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, 1999
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
------------------------------
NELNET STUDENT LOAN CORPORATION-1
(Exact name of registrant as specified in its charter)
(formerly Union Financial Services-1, Inc.)
Nevada 86-0817755
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1801 California St., Suite 3920
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(303) 292-6930
(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, 1999: NONE
THE NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS OF
MARCH 15, 2000 WAS 1,000.
-----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of 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 are incorporated in Part I of this
report by reference.
1
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS....................................................2
ITEM 2. PROPERTIES..................................................8
ITEM 3. LEGAL PROCEEDINGS...........................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................8
ITEM 6. SELECTED FINANCIAL DATA.....................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........14
ITEM 11. EXECUTIVE COMPENSATION.....................................15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K...................................................17
SIGNATURES...................................................................20
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
NELNET Student Loan Corporation-1 (the "Company"), formerly Union
Financial Services-1, Inc., was incorporated under the laws of the State of
Nevada on February 28, 1996. Effective March 2, 2000, the Company became a
wholly owned subsidiary of NelNet, Inc. and a wholly owned indirect subsidiary
of UNIPAC Service Corporation, a Nebraska Corporation ("UNIPAC"). UNIPAC is a
privately held corporation.
BUSINESS OF COMPANY
GENERAL. The Company is a special purpose corporation formed 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. A registration statement on Form S-3,
Registration No. 333-75693, was filed with the SEC by the Company under the
Securities Act for $1 million of additional Notes on April 5, 1999. This
registration statement has not been declared effective and the Company intends
to withdraw it from filing with the SEC.
In July, 1999, the Company issued its Taxable Student Loan
Asset-Backed Notes, Series 1999 (the "Series 1999 Notes") in the aggregate
principal amount of $278,700,000, pursuant to its effective registration
statement. The Series 1999 Notes consisted of (i) Senior Class 1999 A-13 Notes,
Auction Rate Securities (the "Class A-13 Notes"), (ii) Senior Class 1999 A-14
Notes, Auction Rate Securities (the "Class A-14 Notes"), (iii) Senior Class 1999
A-15 Notes, Auction Rate Securities (the "Class A-15 Notes"), and (iv) Senior
Class 1999 A-16 Notes, Auction Rate Securities (the "Class A-16 Notes").
Further information regarding the issuance of Notes by the
Company since its inception is provided in Table A.
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
2
<PAGE>
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").
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. NelNet, Inc. ("NelNet") acts as
servicer (the "Servicer") of the Company's Eligible Loans in accordance with a
Servicing Agreement, dated as of July 1, 1999 (the "Servicing Agreement").
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 NelNet and UNIPAC 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's
corporate headquarters is located in Aurora, Colorado. InTuition 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.
3
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Provided below is selected information as of December 31, 1999 that was
previously provided to holders of the Notes, as well as additional components
not previously reported. 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, 1999
was $1,467,192,574. Set forth in Table A below is the aggregate outstanding
principal amount of Notes of each Class as of December 31, 1999.
<TABLE>
<CAPTION>
TABLE A
ORIGINAL PRINCIPAL AMOUNT OF NOTES ISSUED BY THE COMPANY
AND THE OUTSTANDING AGGREGATE PRINCIPAL AMOUNT PER CLASS
(DECEMBER 31, 1999)
Series Class Date Issued Maturity Dates Original Principal
Principal Amount Outstanding at
December 31, 1999
<S> <C> <C> <C> <C> <C>
1996A A-1 March 8, 1996 July 1, 2014 $48,300,000 $48,300,000
1996A A-2 March 8, 1996 July 1, 2014 48,300,000 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 73,700,000
1996B A-4 June 18, 1996 July 1, 2014 54,300,000 54,300,000
1996B B-2(*) June 18, 1996 July 1, 2014 14,200,000 ----------
1996C A-5 October 31, 1996 July 1, 2005 225,000,000 197,100,000
1996C A-6 October 31, 1996 July 1, 2014 75,500,000 75,500,000
1996C B-3 October 31, 1996 July 1, 2025 15,600,000 15,600,000
1997A B-4 March 20, 1997 July 1, 2030 30,800,000 30,800,000
1998A A-7 December 22, 1998 August 1, 2005 125,000,000 125,000,000
1998A A-8 December 22, 1998 September 1, 2005 125,000,000 125,000,000
1998A A-9 December 22, 1998 December 1, 2005 125,000,000 125,000,000
1998A A-10 December 22, 1998 October 1, 2032 100,000,000 100,000,000
1998A A-11 December 22, 1998 November 1, 2032 100,000,000 100,000,000
1998A A-12 December 22, 1998 December 1, 2032 100,000,000 100,000,000
1998A B-5 December 22, 1998 December 1, 2032 70,000,000 70,000,000
1999A A-13 July 1, 1999 December 1, 2032 70,000,000 70,000,000
1999A A-14 July 1, 1999 December 1, 2032 70,000,000 70,000,000
1999A A-15 July 1, 1999 December 1, 2032 70,000,000 70,000,000
1999A A-16 July 1, 1999 December 1, 2032 68,700,000 68,700,000
---------- ----------
$1,620,500,000 $1,567,300,000
============== ==============
(*) 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.
</TABLE>
4
<PAGE>
Set forth in Table B below is the interest rate for each
outstanding Class of Notes, indicating whether the interest rate is fixed or is
calculated based on the applicable Auction Rate, LIBOR Rate, or Treasury Rate,
as the case may be.
TABLE B
APPLICABLE INTEREST RATE PER CLASS
(December 31, 1999)
CLASS CALCULATION METHOD
----- ------------------
AUCTION RATE
A-1 6.9500%
A-2 6.6000%
A-3 7.0000%
A-4 7.0000%
A-6 7.0000%
A-10 7.1000%
A-11 6.3000%
A-12 6.5500%
A-13 6.6570%
A-14 6.7000%
A-15 6.8500%
A-16 5.9670%
B-5 7.3500%
TREASURY RATE (1)
A-5 6.0220%
LIBOR RATE (1)
B-3 6.9563%
B-4 6.9263%
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.
5
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Set forth in the tables below are the characteristics of Eligible
Loans held in the Trust Estate on December 31, 1999. 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 &
DISTRIBUTION BY LOAN TYPE
(December 31, 1999)
Outstanding Percent of Loans
Principal By Outstanding
Loan Types Balance Balance
---------- --------- -----------
Consolidated $694,406,091 47.33 %
PLUS 34,069,388 2.32
SLS 16,287,992 1.11
Stafford-Subsidized 500,437,189 34.11
Stafford-Unsubsidized 221,991,914 15.13
----------- -----
Total $1,467,192,574 100.00 %
============== ======
Number of Borrowers 148,099
Average Outstanding Principal
Balance Per Borrower $9,907
Number of Loans 250,144
Average Outstanding Principal
Balance Per Loan $5,865
Approximate Weighted Average 142
Remaining Term (months)
(does not include school,
grace, deferment or
forebearance)
6
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TABLE D
DISTRIBUTION OF THE ELIGIBLE LOANS BY INTEREST RATE
(December 31, 1999)
Outstanding Percent of Loans
Principal By Outstanding
Interest Rate Range Balance Balance
--------------------- ------- -------
Less than 7.50% $144,402,202 9.84 %
7.50% to 7.99% 677,024,079 46.14
8.00% to 8.49% 210,463,192 14.35
9.00% to 9.49% 423,621,631 28.87
9.50% or greater 11,681,470 .80
----------- -----
Total $1,467,192,574 100.00 %
============== ======
TABLE E
DISTRIBUTION OF THE ELIGIBLE LOANS BY SCHOOL TYPES
(December 31, 1999)
Outstanding Percent of Loans
Principal By Outstanding
School Type Balance Balance
----------- ------- -------
2-Year $122,235,822 8.33 %
4-Year 622,119,987 42.40
Proprietary 28,186,209 1.92
Unknown 244,465 .02
Consolidation 694,406,091 47.33
----------- -----
Total $1,467,192,574 100.00 %
============== ======
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 NelNet
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.
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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.
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 indirect subsidiary of UNIPAC.
There is no public trading market for the Company's common stock.
As of March 15, 2000, NelNet, a subsidiary of UNIPAC, was the
only record holder of the Company's outstanding shares of common stock. On
12/30/99, dividends were paid in the amount of $4,275,000.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected financial
data as of December 31, 1999, 1998, 1997 and 1996, for each of the fiscal years
ended December 31, 1999, 1998, and 1997 and for the period ended December 31,
1996. This information has been derived from the financial statements of the
Company which have been audited by KPMG LLP. The information below should be
read in conjunction with the Financial Statements and notes thereto appearing
elsewhere in this document.
<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
SELECTED FINANCIAL DATA
Year Ended Year Ended Year Ended Period Ended
STATEMENT OF INCOME DATA: December 31, December 31, December 31, December 31,
1999 1998 1997 1996 (1)
---- ---- ---- --------
<S> <C> <C> <C> <C>
Revenues:
Loan interest.......................... $106,179,544 $ 43,428,726 $41,671,560 $ 15,636,042
Investment interest.................... 3,424,139 1,962,767 2,268,878 1,373,140
Other.................................. 587,699 86,366 195,084 17,449
----------- ---------- ---------- ----------
Total revenues................. 110,191,382 45,477,859 44,135,522 17,026,631
----------- ---------- ---------- ----------
Expenses:
Interest on Notes...................... 78,821,125 34,076,786 32,782,396 11,987,255
Loan Servicing ........................ 12,733,854 5,475,146 4,917,318 2,255,564
Financing fees to parent .............. -- -- 423,112 1,919,207
Trustee and broker fees................ 2,415,554 950,018 915,380 550,899
Amortization of debt issuance costs.... 1,259,135 558,734 494,106 250,992
Amortization of loan premiums.......... 4,767,963 2,008,889 1,441,526 438,584
Other general and administrative ...... 4,637,853 1,944,895 1,154,882 437,956
----------- ---------- ---------- ----------
Total expenses 104,635,484 45,014,468 42,128,720 17,840,457
----------- ---------- ---------- ----------
Income (loss) before income taxes 5,555,898 463,391 2,006,802 (813,826)
Income tax expense (benefit) .............. 2,075,128 169,138 710,717 (274,968)
----------- ---------- ---------- ----------
Net income (loss) ............. $ 3,480,770 $ 294,253 $ 1,296,085 $ (538,858)
=========== ========== ========== ==========
Ratio of earnings to fixed charges......... 1.07% 1.01% 1.06% .93% (2)
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 49,931,090 $ 664,815,085 $ 39,542,382 $ 65,402,585
Student loans receivable, including premiums 1,492,739,182 639,740,073 525,005,954 491,046,915
Total Assets............................... 1,580,406,364 1,322,564,317 575,292,144 568,171,986
Notes payable ............................. 1,567,300,000 1,316,500,000 571,500,000 566,000,000
Total liabilities.......................... 1,573,928,114 1,321,511,837 574,533,917 568,709,844
Shareholders' equity (deficit)............. 6,478,250 1,052,480 758,227 (537,858)
(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
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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 six (6) series of Notes consisting of twenty-one (21) 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, 1999, the Company held approximately $1.467 billion in Eligible
Loans. Throughout 1999, the Company purchased portfolios of Eligible Loans from
various financial institutions. On January 4, 1999, the Company purchased
approximately $622 million of Eligible Loans from a related party, including
approximately $8.7 million of purchased interest and $14.9 million of loan
premiums. In July 1999, the Company purchased approximately $283 million of
Eligible Loans, including approximately $5.7 million of purchased interest and
$6.7 million of loan premiums. The majority of these loans were purchased from
related parties at prices equivalent to those available in the market.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues for the year ended December 31, 1999 consisted
primarily of interest on Eligible Loans, which totaled $111,903,600, compared to
$44,800,871 for the year ended December 31, 1998, an increase of 149.78%. The
amount of interest reported for the year ended December 31, 1999 was derived
from Eligible Loans in an aggregate principal amount of $1,492,739,182, compared
to $639,740,073 for the year ended December 31, 1998. The Company's average net
investment in Eligible Loans during the year ended December 31, 1999 was
approximately $1,332,494,385 (excluding funds held by the Trustee), compared to
$539,082,229 for the year ended December 31, 1998, and the average effective
annual interest rate of interest income on Eligible Loans was approximately
8.40%, compared to 8.31% for the year ended December 31, 1998. The Company also
received investment income and other income for the year ended December 31, 1999
in the amounts of $3,424,139 and $587,699, respectively, compared to $1,962,767
and $86,366 respectively, for the year ended December 31, 1998. This increase
was attributable primarily to the investment of funds for a period of time as a
result of the additional issuance of Notes .
EXPENSES. Expenses for the year ended December 31, 1999 consisted
primarily of interest on the Company's outstanding Notes which totaled
$78,821,125, compared to $34,076,786 for the year ended December 31, 1998, an
increase of 131.30%. The amount of interest expense reported during the year
ended December 31, 1999 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 the issuance of additional notes
in the amount of $278.7 million on July 1, 1999 and $745 million in December
1998. The Company's average debt outstanding was approximately $1,446,050,000
for the year ended December 31, 1999, compared to $633,583,333 for the year
ended December 31, 1998, and the average annual cost of borrowings was
approximately 5.45% for the year ended December 31, 1999, compared to
approximately 5.38% for the year ended December 31, 1998. The Company also
incurred loan servicing fees in the amount of $12,733,854 for the year ended
December 31, 1999, compared to $5,475,146 for the year ended December 31, 1998.
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
1999 because the Company held more student loans in 1999. Trustee and broker
fees, amortization of debt issuance costs and amortization of loan premiums for
the year ended December 31, 1999 amounted to $2,415,554, $1,259,135 and
$4,767,963 respectively, compared to $950,018, $558,734 and $2,008,889
respectively, for the year ended December 31, 1998. Other general and
administrative expenses for the year ended December 31, 1999 amounted to
$10,361,909, compared to $3,317,040 for the year ended December 31, 1998. The
10
<PAGE>
increase in the Company's general and administrative expense was attributable
primarily to an increase in the provision for loan losses, the payment of
origination fees on Federal Consolidation Loans, and the increase in
administrative expenses as a result of the increase in Eligible Loans. Income
tax expense for the year ended December 31, 1999 amounted to $2,075,128,
compared to an income tax expense in the amount of $169,138 for the year ended
December 31, 1998.
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 Eligible Loans, 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 year 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 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 and financing fees 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.
For the year ended December 31, 1999, 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. The Indenture under which the
Notes were issued also creates a Reserve Fund from which money can be drawn to
make payments or interest and principal on the Notes. The Reserve Fund is fully
funded under the terms of the Indenture and the Company anticipates that cash
flows generated from its Eligible Loans will be sufficient to meet the
obligation on its outstanding Notes.
11
<PAGE>
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. The Company began redeeming monthly a percentage of the
Class 1996-A5 Notes on May 1, 1999 with principal receipts from Eligible Loans.
The Company plans to continue to do so monthly in the future, in accordance with
an Issuer Order delivered to the Trustee. The remaining principal receipts from
Eligible Loans have been used to purchase Eligible Loans. On July 1, 1999 and
December 22, 1998, respectively, the Company issued additional Notes in the
amount of $278.7 million and $745 million, respectively, the proceeds of which
were used to acquire Eligible Loans.
IMPACT OF INFLATION
For the year ended December 31, 1999, 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 student loans.
Those student loans are subject to market risk in that the cash flows generated
by the student loans can be affected by changes in interest rates. The student
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 student loan. Thus, if interest rates
generally increase, the Company would expect to earn greater interest on its
student loans, and if interest rates generally decrease, the Company would
expect the interest that it earns to be reduced. The Company does not hold any
of its assets for trading purposes.
The Company attempts to manage its interest rate risk by funding
its portfolio of student 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 its
student loans with variable rate Notes, the Company attempts to maintain a
positive "spread" between the interest earned on its student loans and its
interest payment obligations under the Notes. Thus, in an environment of
generally declining interest rates, the Company should earn less interest on its
student loans, but the interest expense 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 student loans, however, generally bear interest at the
91-day Treasury Bill Rate plus margins specified for such student loans. As a
result of the differences between the indices used to determine the interest
rates on student loans and the interest rates on the Notes, there could be
periods of time when the rates on student 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, LIBOR or auction rates may rise more quickly than the 91-day Treasury
Bill Rate. If there is a decline in the rates on student loans, the funds
deposited into the trust estate created under the Indenture 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 paid out of such funds (such as administrative
expenses).
12
<PAGE>
As shown by the chart below, the Company has conducted a sensitivity
analysis to determine what effect different changes in the interest rates on
student loans and the Notes would have on its cash flows and its resulting
ability to pay the principal and interest due on the Notes. Historically, the
majority of the Company's Notes have borne interest at a rate that approximates
1 Month LIBOR. Generally, student loans bear interest at a rate based on the 91
Day Treasury Rate. Thus, the Company's analysis of the effect of different
interest rates on its cash flows was prepared assuming spreads of 30, 40, 60, 80
and 100 basis points between 91 Day Treasury Bills and 1 Month LIBOR (the
"NelNet-1 Ted Spread"). The NelNet-1 Ted Spreads were then applied at different
rates of interest to determine their effect on the "spread" between the interest
the Company earns on its student loans and its interest payment obligations
under the notes (the "NelNet-1 Net Spread").
- --------------------------------------------------------------------------------
T-BILL* NELNET-1 NET SPREAD
---------- ---------- ---------- ---------- ----------
7.00% .76% .70% .58% .45% .32%
---------- ---------- ---------- ---------- ----------
6.50% .65% .59% .47% .34% .22%
---------- ---------- ---------- ---------- ----------
6.00% .53% .47% .35% .22% .10%
---------- ---------- ---------- ---------- ----------
5.50% .52% .47% .34% .22% .09%
---------- ---------- ---------- ---------- ----------
5.00% .56% .51% .38% .26% .13%
---------- ---------- ---------- ---------- ----------
4.50% .67% .61% .48% .36% .23%
---------- ---------- ---------- ---------- ----------
- --------------------------------------------------------------------------------
NELNET-1
TED SPREAD** 30 40 60 80 100
- --------------------------------------------------------------------------------
* 91 Day T-Bill (Yield)
** 1 Month LIBOR vs. 91 Day T-Bill (Yield)
Generally, increases in the NelNet-1 Ted Spread and decreases in
interest rates have the effect of reducing the NelNet-1 Net Spread, and
correspondingly, the Company's cash flows. For example, as of March 27, 2000 the
1 Month LIBOR rate was 6.13125% and the 91 Day Treasury Bill Rate was 5.844%.
Thus, the NelNet-1 Ted Spread was approximately 29 basis points (6.13125-5.844)
and the NelNet-1 Net Spread was approximately 52 basis points. If, at the same
interest rate (approximately 6.00%), the NelNet-1 Ted Spread is increased to
100, the Company's cash flows are significantly reduced, as evidenced by a
NelNet-1 Net Spread of ten basis points. The Company, however, believes that a
NelNet-1 Ted Spread of 100 is unlikely to occur.
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 independent accountants. 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. There
are no changes in or disagreements on accounting and financial statement
disclosure.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company is governed by a Board of Directors, which is
required by the Company's Articles of Incorporation to include at least three
directors. Directors are required to be elected at each annual meeting of the
shareholders. The present directors and their addresses and principal
occupations or affiliations are as follows:
<TABLE>
<CAPTION>
Principal Officers and
Other Occupation Directors Term
Name of Director Offices Held Age Address or Affiliation From To*
- ---------------- ------------ --- ------- -------------- ---- --
<S> <C> <C> <C> <C> <C> <C>
Michael S. Chairman 36 4732 Calvert Street Executive Vice February Present
Dunlap Lincoln, Nebraska President of 1996
68506 Union Bank and
Trust Company;
President, Farmers &
Merchants Investment,
Inc.; Chairman,
NelNet, Inc.
Stephen F. President 47 6991 East Camelback Vice-Chairman, February Present
Butterfield Road, Suite B290 NelNet, Inc. 1996
Scottsdale, Arizona
85251
Ronald W. Page Vice 51 1801 California Senior Vice February Present
President, Street President of 1996
Treasurer Suite 3920 Union Financial
and Secretary Denver, CO 80202 Services, Inc.
Ross Wilcox -- 57 4732 Calvert Street Chief February Present
Lincoln, Nebraska Executive 1996
68506 Officer of
Union Bank
and Trust
Company
Dr. Paul R. Hoff -- 65 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, 2001.
</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 16 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 & 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.
14
<PAGE>
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., 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.
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 NelNet, which receives remuneration from the Company pursuant
to an Administrative Services Agreement by and between NelNet 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 1999
The Company has not issued any options.
LONG-TERM INCENTIVE PLAN -- AWARDS IN 1999
The Company has no long-term incentive plan.
15
<PAGE>
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE IN 1999
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 1999, the Board held four regular meetings.
All 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 15, 2000, there were 1,000 shares of the Company's
common stock, no par value, outstanding, all of which were held by NelNet. 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 NelNet, the
Company's parent corporation, entered into an Administrative Services Agreement
(the "Agreement") dated as of August 1, 1996. Under the Agreement, NelNet
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. In return for the
services provided by NelNet, the Company pays to NelNet on the first day of each
calendar month an amount equal to 0.015% of the average outstanding balance of
16
<PAGE>
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 NelNet 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 NelNet under the Agreement may be revised on each January 1 during
the term of the Agreement. To alter the fee, NelNet must provide written notice
of the proposed new fee to the Company ninety (90) days prior to the next
January 1. If NelNet 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 NelNet entered into a
Servicing Agreement (the "Servicing Agreement") dated as of July 1, 1999. Under
the Servicing Agreement, NelNet services the Eligible Loans. NelNet owns all of
the issued and outstanding stock of the Company and is a wholly-owned subsidiary
of UNIPAC. NelNet entered into subservicing agreements with UNIPAC and
InTuitition (the "Subservicing Agreements") dated as of July 1, 1999. 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. UNIPAC 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 NelNet 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.
STUDENT LOAN PURCHASE AGREEMENTS. The Company has entered into
Student Loan Purchase Agreements with various financial institutions including,
but not limited to, Union Bank, InTuition Holdings, Inc., NHELP-I, Inc., and
NEBHELP, INC. pursuant to which the Company has purchased Eligible Loans.
NHELP-I, Inc. and NEBHELP, Inc. are subsidiary corporations of NelNet. Certain
of the shareholders of UNIPAC 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. 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 Independent Auditors' Report appears on page F-1 of this report. All
other schedules have been omitted because they are inapplicable, not required,
or the information is included elsewhere in the financial statements or notes
thereto.
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.
17
<PAGE>
The following is a complete list of exhibits filed as part of the
Company's Registration Statement and this Form 10-K. Exhibit numbers correspond
to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Articles of Incorporation of the Company (Incorporated by
reference herein to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.)
3.2 Certificate of Amendment to the Articles of Incorporation of
Union Financial Services-1, Inc. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q dated September 30,
1999.)
3.3 Bylaws of the Company (Incorporated by reference herein to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.)
4.1 Second Amended and Restated Indenture by and between the
Company and Norwest Bank Minnesota, N.A. (Incorporated by
reference herein to the Company's current report on Form 8-K,
filed January 7, 1997.)
4.2 Series 1996C Supplemental Indenture by and between the Company
and Norwest Bank Minnesota, N.A. (Incorporated by reference
herein to the Company's current report on Form 8-K, filed
January 7, 1997.)
4.2.1 1998 Supplemental Indenture by and between the Company and
Zions First National Bank (Incorporated by reference herein to
the Company's current report on Form 8-K, filed January 6
1999.)
4.2.2 Series 1999 Supplemental Indenture of Trust by and between the
Company and Zions First National Bank (Incorporated by
reference herein to the Company's current report on Form 8-K,
filed July 8, 1999.)
10.1 Servicing Agreement, dated as of July 1, 1999, by and between
the Company and National Education Loan Network Inc.
(Incorporated by reference herein to the Company's Registration
Statement on Form S-3 (File No. 333-75693).)
27.1 Financial Data Schedule (Filed herewith.)
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF NELNET STUDENT LOAN CORPORATION-1
Independent Auditors' Report.............................................. F-1
Balance Sheets as of December 31, 1999 and 1998........................... F-2
Statements of Income for the years ended December 31, 1999, 1998
and 1997.................................................................. F-3
Statements of Stockholder's Equity(Deficit) for the years ended
December 31, 1999, 1998 and 1997.......................................... F-4
Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997.................................................................. F-5
Notes to Financial Statements............................................. F-6
All other schedules are omitted as they are not applicable or the required
information is shown in the financial statements or notes thereto.
19
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NELNET Student Loan Corporation-1:
We have audited the accompanying balance sheets of NELNET Student Loan
Corporation-1 (formerly known as Union Financial Services - 1, Inc.) as of
December 31, 1999 and 1998 and the related statements of income,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 audit 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 NELNET Student Loan
Corporation-1 (formerly known as Union Financial Services - 1, Inc.) at
December 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
March 24, 2000
Lincoln, Nebraska
F-1
<PAGE>
<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
(formerly known as Union Financial Services - 1, Inc.)
Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 49,931,090 664,815,085
Student loans receivable, net of allowance of $1,336,294 in 1999
and $416,801 in 1998 1,492,739,182 639,740,073
Accrued interest receivable 30,162,766 11,110,808
Debt issue costs, net of accumulated amortization of $2,533,121
in 1999 and $1,273,986 in 1998 7,249,082 6,698,845
Deferred tax asset 324,244 153,132
Other assets -- 46,374
--------------- ---------------
Total assets $ 1,580,406,364 1,322,564,317
=============== ===============
Liabilities and Stockholder's Equity
Liabilities:
Notes payable $ 1,567,300,000 1,316,500,000
Accrued interest payable 4,801,540 3,725,622
Other liabilities 1,734,065 1,139,945
Income taxes payable to parent 92,509 146,270
--------------- ---------------
Total liabilities 1,573,928,114 1,321,511,837
--------------- ---------------
Stockholder's equity:
Common stock, no par value, authorized 1,000 shares;
issued and outstanding 1,000 shares 1,000 1,000
Additional paid-in capital 6,220,000 --
Retained earnings 257,250 1,051,480
--------------- ---------------
Total stockholder's equity 6,478,250 1,052,480
Commitments and contingencies
--------------- ---------------
Total liabilities and stockholder's equity $ 1,580,406,364 1,322,564,317
=============== ===============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(formerly known as Union Financial Services - 1, Inc.)
Statements of Income
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ----------- -----------
Revenues:
Loan interest $ 106,179,544 43,428,726 41,671,560
Investment interest 3,424,139 1,962,767 2,268,878
Other 587,699 86,366 195,084
------------ ----------- -----------
Total revenues 110,191,382 45,477,859 44,135,522
------------ ----------- -----------
Expenses:
Interest on notes 78,821,125 34,076,786 32,782,396
Loan servicing fees to related party 12,733,854 5,475,146 4,917,318
Financing fees to parent -- -- 423,112
Trustee and broker fees 2,415,554 950,018 915,380
Amortization of debt issuance costs 1,259,135 558,734 494,106
Amortization of loan premiums 4,767,963 2,008,889 1,441,526
Other general and administrative 4,637,853 1,944,895 1,154,882
------------ ----------- -----------
Total expenses 104,635,484 45,014,468 42,128,720
------------ ----------- -----------
Income before income taxes 5,555,898 463,391 2,006,802
Income tax expense 2,075,128 169,138 710,717
------------ ----------- -----------
Net income $ 3,480,770 294,253 1,296,085
============ =========== ===========
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
(formerly known as Union Financial Services - 1, Inc.)
Statements of Stockholder's Equity (Deficit)
Years ended December 31, 1999, 1998 and 1997
Total
Additional Retained stockholders'
Common paid-in earnings equity
stock capital (deficit) (deficit)
------- ---------- --------- -------------
<S> <C> <C> <C> <C>
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
Net income -- -- 3,480,770 3,480,770
Capital contributions -- 6,220,000 -- 6,220,000
Dividends paid - $4,275 per share -- -- (4,275,000) (4,275,000)
------- ---------- --------- -----------
Balance at December 31, 1999 $ 1,000 6,220,000 257,250 6,478,250
======= ========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
(formerly known as Union Financial Services - 1, Inc.)
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Net income $ 3,480,770 294,253 1,296,085
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 6,027,098 2,567,623 1,935,632
Deferred tax expense (benefit) (171,112) (153,132) 274,968
Provision for loan losses 1,150,000 600,000 --
(Increase) decrease in accrued interest receivable (19,051,958) (3,375,516) 515,533
(Increase) decrease in other assets 46,374 (35,374) 2,888
Increase in accrued interest payable 1,075,918 2,118,272 114,209
(Decrease) increase in other liabilities 594,120 150,126 (226,884)
Increase (decrease) in income taxes payable to parent (53,761) (290,478) 436,748
-------------- ------------ ------------
Net cash provided by (used in)
operating activities (6,902,551) 1,875,774 4,349,179
-------------- ------------ ------------
Cash flows used in investing activities:
Purchase of student loans, including premiums (1,081,832,346)(178,538,396)(101,061,642)
Proceeds from sale of student loans 16,850,114 2,056,884 6,139,464
Net proceeds from student loan principal payments
and loan consolidations 206,065,160 59,138,505 59,491,767
-------------- ------------ ------------
Net cash used in investing activities (858,917,072)(117,343,007) (35,430,411)
-------------- ------------ ------------
Cash flows provided by financing activities:
Proceeds from issuance of notes payable 278,700,000 745,000,000 30,800,000
Repayment of notes payable (27,900,000) -- --
Payment for debt issuance costs (1,809,372) (4,260,064) (278,971)
Dividends paid (4,275,000) -- --
Capital contributions 6,220,000 -- --
Payment to defease notes payable -- -- (25,300,000)
-------------- ------------ ------------
Net cash provided by financing activities 250,935,628 740,739,936 5,221,029
-------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents (614,883,995) 625,272,703 (25,860,203)
Cash and cash equivalents, beginning of year 664,815,085 39,542,382 65,402,585
-------------- ------------ ------------
Cash and cash equivalents, end of year $ 49,931,090 664,815,085 39,542,382
============== ============ ============
Supplemental disclosures:
Interest paid $ 77,745,207 31,958,514 32,668,187
============== ============ ============
Income taxes paid to parent $ 2,300,000 611,748 --
============== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
DESCRIPTION OF BUSINESS
NELNET Student Loan Corporation-1 (formerly known as Union Financial
Services - 1, Inc.) (the Company), a wholly-owned subsidiary of National
Education Loan Network, Inc. (formerly known as Union Financial Services,
Inc.) (the Parent) is a C Corporation which invests 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.
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.
CASH EQUIVALENTS
Cash equivalents consist of marketable short-term investment trust and
lockbox receivables in transit, carried at cost, which approximates fair
market value. 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.
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.
F-6 (Continued)
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
DEBT ISSUE COSTS
Debt issue costs are amortized over the estimated life of the related
debt, ranging from five to fifteen years.
INCOME TAXES
The Company and its Parent file a consolidated federal tax return. The
financial statements reflect income taxes computed as if the Company
filed a separate tax return. Current income tax payments are made by the
Company to its Parent as if the Company were a separate tax paying
entity.
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.
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
The Company has no sources of other comprehensive income. Therefore, the
Company's comprehensive income consists solely of its net income.
RECLASSIFICATIONS
Certain amounts have been reclassified for comparability with the 1999
presentation.
(2) CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents at December 31, 1999 and 1998 are
held by the trustee in various accounts subject to use restrictions,
imposed by the indenture of trust, as shown on the following page.
F-7 (Continued)
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<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 16,167,612 14,164,858
Reserve Fund - Established to cure any deficiencies in the debt
service requirements 25,154,002 26,330,011
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 285,569 1,305,941
Interest Fund - Established for the payment of debt service
interest requirements 3,013,092 --
Restricted Cash 97A Escrow - Excess funds required for
potential interest payments on defeased debt (see note 4) -- 1,154,529
Senior Note Redemption Fund - Established to redeem
Senior Notes 4,200,000 --
Operating cash and cash equivalents 1,110,815 884,255
----------- -------------
Total cash and cash equivalents $ 49,931,090 664,815,085
=========== =============
</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.
F-8 (Continued)
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
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 83% of the
student loans at December 31, 1999) 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. Activity in the
allowance for loan losses for the years ended December 31, 1999 and 1998
is shown below:
1999 1998
---------- ----------
Beginning balance $ 416,801 --
Provision for loan losses 1,150,000 600,000
Loans charged off, net of recoveries (230,507) (183,199)
---------- ----------
Ending balance $ 1,336,294 416,801
========== ==========
(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 table on the following page summarizes outstanding notes payable at
December 31, 1999 and 1998 by issue.
F-9 (Continued)
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Final Carrying Interest
1999 maturity amount rate range
- ---------------------------------------------------- ---------- -------------- -----------------
<S> <C> <C> <C>
1996A Senior Auction Rate Notes, Class A-1 and A-2 7/1/14 $ 96,600,000 6.60% - 6.95%
1996B Senior Auction Rate Notes, Class A-3 and A-4 7/1/14 128,000,000 7.00%
1996C Senior Treasury Rate Notes, Class A-5 7/1/05 197,100,000 6.02%
1996C Senior Auction Rate Notes, Class A-6 7/1/14 75,500,000 7.00%
1996C Subordinate LIBOR Rate Notes, Class B-3 7/1/25 15,600,000 6.96%
1997A Subordinate LIBOR Rate Notes, Class B-4 7/1/30 30,800,000 6.93%
1998A Senior Fixed Rate Notes, Class A-7 8/1/05 125,000,000 5.48%
1998A Senior Fixed Rate Notes, Class A-8 9/1/05 125,000,000 5.50%
1998A Senior Fixed Rate Notes, Class A-9 12/1/05 125,000,000 5.73%
1998A Senior Auction Rate Notes, Class A-10 10/1/32 100,000,000 7.10%
1998A Senior Auction Rate Notes, Class A-11 11/1/32 100,000,000 6.30%
1998A Senior Auction Rate Notes ,Class A-12 12/1/32 100,000,000 6.55%
1998B Subordinate Auction Rate Notes, Class B-5 12/1/32 70,000,000 7.35%
1999A Senior Auction Rate Notes, Class A-13, A-14,
A-15 and A-16 12/1/32 278,700,000 5.97% - 6.85%
--------------
$ 1,567,300,000
==============
Final Carrying Interest
1998 maturity amount rate range
- ---------------------------------------------------- ---------- -------------- -----------------
1996A Senior Auction Rate Notes, Class A-1 and A-2 7/1/14 $ 96,600,000 5.59% - 5.60%
1996B Senior Auction Rate Notes, Class A-3 and A-4 7/1/14 128,000,000 5.56% - 5.60%
1996C Senior Treasury Rate Notes, Class A-5 7/1/05 225,000,000 6.07%
1996C Senior Auction Rate Notes, Class A-6 7/1/14 75,500,000 5.58%
1996C Subordinate LIBOR Rate Notes, Class B-3 7/1/25 15,600,000 6.11%
1997A Subordinate LIBOR Rate Notes, Class B-4 7/1/30 30,800,000 5.98%
1998A Senior Fixed Rate Notes, Class A-7 8/1/05 125,000,000 5.48%
1998A Senior Fixed Rate Notes, Class A-8 9/1/05 125,000,000 5.50%
1998A Senior Fixed Rate Notes, Class A-9 12/1/05 125,000,000 5.73%
1998A Senior Auction Rate Notes, Class A-10 10/1/32 100,000,000 5.80%
1998A Senior Auction Rate Notes, Class A-11 11/1/32 100,000,000 5.75%
1998A Senior Auction Rate Notes, Class A-12 12/1/32 100,000,000 5.75%
1998B Subordinate Auction Rate Notes, Class B-5 12/1/32 70,000,000 6.15%
--------------
$ 1,316,500,000
==============
</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. During 1999, the Company redeemed $27,900,000 of the
Series 1996C Senior Treasury Rate Notes, Class A-5.
F-10 (Continued)
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
In July 1999, the Company issued $278,700,000 of Taxable Student Loan
Asset-Backed Notes, Series 1999A, due December 1, 2032, at varying rates.
The proceeds were used to purchase eligible student loans.
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 and eligible student loans were purchased in
January 1999.
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.
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, 1999.
(5) INCOME TAXES
Components of income tax expense in 1999, 1998 and 1997 are shown below.
1999 1998 1997
---------- ----------- -----------
Current: $ 2,051,990 300,265 395,099
Federal 194,250 22,005 40,650
---------- ----------- -----------
State
2,246,240 322,270 435,749
---------- ----------- -----------
Deferred: (157,603) (142,712) 256,693
Federal (13,509) (10,420) 18,275
---------- ----------- -----------
State
(171,112) (153,132) 274,968
---------- ----------- -----------
$ 2,075,128 169,138 710,717
========== =========== ===========
The actual income tax expense differs from the "expected" income tax
expense, computed by applying the federal statutory corporate tax rates
to income before income taxes for 1999, 1998 and 1997, as shown on the
following page.
F-11 (Continued)
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax expense $ 1,889,005 157,553 682,313
Increase in income taxes resulting from:
State taxes, net of federal income tax benefit 119,289 7,646 26,829
Other 66,834 3,939 1,575
----------- ----------- -----------
Actual income tax expense $ 2,075,128 169,138 710,717
=========== =========== ===========
</TABLE>
The Company's deferred tax assets at December 31, 1999 and 1998 resulted
from the future tax benefit of the allowance for loan losses, 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.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below:
o ACCRUED INTEREST RECEIVABLE/PAYABLE, OTHER ASSETS AND OTHER
LIABILITIES - 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 RECEIVABLE - The fair value of student loans receivable
is estimated at amounts recently paid by the Company to acquire the
loans in the market. The fair value of the student loans receivable
approximates carrying value.
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, 1999, National Student Loan Program, Inc., Florida
Department of Education Office of Student Financial Assistance, and the
United Student Aid Fund were the primary guarantors, guaranteeing
approximately 79% of the total student loans beneficially owned by the
Company. As of December 31, 1998 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% 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 1998, 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.
F-12 (Continued)
<PAGE>
NELNET STUDENT LOAN CORPORATION-1
(FORMERLY KNOWN AS UNION FINANCIAL SERVICES - 1, INC.)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(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) RELATED PARTIES
Certain shareholders and directors of the Parent are also officers and
directors of UB&T. A majority of the loans currently held were purchased
from UB&T and other wholly-owned subsidiaries of the Parent.
Under the terms of an agreement, the Company contracts all loan servicing
through UB&T. UNIPAC Service Corporation (UNIPAC) is related to the
Company through common ownership. UNIPAC has been contracted as a
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. On June 30, 1999, UB&T assigned
this servicing agreement to the Parent. The fees amounted to
approximately $12,734,000, $5,475,000, and $4,917,000 in 1999, 1998 and
1997, respectively. At December 31, 1999, $1,143,925 was payable to the
Parent for loan servicing and is included in other liabilities. At
December 31, 1998, $506,274 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.
During 1999, the Company entered into loan purchase agreements with
NHELP-I, Inc. and NEBHELP, Inc., wholly-owned subsidiaries of the Parent,
and purchased student loans of approximately $143 million from NHELP-I,
Inc. and $279 million from NEBHELP, Inc. Premiums paid on these purchased
loans totaled approximately $3 million and $6 million, respectively.
During 1999, the Company also purchased student loans of approximately
$481 million from Intuition, Inc., a company related through common
ownership. Premiums paid on these purchased loans totaled approximately
$12.4 million. These purchases were made on terms similar to those made
with unrelated entities.
During 1999, the Company sold approximately $5.6 million of student loans
to UB&T. During 1999, the Company purchased student loans of
approximately $10.9 million from UB&T. Premiums paid on these loans
totaled approximately $201,000.
The Company incurred fees to the 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, included in
other general and administrative expenses, amounted to approximately
$3,301,000, $953,000, and $1,330,000 in 1999, 1998 and 1997,
respectively.
F-13
<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.
NELNET STUDENT LOAN CORPORATION-1
By:/s/ Michael S. Dunlap
--------------------------------------
Michael S. Dunlap, Chairman of the Board
(Principal Executive Officer)
By:/s/ Ronald W. Page
--------------------------------------
Ronald W. Page, Vice President (Principal
Financial and Accounting Officer)
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/ Michael S. Dunlap Chairman of the Board March 30, 2000
------------------------- (Principal Executive
Michael S. Dunlap Officer)
By: /s/ Stephen F. Butterfield President and Director March 30, 2000
-------------------------
Stephen F. Butterfield
By: /s/ Ronald W. Page Vice-President, Secretary, March 30, 2000
------------------------- Treasurer and Director
Ronald W. Page (Principal Financial and
Accounting Officer)
By: /s/ Ross Wilcox Director March 30, 2000
-------------------------
Ross Wilcox
By: /s/ Dr. Paul Hoff Director March 30, 2000
-------------------------
Dr. Paul Hoff
20
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010519
<NAME> NELNET STUDENT LOAN CORPORATION-1
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 49,931,090
<SECURITIES> 0
<RECEIVABLES> 1,494,075,476
<ALLOWANCES> (1,336,294)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,580,406,364
<CURRENT-LIABILITIES> 0
<BONDS> 1,567,300,000
0
0
<COMMON> 1,000
<OTHER-SE> 6,477,250
<TOTAL-LIABILITY-AND-EQUITY> 1,580,406,364
<SALES> 0
<TOTAL-REVENUES> 110,191,382
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,814,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,821,125
<INCOME-PRETAX> 5,555,898
<INCOME-TAX> 2,075,128
<INCOME-CONTINUING> 3,480,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,480,770
<EPS-BASIC> 3,480.77
<EPS-DILUTED> 3,480.77
</TABLE>
