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 September 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 September 30, 2000
1
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NELNET STUDENT LOAN CORPORATION-1
INDEX
Page No.
--------
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 and
December 31, 1999.......................................... 3
Statements of Income for the three months ended and
nine months ended September 30, 2000 and 1999.............. 4
Statement of Stockholder's Equity for the nine months
ended September 30, 2000................................... 5
Statements of Cash Flows for the nine months ended
September 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
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
-------------------------------------------------------------------------------------------
ASSETS SEPTEMBER 30, DECEMBER 31,
2000 1999
(Unaudited)
----------- ---------
<S> <C> <C>
Cash and cash equivalents $ 86,073 $ 41,727
Student loans receivable including net premiums,
net of allowance for loan losses 1,421,373,668 1,492,739,182
Accrued interest receivable 32,384,348 30,162,766
Restricted cash - held by Trustee 68,596,968 49,889,363
Debt issuance costs, net of accumulated amortization 6,243,869 7,249,082
Other assets 324,244 324,244
-------------- --------------
Total assets $1,529,009,170 $1,580,406,364
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes payable $1,513,800,000 $1,567,300,000
Accrued interest payable 4,658,416 4,801,540
Income taxes payable 782,077 92,509
Other liabilities 1,670,344 1,734,065
-------------- --------------
Total liabilities $1,520,910,837 $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 4,978,929 6,220,000
Retained earnings 3,118,404 257,250
-------------- --------------
Total stockholder's equity 8,098,333 6,478,250
-------------- --------------
Total liabilities and
stockholder's equity $1,529,009,170 $1,580,406,364
============== ==============
See accompanying note to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
STATEMENTS OF INCOME
THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Loan interest $31,362,859 $28,938,072 $92,649,533 $76,412,899
Investment interest 865,599 634,988 2,306,926 2,936,680
Other 174,435 224,072 578,761 385,078
----------- ----------- ----------- -----------
Total revenues $32,402,893 $29,797,132 $95,535,220 $79,734,657
=========== =========== =========== ===========
Expenses:
Interest on notes $24,624,945 $21,827,117 $71,696,680 $55,584,113
Loan servicing fees 3,288,732 3,929,133 10,014,313 9,321,397
Trustee and broker fees 725,891 721,598 2,149,480 1,733,078
Amortization of debt issuance costs 335,071 273,973 1,005,213 918,641
Amortization of loan premiums 1,517,230 1,079,916 3,943,323 3,638,684
Other general and administrative 798,154 1,570,654 2,255,659 3,955,476
----------- ----------- ----------- -----------
Total expenses $31,290,023 $29,402,391 $91,064,668 $75,151,389
=========== =========== =========== ===========
Income before income taxes 1,112,870 394,741 4,470,552 4,583,268
Income tax expense 400,633 147,435 1,609,398 1,711,851
--------- --------- ----------- -----------
Net income $ 712,237 $ 247,306 $ 2,861,154 $ 2,871,417
========= ========= =========== ===========
See accompanying note to financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 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
Return of capital to parent -- (1,251,071) -- (1,251,071)
Net income, nine months ended
September 30, 2000 -- -- 2,861,154 2,861,154
-------------- --------------- ------------- ---------------
Balance at September 30, 2000 $1,000 $4,978,929 $3,118,404 $8,098,333
============== =============== ============= ===============
See accompanying note to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-1
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,861,154 $ 2,871,417
Adjustments to reconcile net income to
net cash from operating activities:
Amortization of loan premiums and debt issuance costs 4,948,536 4,557,325
Provision for loan losses, net of charge offs (266,431) 787,815
Increase in accrued interest receivable (2,221,582) (20,138,309)
Decrease in other assets -- 47,412
Increase (decrease) in accrued interest payable (143,124) 1,084,762
Increase (decrease) in income taxes payable 689,568 (572,086)
Increase (decrease) in other liabilities (63,721) 1,010,778
--------- -----------
Net cash provided by (used in) operating activities 5,804,400 (10,350,886)
--------- -----------
Cash flows from investing activities:
Purchase of student loans, including premiums (175,907,234) (993,882,589)
Proceeds from sale of student loans 103,268,177 16,532,990
Net proceeds from student loan principal payments and loan
consolidations 140,327,679 113,120,562
(Increase) decrease in restricted cash - held by Trustee (18,707,605) 611,692,862
----------- -----------
Net cash provided by (used in) investing activities 48,981,017 (252,536,175)
----------- -----------
Cash flows from financing activities:
Capital contribution from parent 10,000 1,920,000
Return of capital to parent (1,251,071) --
Payments on notes payable (53,500,000) (15,900,000)
Payment of debt issuance costs -- (1,809,372)
Proceeds from issuance of notes payable -- 278,700,000
------------ -----------
Net cash (used in) provided by financing activities (54,741,071) 262,910,628
------------ -----------
Net increase in cash and cash equivalents 44,346 23,567
Cash and cash equivalents, beginning of period 41,727 --
------- -------
Cash and cash equivalents, end of period $86,073 $23,567
======= =======
See accompanying note to financial statements.
</TABLE>
6
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NELNET STUDENT LOAN CORPORATION-1
NOTE TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 and nine months ended
September 30, 1999 have been reclassified to conform to the presentation
reflected in the Statement of Income for the three months and nine months ended
September 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 September 30, 2000 compared to three months ended September
30, 1999
--------------------------------------------------------------------------------
REVENUES. Revenues for the three months ended September 30, 2000,
consisted primarily of interest earned on student loans. Revenues from interest
on student loans increased by $2,424,787 from $28,938,072 for the three months
ended September 30, 1999 to $31,362,859 for the three months ended September 30,
2000. The increase in revenues is attributable to a rising interest rate
environment during the current fiscal year. The Company's average net investment
in student loans during the three months ended September 30, 2000 and 1999 was
approximately $1,413,000,000 and $1,467,540,000, 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 September 30, 2000 and
1999 was approximately 8.88% and 8.30%, respectively.
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 $2,797,828 from $21,827,117 for the three months
ended September 30, 1999 to $24,624,945 for the three months ended September 30,
2000. This increase in expenses is attributable to an increase in interest rates
during the current fiscal year. For the three months ended September 30, 2000
and 1999, the Company's average debt outstanding was approximately
$1,521,000,000 and $1,582,933,000, respectively, and the average annual cost of
borrowings was approximately 6.48% and 5.52%, respectively. The Company also
incurred loan servicing fees in the amount of $3,288,732 for the three months
ended September 30, 2000, as compared to $3,929,133 for the three months ended
September 30, 1999. The decrease in loan servicing fees is directly related to a
reduction in the average net investment of student loans for the period.
Amortization of loan premiums increased by $437,314 from $1,079,916 for the
three months ended September 30, 1999 to $1,517,230 for the three months ended
September 30, 2000. This increase is attributable to the additional amortization
incurred on premiums paid during the third quarter of 1999, and the first three
quarters of 2000, as well as an increase in the rate of amortization due to an
increase in principal payments on the loans. Other general and administrative
expenses incurred by the Company decreased by $772,500, from $1,570,654 for the
three months ended September 30, 1999 to $798,154 for the three months ended
September 30, 2000. This reduction is as a result of a decrease in
administrative fees paid to the parent and a decline in bad debt expense
recognized. Administrative fees paid to the parent for the three months ended
September 30, 1999 were higher than amounts paid for the three months ended
September 30, 2000 as a result of additional permitted amounts reimbursed to the
parent in 1999. For the three months ended September 30, 1999, additional
8
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amounts were incurred as bad debt expense in order to reflect the appropriate
allowance amounts in comparison to the estimated defaults. Income tax expense
amounted to $400,633 for the three months ended September 30, 2000, compared to
$147,435 for the three months ended September 30, 1999. The increase in income
tax expense was a result of higher income before income taxes for the three
months ended September 30, 2000.
NET INCOME. The Company had net income of $712,237 for the three months
ended September 30, 2000 and $247,306 for the three months ended September 30,
1999. The increase in net income is due in part to a decrease in other general
and administrative expenses and a decrease in loan servicing fees.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
--------------------------------------------------------------------------------
REVENUES. Revenues for the nine months ended September 30,
2000, consisted primarily of interest earned on student loans. Revenues from
interest on student loans increased by $16,236,634 from $76,412,899 for the nine
months ended September 30, 1999 to $92,649,533 for the nine months ended
September 30, 2000. The increase in revenues is attributable to the acquisition
of additional student loans by the Company in the first three quarters of 2000,
the third and fourth quarter of 1999, and a rising interest rate environment
during the current fiscal year. The Company's average net investment in student
loans during the nine months ended September 30, 2000 and 1999 was approximately
$1,434,900,000 and $1,228,451,000, respectively (excluding funds held by the
Trustee) and the average effective annual interest rate of interest income on
student loans during the nine months ended September 30, 2000 and 1999 was
approximately 8.61% and 8.34%, respectively. The Company also earned investment
interest and other income in the amounts of $2,306,926 and $578,761,
respectively, for the nine months ended September 30, 2000 and $2,936,680 and
$385,078, respectively, for the nine months ended September 30, 1999. The
decrease in investment interest was a result of the cash being utilized more
efficiently to acquire student loans during the current fiscal year.
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 $16,112,567 from $55,584,113 for the nine months
ended September 30, 1999 to $71,696,680 for the nine months ended September 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 during the
current fiscal year. For the nine months ended September 30, 2000 and 1999, the
Company's average debt outstanding was approximately $1,541,100,000 and
$1,404,322,000, respectively, and the average annual cost of borrowings was
approximately 6.20% and 5.28%, respectively. The Company also incurred loan
servicing fees in the amount of $10,014,313 for the nine months ended September
30, 2000, as compared to $9,321,397 for the nine months ended September 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 $1,699,817, from $3,955,476 for the nine months
ended September 30, 1999, to $2,255,659 for the nine months ended September 30,
2000. This reduction is due to a decline in administrative fees paid to the
parent and a decrease in bad debt expense. Administrative fees paid to the
parent for the nine months ended September 30, 1999 were higher than amounts
paid for the nine months ended September 30, 2000 as a result of additional
permitted amounts reimbursed to the parent in 1999. For the nine months ended
September 30, 1999, additional amounts were incurred as bad debt expense in
order to reflect the appropriate allowance amounts in comparison to the
estimated defaults. Income tax expense amounted to $1,609,398 for the nine
months ended September 30, 2000 compared to $1,711,851 for the nine months ended
September 30, 1999. The decrease in income tax expense was a result of less
income before income taxes for the nine months ended September 30, 2000.
Additionally, the effective income tax rate used in arriving at the income tax
expense was decreased for the nine months ended September 30, 2000. The
reduction in the income tax rate was a result of reflecting the overall
effective income tax rate for all NELnet, Inc. related entities.
9
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NET INCOME. The Company had net income of $2,861,154 for the nine
months ended September 30, 2000 and $2,871,417 for the nine months ended
September 30, 1999.
For the nine months ended September 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.
10
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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).
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: November 14, 2000
13
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EXHIBIT INDEX
Exhibit
27.1 Financial Data Schedule
