UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ----------------------------------------------
Commission file number 333-08929
-------------------------------------------------------
NELNET STUDENT LOAN CORPORATION-1
---------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 86-0817755
------------------------------ -----------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
121 South 13th Street, Suite 301, Lincoln, Nebraska 68508
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(402) 475-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Class of Stock Amount Outstanding
---------------- ---------------------
Common Stock, No par value 1,000 Shares of Common Stock
as of June 30, 2000
1
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NELNET STUDENT LOAN CORPORATION-1
INDEX
Page No.
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2000 and
December 31, 1999............................................3
Statements of Income for the three months ended and six
months ended June 30, 2000 and 1999..........................4
Statement of Stockholder's Equity for the six months
ended June 30, 2000..........................................5
Statements of Cash Flows for the six months ended
June 30, 2000 and 1999.......................................6
Note to Financial Statements...................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk .....10
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings............................................... 11
Item 2.Changes in Securities............................................11
Item 3.Defaults upon Senior Securities................................. 11
Item 4.Submission of Matters to a Vote of Security Holders............. 11
Item 5.Other Information............................................... 11
Item 6.Exhibits and Reports on Form 8-K................................ 12
2
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
----------------------------------------------------------------------------------------
ASSETS JUNE 30, DECEMBER 31,
2000 1999
(Unaudited)
-------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 48,856,078 $ 49,931,090
Student loans receivable including net premiums, net of
allowance for loan losses 1,464,384,663 1,492,739,182
Accrued interest receivable 31,825,127 30,162,766
Debt issuance cost, net of accumulated amortization 6,578,940 7,249,082
Other assets 324,244 324,244
-------------- --------------
Total assets $1,551,969,052 $1,580,406,364
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes payable $1,536,300,000 $1,567,300,000
Accrued interest payable 4,921,130 4,801,540
Income taxes payable 381,444 92,509
Other liabilities 1,729,312 1,734,065
-------------- --------------
Total liabilities $1,543,331,886 $1,573,928,114
-------------- --------------
Stockholder's equity:
Common stock, no par value.
Authorized 1,000 shares;
issued 1,000 shares $ 1,000 $ 1,000
Additional Paid in Capital 6,230,000 6,220,000
Retained earnings 2,406,166 257,250
-------------- --------------
Total stockholder's equity 8,637,166 6,478,250
-------------- --------------
Total liabilities and
stockholder's equity $1,551,969,052 $1,580,406,364
============== ==============
See accompanying note to financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
STATEMENTS OF INCOME
THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Loan interest $30,926,788 $23,728,198 $61,286,674 $47,474,827
Investment interest 659,317 670,322 1,441,327 2,301,693
Other 186,349 89,621 404,327 161,006
----------- ----------- ----------- -----------
Total revenues $31,772,454 $24,488,141 $63,132,328 $49,937,526
=========== =========== =========== ===========
Expenses:
Interest on notes $23,903,876 $17,477,214 $47,071,735 $33,756,996
Loan servicing fees 3,351,047 2,755,373 6,725,581 5,392,264
Trustee and broker fees 726,306 525,206 1,423,589 1,011,480
Amortization of debt issuance costs 335,071 324,897 670,142 644,667
Amortization of loan premiums 1,290,306 1,195,068 2,426,093 2,558,768
Other general and administrative 731,839 1,665,899 1,457,506 2,384,823
----------- ----------- ----------- -----------
Total expenses $30,338,445 $23,943,657 $59,774,646 $45,748,998
=========== =========== =========== ===========
Income before income taxes 1,434,009 544,484 3,357,682 4,188,528
Income tax expense 516,243 203,365 1,208,766 1,564,415
----------- ----------- ----------- -----------
Net income $ 917,766 $ 341,119 $ 2,148,916 $ 2,624,113
========= ========= =========== ===========
See accompanying note to financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
------------------------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1999 $1,000 $6,220,000 $257,250 $6,478,250
Capital contribution from Parent -- 10,000 -- 10,000
Net Income, six months ended
June 30, 2000 -- -- 2,148,916 2,148,916
---------- ------------- ------------ -------------
Balance at June 30, 2000 $1,000 $6,230,000 $2,406,166 $8,637,166
========== ============= ============ =============
See accompanying note to financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
----------------------------------------------------------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,148,916 $ 2,624,113
Adjustments to reconcile net income to
net cash from operating activities:
Amortization 3,097,887 3,203,435
Provision for loan losses, net of charge offs (231,357) 367,821
Increase in accrued interest receivable (1,662,361) (12,154,733)
Decrease in other assets -- 46,107
Increase (decrease) in accrued interest payable 119,590 (319,278)
Increase (decrease) in other liabilities (4,753) 517,654
Increase (decrease) in income tax payable 288,935 (719,521)
------------ -----------
Net cash provided by (used in) operating activities 3,756,857 (6,434,402)
------------ -----------
Cash flows from investing activities:
Purchase of student loans, including premiums (64,432,125) (691,844,677)
Proceeds from sale of student loans -- 16,590,748
Net proceeds from student loan principal payments and
loan consolidations 90,590,256 79,772,905
------------ -----------
Net cash provided by (used in) investing activities 26,158,131 (595,481,024)
------------ -----------
Cash flows from financing activities:
Capital contribution from parent 10,000 1,920,000
Payments on debt (31,000,000) (6,000,000)
Payment of debt issuance costs (393,286)
------------ -----------
--
Net cash used in financing activities (30,990,000) (4,473,286)
------------ -----------
Net decrease in cash and cash equivalents (1,075,012) (606,388,712)
Cash and cash equivalents, beginning of period 49,931,090 664,815,085
------------ -----------
Cash and cash equivalents, end of period $48,856,078 $58,426,373
=========== ===========
See accompanying note to financial statements.
</TABLE>
6
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NELNET STUDENT LOAN CORPORATION-1
NOTE TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
--------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
The accompanying financial statements of NELNET Student Loan
Corporation-1 (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of management, include all adjustments necessary for a fair statement of
income for each period shown. All such adjustments made are of a normal
recurring nature, except when noted as extraordinary or nonrecurring. The
balance sheet at December 31, 1999 is derived from the audited balance sheet as
of that date. All other financial statements are unaudited. Certain items
included in the Statement of Income for the three months ended and six months
ended June 30, 1999 have been reclassified to conform to the presentation
reflected in the Statement of Income for the three months ended and six months
ended June 30, 2000. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. Management believes that the disclosures made are adequate and that
the information is fairly presented. The results for the interim periods are not
necessarily indicative of the results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto in the Company's Annual Report on Form 10-K, which are incorporated by
reference.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
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. The
Company was formed solely for the purpose of acquiring, holding and selling from
time to time student loans originated under the Federal Family Education Loan
Program created by the Higher Education Act of 1965, as amended. The Company
finances its purchases of student loans through the issuance of student loan
asset-backed notes (the "Notes"). The Notes are limited obligations of the
Company secured solely by the student loans and other assets in the trust estate
created by the Indenture of Trust governing the issuance of the Notes.
RESULTS OF OPERATIONS
Three months ended June 30, 2000 compared to three months ended June 30, 1999
-----------------------------------------------------------------------------
REVENUES. Revenues for the three months ended June 30, 2000, consisted
primarily of interest earned on student loans. Revenues from interest on student
loans increased by $7,198,590 from $23,728,198 for the three months ended June
30, 1999 to $30,926,788 for the three months ended June 30, 2000. The increase
in revenues is attributable to the acquisition of additional student loans by
the Company in the first and second quarters of 2000, the third and fourth
quarters of 1999, and a rising interest rate environment. The amount of interest
reported for the three months ended June 30, 2000 was derived from student loans
in an aggregate principal amount of approximately $1,441,000,000. The Company's
average net investment in student loans during the three months ended June 30,
2000 and June 30, 1999 was approximately $1,445,000,000 and $1,192,980,000
respectively (excluding funds held by the Trustee) and the average effective
annual interest rate of interest income on student loans during the three months
ended June 30, 2000 and June 30, 1999 was approximately 8.56% and 8.40%
respectively. The Company also earned investment income and other income in the
amounts of $659,317 and $186,349 respectively, for the three months ended June
30, 2000 and $670,322 and $89,621, respectively, for the three months ended June
30, 1999.
EXPENSES. The Company's expenses consisted primarily of interest due on
the Company's outstanding Notes. Expenses from interest due on the Company's
outstanding Notes increased by $6,426,662 from $17,477,214 for the three months
ended June 30, 1999 to $23,903,876 for the three months ended June 30, 2000.
This increase in expenses is attributable to the issuance of additional Notes in
the third quarter of 1999 and an increase in interest rates. For the three
months ended June 30, 2000 and June 30, 1999, the Company's average debt
outstanding was approximately $1,543,000,000 and $1,313,533,000, respectively,
and the average annual cost of borrowings was approximately 6.20% and 5.32%
respectively. The Company also incurred loan servicing fees in the amount of
$3,351,047, for the three months ended June 30, 2000 as compared to $2,755,373,
for the three months ended June 30, 1999. The increase in loan servicing fees is
directly related to the servicing of additional student loans. Other general and
administrative expenses incurred by the company decreased by $934,060, from
$1,665,899 for the three months ended June 30, 1999 to $731,839 for the three
months ended June 30, 2000. This reduction is partially as a result of a
decrease in the provision for bad debt expense during the period. Additionally,
other administrative expenses incurred by the Company also decreased by $582,600
due to a decrease in the financing fees paid to parent. Income tax expense
8
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amounted to $516,243 for the three months ended June 30, 2000 compared to
$203,365 for the three months ended June 30, 1999. The increase in tax expense
was a result of higher income before income taxes for the three months ended
June 30, 2000.
NET INCOME. The Company had net income of $917,766 for the three months
ended June 30, 2000 and $341,119 for the three months ended June 30, 1999. The
increase in net income is due in part to a decrease in other general and
administrative expenses.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
-------------------------------------------------------------------------
REVENUES. Revenues for the three months ended June 30, 2000,
consisted primarily of interest earned on student loans. Revenues from interest
on student loans increased by $13,811,847 from $47,474,827 for the six months
ended June 30, 1999 to $61,286,674 for the six months ended June 30, 2000. The
increase in revenues is attributable to the acquisition of additional student
loans by the Company in the first and second quarters of 2000, the third and
fourth quarters of 1999 and a rising interest rate environment. The amount of
interest reported for the three months ended June 30, 2000 was derived from
student loans in an aggregate principal amount of approximately $1,441,000,000.
The Company's average net investment in student loans during the six months
ended June 30, 2000 and June 30, 1999 was approximately $1,445,860,000 and
$1,198,907,000 respectively (excluding funds held by the Trustee) and the
average effective annual interest rate of interest income on student loans
during the six months ended June 30, 2000 and June 30, 1999 was approximately
8.48% and 8.36% respectively. The Company also earned investment income and
other income in the amounts of $1,441,327 and $404,327 respectively, for the six
months ended June 30, 2000 and $2,301,693 and $161,006, respectively, for the
six months ended June 30, 1999. The decrease in investment income was a result
of the cash being utilized more efficiently to acquire student loans.
EXPENSES. The Company's expenses consisted primarily of interest due on
the Company's outstanding Notes. Expenses from interest due on the Company's
outstanding Notes increased by $13,314,739 from $33,756,996 for the six months
ended June 30, 1999 to $47,071,735 for the six months ended June 30, 2000. This
increase in expenses is attributable to the issuance of additional Notes in the
third quarter of 1999 and an increase in interest rates. For the six months
ended June 30, 2000 and June 30, 1999, the Company's average debt outstanding
was approximately $1,551,100,000 and $1,313,533,000, respectively, and the
average annual cost of borrowings was approximately 6.07% and 5.13%
respectively. The Company also incurred loan servicing fees in the amount of
$6,725,581, for the six months ended June 30, 2000 as compared to $5,392,264,
for the six months ended June 30, 1999. The increase in loan servicing fees is
directly related to the servicing of additional student loans. Other general and
administrative expenses incurred by the company decreased by $927,317, from
$2,384,823 for the six months ended June 30, 1999 to $1,457,506 for the six
months ended June 30, 2000. This reduction is partially as a result of a
decrease in the provision for bad debt expense during the period. Additionally,
other administrative expenses incurred by the Company also decreased by $582,600
due to a decrease in the financing fees paid to parent. Income tax expense
amounted to $1,208,766 for the six months ended June 30, 2000 compared to
$1,564,415 for the six months ended June 30, 1999. The decrease in tax expense
was a result of lower income before income taxes for the six months ended June
30, 2000.
NET INCOME. The Company had net income of $2,148,916 for the six months
ended June 30, 2000 and $2,624,113 for the six months ended June 30, 1999. The
decrease in net income is primarily due to changes in the interest rate
environment.
9
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For the six months ended June 30, 2000, 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
Student loans held by the Company are pledged as collateral for the
Notes under an Indenture of Trust, the terms of which provide for the retirement
of all Notes from the proceeds of the student loans. Cash flows from payments on
the student loans, together with proceeds of reinvestment of the income earned
on student loans, are intended to provide cash sufficient to make all required
payments of principal and interest on each outstanding series of the Notes. If
current revenues are insufficient to pay principal and interest due on the
Notes, money in the Reserve Fund created under the Indenture is available for
payment of amounts due. The Reserve Fund is fully funded under the terms of the
Indenture.
It is anticipated that regular payments under the terms of the student
loans, as well as early prepayment, will reduce the number of student loans held
in the trust estate created under the Indenture. The Company is authorized under
the Indenture to use principal receipts from student loans to purchase
additional student loans until April 1, 2002. Thereafter, principal receipts
from student loans will be used to redeem the Notes.
ITEM 3. 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
10
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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).
There have been no material changes in the reported market risks faced
by the Company since the end of its most recent fiscal year.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following is a complete list of exhibits filed as part of this Form
10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601
of Regulation S-K.
Exhibit No. Description
---------- -----------
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 three months
covered by this report.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NELNET STUDENT LOAN CORPORATION-1
By: /s/ Terry J. Heimes
----------------------------------------
Terry J. Heimes, Vice President
(Principal Executive Officer)
By: /s/ Jim Kruger
----------------------------------------
Jim Kruger, Vice President
(Principal Financial and Accounting Officer)
Date: August 14, 2000
<PAGE>
EXHIBIT INDEX
Exhibit
27.1 Financial Data Schedule
