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 333-93865
----------------------------------------------------
NELNET STUDENT LOAN CORPORATION-2
---------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 84-1518863
------------------------------ ------------------
State or other jurisdiction (I.R.S. Employer
of 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-2
INDEX
Page No.
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PART I. - FINANCIAL INFORMATION
Item 1.Financial Statements
Balance Sheet as of September 30, 2000.............................3
Statements of Operations for the three months ended and
period June 1, 2000 through September 30, 2000...................4
Statement of Stockholder's Deficit for the period
June 1, 2000 through September 30, 2000..........................5
Statement of Cash Flows for the period
June 1, 2000 through September 30, 2000..........................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 .......... 9
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings................................................... 10
Item 2.Changes in Securities............................................... 10
Item 3.Defaults upon Senior Securities..................................... 10
Item 4.Submission of Matters to a Vote of Security Holders................. 10
Item 5.Other Information................................................... 10
Item 6.Exhibits and Reports on Form 8-K.................................... 11
2
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NELNET STUDENT LOAN CORPORATION-2
BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 468,828
Student loans receivable including net premiums, net of
allowance for loan losses 940,378,951
Accrued interest receivable 30,791,228
Restricted cash - held by Trustee 27,179,367
Debt issuance costs, net of accumulated amortization 4,330,748
Income taxes receivable 288,167
--------------
Total assets $1,003,437,289
==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities:
Notes payable $1,000,000,000
Accrued interest payable 2,742,365
Other liabilities 1,206,221
--------------
Total liabilities $1,003,948,586
--------------
Stockholder's deficit:
Common stock, no par value. Authorized
1,000 shares; issued 1,000 shares $ 1,000
Accumulated deficit (512,297)
--------------
Total stockholder's deficit (511,297)
- --------------
Total liabilities and stockholder's deficit $1,003,437,289
==============
See accompanying note to financial statements.
3
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NELNET STUDENT LOAN CORPORATION-2
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AND PERIOD JUNE 1, 2000 THROUGH SEPTEMBER 30, 2000
(UNAUDITED)
Three Months Ended June 1, 2000 through
September 30, 2000 September 30, 2000
------------------ -------------------
Revenues:
Loan interest $20,425,101 $25,761,091
Investment interest 599,840 1,535,172
Other 37,025 46,670
----------- ------------
Total revenues $21,061,966 $27,342,933
=========== ===========
Expenses:
Interest on notes $16,863,970 $22,417,690
Loan servicing fees 2,261,562 2,923,164
Trustee and broker fees 752,198 959,817
Amortization of loan premiums
and debt issuance costs 611,513 794,632
Other general and administrative 848,094 1,048,094
----------- -----------
Total expenses $21,337,337 $28,143,397
=========== ===========
Loss before income taxes (275,371) (800,464)
Income tax benefit (99,134) (288,167)
----------- -----------
Net loss $ (176,237) $ (512,297)
=========== ===========
See accompanying note to financial statements.
4
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-2
STATEMENT OF STOCKHOLDER'S DEFICIT
PERIOD JUNE 1, 2000 THROUGH SEPTEMBER 30, 2000
(UNAUDITED)
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
----------- -------------- ---------------- ---------------
<S> <C> <C> <C>
Balances at June 1, 2000 $1,000 -- $0 $1,000
Net loss, for the period
June 1, 2000 through
September 30, 2000 -- -- (512,297) (512,297)
----------- -------------- ---------------- ---------------
Balance at September 30, 2000 $1,000 -- $(512,297) $(511,297)
=========== ============== ================ ===============
See accompanying note to financial statements.
</TABLE>
5
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NELNET STUDENT LOAN CORPORATION-2
STATEMENT OF CASH FLOWS
PERIOD JUNE 1, 2000 THROUGH SEPTEMBER 30, 2000
(UNAUDITED)
Cash flows from operating activities:
Net loss $ (512,297)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of loan premiums and debt issuance costs 794,632
Provision for loan losses, net of charge offs 295,049
Increase in accrued interest receivable (30,791,228)
Increase in accrued interest payable 2,742,365
Increase in other liabilities 1,206,221
Increase in income taxes receivable (288,167)
Decrease in other assets 1,000
------------
Net cash used in operating activities (26,552,425)
------------
Cash flows from investing activities:
Purchase of student loans, including premiums (973,717,152)
Net proceeds from student loan principal payments 32,293,398
Increase in restricted cash - held by Trustee (27,179,367)
-------------
Net cash used in investing activities (968,603,121)
-------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 1,000,000,000
Payment of debt issuance costs (4,375,626)
-------------
Net cash provided by financing activities 995,624,374
-------------
Net increase in cash and cash equivalents 468,828
Cash and cash equivalents, beginning of period
--
----------
Cash and cash equivalents, end of period $ 468,828
==========
See accompanying note to financial statements.
6
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NELNET STUDENT LOAN CORPORATION-2
NOTE TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
(1) BASIS OF PRESENTATION
The accompanying financial statements of NELNET Student Loan
Corporation-2 (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
operations for the period shown. All such adjustments made are of a normal
recurring nature, except when noted as extraordinary or nonrecurring. The
Company commenced its business operations on June 1, 2000. The financial
statements are unaudited and present financial information reflecting the
operations of the Company from June 1, 2000 to 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 period are not necessarily indicative of
the results for the full year.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
The Company was incorporated under the laws of the state of Nevada on
October 8, 1999. The Company is 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 initial issuance of Notes occurred on June 1, 2000 in
the amount of $1,000,000,000. Approximately $798,228,800 of these proceeds were
utilized on June 1, 2000 for the purchase of student loans. Substantially all of
the remaining proceeds were utilized on July 3, 2000 for the purchase of student
loans. 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
-------------------------------------
REVENUES. Revenues for the three months ended September 30, 2000
consisted primarily of interest earned on student loans. The amount of interest
reported for the three months ended September 30, 2000 was derived from student
loans in an aggregate principal amount of approximately $923,200,000. The
average effective annual interest rate of interest income on student loans
during the three months ended September 30, 2000 was approximately 8.91%.
EXPENSES. The Company's expenses consisted primarily of interest due on
the Company's outstanding Notes. For the three months ended September 30, 2000
the Company's debt outstanding was approximately $1,000,000,000, and the average
annual cost of borrowings was approximately 6.75%. Loan servicing expense for
the three months ended September 30, 2000 was approximately $2,262,000. The
average annual rate of servicing realized on the average principal amount of
student loans was 1.00%.
NET LOSS. For the three months ended September 30, 2000, a net loss has
been recognized in the amount of $176,237. This net loss is attributable to a
significant amount of amortization of loan premiums.
Period June 1, 2000 through September 30, 2000
----------------------------------------------
REVENUES. Revenues since inception consisted primarily of interest
earned on student loans. The amount of interest reported for the period June 1,
2000 through September 30, 2000 was derived from student loans in an aggregate
principal amount of approximately $923,200,000. The average effective annual
interest rate of interest income on student loans during the period June 1, 2000
through September 30, 2000 was approximately 8.83%.
EXPENSES. Since inception the Company's expenses consisted primarily of
interest due on the Company's outstanding Notes. For the period June 1, 2000
through September 30, 2000 the Company's debt outstanding was approximately
$1,000,000,000, and the average annual cost of borrowings was approximately
6.73%. Loan servicing expense for the period June 1, 2000 through September 30,
2000 was approximately $2,923,000. The average annual rate of servicing realized
on the average principal amount of student loans was 1.00%.
8
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NET LOSS. Since inception, a net loss has been recognized in the amount
of $512,297. This net loss for the period June 1, 2000 through September 30,
2000 is attributable in part to a significant amount of amortization of loan
premiums. Additionally, there was approximately $200,000,000 which was
pre-funded on June 1, 2000 where the cost of borrowing on the proceeds of the
Notes exceeded the earnings during the one month period of time that these funds
were not invested in student loans.
Since inception, 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 June 1, 2003. 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 Company's
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"). 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.
9
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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 is based generally on the LIBOR 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).
A quantitative analysis of market risk for the Company's financial
instruments will be conducted as the Company's business operations continue.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
By September 1, 2000, all original proceeds in the Acquisition
Fund had been utilized for the purchase of student loans.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
10
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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 Quarterly Report on Form
10Q dated June 30, 2000).
3.2 By-Laws of the Company (Incorporated by reference herein to
the Company's Quarterly Report on Form 10Q dated June 30,
2000).
4.1 Indenture of Trust between the Company and Zions First
National Bank dated June 1, 2000 (Incorporated by reference
to the Company's current report on Form 8-K filed June 16,
2000).
4.2 Series 2000 Supplemental Indenture of Trust between the
Company and Zions First National Bank dated June 1, 2000
(Incorporated by reference to the Company's current report on
Form 8-K filed June 16, 2000).
10.1 Servicing Agreement dated June 1, 2000 between the Company
and NELnet, Inc. (Incorporated by reference herein to the
Company's Quarterly Report on Form 10Q dated June 30, 2000).
27.1 Financial Data Schedule is filed herewith.
REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on June 16, 2000 to
report the issuance of $1,000,000,000 of the Company's Student Loan Asset Backed
Notes and to file certain exhibits related thereto.
11
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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-2
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
12
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EXHIBIT INDEX
Exhibit
27.1 Financial Data Schedule
