10-Q 1 nel1.txt 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 March 31, 2001 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 (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 March 31, 2001 1 NELNET STUDENT LOAN CORPORATION-1 INDEX Page No. -------- PART I. - FINANCIAL INFORMATION Item 1.Financial Statements Balance Sheets as of March 31, 2001 and December 31, 2000.............................................3 Statements of Income for the three months ended March 31, 2001 and 2000.......................................4 Statement of Stockholder's Equity for the three months ended March 31, 2001..........................................5 Statements of Cash Flows for the three months ended March 31, 2001 and 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

See accompanying note to financial statements. 3 NELNET STUDENT LOAN CORPORATION-1 STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) Three Months Ended ------------------ 2001 2000 ---- ---- Revenues: Loan interest $27,653,969 $30,577,864 Investment interest 652,503 782,010 ----------- ----------- Total revenues $28,306,472 $31,359,874 =========== =========== Expenses: Interest on notes payable $21,309,910 $23,167,859 Loan servicing fees to related party 3,134,938 3,374,534 Trustee and broker fees 653,037 697,283 Amortization of debt issuance costs 283,752 335,071 Amortization of loan premiums 1,448,443 1,135,787 Provisions for loan losses 150,000 60,000 Other general and administrative 625,577 665,667 ----------- ----------- Total expenses $27,605,657 $29,436,201 =========== =========== Income before income tax expense 700,815 1,923,673 Income tax expense 252,294 692,522 --------- ----------- Net income $ 448,521 $ 1,231,151 ========= =========== See accompanying note to financial statements. 4 NELNET STUDENT LOAN CORPORATION-1 STATEMENT OF STOCKHOLDER'S EQUITY THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED) -------------------------------------------------------------------------------- ADDITIONAL TOTAL COMMON PAID IN RETAINED STOCKHOLDER'S STOCK CAPITAL EARNINGS EQUITY --------- ------------- ----------- -------------- Balances at December 31, 2000 $1,000 $8,827,121 -- $8,828,121 Net income -- -- 448,521 448,521 --------- ------------- ----------- -------------- Balance at March 31, 2001 $1,000 $8,827,121 $448,521 $9,276,642 ========= ============= =========== ============== See accompanying note to financial statements. 5

See accompanying note to financial statements. 6 NELNET STUDENT LOAN CORPORATION-1 NOTE TO FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2001 (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 presentation of the financial statements 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, 2000 is derived from the audited balance sheet as of that date. All other financial statements are unaudited. Certain items included in the financial statements for the three months ended March 31, 2000 have been reclassified to conform with the financial statements for fiscal year 2001. 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. 7 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 and holding 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 March 31, 2001 compared to three months ended March 31, 2000 ------------------------------------------------------------------------------- REVENUES. Revenues for the three months ended March 31, 2001, consisted primarily of interest earned on student loans. Revenues from interest on student loans decreased by $2,923,895 from $30,577,864 for the three months ended March 31, 2000 to $27,653,969 for the three months ended March 31, 2001. The decrease in revenues is attributable to a declining interest rate environment during the current fiscal year. The Company's average net investment in student loans during the three months ended March 31, 2001 and 2000 was approximately $1,382,000,000 and $1,447,000,000, 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 March 31, 2001 and 2000 was approximately 8.01% and 8.39%, 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 decreased by $1,857,949 from $23,167,859 for the three months ended March 31, 2000 to $21,309,910 for the three months ended March 31, 2001. This decrease in expenses is attributable to a decrease in interest rates during the current fiscal year and a lower outstanding notes payable balance. For the three months ended March 31, 2001 and 2000, the Company's average debt outstanding was approximately $1,476,000,000 and $1,559,000,000, respectively, and the average annual cost of borrowings was approximately 5.78% and 5.94%, respectively. The decline in the average annual cost of borrowings was not as significant as the decrease in the annual loan yield as a portion of the notes payable are at a fixed rate. The Company also incurred loan servicing fees to related party in the amount of $3,134,938 for the three months ended March 31, 2001, as compared to $3,374,543 for the three months ended March 31, 2000. The decrease in loan servicing fees to related party is directly related to a reduction in the average net investment of student loans for the period. Amortization of loan premiums increased by $312,656 from $1,135,787 for the three months ended March 31, 2000 to $1,448,443 for the three months ended March 31, 2001. This increase is attributable to an increase in the rate of amortization due to an increase in principal payments on the loans as a greater percentage of the loan portfolio that is in repayment status. Provisions for loan losses increased by $90,000, from $60,000 for the three months ended March 31, 2000 to $150,000 for the three months ended March 31, 2001. Additional amounts were recognized as bad debt expense in order to reflect the appropriate allowance amounts in comparison to the estimated defaults. Income tax expense amounted to $252,294 for the three months ended March 31, 2001, compared to $692,522 for the three months ended March 31, 2000. The decrease in income tax expense was a result of a decline in the net income before income tax expense for the three months ended March 31, 2001. 8 NET INCOME. The Company had net income of $448,521 for the three months ended March 31, 2001 and $1,231,151 for the three months ended March 31, 2000. The decline in net income is due to a decrease in the net interest margin on student loans due to the lower interest rates and the increase in amortization of loan premiums. The net interest margin decreased by $1,065,946 from $7,410,005 for the three months ended March 31, 2000 to $6,344,059 for the three months ended March 31, 2001. For the three months ended March 31, 2001, 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. 9 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. On March 23, 2001, the sole shareholders of the Company, NELnet, Inc., re-elected the following individuals to the Company's Board of Directors: Michael S. Dunlap, Stephen F. Butterfield, Ronald W. Page, Ross Wilcox and Dr. Paul Hoff. ITEM 5. OTHER INFORMATION. None 10 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)). REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the three months covered by this report. 11 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: May 15, 2001 12

NELNET STUDENT LOAN CORP 1 10-Q