UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from .............. to ..............
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 Identification No.)
incorporation or organization)
121 South 13th Street, Suite 201
Lincoln, Nebraska 68508
(Address of principal executive offices) (Zip Code)
(402) 458-2370 (Registrant's
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on December 31, 2002: None
The number of shares outstanding of registrant's common stock as of
March 31, 2003 was 1,000.
-----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
1
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS.................................................3
ITEM 2. PROPERTIES...............................................9
ITEM 3. LEGAL PROCEEDINGS........................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.....................................9
ITEM 6. SELECTED FINANCIAL DATA.................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......16
ITEM 11. EXECUTIVE COMPENSATION..................................17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........18
ITEM 14. CONTROLS AND PROCEDURES.................................19
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................19
SIGNATURES....................................................................22
2
Forward Looking Statements
Statements regarding the Company's expectations as to its ability
to purchase Eligible Loans, to structure and issue competitive securities and to
compete generally, and certain of the information presented in this report,
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations.
PART I
ITEM 1. BUSINESS
The Company
NELNET Student Loan Corporation-2 (the "Company") was
incorporated under the laws of the State of Nevada on October 8, 1999. Effective
March 2, 2000, the Company became a wholly owned subsidiary of Nelnet, Inc.
("Nelnet") and a wholly owned indirect subsidiary of Nelnet Loan Services, Inc.,
a privately held Nebraska Corporation.
Business of Company
GENERAL. The Company is a special purpose corporation formed to
engage in the business of purchasing, financing, holding and selling guaranteed
educational loans made to students and to parents of students ("Eligible Loans")
under the Higher Education Act of 1965, as amended (the "Higher Education Act").
Eligible Loans are purchased by the Company from eligible lenders under the
Higher Education Act pursuant to the terms and subject to the conditions stated
in student loan purchase agreements. The proceeds of the Eligible Loans are used
by the borrowers to pay the costs associated with attendance at post-secondary
educational institutions.
The Company finances its purchases of Eligible Loans through the
issuance of its Taxable Student Loan Asset-Backed Notes (the "Notes"). The Notes
have been issued in several series. Repayment of the Notes is secured by the
pledge of a revolving pool of Eligible Loans and certain other property held for
the benefit of the owners of the Notes (the "Trust Estate"). The Trust Estate is
held by a trustee (the "Trustee") pursuant to the terms of the Indenture of
Trust governing the issuance of the Notes (the "Indenture").
REGISTRATION AND RECENT ISSUANCE OF NOTES. A registration
statement on Form S-3, Registration No. 333-93865 (the "Registration
Statement"), was filed with the Securities and Exchange Commission (the "SEC")
by the Company under the Securities Act of 1933, as amended (the "Securities
Act"), for $2,500,000,000 of Notes, and was declared effective by order of the
SEC in February, 2000. The Notes may be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933. In March of 2002, the
Company filed with the SEC a registration statement on Form S-3 pursuant to Rule
462(b) under the Securities Act of 1933 for $94,000,000 of Notes.
The Company issued Taxable Student Loan Asset-Backed Auction Rate
Notes, Series 2002A (the "Series 2002A Notes") on March 27, 2002 in the
aggregate principal amount of $564,000,000, pursuant to the Registration
Statement. The Series 2002A Notes consisted of (i) Senior Class 2002A-1 Auction
Rate Notes (the "Class 2002A-1 Notes"), (ii) Senior Class 2002A-2 Auction Rate
Notes (the "Class 2002A-2 Notes"), (iii) Senior Class 2002A-3 Auction Rate Notes
(the "Class 2002A-3 Notes"), (iv) Senior Class 2002A-4 Auction Rate Notes (the
"Class 2002A-4 Notes"), (v) Senior Class 2002A-5 Auction Rate Notes (the "Class
2002A-5 Notes"), (vi) Senior Class 2002A-6 Auction Rate Notes (the "Class
2002A-6 Notes"), and (vii) Senior Class 2002A-7 Auction Rate Notes (the "Class
2002A-7 Notes"). Issuance of the Series 2002A Notes completed the Company's
offering under the Registration Statement.
Further information regarding the issuance of Notes by the
Company since its inception is provided in Table A.
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM. The Higher Education
Act provides for a program of direct federal insurance of student loans
("FISLP") and reinsurance of student loans guaranteed or insured by a state
agency or private non-profit corporation (collectively, "Federal Family
Education Loans," with such program referred to herein as the "Federal Family
Education Loan Program"). Several types of loans are currently authorized as
Federal Family Education Loans pursuant to the Federal Family Education Loan
Program. These include: (a) loans to students with respect to which the federal
government makes interest payments available to reduce student interest cost
during periods of enrollment ("Subsidized Federal Stafford Loans"); (b) loans to
students with respect to which the federal government does not make such
interest payments ("Unsubsidized Federal Stafford Loans" and, collectively with
3
Subsidized Federal Stafford Loans, "Federal Stafford Loans"); (c) supplemental
loans to parents of dependent students ("Federal PLUS Loans"); and (d) loans to
fund payment and consolidation of certain of the borrower's obligations
("Federal Consolidation Loans"). Prior to July 1, 1994, the Federal Family
Education Loan Program also included a separate type of loan to graduate and
professional students and independent undergraduate students and, under certain
circumstances, dependent undergraduate students, to supplement their Stafford
Loans ("Federal Supplemental Loans for Students" or "Federal SLS Loans").
GUARANTEE AGENCIES. Each Eligible Loan is guaranteed as to the
payment of principal and interest by a state or private non-profit guarantor
(each, a "Guarantee Agency"). Eligible Loans originated prior to October 1, 1993
are fully guaranteed as to the principal amount of such loans and accrued
interest by the applicable Guarantee Agency. Eligible Loans originated on or
after October 1, 1993 are guaranteed as to 98% of the principal amount of such
loans and accrued interest by the applicable Guarantee Agency. Each of the
Guarantee Agencies has a reinsurance contract with the Department of Education
(the "Department"). The Department reimburses the Guarantee Agencies for claims
paid by the Guarantee Agencies. The amount of such reinsurance payment is
calculated annually and is subject to reduction based upon the annual claims
rate of the Guarantee Agency to the Department. Regardless of the level of
reinsurance that the applicable Guarantee Agency receives from the Department,
the Trustee will continue to be entitled to reimbursement for the applicable
guaranteed portion of an Eligible Loan (either 98% or 100%, as applicable) from
such Guarantee Agency. The obligations of each of the Guarantee Agencies to the
holders of Eligible Loans reinsured by the Department (the "Federal Loans"),
such as the Trustee, are payable from the general funds available to such
Guarantee Agency, including cash on deposit therewith, reimbursements received
from the Department and reserve funds maintained by such Guarantee Agency as
required by the Higher Education Act. The Higher Education Act provides that,
subject to the provisions thereof including the proper origination and servicing
of Eligible Loans, the full faith and credit of the United States is pledged to
the reinsurance payments by the Department to the Guarantee Agencies. In
addition, the Higher Education Act provides that if the Secretary of Education
has determined that a Guarantee Agency is unable to meet its obligations to
holders of Federal Loans, such as the Trustee, then the holders of Federal Loans
may submit guarantee claims directly to the Department and the Department is
required to pay to the holders the full insurance obligation of such Guarantee
Agency until such time as the obligations are transferred by the Department to a
new Guarantee Agency capable of meeting such obligations or until a qualified
successor Guarantee Agency assumes such obligations. Certain delays in receiving
reimbursement could occur if a Guarantee Agency fails to meet its obligations.
In addition, failure to properly originate or service an Eligible Loan can cause
an Eligible Loan to lose its guarantee.
SERVICING OF ELIGIBLE LOANS. Nelnet acts as servicer (the
"Servicer") of the Company's Eligible Loans in accordance with a Servicing
Agreement, dated as of June 1, 2000 (the "Servicing Agreement"). Nelnet Loan
Services, Inc. acts as subservicer (the "Subservicer") and custodian (the
"Custodian") of the Eligible Loans in accordance with the Subservicing Agreement
(the "Subservicing Agreement") between Nelnet and Nelnet Loan Services, Inc.,
respectively. The Company may appoint other entities to act as a servicer or
subservicer if approved by the rating agencies which rate the Notes. Nelnet Loan
Services, Inc. began its education loan servicing operations on January 1, 1978,
and provides education loan servicing, time sharing, administration and other
services to lenders, secondary market purchasers and Guarantee Agencies
throughout the United States.
4
Information on the Notes and Eligible Loans
In accordance with the Indenture, the Company is required to
provide information periodically to the Trustee regarding the Notes and Eligible
Loans, which information is then forwarded to registered holders of the Notes.
Provided below is selected information as of December 31, 2002 that was
previously provided to holders of the Notes, as well as additional components
not previously reported. Although the information set forth below has not been
independently verified by third parties, the Company believes it to be accurate
to the best of its knowledge.
The principal balance of Eligible Loans as of December 31, 2002
was $1,222,296,890. Set forth in Table A below is the aggregate outstanding
principal amount of Notes of each Class as of December 31, 2002.
Table A
Original Principal Amount of Notes Issued by the Company
And the Outstanding Aggregate Principal Amount Per Class
(December 31, 2002)
Principal
Original Outstanding as of
Series Class Date Issued Maturity Dates Principal Amount December 31, 2002
2000 A-1 June 1, 2000 December 1, 2032 $50,000,000 $ --------(i)
2000 A-2 June 1, 2000 December 1, 2032 50,000,000 --------(i)
2000 A-3 June 1, 2000 December 1, 2032 50,000,000 --------(i)
2000 A-4 June 1, 2000 December 1, 2032 50,000,000 --------(i)
2000 A-5 June 1, 2000 December 1, 2032 50,000,000 --------(i)
2000 A-6 June 1, 2000 December 1, 2032 50,000,000 --------(i)
2000 A-7 June 1, 2000 December 1, 2032 50,000,000 --------(i)
2000 A-8 June 1, 2000 December 1, 2032 75,000,000 --------(i)
2000 A-9 June 1, 2000 December 1, 2032 75,000,000 --------(i)
2000 A-10 June 1, 2000 December 1, 2032 75,000,000 --------(i)
2000 A-11 June 1, 2000 December 1, 2032 75,000,000 --------(i)
2000 A-12 June 1, 2000 December 1, 2032 100,000,000 --------(i)
2000 A-13 June 1, 2000 December 1, 2032 100,000,000 --------(i)
2000 A-14 June 1, 2000 December 1, 2032 100,000,000 --------(i)
2000 B-1 June 1, 2000 December 1, 2032 50,000,000 50,000,000
2001 A-1 April 2, 2001 July 1, 2012 480,000,000 480,000,000
2001 A-2 September 4, 2001 June 1, 2035 50,000,000 50,000,000
2001 A-3 September 4, 2001 June 1, 2035 50,000,000 --------(i)
2001 A-4 September 4, 2001 June 1, 2035 75,000,000 --------(i)
2001 A-5 September 4, 2001 June 1, 2035 100,000,000 100,000,000
2001 A-6 September 4, 2001 June 1, 2035 100,000,000 --------(i)
2001 A-7 September 4, 2001 June 1, 2035 100,000,000 100,000,000
2001 B-1 September 4, 2001 June 1, 2035 37,500,000 37,500,000
2001 B-2 September 4, 2001 June 1, 2035 37,500,000 37,500,000
2002 A-1 March 27, 2002 June 1, 2035 70,500,000 70,500,000
2002 A-2 March 27, 2002 June 1, 2035 70,500,000 70,500,000
2002 A-3 March 27, 2002 June 1, 2035 70,500,000 70,500,000
2002 A-4 March 27, 2002 June 1, 2035 70,500,000 70,500,000
2002 A-5 March 27, 2002 June 1, 2035 100,000,000 100,000,000
2002 A-6 March 27, 2002 June 1, 2035 100,000,000 100,000,000
2002 A-7 March 27, 2002 June 1, 2035 82,000,000 82,000,000
------------- --------------
$2,594,000,000 $1,419,000,000
(i) Notes in the amount of $1,175,000,000 were redeemed by the Company during
the months of October and November of 2002. Funds utilized for this redemption
were derived from the proceeds of a sale of a portfolio of loans by the Company
to Nelnet Student Loan Funding, LLC on October 8, 2002.
5
Set forth in Table B below is the interest rate for each
outstanding Class of Notes as of December 31, 2002. The interest rate is
calculated based on the applicable Auction Rate. The term "Auction Rate" refers
to the rate of interest per annum that results from implementation of the
auction procedures as described in the Indenture.
Table B
Applicable Interest Rate Per Class
(as of December 31, 2002)
Class Calculation method
----- ------------------
AUCTION RATE
2000B-1 1.60%
2001A-2 1.50%
2001A-5 1.52%
2001A-7 1.50%
2001B-1 1.65%
2001B-2 1.60%
2002A-1 1.65%
2002A-2 1.39%
2002A-3 1.50%
2002A-4 1.52%
2002A-5 1.50%
2002A-6 1.50%
2002A-7 1.50%
FIXED RATE
2001A-1 5.76%
6
Set forth in the tables below are the characteristics of Eligible
Loans held in the Trust Estate on December 31, 2002. Although the information
set forth below has not been independently verified by third parties, the
Company believes it to be accurate to the best of its knowledge.
Table C
Composition of the Eligible Loans &
Distribution by Loan Type
(as of December 31, 2002)
Outstanding Percent of Loans
Principal By Outstanding
Loan Types Balance Balance
---------- ------------ ---------------
Consolidation $ 738,148,955 60.39 %
PLUS 9,149,382 .75
SLS 1,366,715 .11
Stafford-Subsidized 236,653,470 19.36
Stafford-Unsubsidized 236,978,368 19.39
----------- -----
Total $1,222,296,890 100.00 %
============== ======
Number of Borrowers 77,356
Average Outstanding Principal
Balance Per Borrower $ 15,801
Number of Loans 155,402
Average Outstanding Principal
Balance Per Loan $ 7,865
Approximate Weighted Average
Remaining Term (Months) 175
7
Table D
Distribution of the Eligible Loans by Interest Rate
(as of December 31, 2002)
Outstanding Percent of Loans
Principal By Outstanding
Interest Rate Range Balance Balance
------------------- ----------- -----------------
Less than 7.50% $ 621,319,218 50.83 %
7.50% to 7.99% 64,764,760 5.30
8.00% to 8.49% 301,903,491 24.70
8.50% to 8.99% - .00
9.00% to 9.49% 225,574,872 18.46
9.50% or greater 8,734,549 .71
-------------- ------
Total $1,222,296,890 100.00 %
============== ======
Table E
Distribution of the Eligible Loans by School Types
(as of December 31, 2002)
Outstanding Percent of Loans
Principal By Outstanding
School Type Balance Balance
----------- ------------- ----------------
2-Year $28,519,113 2.33 %
4-Year 413,162,296 33.80
Proprietary 40,073,265 3.28
Unknown 2,393,261 .20
Consolidation 738,148,955 60.39
----------- -----
Total $1,222,296,890 100.00 %
============== ======
COMPETITION
The Company experiences competition from banks and savings
associations and other private companies, non-profit companies, trusts and
financial firms issuing debt securities the proceeds of which are used to
purchase pools of student loans. Many of these entities have greater financial,
technical, management and other resources than does the Company. The Company
believes that key factors in its ability to compete will be its ability to
purchase Eligible Loans and its ability to structure notes or other securities
in a manner which will be competitive with securities offered by competitors.
EMPLOYEES
The Company does not employ any employees. The Company and Nelnet
have entered into an Administrative Services Agreement which is more fully
described in ITEM 13 hereof. The Company does not plan to hire any employees in
the next fiscal year.
8
ITEM 2. PROPERTIES
The Company has no materially important physical properties.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly owned subsidiary of Nelnet. There is no public
trading market for the Company's common stock and the Company does not have any
compensation plans that provide for issuance of its equity securities.
As of March 31, 2003, Nelnet was the only record holder of the
Company's outstanding shares of common stock. The Company paid dividends on
December 30, 2002 in the amount of $6,400,000 and on December 31, 2001 in the
amount of $5,500,000.
9
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected financial
data as of December 31, 2002, 2001, and 2000, and for the years ended December
31, 2002 and 2001and for the period from June 1, 2000 (date of inception)
through December 31, 2000. This information has been derived from the financial
statements of the Company which have been audited by KPMG LLP. The information
below should be read in conjunction with the Financial Statements and notes
thereto appearing elsewhere in this document.
NELNET STUDENT LOAN CORPORATION-2
SELECTED FINANCIAL DATA
Year Ended Year Ended Period Ended
Statement of Operations Data: December 31, December 31, December 31,
2002 2001 2000 (1)
---- ---- --------
Revenues:
Loan interest........................ $ 113,531,516 $ 100,455,019 $ 46,225,110
Investment interest.................. 2,635,858 1,743,425 2,174,126
Other................................ 598,458 198,289 80,481
----------- ----------- ----------
Total revenues............... 116,765,832 102,396,733 48,479,717
----------- ----------- ----------
Expenses:
Interest on notes payable............ 63,180,085 68,190,154 39,401,390
Loan servicing fees to related party. 17,150,999 13,586,370 5,414,538
Trustee and broker fees.............. 4,715,340 3,311,175 1,621,060
Amortization and write down of debt
issuance costs....................... 5,707,491 344,311 78,537
Amortization of loan premiums and
lender fees.......................... 10,454,316 4,434,839 1,652,178
Provision for loan losses............ 1,100,000 1,600,000 1.010,000
Other general and administrative .... 3,570,669 2,767,940 1,147,800
----------- ----------- ----------
Total expenses............... 105,878,900 94,234,789 50,325,503
----------- ----------- ----------
Income (loss) before income
tax expense (benefit)........ 10,886,932 8,161,944 (1,845,786)
Income tax expense (benefit) ............ 3,919,295 2,938,300 (664,483)
----------- ----------- ----------
Net income (loss) ........... $ 6,967,637 $ 5,223,644 $ (1,181,303)
=========== =========== ===========
Ratio of earnings to fixed charges....... 1.16% 1.12% .95% (2)
Balance Sheet Data:
Cash and cash equivalents ............... $ - $ 8,093 $ 1,008,671
Restricted cash - held by trustee ....... 153,201,633 46,135,799 24,532,423
Student loans receivable, net............ 1,241,067,610 1,933,941,068 942,498,737
Total assets............................. 1,435,119,250 2,044,484,139 1,003,025,980
Notes payable ........................... 1,419,000,000 2,030,000,000 1,000,000,000
Total liabilities........................ 1,425,169,906 2,040,340,798 1,004,206,283
Stockholder's equity (deficit)........... 9,949,344 4,143,341 (1,180,303)
(1) The Company was incorporated on October 8, 1999. The Company
commenced its business operations on June 1, 2000.
(2) Earnings were inadequate to cover fixed charges by $1,845,786
for the period ended December 31, 2000.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the information set forth under the caption entitled "ITEM 6.--SELECTED
FINANCIAL DATA" and the financial statements and notes thereto included
elsewhere herein. Moreover, any forward looking statements should be read in
conjunction with information set forth in "ITEM 1 -- Forward Looking
Statements."
GENERAL
The Company was formed on October 8, 1999 solely for the purpose of
acquiring, from time to time, Eligible Loans and issuing notes, such as the
Notes, secured by such Eligible Loans. Since its inception, the Company has
issued four (4) series of Notes consisting of thirty-one (31) classes. The Notes
shown in the financial statements of the Company represent limited obligations
of the Company secured solely by the Eligible Loans and other assets in the
Trust Estate.
The assets of the Company consist primarily of Eligible Loans. The
total principal balance of Eligible Loans held by the Company was $1,222,300,000
on December 31, 2002. The initial issuance of Notes occurred on June 1, 2000 in
the amount of $1,000,000,000. There were two additional issuances in 2001, on
April 2, 2001 in the amount of $480,000,000 and on September 4, 2001 in the
amount of $550,000,000. There was one additional issuance in 2002, on March 27,
2002, in the amount of $564,000,000.
SIGNIFICANT ACCOUNTING POLICIES
The notes to the 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 critical 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 financial statements.
CRITICAL ACCOUNTING POLICY - ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of
probable losses on Eligible Loans held 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 Estate, 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.
The allowance for loan losses reflects assumptions and estimates the
Company believes are reasonable in light of historical loan losses and known
trends with respect to Eligible Loans held in the Trust Estate. However, these
estimates and assumptions are inherently uncertain and there can be no guarantee
that management's estimates and assumptions will prove correct in future
periods. Management continually measures expected losses against actual losses
and assumptions are revised accordingly. Moreover, changes in the estimates and
assumptions management uses to estimate the allowance for loan losses could have
a direct impact on the amount of the allowance and the Company's financial
condition in future periods.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. Revenues for the year ended December 31, 2002 consisted
primarily of interest earned on student loans, which totaled $113,531,516,
compared to $100,455,019 for the year ended December 31, 2001, an increase of
13.02%. The increase in revenues is directly attributable to the issuance of
additional debt by the Company to acquire student loans in the first quarter of
2002. The Company's average net investment in student loans during the year
ended December 31, 2002 was $2,040,687,694 (excluding funds held by the
Trustee), compared to $1,422,838,180 for the year ended December 31, 2001, and
the average effective annual interest rate of interest income on Eligible Loans
was 5.56% for the year ended December 31, 2002, compared to 7.06% for the year
11
ended December 31, 2001, 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 during 2002 and the "floor rate" on the
student loan assets being reset annually on July 1. The Company also received
investment interest and other income for the year ended December 31, 2002 in the
amounts of $2,635,858 and $598,458, respectively, compared to $1,743,425 and
$198,289, respectively, for the year ended December 31, 2001. The increase in
investment interest was a result of restricted cash being held by the Trust to
redeem bonds during the fourth quarter of 2002.
EXPENSES. Expenses for the year ended December 31, 2002 consisted
primarily of interest on the Company's outstanding Notes which totaled
$63,180,085, compared to $68,190,154 for the year ended December 31, 2001, a
decrease of 7.35%. The amount of interest expense reported depends upon the
amount of Notes outstanding during the years and the interest rates on such
Notes. The Company's average debt outstanding was approximately $2,258,000,000
for the year ended December 31, 2002, compared to average debt outstanding of
$1,543,000,000 for the year ended December 31, 2001 and the average annual cost
of borrowings was approximately 2.80% for the year ended December 31, 2002,
compared to approximately 4.42% for the year ended December 31, 2001. The
decrease in expense and the average annual cost of borrowings is a direct result
of a declining interest rate environment during 2002. The Company also incurred
loan servicing fees to a related party in the amount of $17,150,999 for the year
ended December 31, 2002, compared to $13,586,370 for the year ended December 31,
2001. See "ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a
description of the Servicing Agreement and Administrative Services Agreement
pursuant to which such fees are owed. Loan servicing fees to a related party
were higher in 2002 because the Company held, on average, more student loans in
2002. Trustee and broker fees, amortization of debt issuance costs and
amortization of loan premiums and lender fees for the year ended December 31,
2002 amounted to $4,715,340, $5,707,491, and $10,454,316, respectively, compared
to $3,311,175, $344,311, and $4,434,839, respectively, for the year ended
December 31, 2001. The increases are attributable to the issuance of additional
Notes and the acquisition of student loans in the first quarter of 2002. The
increase in amortization of debt issuance costs is attributable to the write-off
of debt issuance costs related to the approximate $1.2 billion of redeemed notes
in 2002. Amortization of loans premiums and lender fees also increased due to an
increase in the rate of amortization based on an increase in principal payments
on the loans as a greater percentage of the loan portfolio is in repayment
status. Provision for loan losses for the year ended December 31, 2002 amounted
to $1,100,000, compared to $1,600,000 for the year ended December 31, 2001. The
decrease in the provision for loan losses occurred in order to reflect the
appropriate allowance amounts in comparison to the estimated defaults. General
and administrative expenses for the year ended December 31, 2002 amounted to
$3,570,669, compared to $2,767,940 for the year ended December 31, 2001. This
increase is due to an increase in administrative fees incurred to the parent as
the average outstanding student loan balances increased in 2002.
INCOME TAX EXPENSE. The Company has recognized income tax expense of
$3,919,295 for the year ended December 31, 2002 compared to $2,938,300 for the
year ended December 31, 2001. The increase in income tax expense was a result of
higher net income being realized for the year ended December 31, 2002, compared
to the year ended December 31, 2001. The effective tax rate utilized by the
Company to recognize a provision for income taxes in 2002 and 2001 was 36%. The
effective tax rate will be adjusted in the future for changes to the corporate
tax regulations.
NET INCOME. The Company had net income of $6,967,637 for the year ended
December 31, 2002 compared to $5,223,644 for the year ended December 31, 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 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 $18,086,566 from $32,264,865 for the year ended
December 31, 2001 to $50,351,431 for the year ended December 31, 2002.
On October 8, 2002, the Company sold a portfolio of student loans to
Nelnet Student Loan Funding LLC, which is a 100% owned subsidiary of Nelnet.
Proceeds from the loan sale were used to redeem approximately $1.2 billion of
the Company's notes. Additional amortization of debt issuance costs of
$5,219,919 included in the statement of operations for the year ended December
31, 2002 is a result of a write-off of debt issuance costs related to the
redeemed notes. There were no other unusual or infrequent events or transactions
that materially affected the amount of reported income.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO PERIOD ENDED DECEMBER 31, 2000
REVENUES. Revenues for the year ended December 31, 2001 consisted
primarily of interest earned on student loans, which totaled $100,455,019,
compared to $46,225,110 for the period ended December 31, 2000, an increase of
117.32%. 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
along with the financial results on a full year of business activity in 2001
compared to seven months of business activity in 2000. The amount of interest
reported for each period was derived from Eligible Loans in an aggregate
12
principal amount, net of allowance for loan losses and unamortized premiums, of
$1,933,941,068 at December 31, 2001, compared to $942,498,737 at December 31,
2000. The Company's average net investment in student loans during the year
ended December 31, 2001 was $1,422,838,180 (excluding funds held by the
Trustee), compared to $891,888,250 for the period ended December 31, 2000, and
the average effective annual interest rate of interest income on Eligible Loans
was 7.06% for the year ended December 31, 2001, compared to 8.88% for the period
ended December 31, 2000, 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 during 2001 and the "floor rate" on the
student loan assets being reset annually on July 1. The Company also received
investment interest and other income for the year ended December 31, 2001 in the
amounts of $1,743,425 and $198,289, respectively, compared to $2,174,126 and
$80,481, respectively, for the period ended December 31, 2000. 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. Expenses for the year ended December 31, 2001 consisted
primarily of interest on the Company's outstanding Notes which totaled
$68,190,154, compared to $39,401,390 for the period ended December 31, 2000, an
increase of 73.07% . The amount of interest expense reported depends upon the
amount of Notes outstanding during the years and the interest rates on such
Notes. This increase in expenses is directly attributable to the issuance of
additional Notes in the second and third quarters of 2001 along with the
financial information on a full year of business activity compared to seven
months of business activity in 2000. The Company's average debt outstanding was
approximately $1,543,000,000 for the year ended December 31, 2001, compared to
debt outstanding of $1,000,000,000 for the period ended December 31, 2000 and
the average annual cost of borrowings was approximately 4.42% for the year ended
December 31, 2001, compared to approximately 6.75% for the period ended December
31, 2000. The decrease in the average annual cost of borrowings is a direct
result of a declining interest rate environment during 2001. The Company also
incurred loan servicing fees to a related party in the amount of $13,586,370 for
the year ended December 31, 2001, compared to $5,414,538 for the period ended
December 31, 2000. See "ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
for a description of the Servicing Agreement and Administrative Services
Agreement pursuant to which such fees are owed. Loan servicing fees to a related
party were higher in 2001 because the Company held, on average, more student
loans in 2001 and incurred a full year of servicing costs. Trustee and broker
fees, amortization of debt issuance costs and amortization of loan premiums and
lender fees for the year ended December 31, 2001 amounted to $3,311,175,
$344,311 and $4,434,839 respectively, compared to $1,621,060, $78,537 and
$1,652,178 respectively, for the period ended December 31, 2000. The increases
are attributable to the issuance of additional Notes in the second and third
quarters of 2001 and a comparison of a full year of expenses in 2001 to seven
months of expenses in 2000. Amortization of loans premiums and lender fees also
increased due to an increase in the rate of amortization based on 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 for the year ended
December 31, 2001 amounted to $1,600,000, compared to $1,010,000 for the period
ended December 31, 2000. Additional amounts were recognized as provision for
loan losses in order to reflect the appropriate allowance amounts in comparison
to the estimated defaults. Other general and administrative expenses for the
year ended December 31, 2001 amounted to $2,767,940, compared to $1,147,800 for
the period ended December 31, 2000. This increase is due to an increase in
administrative fees incurred to the parent as the average outstanding student
loan balances increased in 2001 along with a full year of expenses reported in
2001 compared to seven months in 2000.
INCOME TAX EXPENSE. The Company has recognized income tax expense of
$2,938,300 for the year ended December 31, 2001 compared to an income tax
benefit of $664,483 for the period ended December 31, 2000. The income tax
expense was a result of net income being realized for the year ended December
31, 2001 compared with the net loss realized for the period ended December 31,
2000. The effective tax rate utilized by the Company to recognize a provision
for income taxes in 2001 and 2000 was 36%. The effective tax rate will be
adjusted in the future for changes to the corporate tax regulations.
NET INCOME. The Company had net income of $5,223,644 for the year ended
December 31, 2001 compared to a net loss of $1,181,303 for the period ended
December 31, 2000. The 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 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 $25,441,145 from $6,823,720 for
the period ended December 31, 2000 to $32,264,865 for the year ended December
31, 2001. The net loss for the period ended December 31, 2000 resulted from the
pre-funding of a portion of the Series 2000 Notes, establishing the allowance
for loan loss and amortization expense related to student loan premiums being
higher than expected.
For the year ended December 31, 2001, there were no unusual or
infrequent events or transactions or any significant economic dangers that
materially affected the amount of reported income.
13
LIQUIDITY AND CAPITAL RESOURCES
Eligible Loans held by the Company are pledged as collateral for the
Notes, the terms of which provide for the retirement of all Notes from the
proceeds of the Eligible Loans. Cash flows from payments on the Eligible Loans,
together with proceeds of reinvestment income earned on the Eligible Loans, are
intended to provide cash sufficient to make all required payments of principal
and interest on each outstanding series of Notes. The Indenture under which the
Notes were issued also creates a Reserve Fund from which money can be drawn to
make payments or interest and principal on the Notes. The Reserve Fund is fully
funded under the terms of the Indenture and the Company anticipates that cash
flows generated from its Eligible Loans will be sufficient to meet the
obligation on its outstanding Notes.
It is anticipated that regular payments under the terms of the Eligible
Loans, as well as early prepayment, will reduce the number of Eligible Loans
held in the Trust Estate. The Company is authorized under the Indenture to use
principal receipts from Eligible Loans to purchase additional Eligible Loans
until July 1, 2004.
Scheduled payments on the Company's notes payable will be made, only to
the extent funds are available. Assuming funds are available, scheduled payments
are due as follows:
2003 $48,000,000
2004 89,760,000
2005 84,000,000
2006 84,000,000
2007 79,200,000
2008 and thereafter 1,034,040,000
-------------
$1,419,000,000
Management's expectations are that future cash flows provided by
operating activities will be sufficient to meet the Company's obligations. For
further discussion of the above obligations, refer to Note 4 of the financial
statements.
IMPACT OF INFLATION
For the year ended December 31, 2002, cost increases to the Company
were not materially impacted by inflation.
ITEM 7A. 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 Notes bear
interest at a rate that is reset periodically by means of auction procedures. 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 rate on each series of Auction Rate Notes is based
generally on the outcome of each auction of such series of Notes. 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, 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).
14
As shown by the chart below, the Company has conducted a sensitivity
analysis to determine what effect different changes in the interest rates on
student loans and the Notes would have on its cash flows and its resulting
ability to pay the principal and interest due on the Notes. Historically, the
majority of the Company's Notes have borne interest at a rate that approximates
1 Month LIBOR. Generally, student loans bear interest at a rate based on the
91-day Treasury Bill Rate. Thus, the Company's analysis of the effect of
different interest rates on its cash flows was prepared assuming spreads of 10,
30, 40, 60, 80 and 100 basis points between 91-day Treasury Bills and 1 Month
LIBOR (the "NELNET-2 Ted Spread"). The NELNET-2 Ted Spreads were then applied at
different rates of interest to determine their effect on the "spread" between
the interest the Company earns on its student loans and its interest payment
obligations under the notes (the "NELNET-2 Net Spread").
- --------------------------------------------------------------------------------
T-Bill* NELNET-2 Net Spread
---------- --------- ----------- ----------- ---------- -----------
5.00% .10% -.03% -.10% -.23% -.37% -.50%
---------- --------- ----------- ----------- ---------- -----------
4.00% .24% .11% .04% -.09% -.22% -.36%
---------- --------- ----------- ----------- ---------- -----------
3.00% .44% .31% .24% .11% -.02% -.16%
---------- --------- ----------- ----------- ---------- -----------
2.00% .64% .51% .44% .31% .18% .04%
---------- --------- ----------- ----------- ---------- -----------
1.50% .78% .65% .59% .45% .32% .19%
---------- --------- ----------- ----------- ---------- -----------
1.00% .91% .78% .71% .58% .44% .31%
---------- --------- ----------- ----------- ---------- -----------
- ------------ ---------- --------- ----------- ----------- ---------- -----------
NELNET-2
Ted Spread** 10 30 40 60 80 100
- --------------------------------------------------------------------------------
* 91 Day T-Bill (Yield)
** 1 Month LIBOR vs. 91 Day T-Bill (Yield)
Generally, increases in the NELNET-2 Ted Spread and decreases in
interest rates have the effect of reducing the NELNET-2 Net Spread, and
correspondingly, the Company's cash flows. For example, as of March 21, 2003 the
1 Month LIBOR rate was 1.305% and the 91-day Treasury Bill Rate was 1.16%. Thus,
the NELNET-2 Ted Spread was approximately fifteen basis points (1.305- 1.16) and
the NELNET-2 Net Spread was approximately 91 basis points. If, at the same
interest rate (approximately 1.00%), the NELNET-2 Ted Spread is increased to
100, the Company's cash flows are significantly reduced, as evidenced by a
NELNET-2 Net Spread of 31 basis points. The Company, however, believes that a
NELNET-2 Ted Spread of 100 is unlikely to occur.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by
this ITEM 8 are set forth in ITEM 15 of this Form 10-K. All information which
has been omitted is either inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no adverse opinions or disclaimers of opinion, nor were
there any modifications as to uncertainty, audit scope, or accounting principles
rendered by the independent accountants. There were no disagreements with the
current accounting firm on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. There are no
changes in or disagreements on accounting and financial statement disclosure.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company is governed by a Board of Directors, which is required by
the Company's Articles of Incorporation to include at least three directors.
Directors are required to be elected at each annual meeting of the shareholders.
The present directors and executive officers and their addresses and principal
occupations or affiliations are as follows:
Principal Officers and
Other Occupation Directors Term
Name of Director Offices Held Age Address or Affiliation From To*
- ---------------- ------------ --- ------- -------------- ------ -----
Michael S. Chairman 39 6801 S. 27th Street Chief October Present
Dunlap P.O. Box 82529 Executive 1999
Lincoln, Nebraska Officer of
68501 Union Bank and
Trust Company;
President,
Farmers &
Merchants
Investment, Inc.;
Chairman,
Nelnet, Inc.
Stephen F. President 50 6991 East Camelback Vice October Present
Butterfield Road, Suite B290 Chairman, 1999
Scottsdale, Arizona Nelnet, Inc.;
85251 President of
Union Financial
Services, Inc.
Terry J. Heimes Vice 38 121 S. 13th Street Executive December Present
President, Suite 201 Vice President 2002
Treasurer Lincoln, NE 68508 and Chief
and Secretary Financial
Officer, -
Nelnet, Inc.
Jeffery R. Vice 37 3015 S. Parker Road Executive November Present
Noordhoek President Suite 400 Director, 2001
Aurora, CO 80014 Capital
Markets -
Nelnet, Inc.
Ross Wilcox Director 60 4732 Calvert Street Chairman of October Present
Lincoln, Nebraska the Board of 1999
68506 Union Bank
and Trust
Company
Dr. Paul R. Hoff Director 68 Hernia Hill, Rural Retired October Present
Route 1 Physician 1999
Seward, Nebraska
68434
(*) Each director holds office until the next annual meeting of shareholders
following his or her election until such director's successors shall
have been elected and qualified. The Company's next annual meeting is
scheduled for March 2004.
EXECUTIVE MANAGEMENT
The Board of Directors and executive officers described below are
responsible for overall management of the Company. The Company's officers and
directors are shareholders, officers and directors of business entities that
have engaged in the business of purchasing, holding and selling student loans.
MICHAEL S. DUNLAP, CHAIRMAN OF THE BOARD. As co-founder and chairman of
the board of both Nelnet and Union Financial Services, Inc. ("UFS"), Michael S.
Dunlap is responsible for the overall strategy and direction of the companies.
Mr. Dunlap is also the chief executive officer of Union Bank and Trust Company,
and president of Farmers & Merchants Investment, Inc. (the parent of Union Bank
and Trust Company). Mr. Dunlap has been an employee of Union Bank and Trust
Company for approximately 20 years and is a member of the Nebraska State Bar
Association. Mr. Dunlap received his B.S. degree in finance and accounting and
his law degree from the University of Nebraska.
16
STEPHEN F. BUTTERFIELD, PRESIDENT AND DIRECTOR. Stephen F. Butterfield
serves as the vice chairman of Nelnet, assisting in the executive direction of
the company and managing its capital market relationships. As co-founder and
president of UFS, Mr. Butterfield directs the overall management and direction
of the company, including asset purchasing, marketing of corporate services, and
coordination of the company's capital market activities. Mr. Butterfield has
been a member of the student loan industry since January 1989, first as
president of a for-profit student loan secondary marketing facility located in
Scottsdale, Arizona, and second as president of the Student Loan Acquisition
Authority of Arizona, a non-profit secondary marketing facility in Scottsdale,
Arizona. Prior to his work in the student loan industry, Mr. Butterfield spent
15 years as an investment banker for Boettcher and Company specializing in
municipal finance. Mr. Butterfield received his B.S. degree in business
administration from Arizona State University.
TERRY J. HEIMES, VICE PRESIDENT, TREASURER AND SECRETARY. Terry J.
Heimes serves as chief financial officer and executive vice president of Nelnet
and its operating companies and is responsible for the coordination of all
financial and accounting functions for the corporation. Active in the strategic
planning and direction of the company, Mr. Heimes oversees the preparation and
issuance of financial statements, corporate accounting/tax matters, preparation
of asset-backed securitization, and warehousing activities. With over 13 years
experience in education finance, Mr. Heimes is versed in taxable and tax-exempt
issuances of debt, warehousing lines of credit, asset-backed commercial paper,
conduit financing, private placements, and conversion of non-profit tax-exempt
issuers to taxable issuers. Mr. Heimes joined Nelnet in 1998 with the conversion
and acquisition of the Nebraska Higher Education Loan Program, Inc. (NEBHELP).
Prior to joining NEBHELP, Mr. Heimes worked for the public accounting firm of
KPMG Peat Marwick through 1992 as a manager in the audit department. Mr. Heimes
graduated Magna cum Laude from the University of Nebraska-Kearney with a
bachelor of science in business administration with an emphasis in accounting.
JEFFERY R. NOORDHOEK, VICE PRESIDENT AND DIRECTOR. As executive director
of the Capital Markets area of Nelnet, Jeffrey R. Noordhoek is responsible for
leading the company in its securitization and capital markets funding efforts.
Mr. Noordhoek's primary function is to raise low cost capital and to design
creative methods to finance the company's student loan portfolios through
warehouse lines of credit, long-term securitizations, and private debt
arrangements. Mr. Noordhoek has been in the capital markets area of Nelnet since
1996. Prior to joining Nelnet, Mr. Noordhoek served as a senior associate for
State Street Capital Corporation where he assisted in the establishment of
Clipper Receivables Commercial Paper Conduit and the Clipper Blue Tax-Exempt
financing vehicles. While at State Street, Mr. Noordhoek worked at its offices
in Luxembourg, Toronto, and Boston where he successfully executed
securitizations in numerous asset classes. Mr. Noordhoek received his B.S. in
business administration from the University of Nebraska and his M.B.A. from
Boston University.
ROSS WILCOX, DIRECTOR. Ross Wilcox has been with Union Bank and Trust
Company since 1966 and serves as chairman of its Board of Directors. Mr. Wilcox
is the chairman of the Lincoln Chamber of Commerce. A graduate of Nebraska
Wesleyan University, Mr. Wilcox now serves as a trustee for the University. Mr.
Wilcox also serves as trustee for Lighthouse (a youth intervention program), the
Lincoln Public Schools Foundation, and Bryan LGH Medical Center. Mr. Wilcox is
also on the Board of Directors for the Lincoln Country Club, the Lincoln Chamber
of Commerce, and the Nebraska chapter of the Nature Conservancy.
DR. R. PAUL HOFF, DIRECTOR. Dr. R. Paul Hoff has worked as a family
practice physician in Seward, Nebraska for 35 years. In addition, Dr. Hoff has
served as a past member of Admissions Board of University of Nebraska Medical
School and the Deans Advisory Board. Dr. Hoff currently acts as a board member
for Stratus Mutual Fund and Security Home Bank, and as a past board member for:
Hawkeye Bank Corp., NEBHELP and Nelnet Loan Services.
The Company's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The Company's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 is not applicable
to the Company, because the Company has no class of equity securities registered
pursuant to Section 12 thereof.
ITEM 11. EXECUTIVE COMPENSATION
The Company's executive officers are not compensated by the Company for
services rendered by them, although some of the Company's officers are
compensated by Nelnet, which receives remuneration from the Company pursuant to
an Administrative Services Agreement by and between Nelnet and the Company. A
detailed description of the Administrative Services Agreement is set forth in
ITEM 13 of this Form 10-K.
17
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES IN 2002
The Company has not issued any options.
LONG-TERM INCENTIVE PLAN AWARDS IN 2002
The Company has no long-term incentive plan.
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE IN 2002
The Company has no such benefit plans.
EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements.
DIRECTOR COMPENSATION
Directors of the Company are not compensated as directors, but may
receive reimbursement of out-of-pocket expenses in connection with attendance at
Board meetings.
OFFICER COMPENSATION
The Company has not adopted a compensation plan for officers.
BOARD MEETINGS
During fiscal year 2002, the Board held three regular meetings.
COMMITTEES OF THE BOARD
The Board of Directors has not established an Audit Committee or a
Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 31, 2003, there were 1,000 shares of the Company's common
stock, no par value, outstanding, all of which were held by Nelnet. No director
or executive officer owns any shares of the Company and there are no other
beneficial owners.
CHANGES IN CONTROL.
The Company knows of no arrangement, including the pledge by any person
of securities of the Company, which may at a subsequent date result in change of
control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Administrative Services Agreement. The Company and Nelnet, the
Company's parent corporation, entered into an Administrative Services Agreement
(the "Agreement") dated as of June 1, 2000. Under the Agreement, Nelnet agreed:
(i) to furnish or cause to be furnished to the Company or the Trustee copies of
reports received with respect to the Loans, and prepare such additional reports
with respect to the Loans as the Company or the Trustee may reasonably request
from time to time; (ii) to respond to inquiries and requests made by borrowers,
educational institutions, Guarantee Agencies, the Trustee, and other parties
with respect to the Loans and respond to requests by the Company's independent
auditors for information concerning the Company's financial affairs; (iii) to
maintain financial records concerning the Loans and, if furnished adequate
information with respect to financial affairs not related to the Loans, prepare
and maintain a general ledger and financial statements for the Company; (iv)
provide instructions to the Trustee with respect to the administration of the
Loans; (v) to prepare for and furnish to the Company such statistical reports
and cash flow projections as may be required under the Indenture or requested by
the Company; and (vi) to provide such other services with respect to
administration of its program as the Company may reasonably request. The
Agreement expires upon the stated maturity of the Notes. In return for the
services provided by Nelnet, the Company pays to Nelnet on the first day of each
18
calendar month an amount equal to 0.015% of the average outstanding balance of
the Loans during the preceding month. The obligation of the Company to pay fees
under the Agreement is a limited obligation to be satisfied solely from
distributions made by the Trustee to the Company under the terms of the
Indenture. Although the Company is obligated to pay to Nelnet the full amount of
all accrued fees, such payments are made exclusively from amounts deposited in
the Operating Fund for payment of the Company's Maintenance and Operating
Expenses (as defined in the Indenture). If the Company does not have funds on
hand to cover the full amount of the fees due under the Agreement, then payment
of the unpaid balance is deferred until there are sufficient funds available
from such sources to satisfy part, or all, of the outstanding debt. The fee
payable to Nelnet under the Agreement may be revised on each January 1 during
the term of the Agreement. To alter the fee, Nelnet must provide written notice
of the proposed new fee to the Company ninety (90) days prior to the next
January 1. If Nelnet and the Company cannot reach an agreement within sixty (60)
days of the receipt of the notice, either party may terminate the Agreement upon
thirty (30) day's written notice to the other party.
SERVICING AGREEMENT. The Company and Nelnet entered into a Servicing
Agreement (the "Servicing Agreement") dated as of June 1, 2000. Under the
Servicing Agreement, Nelnet services the Eligible Loans. Nelnet entered into
subservicing agreements with Nelnet Loan Services, Inc. (the "Subservicing
Agreement") dated as of June 1, 2000. Under the Subservicing Agreement, Nelnet
Loan Services, Inc., as Subservicer, assumes substantially all of the duties of
the Servicer under the Servicing Agreement for the term of the Servicing
Agreement. The Company believes that the terms and conditions of the Servicing
Agreement (and the subservicing arrangement) are comparable to those offered by
or available to unrelated parties. The servicing fee to Nelnet is calculated
using an annual asset-based charge that ranges from 0.60 to 1.25 percent of the
student loan principal balance, depending on the type of loan, calculated
monthly.
STUDENT LOAN PURCHASE AGREEMENTS. The Company has entered into Student
Loan Purchase Agreements with various financial institutions including, but not
limited to, Union Bank and Trust Company, NEBHELP, Inc., MELMAC, LLC, NHELP-I,
Inc., NHELP-III, Inc., NELNET Student Loan Corporation-1, EFS Finance Co., EMT
Corporation, Nelnet Student Loan Warehouse Corporation-1, and Nelnet Student
Loan Funding, LLC pursuant to which the Company has purchased or sold Eligible
Loans. NEBHELP, Inc., MELMAC, LLC, NHELP-I, Inc., NHELP-III, Inc., NELNET
Student Loan Corporation-1, EFS Finance Co., EMT Corporation, Nelnet Student
Loan Warehouse Corporation-1, and Nelnet Student Loan Funding, LLC are
subsidiary corporations of or are controlled by Nelnet. Certain of the
shareholders of Nelnet Loan Services, Inc. also hold an interest in the bank
holding company that owns and controls Union Bank and Trust Company, and certain
of the officers and directors of the Company are also officers and directors of
Union Bank and Trust Company. Although the above mentioned entities are related
to the Company as described above, the Company believes that the terms and
conditions of the Student Loan Purchase Agreements are comparable to those
offered by or available to unrelated parties.
ITEM 14. CONTROLS AND PROCEDURES
The principal executive officer and the principal financial officer of
the Company have reviewed and evaluated the Company's disclosure controls and
procedures and found that they are effective to gather, analyze, and report all
information that is required to be disclosed in this report. There were no
significant changes to the Company's disclosure procedures and controls since
the date of that review.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The financial statements and financial statement information and
schedules required by this Item are included in this report commencing on page
F-1. The Independent Auditors' Report appears on page F-1 of this report. All
other schedules have been omitted because they are inapplicable, not required,
or the information is included elsewhere in the financial statements or notes
thereto.
EXHIBITS
All exhibits listed hereunder, unless otherwise indicated, have
previously been filed as exhibits to the Company's Registration Statement
declared effective in February, 2000. Such exhibits have been filed with the
Commission pursuant to the requirements of the Acts administered by the
Commission. Such exhibits are incorporated herein by reference under Rule 12b-23
of the Securities Exchange Act of 1934.
19
The following is a complete list of exhibits filed as part of the
Company's Registration Statement and this Form 10-K. 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
for the period ended June 30, 2000.)
3.3 Bylaws of the Company (Incorporated by reference herein to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2000.)
4.1 Indenture of Trust by and between the Company and Zions First
National Bank, dated as of 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 by and between the Company
and Zions First National Bank, dated as of June 1, 2000
(Incorporated by reference herein 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 the
Company and Zions First National Bank, dated as of April 1,
2001 (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 by and between the
Company 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 the
Company 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 as of June 1, 2000, by and between
the Company and Nelnet, Inc. (Incorporated by reference herein
to the Company's Quarterly report on Form 10-Q for the period
ended 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. *
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. *
* Filed herewith
Reports on Form 8-K
The Company filed a report on Form 8-K on April 5, 2002 to report in
response to Item 5 the issuance of $564,000,000 of Student Loan
Asset-Backed Auction Rate Notes Series 2002A.
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.
20
INDEX TO FINANCIAL STATEMENTS
Financial Statements of NELNET STUDENT LOAN CORPORATION-2
Independent Auditors' Report.................................................F-1
Balance Sheets as of December 31, 2002 and 2001..............................F-2
Statements of Operations for the years ended December 31, 2002 and 2001
and for the period from June 1, 2000 (date of inception) through
December 31, 2000............................................................F-3
Statements of Stockholder's Equity (deficit) for the years ended
December 31, 2002 and 2001 and for the period from June 1, 2000
(date of inception) through December 31, 2000................................F-4
Statements of Cash Flows for the years ended December 31, 2002 and
2001 and for the period from June 1, 2000 (date of inception)
through December 31, 2000....................................................F-5
Notes to Financial Statements................................................F-6
All other schedules are omitted as they are not applicable or the required
information is shown in the financial statements or notes thereto.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Michael S. Dunlap
-------------------------------
Michael S. Dunlap, Chairman
of the Board (Principal
Executive Officer)
Date: March 31, 2003
By: /s/ Terry J. Heimes
--------------------------------
Terry J. Heimes, Vice President
(Principal Financial and
Accounting Officer)
Date: March 31, 2003
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
By: /s/ Michael S. Dunlap Chairman of the Board March 31, 2003
---------------------------- (Principal Executive
Michael S. Dunlap Officer)
By: /s/ Stephen F. Butterfield President and Director March 31, 2003
-----------------------------
Stephen F. Butterfield
By: /s/ Jeffery R. Noordhoek Vice President and March 31, 2003
----------------------------- Director
Jeffery R. Noordhoek
By: /s/ Ross Wilcox Director March 28, 2003
-----------------------------
Ross Wilcox
By: /s/ Dr. Paul Hoff Director March 28, 2003
-----------------------------
Dr. Paul Hoff
22
CERTIFICATIONS
I, Michael S. Dunlap, certify that:
1. I have reviewed this annual report on Form 10-K, of NELNET
Student Loan Corporation-2 (the "Company");
2. Based on my knowledge, the information in the report, does not
contain any untrue statement of material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the
periods presented in this annual report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining the disclosure controls and
procedures (as defined in Exchange Act Rule 15d-14) for the
Company and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the
Company is made known to us by others within those
entities, particularly during the period in which the
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of the report
(the "Evaluation Date"); and
(c) Presented in the report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize, and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
6. The Company's other certifying officers and I have indicated in
this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Michael S. Dunlap
-------------------------
Michael S. Dunlap
Chairman
23
I, Terry J. Heimes, certify that:
1. I have reviewed this annual report on Form 10-K, of NELNET
Student Loan Corporation-2 (the "Company");
2. Based on my knowledge, the information in the report, does not
contain any untrue statement of material fact or omit to state
a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the
periods presented in this annual report;
4. The Company's other certifying officers and I are responsible
for establishing and maintaining the disclosure controls and
procedures (as defined in Exchange Act Rule 15d-14) for the
Company and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the
Company is made known to us by others within those
entities, particularly during the period in which the
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of the report
(the "Evaluation Date"); and
(c) Presented in the report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of the board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize, and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
6. The Company's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/ Terry J. Heimes
------------------------------------------
Terry J. Heimes
Principal Financial and Accounting Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The registrant has not sent to security holders any annual report for
its last fiscal year or any proxy material with respect to a meeting of
shareholders.
24
NELNET STUDENT LOAN CORPORATION-2
(A Wholly Owned Subsidiary of Nelnet, Inc.)
Financial Statements
December 31, 2002 and 2001
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
NELNET Student Loan Corporation-2:
We have audited the accompanying balance sheets of NELNET Student Loan
Corporation-2, (a wholly owned subsidiary of Nelnet, Inc.), as of December 31,
2002 and 2001, and the related statements of operations, stockholder's equity
(deficit), and cash flows for the years ended December 31, 2002 and 2001 and for
the period from June 1, 2000 (date of inception) through December 31, 2000.
These financial statements are the responsibility of NELNET Student Loan
Corporation-2's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NELNET Student Loan
Corporation-2 at December 31, 2002 and 2001 and the results of its operations
and its cash flows for the years ended December 31, 2002 and 2001 and for the
period from June 1, 2000 (date of inception) through December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
---------------
March 21, 2003
Lincoln, Nebraska
F-1
NELNET STUDENT LOAN CORPORATION-2
(A Wholly Owned Subsidiary of Nelnet, Inc.)
Balance Sheets
December 31, 2002 and 2001
Assets 2002 2001
--------------- ----------------
Cash and cash equivalents $ -- 8,093
Student loans receivable, net of allowance of
$1,285,201 in 2002 and $1,891,253 in 2001 1,241,067,610 1,933,941,068
Accrued interest receivable 31,655,348 50,256,051
Restricted cash - held by trustee 153,201,633 46,135,799
Debt issuance costs, net of accumulated amortization
of $910,420 in 2002 and $422,848 in 2001 6,072,333 9,355,177
Income taxes receivable from parent 2,467,186 --
Due from parent -- 4,100,000
Deferred tax assets 655,140 687,951
--------------- ----------------
Total assets $1,435,119,250 2,044,484,139
=============== ================
Liabilities and Stockholder's Equity
Liabilities:
Notes payable $1,419,000,000 2,030,000,000
Accrued interest payable 2,999,062 4,087,348
Other liabilities 3,170,844 3,833,683
Income taxes payable to parent -- 2,419,767
--------------- ----------------
Total liabilities 1,425,169,906 2,040,340,798
--------------- ----------------
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 9,380,707 4,142,341
Retained earnings 567,637 --
--------------- ----------------
Total stockholder's equity 9,949,344 4,143,341
Commitments and contingencies
--------------- ----------------
Total liabilities and stockholder's equity $1,435,119,250 2,044,484,139
=============== ================
See accompanying notes to financial statements.
F-2
NELNET STUDENT LOAN CORPORATION-2
(A Wholly Owned Subsidiary of Nelnet, Inc.)
Statements of Operations
Years ended December 31, 2002 and 2001
and for the period from June 1, 2000 (date of inception) through December 31, 2000
2002 2001 2000
-------------- -------------- --------------
Revenues:
Loan interest $ 113,531,516 100,455,019 46,225,110
Investment interest 2,635,858 1,743,425 2,174,126
Other 598,458 198,289 80,481
-------------- -------------- --------------
Total revenues 116,765,832 102,396,733 48,479,717
-------------- -------------- --------------
Expenses:
Interest on notes payable 63,180,085 68,190,154 39,401,390
Loan servicing fees to related party 17,150,999 13,586,370 5,414,538
Trustee and broker fees 4,715,340 3,311,175 1,621,060
Amortization and write down of debt issuance costs 5,707,491 344,311 78,537
Amortization of loan premiums and lender fees 10,454,316 4,434,839 1,652,178
Provision for loan losses 1,100,000 1,600,000 1,010,000
Other general and administrative 3,570,669 2,767,940 1,147,800
-------------- -------------- --------------
Total expenses 105,878,900 94,234,789 50,325,503
-------------- -------------- --------------
Income (loss) before income tax
expense (benefit) 10,886,932 8,161,944 (1,845,786)
Income tax expense (benefit) 3,919,295 2,938,300 (664,483)
-------------- -------------- --------------
Net income (loss) $ 6,967,637 5,223,644 (1,181,303)
============== ============== ==============
See accompanying notes to financial statements.
F-3
NELNET STUDENT LOAN CORPORATION-2
(A Wholly Owned Subsidiary of Nelnet, Inc.)
Statements of Stockholder's Equity (Deficit)
Years ended December 31, 2002 and 2001
and for the period from June 1, 2000 (date of inception) through December 31, 2000
Total
Additional Retained stockholder's
Common paid-in earnings equity
stock capital (deficit) (deficit)
--------- ------------ ------------ --------------
Balance at June 1, 2000 (date
of inception) $ -- -- -- --
Issuance of common stock 1,000 -- -- 1,000
Net loss -- -- (1,181,303) (1,181,303)
--------- ------------ ------------ --------------
Balance at December 31, 2000 1,000 -- (1,181,303) (1,180,303)
Net income -- -- 5,223,644 5,223,644
Capital contributions from parent -- 5,600,000 -- 5,600,000
Dividends paid - $5,500 a share -- (1,457,659) (4,042,341) (5,500,000)
--------- ------------ ------------ --------------
Balance at December 31, 2001 1,000 4,142,341 -- 4,143,341
Net income -- -- 6,967,637 6,967,637
Capital contributions from parent -- 13,077,830 -- 13,077,830
Return of capital to parent -- (7,839,464) -- (7,839,464)
Dividends paid - $6,400 a share -- -- (6,400,000) (6,400,000)
--------- ------------ ------------ --------------
Balance at December 31, 2002 $ 1,000 9,380,707 567,637 9,949,344
========= ============ ============ ==============
See accompanying notes to financial statements.
F-4
NELNET STUDENT LOAN CORPORATION-2
(A Wholly Owned Subsidiary of Nelnet, Inc.)
Statements of Cash Flows
Years ended December 31, 2002 and 2001
and for the period from June 1, 2000 (date of inception) through December 31, 2000
2002 2001 2000
-------------- ------------- -------------
Net income (loss) $ 6,967,637 5,223,644 (1,181,303)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Amortization and write down of loan premiums,
lender fees, and debt issuance costs 16,161,807 4,779,150 1,730,715
Deferred income tax expense (benefit) 32,811 (847,754) (287,775)
Provision for loan losses 1,100,000 1,600,000 1,010,000
Decrease (increase) in accrued interest
receivable 18,600,703 (20,231,474) (30,024,577)
Increase (decrease) in accrued interest payable (1,088,286) 966,733 3,120,615
Increase (decrease) in other liabilities (662,839) 2,748,015 1,085,668
Change in income taxes recoverable/payable
from/to parent (4,886,953) 3,244,053 (376,708)
Decrease (increase) in due from parent 4,100,000 (4,100,000) --
------------ ------------ -------------
Net cash provided by (used in)
operating activities 40,324,880 (6,617,633) (24,923,365)
------------ ------------ -------------
Cash flows from investing activities:
Purchases of student loans, including premiums (834,697,043) (1,188,809,680) (1,007,842,817)
Proceeds from sales of student loans 1,429,690,080 54,923,189 11,698
Net proceeds from student loan principal
payments and loan consolidations 86,326,105 136,409,321 62,670,204
Increase in restricted cash - held by trustee (107,065,834) (21,603,376) (24,532,423)
-------------- -------------- --------------
Net cash provided by (used in)
investing activities 574,253,308 (1,019,080,546) (969,693,338)
-------------- -------------- --------------
Cash flows from financing activities:
Payment on notes payable (1,175,000,000) -- --
Proceeds from issuance of notes payable 564,000,000 1,030,000,000 1,000,000,000
Payment for debt issuance costs (2,424,647) (5,402,399) (4,375,626)
Issuance of common stock -- -- 1,000
Capital contributions from parent 13,077,830 5,600,000 --
Return of capital to parent (7,839,464) -- --
Dividends paid (6,400,000) (5,500,000) --
-------------- -------------- --------------
Net cash provided by (used in)
financing activities (614,586,281) 1,024,697,601 995,625,374
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents (8,093) (1,000,578) 1,008,671
Cash and cash equivalents, beginning of the year 8,093 1,008,671 --
-------------- -------------- --------------
Cash and cash equivalents, end of year $ -- 8,093 1,008,671
============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ 64,268,371 67,223,421 36,280,775
============== ============== ==============
Income taxes paid to parent $ 9,221,016 542,001 --
============== ============== ==============
See accompanying notes to financial statements.
F-5
Nelnet Student Loan Corporation-2
(A Wholly Owned Subsidiary of Nelnet, Inc.)
Notes to Financial Statements
December 31, 2002 and 2001
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
NELNET Student Loan Corporation-2 (the Company), a wholly owned
subsidiary of Nelnet, Inc. (the Parent or Nelnet) is a C corporation
which invests in eligible student loans issued under Title IV of the
Higher Education Act of 1965, as amended (the Act). The 2000
financial statements reflect the operations of the Company for the
period June 1, 2000 (date of inception) through December 31, 2000.
Student loans beneficially owned by the Company include those
originated under the Stafford Loan Program (SLP), the Parent Loan
Program for Undergraduate Students (PLUS) program, the Supplemental
Loans for Students (SLS) program and loans which consolidate certain
borrower obligations (Consolidation). Title to the loans is held by
an eligible lender trustee under the Act for the benefit of the
Company. The financed eligible loan borrowers are geographically
located throughout the United States and the majority are in school
or in repayment status. The notes payable outstanding are payable
primarily from interest and principal payments on the student loans
receivable.
The Parent is a holding company organized for the purpose of
establishing and owning the stock of corporations like the Company
engaged in the securitization of financial assets. The Parent also
provides managerial and administrative support to the Company.
(b) Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all investments with original maturities of three months or less to
be cash equivalents.
(c) Student Loans Receivable and Allowance for Loan Losses
Investments in student loans, including premiums, are recorded at
cost, net of premium amortization and the allowance for loan losses.
Premiums are amortized over the estimated principal life of the
related loans.
The allowance for loan losses is estimated and established through a
provision charged to expense. Losses are charged against the
allowance when management believes that the collectibility of the
loan principal is unlikely. Recovery of amounts previously charged
off are credited to the allowance for loan losses. The charge to
operations is estimated and based on management's evaluation of the
loan portfolio, including such factors as the volume and character of
loans outstanding, past loan loss experience, and general economic
conditions.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize probable
losses on loans, future additions to the allowance for loan losses
may be necessary based on changes in economic conditions.
F-6 (Continued)
(d) Interest on Student Loans
Interest on student loans is accrued when earned and is either paid
by the Department of Education or the borrower depending on the
status of the loan at the time of accrual. In addition, the
Department of Education makes quarterly interest subsidy payments on
certain qualified Title IV loans until the student is required under
the provisions of the Act to begin repayment. Repayment on guaranteed
student loans normally begins within six months after completion of
their course of study, leaving school or ceasing to carry at least
one-half the normal full-time academic load as determined by the
educational institution. Repayment of PLUS loans normally begins
within 60 days from the date of loan disbursement and repayment of
SLS loans begins within one month after completion of course study,
leaving school, or ceasing to carry at least the normal full-time
academic load as determined by the educational institution.
(e) Debt Issuance Costs
Debt issuance costs are amortized over the estimated life of the
related debt, ranging from 12 to 34 years.
(f) Income Taxes
The Company files a consolidated Federal tax return with Nelnet Loan
Services, Inc. (NLS), the legal parent of Nelnet. The financial
statements reflect income tax expense (benefit) computed as if the
Company filed a separate tax return. Income tax expense (benefit) is
allocated by (to) the Company to (from) its Parent as if the Company
were a separate tax paying entity.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(g) Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make a number of estimates and
assumptions that effect the reported amounts of assets and
liabilities, reported amounts of revenues and expenses, and other
disclosures. Actual results could differ from those estimates.
(h) Comprehensive Income
The Company has no sources of other comprehensive income. Therefore,
the Company's comprehensive income consists solely of its net income
(loss).
F-7 (Continued)
(i) Reclassification
Certain amounts have been reclassified to conform to the 2002
financial statement presentation.
(2) Restricted Cash - Held by Trustee
The Company's restricted cash, consisting primarily of U.S. Treasury money
market funds, is held by the trustee in various accounts subject to use
restrictions, imposed by the indenture of trust. These trustee funds
include: the recycling account fund which is used to maintain excess funds
for future operating needs, if necessary, and purchases of eligible
student loans; the reserve fund which is used to cure any deficiencies in
the debt service requirement; and the revenue fund which is used for the
receipt of interest payments on eligible student loans and investment
securities and to pay fees and expenses incurred under the indenture.
(3) Student Loans Receivable and Concentration of Credit Risk
Guaranteed loans may be made under the insured student loan program by
certain lenders as defined by the Act. These loans, including related
accrued interest, are guaranteed at their maximum level permitted under
the Act by an authorized guarantee agency which has a contract of
reinsurance with the Department of Education. The terms of the loans,
which vary on an individual basis, generally provide for repayment in
monthly installments of principal and interest over a period of up to 20
years. Interest rates on loans may be fixed or variable, and will vary
based on the average of the 91-day U. S. Treasury bill rate, and currently
range from 3.5% to 12.0% (the weighted average rate was 6.4% at December
31, 2002) dependent upon type, terms of loan agreements, and date of
origination. For Title IV loans, the Company has entered into a trust
agreement in which an unrelated financial institution will serve as the
eligible lender trustee. As an eligible lender trustee, the financial
institution acts as the eligible lender in acquiring certain eligible
student loans as an accommodation to the Company who holds a beneficial
interest in the student loan assets as the beneficiary of such trust.
Substantially all student loan principal and related accrued interest are
guaranteed as defined by the Act. These guarantees are made subject to the
performance of certain loan servicing procedures stipulated by applicable
regulations. If these procedures are not met, affected student loans may
not be covered by the guarantees should the borrower default. The Company
retains and enforces recourse provisions against servicers and lenders
under certain circumstances. Such loans are subject to "cure" procedures
and reinstatement of the guarantee under certain circumstances. Also, in
accordance with Student Loan Reform Act of 1993, loans disbursed prior to
October 1, 1993 are fully insured and loans disbursed subsequent to
October 1, 1993 (approximately 95% and 96% of the student loans at
December 31, 2002 and 2001, respectively) are insured up to 98%.
F-8 (Continued)
The Company has provided for an allowance for loan losses related to those
student loans only guaranteed up to 98% for principal and interest. The
provision is based upon historical default rates for such loans. Activity
in the allowance for loan losses for the years ended December 31, 2002,
2001, and for the period from June 1, 2000 (date of inception) through
December 31, 2000 is shown below:
2002 2001 2000
----------- ---------- ----------
Beginning balance $ 1,891,253 826,279 --
Provision for loan losses 1,100,000 1,600,000 1,010,000
Transfer of allowance for sale of student
loans receivable to affiliates (1,150,000) -- --
Loans charged off, net of recoveries (556,052) (535,026) (183,721)
----------- ---------- ----------
Ending balance $ 1,285,201 1,891,253 826,279
=========== ========== ==========
(4) Notes Payable
The Company periodically issues taxable student loan asset-backed notes to
finance the acquisition of student loans. All notes are primarily secured
by the student loans receivable, related accrued interest, and other
property and funds held in trust. The majority of the notes are variable
rate notes with interest rates reset periodically based upon auction rates
and national indices.
F-9 (Continued)
The table below summarizes the outstanding notes payable at December 31,
2002 and 2001 by issue:
2002 2001
--------------------------- -------------------------
Carrying Interest Carrying Interest
Maturity amount rate amount rate
------------- ------------- ------------- ------------- ----------
2000 Senior Auction Rate Notes, Class A-1 12/1/2032 $ -- -- % $ 50,000,000 2.12%
2000 Senior Auction Rate Notes, Class A-2 12/1/2032 -- -- 50,000,000 2.20
2000 Senior Auction Rate Notes, Class A-3 12/1/2032 -- -- 50,000,000 2.15
2000 Senior Auction Rate Notes, Class A-4 12/1/2032 -- -- 50,000,000 2.15
2000 Senior Auction Rate Notes, Class A-5 12/1/2032 -- -- 50,000,000 2.30
2000 Senior Auction Rate Notes, Class A-6 12/1/2032 -- -- 50,000,000 2.40
2000 Senior Auction Rate Notes, Class A-7 12/1/2032 -- -- 50,000,000 2.12
2000 Senior Auction Rate Notes, Class A-8 12/1/2032 -- -- 75,000,000 2.24
2000 Senior Auction Rate Notes, Class A-9 12/1/2032 -- -- 75,000,000 2.15
2000 Senior Auction Rate Notes, Class A-10 12/1/2032 -- -- 75,000,000 2.10
2000 Senior Auction Rate Notes, Class A-11 12/1/2032 -- -- 75,000,000 2.28
2000 Senior Auction Rate Notes, Class A-12 12/1/2032 -- -- 100,000,000 2.15
2000 Senior Auction Rate Notes, Class A-13 12/1/2032 -- -- 100,000,000 2.35
2000 Senior Auction Rate Notes, Class A-14 12/1/2032 -- -- 100,000,000 2.20
2000 Subordinate Auction Rate Notes, Class B-1 12/1/2032 50,000,000 1.60 50,000,000 2.17
2001 Senior Fixed Rate Notes, Class A-1 7/1/2012 480,000,000 5.76 480,000,000 5.76
2001 Senior Auction Rate Notes, Class A-2 6/1/2035 50,000,000 1.50 50,000,000 2.11
2001 Senior Auction Rate Notes, Class A-3 6/1/2035 -- -- 50,000,000 2.30
2001 Senior Auction Rate Notes, Class A-4 6/1/2035 -- -- 75,000,000 2.11
2001 Senior Auction Rate Notes, Class A-5 6/1/2035 100,000,000 1.52 100,000,000 2.20
2001 Senior Auction Rate Notes, Class A-6 6/1/2035 -- -- 100,000,000 2.15
2001 Senior Auction Rate Notes, Class A-7 6/1/2035 100,000,000 1.50 100,000,000 2.20
2001 Subordinate Auction Rate Notes, Class B-1 6/1/2035 37,500,000 1.65 37,500,000 2.12
2001 Subordinate Auction Rate Notes, Class B-1 6/1/2035 37,500,000 1.60 37,500,000 2.20
2002 Senior Auction Rate Notes, Class A-1 6/1/2035 70,500,000 1.65 -- --
2002 Senior Auction Rate Notes, Class A-2 6/1/2035 70,500,000 1.39 -- --
2002 Senior Auction Rate Notes, Class A-3 6/1/2035 70,500,000 1.50 -- --
2002 Senior Auction Rate Notes, Class A-4 6/1/2035 70,500,000 1.52 -- --
2002 Senior Auction Rate Notes, Class A-5 6/1/2035 100,000,000 1.50 -- --
2002 Senior Auction Rate Notes, Class A-6 6/1/2035 100,000,000 1.50 -- --
2002 Senior Auction Rate Notes, Class A-7 6/1/2035 82,000,000 1.50 -- --
------------- -------------
$ 1,419,000,000 $ 2,030,000,000
============= =============
On October 8, 2002, the Company sold a portfolio of student loans to
Nelnet Student Loan Funding, LLC. Proceeds from the loan sale were used to
redeem approximately $1.2 billion of the Company's notes. As a result of
this transaction, the Company wrote down debt issuance costs of
$5,219,919, that were related to the redeemed notes, through a charge to
operations.
F-10 (Continued)
Generally, the notes can be redeemed on any interest payment date at par
plus accrued interest at the option of the Company, without a prepayment
penalty. The Company's prospectus supplement for the 2001 Senior Fixed
Rate Notes, Class A-1 provides that beginning July 1, 2003, scheduled
payments will be made, only to the extent funds are available. Assuming
funds are available, scheduled payments are due as follows:
2003 $ 48,000,000
2004 89,760,000
2005 84,000,000
2006 84,000,000
2007 79,200,000
2008 and thereafter 1,034,040,000
--------------
$ 1,419,000,000
==============
The indenture of trust contains, among other requirements, covenants
related to the restriction of funds to be maintained in a reserve fund.
Management believes the Company is in compliance with all covenants of the
note agreements at December 31, 2002 and 2001.
(5) Income Taxes
Components of the income tax expense (benefit) for the years ended
December 31, 2002 and 2001 and for the period from June 1, 2000 (date of
inception) through December 31, 2000 are shown below.
2002 2001 2000
----------- ----------- ----------
Current:
Federal $ 3,562,539 3,474,268 (346,123)
State 323,945 311,786 (30,585)
----------- ----------- ----------
3,886,484 3,786,054 (376,708)
----------- ----------- ----------
Deferred:
Federal 30,148 (780,826) (262,987)
State 2,663 (66,928) (24,788)
----------- ----------- ----------
32,811 (847,754) (287,775)
----------- ----------- ----------
$ 3,919,295 2,938,300 (664,483)
=========== =========== ==========
F-11 (Continued)
The actual income tax expense (benefit) differs from the "expected" income
tax expense (benefit), computed by applying the federal statutory
corporate tax rates to income (loss) before income tax expense (benefit)
for the years ended December 31, 2002 and 2001 and for the period from
June 1, 2000 (date of inception) through December 31, 2000, as shown
below.
2002 2001 2000
---------- ---------- ---------
Computed "expected" income tax
expense (benefit) $ 3,701,557 2,775,061 (627,567)
Increase in income tax expense (benefit)
resulting from:
State taxes, net of Federal income
tax expense (benefit) 215,561 161,606 (36,916)
Other 2,177 1,633 --
---------- ---------- ---------
$ 3,919,295 2,938,300 (664,483)
========== ========== =========
The Company's net deferred tax assets at December 31, 2002 and 2001
resulted primarily from the future tax benefit of the allowance for loan
losses, not currently deductible for tax purposes. Management believes
that it is more likely than not that the Company will generate sufficient
future taxable income to fully recover deferred tax assets recognized and,
therefore, no valuation allowance is required.
(6) Fair Value of Financial Instruments
Fair value estimates, methods, and assumptions are set forth below:
Cash and Cash Equivalents, Restricted Cash - Held by Trustee,
and Accrued Interest Receivable/Payable
The carrying amount approximates fair value due to the variable rate
of interest and/or the short maturities of these instruments.
Student Loans Receivable
The fair value of student loans receivable is estimated at amounts
recently paid by Nelnet to acquire loans in the market. The fair
value of the student loans receivable at December 31, 2002 and 2001
is approximately $1.26 billion and $1.98 billion, respectively.
Notes Payable
The fair value of notes payable is based on market prices for
securities that possess similar credit risk and interest rate risk at
or near December 31, 2002 and 2001. The estimated fair value of notes
payable at December 31, 2002 and 2001 is approximately $1.43 billion
and $2.04 billion, respectively.
F-12 (Continued)
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(7) Guarantee Agencies
As of December 31, 2002 and 2001, Nebraska Student Loan Program, Inc., the
Florida Department of Education Office of Student Financial Assistance,
California Student Aid Commission, and the United Student Aid Funds, Inc.
were the primary guarantors, guaranteeing approximately 85% and 66%,
respectively, of the total student loans beneficially owned by the
Company. Management periodically reviews the financial condition of its
guarantors and does not believe the level of concentration creates an
unusual or unanticipated credit risk. In addition, management believes
that based on the Higher Education Amendments of 1998, as amended, the
security for and payment of any of the Company's obligations would not be
materially adversely affected as a result of legislative action or other
failure to perform on its obligations on the part of any guarantee agency.
The Company, however, offers no assurances to that effect.
(8) Related Parties
Certain shareholders and directors of Nelnet are also officers and
directors of Union Bank & Trust Company (UB&T). A majority of the loans
currently held were purchased from UB&T and other wholly owned
subsidiaries of Nelnet.
Under the terms of an agreement, the Company contracts all loan servicing
through Nelnet who contracts NLS as a sub-servicer. Fees paid to Nelnet
are calculated using an annual asset-based charge ranging from 0.60% to
1.25% of the student loan principal balance, calculated monthly. The fees
amounted to approximately $17.2 million, $13.6 million, and $5.4 million
in 2002, 2001, and 2000, respectively. At December 31, 2002 and 2001,
approximately $1.7 million and $2.9 million, respectively, was payable to
Nelnet and NLS for loan servicing and is included in other liabilities on
the accompanying balance sheets.
During 2002 and 2001, the Company purchased student loans in the
approximate amounts, from the following wholly owned subsidiaries of
Nelnet. Premiums paid on these loans, not included in the amounts below,
totaled approximately $19 million and $14 million in 2002 and 2001,
respectively.
2002 2001
------------- -------------
NELNET Student Loan Corporation-1 $ -- 224,800,000
NHELP-I, Inc. 132,100,000 191,600,000
NHELP-III, Inc. 193,300,000 42,400,000
NEBHELP, Inc. 286,800,000 390,600,000
MELMAC, LLC -- 4,900,000
EFS Finance Co. 53,800,000 --
EMT Corp. 7,900,000 --
F-13 (Continued)
During 2002 and 2001, the Company sold student loans, including
unamortized premiums, to the following wholly owned subsidiaries of
Nelnet. No gains or losses were recognized, as sales between wholly owned
subsidiaries of Nelnet are recorded at amortized cost, which approximates
fair value.
2002 2001
------------- -----------
Nelnet Student Loan Funding, LLC $ 1,333,700,000 --
Nelnet Student Loan Warehouse Corporation-1 77,300,000 --
NEBHELP, Inc. 18,600,000 54,900,000
During 2002 and 2001, the Company purchased student loans of approximately
$59 million and $270 million, respectively, from UB&T. Premiums paid on
these loans totaled approximately $1.2 million and $3.4 million,
respectively.
During 2002, the Company paid a related party through common ownership
approximately $280,000 for services related to the Company's debt
issuance. This payment has been recorded as debt issuance costs in the
accompanying balance sheet at December 31, 2002.
The Company incurred fees to Nelnet for managerial and administrative
support for the operations of the Company based on a service agreement
that requires 0.015% of the average outstanding loan balance to be paid
monthly. In addition, Nelnet has provided additional services to the
Company on an as-needed transactional basis. These fees, included in other
general and administrative expenses on the accompanying statements of
operations, amounted to approximately $3.6 million, $2.6 million, and
$800,000 in 2002, 2001, and 2000, respectively.
F-14 (Continued)