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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from
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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 August 14, 2002
1
NELNET STUDENT LOAN CORPORATION-2
INDEX
Page No.
--------
PART I. - FINANCIAL INFORMATION
Item 1.Financial Statements
Balance Sheets as of June 30, 2002 and December 31, 2001.......3
Statements of Operations for the three months and
six months ended June 30, 2002 and 2001......................4
Statement of Stockholder's Equity for the six months ended
June 30, 2002................................................5
Statements of Cash Flows for the six months ended
June 30, 2002 and 2001.......................................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 .........12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings..................................................13
Item 2. Changes in Securities..............................................13
Item 3. Defaults upon Senior Securities....................................13
Item 4. Submission of Matters to a Vote of Security Holders................13
Item 5. Other Information..................................................13
Item 6. Exhibits and Reports on Form 8-K...................................13
2
NELNET STUDENT LOAN CORPORATION-2
BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
- --------------------------------------------------------------------------------------------------------
ASSETS
June 30, 2002 December 31,
(unaudited) 2001
--------------- --------------
Cash and cash equivalents $ 77,620 $ 8,093
Student loans receivable including net premiums, net of allowance
for loan losses of $2,257,070 in 2002 and $1,891,253 in 2001 2,465,155,620 1,933,941,068
Accrued interest receivable 67,136,006 50,256,051
Restricted cash - held by trustee 74,230,033 46,135,799
Debt issuance costs, net of accumulated amortization of $674,599 in 2002
and $422,848 in 2001 11,403,992 9,355,177
Due from affiliates 831,493 4,100,000
Deferred tax asset 901,664 1,135,529
-------------- --------------
Total assets $2,619,736,428 $2,044,931,717
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes payable $2,594,000,000 $2,030,000,000
Accrued interest payable 4,783,640 4,087,348
Other liabilities 4,918,790 3,833,683
Due to affiliates 3,469,807 2,867,345
-------------- --------------
Total liabilities $2,607,172,237 $2,040,788,376
-------------- --------------
Stockholder's equity:
Common stock, no par value. Authorized 1,000 shares; issued and
outstanding 1,000 shares $ 1,000 $ 1,000
Additional paid in capital 1,988,533 4,142,341
Retained earnings 10,574,658 --
-------------- --------------
Total stockholder's equity 12,564,191 4,143,341
-------------- --------------
Total liabilities and stockholder's equity $2,619,736,428 $2,044,931,717
============== ==============
See accompanying note to financial statements.
3
NELNET STUDENT LOAN CORPORATION-2
STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Loan interest $37,653,255 $26,693,206 $68,166,008 $44,742,798
Investment interest 243,402 479,002 389,872 930,571
----------- ----------- ----------- -----------
Total revenues $37,896,657 $27,172,208 $68,555,880 $45,673,369
----------- ----------- ----------- -----------
Expenses:
Interest on notes payable $17,664,133 $18,337,660 $32,591,290 $32,985,095
Loan servicing fees to related party 5,409,690 3,180,779 10,151,248 5,627,322
Trustee and broker fees 1,428,130 688,245 2,397,995 1,350,603
Amortization of debt issuance costs 132,518 93,697 251,751 127,355
Amortization of loan premiums 2,194,074 977,681 4,033,916 1,795,466
Provision for loan losses 275,000 200,000 675,000 300,000
Other general and administrative 1,061,847 718,358 1,931,778 1,131,006
----------- ----------- ----------- -----------
Total expenses $28,165,392 $24,196,420 $52,032,978 $43,316,847
----------- ----------- ----------- -----------
Income before income taxes 9,731,265 2,975,788 16,522,902 2,356,522
Income tax expense 3,503,255 1,071,284 5,948,244 848,348
----------- ----------- ----------- -----------
Net income $ 6,228,010 $ 1,904,504 $ 10,574,658 $ 1,508,174
=========== =========== ============ ===========
See accompanying note to financial statements.
4
NELNET STUDENT LOAN CORPORATION-2
STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
TOTAL
COMMON ADDITIONAL RETAINED STOCKHOLDER'S
STOCK PAID-IN CAPITAL EARNINGS EQUITY
---------- ---------------- ------------ ---------------
Balances at December 31, 2001 $1,000 $4,142,341 -- $4,143,341
Capital contribution from parent -- 2,075,000 -- 2,075,000
Return of capital to parent -- (4,228,808) -- (4,228,808)
Net income -- -- 10,574,658 10,574,658
---------- ---------------- ------------ ---------------
Balances at June 30, 2002 $1,000 $1,988,533 $10,574,658 $12,564,191
========== ================ ============ ===============
See accompanying note to financial statements.
5
NELNET STUDENT LOAN CORPORATION-2
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $10,574,658 $ 1,508,174
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of loan premiums and debt issuance costs 4,285,667 1,922,821
Provision for loan losses, net of charge offs 365,817 49,083
Deferred tax benefit (expense) 233,865 (20,000)
Increase in accrued interest receivable (16,879,955) (8,289,427)
Decrease (increase) in due from affiliates 3,268,507 (523,292)
Increase in accrued interest payable 696,292 555,080
Increase in other liabilities 1,085,107 1,790,960
Increase in due to affiliates 602,462 491,640
------------ -------------
Net cash provided by (used in) operating activities 4,232,420 (2,514,961)
------------ -------------
Cash flows from investing activities:
Purchases of student loans, including premiums (856,643,105) (527,190,391)
Proceeds from sale of student loans 179,902,228 --
Net proceeds from student loan principal payments and loan consolidations 141,126,592 68,840,861
Increase in restricted cash - held by trustee (28,094,234) (17,230,625)
------------- -------------
Net cash used in investing activities (563,708,519) (475,580,155)
------------- -------------
Cash flows from financing activities:
Issuance of notes payable 564,000,000 480,000,000
Payment of debt issuance costs (2,300,566) (2,809,535)
Capital contribution from parent 2,075,000 --
Return of capital to parent (4,228,808) --
------------- -------------
Net cash provided by financing activities 559,545,626 477,190,465
------------- ------------
Net increase (decrease) in cash and cash equivalents 69,527 (904,651)
Cash and cash equivalents, beginning of period 8,093 1,008,671
------------- -------------
Cash and cash equivalents, end of period $ 77,620 $ 104,020
============= =============
See accompanying note to financial statements.
6
NELNET STUDENT LOAN CORPORATION-2
NOTE TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
NELNET Student Loan Corporation-2 (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
Nelnet Loan Services, Inc. (formerly UNIPAC Service Corporation), a privately
held Nebraska Corporation. The accompanying financial statements of 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
the periods shown. All such adjustments made are of a normal recurring nature,
except when noted as extraordinary or nonrecurring. The balance sheet at
December 31, 2001 is derived from the audited balance sheet as of that date. All
other financial statements are unaudited. 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. 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 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 initial issuance of the Series 2000 Notes occurred on
June 1, 2000 in the amount of $1,000,000,000. Series 2001A Notes were issued on
April 2, 2001 in the amount of $480,000,000, Series 2001B Notes were issued on
September 4, 2001 in the amount of $550,000,000 and Series 2002A Notes were
issued on March 27, 2002 in the amount of $564,000,000. Approximately
$479,000,000 of the Note proceeds were utilized on March 27, 2002 for the
purchase of student loans. All the remaining proceeds of the 2002A Notes have
been utilized for the purchase of additional 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.
SIGNIFICANT ACCOUNTING POLICIES
The notes to the audited financial statements contain a summary of the
Company's significant accounting policies. Certain of these policies are
considered to be important to the portrayal of the Company's financial
condition, since they may require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. The Company's significant accounting policy is determining the level
of the allowance for loan losses. Additional information about this policy can
be found in Note 1 to the audited financial statements as of and for the year
ended December 31, 2001.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents management's estimate of
probable losses on Eligible Loans in the Trust Estate and pledged to repay the
Notes. This evaluation process is subject to numerous estimates and judgments.
In making such estimates and judgments, management considers such things as the
value and character of loans outstanding, past loan loss experience and general
economic conditions. The allowance for loan losses is determined via a process
that begins with estimates of probable losses on Eligible Loans held in the
Trust Estates, based upon a statistical analysis. Historical delinquencies and
credit loss experience is applied to the current aging of the portfolio,
together with analyses that reflect current trends and conditions.
RESULTS OF OPERATIONS
Three months ended June 30, 2002 compared to three months ended June 30, 2001
- -----------------------------------------------------------------------------
REVENUES. Revenues for the three months ended June 30, 2002 consisted
primarily of interest earned on student loans. Revenues from interest on student
loans increased by $10,960,049 from $26,693,206 for the three months ended June
30, 2001 to $37,653,255 for the three months ended June 30, 2002. The increase
in revenues is directly attributable to the acquisition of additional student
loans by the Company in the second and third quarters of 2001 and the first
quarter of 2002. The Company's average net investment in student loans during
the three months ended June 30, 2002 and 2001 was approximately $2,408,000,000
and $1,367,000,000, respectively, (excluding funds held by the Trustee) and the
8
average effective annual interest rate of interest income on student loans
during the three months ended June 30, 2002 and 2001 was 6.25% and 7.81%,
respectively. The decrease in the effective annual interest rate of interest
income on student loans is a direct result of the declining interest rate
environment and the "floor rate" on the student loan assets being reset annually
on July 1. Investment interest decreased by $235,600 from $479,002 for the three
months ended June 30, 2001 to $243,402 for the three months ended June 30, 2002.
The decrease in investment interest was a result of the restricted cash being
utilized to acquire student loans along with lower interest rates on investments
in the current fiscal year.
EXPENSES. The Company's expenses consisted primarily of interest on the
Company's outstanding Notes. Interest on the Company's outstanding Notes
decreased by $673,527 from $18,337,660 for the three months ended June 30, 2001
to $17,664,133 for the three months ended June 30, 2002. This decrease in
expenses is directly attributable to a decrease in interest rates during the
current fiscal year, offset by an increase in interest expense due to additional
Notes outstanding. For the three months ended June 30, 2002, the Company's Notes
outstanding was $2,594,000,000 compared to debt outstanding of $1,480,000,000
for the three months ended June 30, 2001. The average annual cost of borrowings
for the three months ended June 30, 2002 and 2001 was 2.72% and 4.96%,
respectively. The decrease in the average annual cost of borrowings is a direct
result of a declining interest rate environment. The Company also incurred loan
servicing fees to a related party in the amount of $5,409,690 for the three
months ended June 30, 2002, as compared to $3,180,779 for the three months ended
June 30, 2001, an increase of $2,228,911. The increase in loan servicing fees to
a related party is directly related to the servicing of additional student
loans. Trustee and broker fees increased by $739,885 from $688,245 for the three
months ended June 30, 2001 to $1,428,130 for the three months ended June 30,
2002. This increase is a result of increased financing activity. Amortization of
loan premiums increased by $1,216,393 from $977,681 for the three months ended
June 30, 2001 to $2,194,074 for the three months ended June 30, 2002. The
increase is attributable to the acquisition of additional student loans in the
second and third quarters of 2001 and the first quarter of 2002 along with an
increase in the rate of amortization due to an increase in principal payments on
the loans due to more prepayments and consolidations. Provision for loan losses
increased by $75,000 from $200,000 for the three months ended June 30, 2001 to
$275,000 for the three months ended June 30, 2002. Additional amounts were
recognized as provision for loan losses in order to reflect the appropriate
allowance amounts in relation to the estimated defaults. Other general and
administrative expenses increased by $343,489 from $718,358 for the three months
ended June 30, 2001 to $1,061,847 for the three months ended June 30, 2002. The
increase is a result of higher administrative fees paid to the parent as the
outstanding student loan balance has increased in 2002.
INCOME TAX EXPENSE. The Company has recognized income tax expense of
$3,503,255 for the three months ended June 30, 2002, compared to $1,071,284 for
the three months ended June 30, 2001. 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, 2002. The effective tax rate utilized by the Company to recognize
a provision for income taxes was 36% for both periods. The effective tax rate
may be adjusted in the future for changes to the corporate tax regulations.
NET INCOME. The Company had net income of $6,228,010 for the three
months ended June 30, 2002 and $1,904,504 for the three months ended June 30,
2001. 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 on student loans increases and in a rising interest rate
9
environment it decreases. The net interest margin on student loans increased by
$11,633,576 from $8,355,546 (interest margin percentage of 2.44%) for the three
months ended June 30, 2001 to $19,989,122 (interest margin percentage of 3.32%)
for the three months ended June 30, 2002.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
- -------------------------------------------------------------------------
REVENUES. Revenues for the six months ended June 30, 2002 consisted
primarily of interest earned on student loans. Revenues from interest on student
loans increased by $23,423,210 from $44,742,798 for the six months ended June
30, 2001 to $68,166,008 for the six months ended June 30, 2002. The increase in
revenues is directly attributable to the acquisition of additional student loans
by the Company in the second and third quarters of 2001 and the first quarter of
2002. The Company's average net investment in student loans during the six
months ended June 30, 2002 and 2001 was approximately $2,235,000,000 and
$1,141,000,000, 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, 2002 and 2001 was 6.10% and 7.84%,
respectively. The decrease in the effective annual interest rate of interest
income on student loans is a direct result of the declining interest rate
environment and the "floor rate" on the student loan assets being reset annually
on July 1. Investment interest decreased by $540,699 from $930,571 for the six
months ended June 30, 2001 to $389,872 for the six months ended June 30, 2002.
The decrease in investment interest was a result of the restricted cash being
utilized to acquire student loans along with lower interest rates on investments
in the current fiscal year.
EXPENSES. The Company's expenses consisted primarily of interest on the
Company's outstanding Notes. Interest on the Company's outstanding Notes
decreased by $393,805 from $32,985,095 for the six months ended June 30, 2001 to
$32,591,290 for the six months ended June 30, 2002. This decrease in expenses is
directly attributable to a decrease in interest rates during the current fiscal
year, offset by an increase in interest expense due to additional Notes
outstanding. For the six months ended June 30, 2002 and 2001, the Company's
average Notes outstanding was $2,406,000,000 and $1,240,000,000, respectively,
and the average annual cost of borrowings was 2.71% and 5.32%, respectively. The
decrease in the average annual cost of borrowings is a direct result of a
declining interest rate environment. The Company also incurred loan servicing
fees to a related party in the amount of $10,151,248 for the six months ended
June 30, 2002, as compared to $5,627,322 for the six months ended June 30, 2001,
an increase of $4,523,926. The increase in loan servicing fees to a related
party is directly related to the servicing of additional student loans. Trustee
and broker fees increased by $1,047,392 from $1,350,603 for the six months ended
June 30, 2001 to $2,397,995 for the six months ended June 30, 2002. This
increase is a result of increased financing activity. Amortization of loan
premiums increased by $2,238,450 from $1,795,466 for the six months ended June
30, 2001 to $4,033,916 for the six months ended June 30, 2002. The increase is
attributable to the acquisition of additional student loans in the second and
third quarters of 2001 and the first quarter of 2002 along with an increase in
the rate of amortization due to an increase in principal payments on the loans
due to more prepayments and consolidations. Provision for loan losses increased
by $375,000 from $300,000 for the six months ended June 30, 2001 to $675,000 for
the six months ended June 30, 2002. Additional amounts were recognized as
provision for loan losses in order to reflect the appropriate allowance amounts
in relation to the estimated defaults and the student loan balance. Other
general and administrative expenses increased by $800,772 from $1,131,006 for
the six months ended June 30, 2001 to $1,931,778 for the six months ended June
30, 2002. The increase is a result of higher administrative fees paid to the
parent as the outstanding student loan balance has increased in 2002.
INCOME TAX EXPENSE. The Company has recognized income tax expense of
$5,948,244 for the six months ended June 30, 2002, compared to $848,348 for the
six months ended June 30, 2001. 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, 2002. The effective tax rate utilized by the Company to recognize a
provision for income taxes was 36% for both periods. The effective tax rate may
be adjusted in the future for changes to the corporate tax regulations.
10
NET INCOME. The Company had net income of $10,574,658 for the six months
ended June 30, 2002 and $1,508,174 for the six months ended June 30, 2001. 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 on student loans increases and in a rising interest rate environment it
decreases. The net interest margin on student loans increased by $23,817,015
from $11,757,703 (interest margin percentage of 2.06%) for the six months ended
June 30, 2001 to $35,574,718 (interest margin percentage of 3.18%) for the six
months ended June 30, 2002.
For the six months ended June 30, 2002, there were no unusual or
infrequent events or transactions 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 $74,230,000 as of June 30, 2002. The restricted cash includes cash
held by the trustee in an Acquisition and Revenue fund of approximately
$54,775,000 and cash held by the trustee in a Reserve Fund of approximately
$19,455,000. 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.
The Company had a net increase in cash equivalents of $69,527 for the
six months ended June 30, 2002 compared to a decrease in cash equivalents of
$904,651 for the six months ended June 30, 2001. This net change consists of (1)
net cash provided by operating activities of approximately $4,232,000 due
primarily to an increase in net income and amortization of loan premiums, offset
by a decrease in due from affiliates and an increase in accrued interest
receivable, (2) net cash used in investing activities of approximately
$563,709,000 due to the proceeds from the sale of student loans and from student
loan principal payments, net of student loan purchases and (3) net cash provided
by financing activities of approximately $559,546,000 due to the additional
issuance of Notes.
The Company purchased student loans, including unamortized premiums,
from affiliates of approximately $650,500,000 for the six months ended June 30,
2002 and $486,700,000 for the six months ended June 30, 2001. The Company sold
student loans, including unamortized premiums, to affiliates of approximately
$179,900,000 for the six months ended June 30, 2002 and no sales were made to
affiliates for the six months ended June 30, 2001. These sales were made at
amortized cost.
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.
The shelf registration of $2,500,000,000 is at full capacity and no
additional notes will be issued.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets consist almost entirely of student loans. Variable
rate 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 variable
rate 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 variable rate 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 variable rate student loans with variable rate debt instruments.
The Company's variable rate Notes bear interest at a rate that is reset
periodically by means of auction procedures. By funding its variable rate
student loans with variable rate Notes, the Company attempts to maintain a
positive "spread" between the interest earned on its variable rate student loans
and its interest payment obligations under the variable rate Notes. Thus, in an
environment of generally declining interest rates, the Company should earn less
interest on its variable rate student loans, but the interest expense on the
variable rate 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 variable
rate 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 variable interest rates on
student loans and the interest rates on the variable rate Notes, there could be
periods of time when the variable rates on student loans are inadequate to
generate sufficient cash flow to cover the interest on the variable rate Notes
and the expenses required to be paid under the Indenture. In a period of rapidly
rising interest rates, auction rates may rise more quickly than the 91-day
Treasury Bill Rate. If there is a decline in the variable 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).
Effective with the issuance of Notes on April 2, 2001, $480,000,000 of
the Company's Notes bear interest at a fixed rate, the Company's only fixed rate
series. The proceeds from the fixed rate Notes were used to finance a portfolio
of fixed rate student loans. As a result of the fixed rate nature, no changes
will occur in the "spread" between the interest earned on its fixed rate student
loans and its interest payment obligations under the fixed rate Notes.
Therefore, the approximate $480,670,000 fixed rate student loans are not subject
to market risk in that the cash flows generated by the fixed rate student loans
will not be affected by any change in interest rates.
There have been no material changes in the reported market risks faced
by the Company since the end of its most recent fiscal year.
12
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
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
10-Q dated June 30, 2000).
3.2 By-Laws of the Company (Incorporated by reference herein to
the Company's Quarterly Report on Form 10-Q dated June 30,
2000).
4.1 Indenture of Trust between the Company and Zions First
National Bank dated June 1, 2000 (Incorporated by reference
herein 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).
4.3 Series 2001A Supplemental Indenture of Trust by and between
NELNET Student Loan Corporation-2 and Zions First National
Bank, dated as of April 1, 2000 (Incorporated by reference
herein to the Company's current report on Form 8-K filed
April 16, 2001).
13
4.4 Series 2001B Supplemental Indenture of Trust between NELNET
Student Loan Corporation-2 and Zions First National Bank,
dated as of September 1, 2001 (Incorporated by reference
herein to the Company's current report on Form 8-K filed
September 7, 2001).
4.5 Series 2002A Supplemental Indenture of Trust between NELNET
Student Loan Corporation-2 and Zions First National Bank,
dated as of March 1, 2002 (Incorporated by reference herein
to the Company's current report on Form 8-K filed April 5,
2002).
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 10-Q dated June 30, 2000).
99.1 Certification Pursuant to 18 U.S.C. section 1350 of the Chief
Executive Officer of the Company is filed herewith.
99.2 Certification Pursuant to 18 U.S.C. section 1350 of the Chief
Financial Officer of the 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.
14
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/ Stephen F. Butterfield
-------------------------------------
Stephen F. Butterfield, President
(Chief Executive Officer)
By: /s/ Jeffrey Noordhoek
-------------------------------------
Jeffrey Noordhoek, Treasurer
(Principal Financial Officer)
Date: August 14, 2002