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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 September 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 of (I.R.S. Employer
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 November 14, 2002
1
NELNET STUDENT LOAN CORPORATION-2
INDEX
Page No.
--------
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2002 and
December 31, 2001..........................................3
Statements of Operations for the three months and
nine months ended September 30, 2002 and 2001...............4
Statement of Stockholder's Equity for the nine months ended
September 30, 2002..........................................5
Statements of Cash Flows for the nine months ended
September 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
Item 4. Controls and Procedures .........................................13
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
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------
ASSETS
September 30,
2002 December 31,
(unaudited) 2001
-------------- --------------
Cash and cash equivalents $ 422,502 $ 8,093
Student loans receivable including net premiums,
net of allowance for loan losses of $2,341,820
in 2002 and $1,891,253 in 2001 2,438,124,017 1,933,941,068
Accrued interest receivable 67,865,116 50,256,051
Restricted cash - held by trustee 99,474,446 46,135,799
Debt issuance costs, net of accumulated amortization
of $6,007,172 in 2002 and $422,848 in 2001 6,071,420 9,355,177
Due from affiliates 1,812,535 4,100,000
Deferred tax asset 685,529 1,135,529
-------------- --------------
Total assets $2,614,455,565 $2,044,931,717
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes payable $2,594,000,000 $2,030,000,000
Accrued interest payable 4,162,964 4,087,348
Other liabilities 4,927,195 3,833,683
Due to affiliates -- 2,867,345
-------------- --------------
Total liabilities $2,603,090,159 $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 2,491,276 4,142,341
Retained earnings 8,873,130 --
-------------- --------------
Total stockholder's equity 11,365,406 4,143,341
-------------- --------------
Total liabilities and stockholder's equity $2,614,455,565 $2,044,931,717
============== ==============
See accompanying note to financial statements.
3
NELNET STUDENT LOAN CORPORATION-2
STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Loan interest $ 31,415,274 $25,290,597 $ 99,581,282 $70,033,394
Investment interest 426,503 459,968 816,376 1,390,539
------------ ----------- ------------ -----------
Total revenues $ 31,841,777 $25,750,565 $100,397,658 $71,423,933
------------ ----------- ------------ -----------
Expenses:
Interest on notes payable $ 17,362,739 $18,016,951 $ 49,954,029 $51,002,046
Loan servicing fees to related party 5,310,813 3,499,641 15,462,061 9,126,963
Trustee and broker fees 1,432,823 898,397 3,830,818 2,248,999
Amortization of debt issuance costs 5,332,573 236,457 5,584,324 363,812
Amortization of loan premiums 3,646,579 937,639 7,680,494 2,733,105
Provision for loan losses 325,000 600,000 1,000,000 900,000
Other general and administrative 1,089,887 623,366 3,021,666 1,754,372
------------ ----------- ------------ -----------
Total expenses $ 34,500,414 $24,812,451 $ 86,533,392 $68,129,297
------------ ----------- ------------ -----------
Income (loss) before income taxes (2,658,637) 938,114 13,864,266 3,294,636
Income tax expense (benefit) (957,109) 337,721 4,991,136 1,186,069
------------ ----------- ------------ -----------
Net income (loss) $ (1,701,528) $ 600,393 $ 8,873,130 $ 2,108,567
============ =========== ============ ===========
See accompanying note to financial statements.
4
NELNET STUDENT LOAN CORPORATION-2
STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 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 -- 3,256,070 -- 3,256,070
Return of capital to parent -- (4,907,135) -- (4,907,135)
Net income -- -- 8,873,130 8,873,130
-------- --------------- ------------ -------------
Balances at September 30, 2002 $1,000 $ 2,491,276 $8,873,130 $11,365,406
======== =============== ============ =============
See accompanying note to financial statements.
5
NELNET STUDENT LOAN CORPORATION-2
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
- ----------------------------------------------------------------------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 8,873,130 $ 2,108,567
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of loan premiums and debt issuance costs 13,264,818 3,096,917
Provision for loan losses, net of charge offs 450,567 557,500
Deferred tax expense (benefit) 450,000 (200,000)
Increase in accrued interest receivable (17,609,065) (21,218,365)
Decrease (increase) in due from affiliates 2,287,465 (3,323,292)
Increase in accrued interest payable 75,616 1,976,710
Increase in other liabilities 1,093,512 2,310,675
Increase (decrease) in due to affiliates (2,867,345) 1,009,361
------------- --------------
Net cash provided by (used in) operating activities 6,018,698 (13,681,927)
------------- --------------
Cash flows from investing activities:
Purchases of student loans, including premiums (1,049,269,004) (1,057,698,883)
Proceeds from sale of student loans 205,242,337 --
Net proceeds from student loan principal payments and
loan consolidations 331,712,657 116,315,548
Increase in restricted cash - held by trustee (53,338,647) (70,647,483)
------------- ---------------
Net cash used in investing activities (565,652,657) (1,012,030,818)
------------- ---------------
Cash flows from financing activities:
Issuance of notes payable 564,000,000 1,030,000,000
Payment of debt issuance costs (2,300,567) (5,197,824)
Capital contribution from parent 3,256,070 --
Return of capital to parent (4,907,135) --
------------- --------------
Net cash provided by financing activities 560,048,368 1,024,802,176
------------- --------------
Net increase (decrease) in cash and cash equivalents 414,409 (910,569)
Cash and cash equivalents, beginning of period 8,093 1,008,671
------------- -------------
Cash and cash equivalents, end of period $ 422,502 $ 98,102
============= ============
Supplemental disclosures of cash flow information:
Interest Paid $49,878,413 $49,025,336
============= ============
Income taxes paid $9,221,016 $ --
============= =========
See accompanying note to financial statements.
6
NELNET STUDENT LOAN CORPORATION-2
NOTE TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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") and is an "asset-backed issuer" as that term is defined in
Rule 15d-14(g) under the Securities Exchange Act of 1934. 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. 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 SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES. Revenues for the three months ended September 30, 2002
consisted primarily of interest earned on student loans. Revenues from interest
on student loans increased by $6,124,677 from $25,290,597 for the three months
ended September 30, 2001 to $31,415,274 for the three months ended September 30,
2002. The increase in revenues is directly attributable to the acquisition of
8
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 September 30, 2002 and 2001 was
approximately $2,423,000,000 and $1,530,000,000, 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 September 30, 2002 and
2001 was 5.19% and 6.61%, 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.
EXPENSES. The Company's expenses consisted primarily of interest on the
Company's outstanding Notes. Interest on the Company's outstanding Notes
decreased by $654,212 from $18,016,951 for the three months ended September 30,
2001 to $17,362,739 for the three months ended September 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 September 30, 2002 and 2001, the
Company's average Notes outstanding was $2,594,000,000 and $1,663,000,000,
respectively. The average annual cost of borrowings for the three months ended
September 30, 2002 and 2001 was 2.68% and 4.33%, 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 $5,310,813 for the three months ended September 30, 2002,
as compared to $3,499,641 for the three months ended September 30, 2001, an
increase of $1,811,172. 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 $534,426 from $898,397 for the three months ended
September 30, 2001 to $1,432,823 for the three months ended September 30, 2002.
This increase is a result of increased financing activity. Amortization of debt
issuance costs increased by $5,096,116 from $236,457 for the three months ended
September 30, 2001 to $5,332,573 for the three months ended September 30, 2002.
The increase is attributable to the accelerated amortization of a portion of the
debt issuance costs due to the anticipated redemption of approximately
$1,175,000,000 of the Company's Notes. Amortization of loan premiums increased
by $2,708,940 from $937,639 for the three months ended September 30, 2001 to
$3,646,579 for the three months ended September 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 decreased
by $275,000 from $600,000 for the three months ended September 30, 2001 to
$325,000 for the three months ended September 30, 2002. The change in the
provision for loan losses was recognized 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 $466,521 from
$623,366 for the three months ended September 30, 2001 to $1,089,887 for the
three months ended September 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 (BENEFIT). The Company has recognized income tax
expense (benefit) of ($957,109) for the three months ended September 30, 2002,
compared to $337,721 for the three months ended September 30, 2001. The decrease
in income tax expense was a result of a lower net income before income tax
expense for the three months ended September 30, 2002. The effective tax rate
utilized by the Company to recognize a provision for income taxes was 36%. The
effective tax rate may be adjusted in the future for changes to the corporate
tax regulations.
NET INCOME (LOSS). The Company had net income (loss) of ($1,701,528) for
the three months ended September 30, 2002 and $600,393 for the three months
ended September 30, 2001. The decrease in net income is attributable to an
increase in the amortization of debt issuance costs offset by 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 $6,778,889 from $7,273,646 (interest margin percentage of 1.90%)
for the three months ended September 30, 2001 to $14,052,535 (interest margin
percentage of 2.32%) for the three months ended September 30, 2002.
9
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES. Revenues for the nine months ended September 30, 2002
consisted primarily of interest earned on student loans. Revenues from interest
on student loans increased by $29,547,888 from $70,033,394 for the nine months
ended September 30, 2001 to $99,581,282 for the nine months ended September 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 nine months ended September 30, 2002 and 2001 was approximately
$2,298,000,000 and $1,271,000,000, respectively, (excluding funds held by the
Trustee) and the average effective annual interest rate of interest income on
student loans during the nine months ended September 30, 2002 and 2001 was 5.78%
and 7.35%, 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 $574,163 from $1,390,539
for the nine months ended September 30, 2001 to $816,376 for the nine months
ended September 30, 2002. The decrease in investment interest was a result of a
decreased average restricted cash balance, which was used 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 $1,048,017 from $51,002,046 for the nine months ended September 30,
2001 to $49,954,029 for the nine months ended September 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 nine months ended September 30, 2002 and 2001, the
Company's average Notes outstanding was $2,469,000,000 and $1,381,000,000,
respectively, and the average annual cost of borrowings was 2.70% and 4.97%,
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 $15,462,061 for the nine
months ended September 30, 2002, as compared to $9,126,963 for the nine months
ended September 30, 2001, an increase of $6,335,098. 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 $1,581,819 from
$2,248,999 for the nine months ended September 30, 2001 to $3,830,818 for the
nine months ended September 30, 2002. This increase is a result of increased
financing activity. Amortization of debt issuance costs increased by $5,220,512
from $363,812 for the three months ended September 30, 2001 to $5,584,324 for
the three months ended September 30, 2002. The increase is attributable to the
accelerated amortization of a portion of the debt issuance costs due to the
anticipated redemption of approximately $1,175,000,000 of the Company's Notes.
Amortization of loan premiums increased by $4,947,389 from $2,733,105 for the
nine months ended September 30, 2001 to $7,680,494 for the nine months ended
September 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 $100,000 from $900,000
for the nine months ended September 30, 2001 to $1,000,000 for the nine months
ended September 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 $1,267,294 from $1,754,372 for the nine
months ended September 30, 2001 to $3,021,666 for the nine months ended
September 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.
10
INCOME TAX EXPENSE. The Company has recognized income tax expense of
$4,991,136 for the nine months ended September 30, 2002, compared to $1,186,069
for the nine months ended September 30, 2001. The increase in income tax expense
was a result of a higher net income before income tax expense for the nine
months ended September 30, 2002. The effective tax rate utilized by the Company
to recognize a provision for income taxes was 36%. 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 $8,873,130 for the nine months
ended September 30, 2002 and $2,108,567 for the nine months ended September 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
$30,595,905 from $19,031,348 (interest margin percentage of 2.00%) for the nine
months ended September 30, 2001 to $49,627,253 (interest margin percentage of
2.88%) for the nine months ended September 30, 2002.
For the nine months ended September 30, 2002, amortization of debt
issuance costs was accelerated due to the anticipated redemption of
approximately $1,175,000,000 of the Company's Notes. There were no other 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 $99,474,000 as of September 30, 2002. The restricted cash includes
cash held by the trustee in an Acquisition and Revenue fund of approximately
$80,019,000 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 $414,409 for the
nine months ended September 30, 2002 compared to a decrease in cash equivalents
of $910,569 for the nine months ended September 30, 2001. This net change
consists of (1) net cash provided by operating activities of approximately
$6,019,000 due primarily to an increase in net income, amortization of debt
issuance costs and amortization of loan premiums, offset by a decrease in due
from affiliates, a decrease in due to affiliates and an increase in accrued
interest receivable, (2) net cash used in investing activities of approximately
$565,653,000 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 $560,048,000 due to the additional
issuance of Notes.
11
The Company purchased student loans, including unamortized premiums,
from affiliates of approximately $650,500,000 for the nine months ended
September 30, 2002 and $826,100,000 for the nine months ended September 30,
2001. The Company sold student loans, including unamortized premiums, to
affiliates of approximately $205,200,000 for the nine months ended September 30,
2002 and no sales were made to affiliates for the nine months ended September
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.
On October 8, 2002, the Company sold to Nelnet Student Loan Funding, LLC
a portfolio of student loans having an aggregate outstanding principal balance
of approximately $1,152,000,000. Nelnet Student Loan Funding, LLC acquired such
student loans at a purchase price equal to amortized cost of the aggregate
unpaid principal balance of such student loans plus 100% of the accrued and
unpaid interest thereon. Proceeds from the loan sale were deposited in the trust
estate that secures repayment of the student loan asset-backed notes the Company
previously issued. The Company intends to use those proceeds to redeem certain
of its auction rate student loan asset-backed notes under the terms of the
governing indenture.
The Company is a wholly owned subsidiary of Nelnet, Inc. and Nelnet,
Inc. is a member of Nelnet Student Loan Funding, LLC.
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).
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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 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.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable
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).
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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).
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 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 of the
Chief Executive Officer of the Company is filed herewith.
99.2 Certification Pursuant to 18 U.S.C. section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 of the
Chief Financial Officer of the Company is filed herewith.
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on October 8, 2002 to report in
response to Item 2 the sale of a portfolio of student loans having an
outstanding principal balance of approximately $1,152,000,000.
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: November 14, 2002
15