10-Q 1 n10q18-01.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 June 30, 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 June 30, 2001 1 NELNET STUDENT LOAN CORPORATION-1 INDEX Page No. PART I. - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of June 30, 2001 and December 31, 2000.................................................3 Statements of Income for the three months and six months ended June 30, 2001 and 2000......................................4 Statement of Stockholder's Equity for the six months ended June 30, 2001...............................................5 Statements of Cash Flows for the six months ended June 30, 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 .........11 PART II. - OTHER INFORMATION Item 1. Legal Proceedings..................................................12 Item 2. Changes in Securities..............................................12 Item 3. Defaults upon Senior Securities....................................12 Item 4. Submission of Matters to a Vote of Security Holders................12 Item 5. Other Information..................................................12 Item 6. Exhibits and Reports on Form 8-K...................................13 2

See accompanying notes to financial statements. 3

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See accompanying notes to financial statements. 6 NELNET STUDENT LOAN CORPORATION-1 NOTE TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 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 six months ended June 30, 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. (2) STUDENT LOAN INTEREST MARGIN SECURITIES TRANSACTION Effective April 3, 2001, NELnet Group Trust-I (the Trust) issued student loan interest margin securities. In connection with that transaction, the Company transfered to the Trust its rights to receive future excess residual cash flows and the administrative fees that are permitted to be withdrawn from the Company's trust estate created under the Company's Trust Indenture. Those revenues, along with revenues from similar transfers made by an affiliate of the Company, will be used by the Trust to make payments of principal and interest due on the Trust's securities. NELnet, Inc., which is the parent and sole owner of the Company, is also the sole beneficial owner of the Trust. The proceeds from the issuance of the Trust's securities which were attributed to the transfer to the Trust made by the Company were paid to NELnet, Inc. The future excess residual cash flows of the Company's trust estate represent funds which would normally be available for the payment of dividends by the Company to NELnet, Inc. As a result of the Company's transfer to the Trust, no excess cash flows will be available for dividend by the Company to NELnet, Inc. After the obligations of the Trust are satisfied in full, NELnet, Inc. will receive any remaining excess cash flows as the sole beneficial owner of the Trust and will be reflected as dividends from the Company. The transfer of the rights to future excess residual cash flows and the right to receive future administrative fees will not have an adverse effect on the holders of the Notes as these payments represent amounts available after all debt service and other requirements associated with the outstanding Notes existing under the Company's Trust Indenture are met. NELnet, Inc. has agreed to provide the administrative services necessary for administration of the Company's trust estate. The Trust securities are not obligations of the Company or NELnet, Inc. 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 June 30, 2001 compared to three months ended June 30, 2000 ----------------------------------------------------------------------------- REVENUES. Revenues for the three months ended June 30, 2001, consisted primarily of interest earned on student loans. Revenues from interest on student loans decreased by $4,126,555 from $31,113,137 for the three months ended June 30, 2000 to $26,986,582 for the three months ended June 30, 2001. The decrease in revenues is attributable to a declining interest rate environment during the current fiscal year along with a reduced investment in student loans. The Company's average net investment in student loans during the three months ended June 30, 2001 and 2000 was approximately $1,336,000,000 and $1,445,000,000, 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 June 30, 2001 and 2000 was 8.08% and 8.56%, respectively. EXPENSES. The Company's expenses consisted primarily of interest on the Company's outstanding Notes. Interest on the Company's outstanding Notes decreased by $6,341,923 from $23,903,876 for the three months ended June 30, 2000 to $17,561,953 for the three months ended June 30, 2001. This decrease in expenses is attributable to a decrease in interest rates during the current fiscal year and a lower outstanding Notes balance. For the three months ended June 30, 2001 and 2000, the Company's average Notes outstanding was approximately $1,452,000,000 and $1,543,000,000, respectively, and the average annual cost of borrowings was 4.84% and 6.20%, respectively. The Company also incurred loan servicing fees to related party in the amount of $3,108,304 for the three months ended June 30, 2001, as compared to $3,351,047 for the three months ended June 30, 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 $181,218 from $1,290,306 for the three months ended June 30, 2000 to $1,471,524 for the three months ended June 30, 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. Provision for loan losses decreased by $10,000, from $60,000 for the three months ended June 30, 2000 to $50,000 for the three months ended June 30, 2001. A reduced provision expense was recognized as bad debt expense in order to reflect the appropriate allowance amounts in comparison to the estimated defaults. Income tax expense amounted to $1,431,053 for the three months ended June 30, 2001, compared to $516,243 for the three months ended June 30, 2000. The increase in income tax expense was a result of a higher net income before income tax expense for the three months ended June 30, 2001. The effective tax rate utilized by the Company to recognize a provision for income tax expense was 36%. 8 NET INCOME. The Company had net income of $2,544,094 for the three months ended June 30, 2001 and $917,766 for the three months ended June 30, 2000. The increase in net income is attributable to a higher net interest margin on student loans due to the declining interest rates on the Notes during the period while the "floor rate" on the student loan assets is determined annually on July 1. Consequently, in a declining interest rate environment the net interest margin increases and in a rising interest rate environment it decreases. The net interest margin increased by $2,215,368 from $7,209,261 for the three months ended June 30, 2000 to $9,424,629 for the three months ended June 30, 2001. Six months ended June 30, 2001 compared to six months ended June 30, 2000 ------------------------------------------------------------------------- REVENUES. Revenues for the six months ended June 30, 2001, consisted primarily of interest earned on student loans. Revenues from interest on student loans decreased by $7,050,450 from $61,691,001 for the six months ended June 30, 2000 to $54,640,551 for the six months ended June 30, 2001. The decrease in revenues is attributable to a declining interest rate environment during the current fiscal year along with a reduced investment in student loans. The Company's average net investment in student loans during the six months ended June 30, 2001 and 2000 was approximately $1,359,000,000 and $1,446,000,000, 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, 2001 and 2000 was 8.04% and 8.48%, respectively. EXPENSES. The Company's expenses consisted primarily of interest on the Company's outstanding Notes. Interest on the Company's outstanding Notes decreased by $8,199,871 from $47,071,735 for the six months ended June 30, 2000 to $38,871,864 for the six months ended June 30, 2001. This decrease is attributable to a decrease in interest rates during the current fiscal year and a lower outstanding Notes balance. For the six months ended June 30, 2001 and 2000, the Company's average Notes outstanding was approximately $1,464,000,000 and $1,551,100,000, respectively, and the average annual cost of borrowings was 5.31% and 6.07%, respectively. The Company also incurred loan servicing fees to related party in the amount of $6,243,241 for the six months ended June 30, 2001, as compared to $6,725,581 for the six months ended June 30, 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 $493,874 from $2,426,093 for the six months ended June 30, 2000 to $2,919,967 for the six months ended June 30, 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. Provision for loan losses increased by $80,000, from $120,000 for the six months ended June 30, 2000 to $200,000 for the six months ended June 30, 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 $1,683,346 for the six months ended June 30, 2001, compared to $1,208,766 for the six months ended June 30, 2000. The increase in income tax expense was a result of a higher net income before income tax expense for the six months ended June 30, 2001. The effective tax rate utilized by the Company to recognize income tax expense was 36%. NET INCOME. The Company had net income of $2,992,615 for the six months ended June 30, 2001 and $2,148,916 for the six months ended June 30, 2000. The increase in net income is attributable to higher net interest margins on student loans due to the declining interest rates on the debt during the period while the "floor rate" on student loan assets is determined annually on July 1. Consequently, in a declining interest rate environment the net interest margin increases and in a rising interest rate environment it decreases. The net interest margin increased by $1,149,421 from $14,619,266 for the six months ended June 30, 2000 to $15,768,687 for the six months ended June 30, 2001. 9 For the six months ended June 30, 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 Company has restricted cash held by the trustee of approximately $61,971,000 as of June 30, 2001. The restricted cash includes cash held by the trustee in an Acquisition and Revenue Fund of approximately 38,647,000 and cash held by the trustee in a Reserve Fund of approximately $23,324,000. All restricted cash is held by the trustee and can be used only for designated purposes. 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. On April 3, 2001, $57,500,000 of NELNET Student Loan Interest Margin Securities - 2001 ("SLIMS") were issued by the NELnet Group Trust I (the "NELnet Group Trust") under the terms of a Trust Agreement dated April 1, 2001. In connection with that transaction, the Company assigned to the NELnet Group Trust its rights to receive the residual cash flows that exist on the student loans financed by the Notes. Certain other affiliated entities of the Company made similar contributions to the NELnet Group Trust. On a semiannual basis, the residual interest that exists above the minimum parity requirements as specified by the terms of the Company's Trust Indenture are required to be withdrawn from the trust estate created by the Company's Trust Indenture and deposited within the NELnet Group Trust. Additionally, funds representing an administrative fee permitted to be withdrawn from the trust estate created by the Company's Trust Indenture are also required to be deposited within the NELnet Group Trust. These funds are then utilized for the payment of a portion of the outstanding SLIMS on a semiannual basis. As of June 30, 2001, only funds representing the administrative fee described above have been withdrawn from the NELNET-1 Trust Estate. 10 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 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. 11 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 12 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)). 10.2 Trust Agreement dated as of April 1, 2001, among NELNET Student Loan Corporation-1, MELMAC LLC, NELnet, Inc., The Chase Manhattan Bank and Wilmington Trust Company is 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. 13 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, 2001 14

NELNET STUDENT LOAN CORP 1 10-Q