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 333-93865
----------------------------------------------------
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 June 30, 2000
1
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NELNET STUDENT LOAN CORPORATION-2
INDEX
Page No.
---------
PART I. - FINANCIAL INFORMATION
Item 1.Financial Statements
Balance Sheet as of June 30, 2000............................3
Statement of Operations for the period ended June 30, 2000...4
Statement of Stockholder's Deficit for the
period ended June 30, 2000.................................5
Statement of Cash Flows for the period ended June 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
JUNE 30, 2000
(UNAUDITIED)
--------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 210,629,191
Student loans receivable including net premiums, net of
allowance for loan losses 766,480,772
Accrued interest receivable 22,585,616
Debt issuance cost, net of accumulated amortization 4,103,574
Income taxes receivable 189,033
Other assets 1,000
--------------
Total assets $1,003,989,186
==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities:
Notes payable $1,000,000,000
Accrued interest payable 3,481,420
Other liabilities 842,826
--------------
Total liabilities $1,004,324,246
--------------
Stockholder's deficit:
Common stock, no par value. Authorized 1,000 shares;
issued 1,000 shares $ 1,000
Accumulated deficit (336,060)
--------------
Total stockholder's deficit (335,060)
--------------
Total liabilities and stockholder's deficit $1,003,989,186
==============
See accompanying note to financial statements.
3
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NELNET STUDENT LOAN CORPORATION-2
STATEMENT OF OPERATIONS
PERIOD ENDED JUNE 30, 2000 /1
(UNAUDITED)
Revenues:
Loan interest $5,335,990
Investment interest 935,332
Other 9,645
----------
Total revenues $6,280,967
==========
Expenses:
Interest on notes $5,553,720
Loan servicing fees 661,602
Trustee and broker fees 207,619
Amortization of debt issuance costs 69,552
Amortization of loan premiums 113,567
Other general and administrative 200,000
----------
Total expenses $6,806,060
==========
Loss before income taxes (525,093)
Income tax benefit (189,033)
-----------
Net loss $ (336,060)
===========
See accompanying note to financial statements.
/1 Commenced active business on June 1, 2000.
4
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<TABLE>
<CAPTION>
NELNET STUDENT LOAN CORPORATION-2
STATEMENT OF STOCKHOLDER'S DEFICIT
PERIOD ENDED JUNE 30, 2000 /1
(UNAUDITED)
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
----------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Balances at June 1, 2000 $1,000 -- 0 $1,000
Net Loss, for the period
ended June 30, 2000 -- -- (336,060) (336,060)
----------- -------------- -------------- --------------
Balance at June 30, 2000 $1,000 -- $(336,060) $(335,060)
=========== ============== ============== ==============
See accompanying note to financial statements.
/1 Commenced active business on June 1, 2000.
</TABLE>
5
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NELNET STUDENT LOAN CORPORATION-2
STATEMENT OF CASH FLOWS
PERIOD ENDED JUNE 30, 2000 /1
(UNAUDITED)
-----------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (336,060)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization 183,119
Provision for loan losses, net of charge offs 199,395
Increase in accrued interest receivable (22,585,616)
Increase in accrued interest payable 3,481,420
Increase in other liabilities 842,826
Decrease in income tax receivable (189,033)
------------
Net cash used in operating activities (18,403,949)
------------
Cash flows from investing activities:
Purchase of student loans, including premiums (772,158,316)
Net proceeds from student loan principal payments 5,364,582
------------
Net cash used in investing activities (766,793,734)
------------
Cash flows from financing activities:
Issuance of Notes 1,000,000,000
Payment of debt issuance costs (4,173,126)
------------
Net cash provided by financing activities 995,826,874
------------
Net increase in cash and cash equivalents 210,629,191
Cash and cash equivalents, beginning of period
0
------------
Cash and cash equivalents, end of period $210,629,191
============
See accompanying note to financial statements.
/1 Commenced active business on June 1, 2000.
6
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NELNET STUDENT LOAN CORPORATION-2
NOTE TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 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 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 in the Acquisition Fund of the Trust Estate 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
Period Ended June 30, 2000
--------------------------
REVENUES. Revenues since inception consisted primarily of interest
earned on student loans. The amount of interest reported for the period ended
June 30, 2000 was derived from student loans in an aggregate principal amount of
approximately $751,650,000. The average effective annual interest rate of
interest income on student loans during the period ended June 30, 2000 was
approximately 8.52%.
EXPENSES. Since inception the Company's expenses consisted primarily of
interest due on the Company's outstanding Notes. For the period ended June 30,
2000 the Company's debt outstanding was approximately $1,000,000,000, and the
average annual cost of borrowings was approximately 6.66%.
NET LOSS. Since inception, a net loss existed in the amount of $336,060.
This net loss is primarily due to the Company's cost of borrowings being greater
than the earnings on proceeds of the Notes in the approximate amount of
$186,500,000, which had not been invested in student loan assets for the period
ended June 30, 2000.
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.
8
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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.
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.
9
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Notes were issued by the Company on June 1, 2000 in the amount of
$1,000,000,000. The proceeds of this issuance were deposited in
the Trust Estate or utilized to pay certain expenses associated
with the issuance as noted below:
Deposit to Acquisition Fund $ 986,190,000
Deposit to Reserve Fund $ 7,500,000
Deposit to Revenue Fund $ 3,060,000
Proceeds utilized for the payment of
Underwriter's Discount and Structuring Fee $ 3,250,000
--------------
Total $1,000,000,000
Approximately $798,228,800 of proceeds in the Acquisition Fund
were utilized on June 1, 2000 for the purchase of student loans.
Approximately $1,450,000 of the proceeds deposited in the
Acquisition Fund were set aside to pay costs of issuing the
Notes. On July 3, 2000 substantially all of the remaining
proceeds in the Acquisition Fund were utilized for the purchase
of additional student loans.
Paine Weber Incorporated served as the managing underwriter for
the Notes. The Notes were issued pursuant to a Registration
Statement on Form S-3, Registration No. 333-03865, that was
declared effective by the Securities and Exchange Commission on
February 15, 2000. The Notes were designated as the Company's
Student Loan Asset-Backed Auction Rate Notes Series 2000. Net
proceeds to the Company after underwriting discounts and other
expenses amounted to $995,300,000.
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 are filed herewith.
3.2 By-Laws of the Company are filed herewith.
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 From 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. is filed herewith.
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,
relating to issuance of the Company's Notes.
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: August 14, 2000
12
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EXHIBIT INDEX
Exhibit
3.1 Articles of Incorporation
3.2 By-Laws
10.1 Servicing Agreement
27.1 Financial Data Schedule
