable 11,110,808 7,735,292
Debt issuance cost, net of accumulated amortization of $1,273,986
in 1998 and $715,252 in 1997 6,698,845 2,997,516
Deferred tax asset 153,132 --
Other assets 46,374 11,000
---------------- ------------
Total assets $ 1,322,564,317 575,292,144
================ ============
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 1,316,500,000 571,500,000
Accrued interest payable 3,725,622 1,607,350
Income taxes payable to parent 146,270 436,748
Other liabilities 1,139,945 989,819
---------------- ------------
Total liabilities 1,321,511,837 574,533,917
---------------- ------------
Stockholders' equity:
Common stock, no par value. Authorized 1,000 shares;
issued 1,000 shares 1,000 1,000
Retained earnings 1,051,480 757,227
---------------- ------------
Total stockholders' equity 1,052,480 758,227
Commitments and contingencies
---------------- ------------
Total liabilities and stockholders' equity $ 1,322,564,317 575,292,144
================ ============
See accompanying notes to financial statements.
</TABLE>
F-2
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Statements of Operations
Years ended December 31, 1998 and 1997 and period from
inception (February 28, 1996) to December 31, 1996
1998 1997 1996
----------- ----------- ------------
Revenues:
Loan interest $ 44,800,871 42,757,006 15,636,042
Investment interest 1,962,767 2,268,878 1,373,140
Other 86,366 195,084 17,449
----------- ----------- ------------
Total revenues 46,850,004 45,220,968 17,026,631
----------- ----------- ------------
Expenses:
Interest on notes 34,076,786 32,782,396 11,987,255
Loan servicing 5,475,146 4,917,318 2,255,564
Financing fees to parent -- 423,112 1,919,207
Trustee and broker fees 950,018 915,380 550,899
Amortization of debt issuance costs 558,734 494,106 250,992
Amortization of loan premiums 2,008,889 1,441,526 438,584
Other general and administrative 3,317,040 2,240,328 437,956
----------- ----------- ------------
Total expenses 46,386,613 43,214,166 17,840,457
----------- ----------- ------------
Income (loss) before
income taxes 463,391 2,006,802 (813,826)
Income tax expense (benefit) 169,138 710,717 (274,968)
----------- ----------- ------------
Net income (loss) $ 294,253 1,296,085 (538,858)
=========== =========== ============
See accompanying notes to financial statements.
F-3
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997 and period from
inception (February 28, 1996) to December 31, 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
Net income -- 294,253 294,253
--------- ---------- -----------
Balance at December 31, 1998 $ 1,000 1,051,480 1,052,480
========= ========== ===========
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
UNION FINANCIAL SERVICES - 1, INC.
Statements of Cash Flows
Years ended December 31, 1998 and 1997 and period from
inception (February 28, 1996) to December 31, 1996
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) $ 294,253 1,296,085 (538,858)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization 2,567,623 1,935,632 689,576
Deferred tax expense (benefit) (153,132) 274,968 (274,968)
Provision for loan losses 600,000 -- --
(Increase) decrease in accrued interest receivable (3,375,516) 515,533 (8,250,825)
(Increase) decrease in other assets (35,374) 2,888 (13,888)
Increase in accrued interest payable 2,118,272 114,209 1,493,141
(Decrease) increase in other liabilities 150,126 (226,884) 1,216,703
Increase (decrease) in income taxes payable to parent (290,478) 436,748 --
------------- ------------- -------------
Net cash provided by (used in) operating activities 1,875,774 4,349,179 (5,679,119)
------------- ------------- -------------
Cash flows used in investing activities:
Purchase of student loans, including premiums (178,538,396) (101,061,642) (515,058,073)
Proceeds from sale of student loans 2,056,884 6,139,464 --
Net proceeds from student loan principal payments
and loan consolidations 59,138,505 59,491,767 23,572,574
------------- ------------- -------------
Net cash used in investing activities (117,343,007) (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 745,000,000 30,800,000 566,000,000
Payment for debt issuance costs (4,260,064) (278,971) (3,433,797)
Payment to defease notes payable -- (25,300,000) --
------------- ------------- -------------
Net cash provided by financing activities 740,739,936 5,221,029 562,567,203
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 625,272,703 (25,860,203) 65,402,585
Cash and cash equivalents, beginning of year 39,542,382 65,402,585 --
------------- ------------- -------------
Cash and cash equivalents, end of year $ 664,815,085 39,542,382 65,402,585
============= ============= =============
Supplemental disclosures:
Interest paid $ 30,351,165 32,668,187 10,494,114
============= ============= =============
Income taxes paid to parent $ 611,748 -- --
============= ============= =============
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 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 financed eligible loan borrowers are geographically located
throughout the United States and the majority 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.
Union Financial Services, Inc., the parent, is a holding company
organized for the purpose of establishing and owning the stock of
corporations like the Company engaged in the securitization of financial
assets. The parent also provides managerial and administrative support to
the Company.
Student Loans Receivable
Investments in student loans, including premiums, are recorded at cost,
net of premium amortization. Premiums are amortized over the estimated
principal life of the related loans.
Interest on Student Loans
Interest on student loans is accrued when earned and is either paid by
the Department of Education or the borrower depending on the status of
the loan at the time of accrual. In addition, the Department of Education
makes quarterly interest subsidy payments on certain qualified Title IV
loans until the student is required under the provisions of the Act to
begin repayment. Repayment on guaranteed student loans normally begins
within six months after completion of their course of study, leaving
school or ceasing to carry at least one-half the normal full-time
academic load as determined by the educational institution. Repayment of
PLUS loans normally begins within 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.
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.
(Continued)
F-6
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
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. Current income tax payments are made by the
Company to its parent as if the Company were a separate tax paying
entity.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make a number of
estimates and assumptions that effect the reported amounts of assets and
liabilities, reported amounts of revenues and expenses, and other
disclosures. Actual results could differ from those estimates.
Comprehensive Income
During 1998, the Company adopted the provisions of the Financial
Accounting Standards Board Statement No. 130, Reporting Comprehensive
Income. This Statement requires that an enterprise classify items of
other comprehensive income by their nature in the financial statements.
The Company has no sources of other comprehensive income. Therefore, the
Company's comprehensive income consists solely of its net income.
(2) Cash and Cash Equivalents
The Company's cash and cash equivalents at December 31, 1998 and 1997 are
held by the trustee in various accounts subject to use restrictions,
imposed by the indenture of trust, as shown on the following page.
(Continued)
F-7
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Loan Account 98A Fund - Established for the purpose of
purchasing eligible student loans with proceeds of the
borrowing $ 619,999,565 --
Recycling Account Fund - Established to maintain excess
funds for future operating needs, if necessary, and
purchases of eligible student loans 14,164,858 27,723,00
Reserve Fund - Established to cure any deficiencies in the
debt service requirements 26,330,011 7,706,756
Cost of Issuance Fund - Established to pay administrative
and issuance costs incurred with the issuance of Company debt 975,926 --
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 1,305,941 150,768
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) 1,154,529 3,320,995
Operating cash and cash equivalents 884,255 640,858
------------ ------------
Total cash and cash equivalents $ 664,815,085 39,542,382
============ ============
</TABLE>
(3) Student Loans Receivable and Concentration of Credit Risk
Student loans are recorded at cost, including unamortized premiums.
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.
(Continued)
F-8
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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 80% of the
student loans at December 31, 1998) are insured up to 98%.
The Company has provided for an allowance for loan loss related to those
loans only guaranteed up to 98% for principal and interest. The provision
is based upon historical default rates for such loans.
(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. The majority of the notes are
variable rate notes with interest rates reset periodically based upon
auction rates and national indices.
The following tables summarize outstanding notes payable at December 31,
1998 and 1997 by issue:
<TABLE>
<CAPTION>
Final Carrying Interest
1998 maturity amount range
----------------------------------------------- ---------- --------------- ---------------
<S> <C> <C> <C>
1996A Senior Auction Rate Notes, Class A-1 and A-2 7-01-14 $ 96,600,000 4.95% - 5.70%
1996B Senior Auction Rate Notes, Class A-3 and A-4 7-01-14 128,000,000 5.38% - 5.80%
1996C Senior Treasury Rate Notes, Class A-5 7-01-05 225,000,000 4.50% - 5.99%
1996C Senior Auction Rate Notes, Class A-6 7-01-14 75,500,000 5.10% - 6.40%
1996C Subordinate LIBOR Rate Notes, Class B-3 7-01-25 15,600,000 5.42% - 6.20%
1997A Subordinate LIBOR Rate Notes, Class B-4 7-01-30 30,800,000 5.39% - 6.12%
1998A Senior Fixed Rate Notes, Class A-7 8-01-05 125,000,000 5.48%
1998A Senior Fixed Rate Notes Class A-8 9-01-05 125,000,000 5.50%
1998A Senior Fixed Rate Notes Class A-9 12-01-05 125,000,000 5.73%
1998A Senior Auction Rate Notes Class A-10 10-01-32 100,000,000 5.80%
1998A Senior Auction Rate Notes Class A-11 11-01-32 100,000,000 5.75%
1998A Senior Auction Rate Notes Class A-10 12-01-32 100,000,000 5.75%
1998B Subordinate Auction Rate Notes, Class B-5 12-01-32 70,000,000 6.15%
---------------
$ 1,316,500,000
===============
</TABLE>
(Continued)
F-9
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
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
============
</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, 1998.
In December 1998, the Company issued $745,000,000 of Taxable Student Loan
Asset-Backed Notes, Series 1998A, due in maturities from August 1, 2005
to December 1, 2032, at varying rates. The proceeds were deposited into
the Loan Account Fund 98A for the purchase of eligible student loans.
In March 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.
(5) Income Taxes
Components of income tax expense (benefit) in 1998, 1997 and 1996 are
shown on the following page.
(Continued)
F-10
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ---------- ------------
Current:
Federal $ 300,265 395,099 --
State 22,005 40,650 --
----------- ---------- ------------
322,270 435,749 --
----------- ---------- ------------
Deferred:
Federal (142,712) 256,693 (256,693)
State (10,420) 18,275 (18,275)
----------- ---------- ------------
(153,132) 274,968 (274,968)
----------- ========== ============
$ 169,138 710,717 (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 1998, 1997 and 1996 as
shown below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) $ 157,553 682,313 (276,701)
Increase (decrease) in income taxes resulting
from:
State taxes, net of federal income tax benefit 7,646 26,829 (12,062)
Other 3,939 1,575 13,795
---------- ---------- ----------
$ 169,138 710,717 (274,968)
========== ========== =========
</TABLE>
The Company's deferred tax assets at December 31, 1998 resulted from the
future tax benefit of the loan loss allowance, not currently deductible
for tax purposes. Management believes that it is more likely than not
that the Company will generate sufficient future taxable income and
capital gains to fully recover deferred tax assets recognized and,
therefore, no valuation allowance is required. There were no deferred tax
assets or liabilities at December 31, 1997.
(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 student loans are estimated at
amounts recently paid by the Company to acquire the loans in the
market. The fair value of the student loans approximates carrying
value.
(Continued)
F-11
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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, 1998 and 1997, Iowa College Student Aid Commission,
Nebraska Student Loan Program, Inc. and Kentucky Higher Education
Assistance Authority and the United Student Aid Fund were the primary
guarantors, guaranteeing approximately 88% and 75%, 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
The Company was organized pursuant to provisions of the Act and as such,
may be subject to legislative changes. Legislative changes affecting
competition, loan asset characteristics, debt structure provisions and
regulatory compliance may from time to time affect the operations of the
Company. The Act expired September 1998 and was reauthorized with certain
amendments effective October 1, 1998. These amendments included certain
provisions for changes in the existing Federal Family Loan Program which
included changes to interest rates, special allowance payments and
guarantee fees that could have a material effect on the financial
statements.
(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 1998 and 1997.
(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, 1998 and 1997, $506,274 and $867,066,
respectively, was payable to UB&T for loan servicing and is included in
other liabilities. In 1998, the Company also paid approximately $385,000
to UB&T for services provided in connection with the purchase of eligible
student loans.
F-12
(Continued)
<PAGE>
UNION FINANCIAL SERVICES - 1, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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. In addition, the parent has provided additional services to the
Company on an as-needed transactional basis. These fees amounted to
approximately $953,000, $1,330,000 and $2,135,000 in 1998, 1997 and 1996,
respectively. At December 31, 1998, the amount payable to its parent is
approximately $210,000.
(11) Subsequent Event
On January 4, 1999, the Company purchased approximately $622 million of
eligible loans, including approximately $8.7 million of purchased
interest and $14.9 million of loan premiums. Approximately $399 million
of these loans were purchased from related parties at prices equivalent
to those available in the market.
F-13
<PAGE>
Schedule I
UNION FINANCIAL SERVICES - 1, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1998 and 1997 and period from
inception (February 28, 1996) to December 31, 1996
Additions
Balance at charged to Loans Balance at
beginning of costs and charged end of
Description year expenses off* year
------------ ------------ --------- ---------
Year ended December 31, 1998,
allowance deducted from asset
accounts, allowance for
loan losses $ -- 600,000 (183,199) 416,801
=========== ========== ========= =========
Year ended December 31, 1997,
allowance deducted from asset
accounts, allowance for
loan losses $ -- 133,408 (133,408) --
=========== =========== ========= ==========
Period from inception to December 31,
1996, allowance deducted from asset
accounts, allowance for
loan losses $ -- 4,441 (4,441) --
=========== =========== ========== =========
* Loans charged off are net of recoveries.
F-14
<PAGE>
Independent Auditors' Report
The Board of Directors
Union Financial Services - 1, Inc.
Under date of February 19, 1999, we reported on the balance sheets of Union
Financial Services - 1, Inc. as of December 31, 1998 and 1997, and the related
statements of operations, stockholder's equity and cash flows for each of the
years ended December 31, 1998 and 1997 and the period from inception (February
28, 1996) to December 31, 1996, as contained in the 1998 annual report. These
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year ended December 31, 1998. In connection
with our audits of the aforementioned financial statements, we also audited the
related accompanying financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Lincoln, Nebraska
February 19, 1999
F-15
<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 31, 1999
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 31, 1999
- ------------------------ (Principal Executive
Michael S. Dunlap Officer)
By: /s/ Stephen F. Butterfield President and Director March 31, 1999
- -------------------------------
Stephen F. Butterfield
By: /s/ Ronald W. Page Vice-President, Secretary, March 31, 1999
- --------------------- Treasurer and Director
Ronald W. Page (Principal Financial and
Accounting Officer)
By: /s/ Ross Wilcox Director March 31, 1999
- --------------------------
Ross Wilcox
By:/s/ Paul Hoff Director March 31, 1999
- --------------------------
Dr. Paul Hoff
Accountants' Consent
The Board of Directors
Union Financial Services - 1, Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-28551)on Form S-3, relating to Union Financial Services - 1, Inc.'s
registration of Taxable Student Loan Asset-Backed Notes of our report, dated
February 19, 1999, relating to the balance sheets of Union Financial Services -
1, Inc. as of December 31, 1998 and 1997, and related statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
1998 and 1997 and the period from inception (February 28, 1996) to December 31,
1996, which report appears in the December 31, 1998 annual report on Form 10-K
of Union Financial Services - 1, Inc.
/s/ KPMG Peat Marwick LLP
Lincoln, Nebraska
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 664,815,085
<SECURITIES> 0
<RECEIVABLES> 640,156,874
<ALLOWANCES> (416,801)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,322,564,317
<CURRENT-LIABILITIES> 0
<BONDS> 1,316,500,000
0
0
<COMMON> 1,000
<OTHER-SE> 1,051,480
<TOTAL-LIABILITY-AND-EQUITY> 1,322,564,317
<SALES> 0
<TOTAL-REVENUES> 46,850,004
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,309,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,076,786
<INCOME-PRETAX> 463,391
<INCOME-TAX> (169,138)
<INCOME-CONTINUING> 294,253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294,253
<EPS-PRIMARY> 294.25
<EPS-DILUTED> 294.25
</TABLE>
