Prospectus Supplement
(To Prospectus Dated November 19, 1997)
$204,147,164.67
UACSC 1997-D Auto Trust
$33,250,000.00 6.4507% Class A-1 Money Market Automobile
Receivable Backed Certificates
$71,250,000.00 6.20% Class A-2 Automobile Receivable Backed Certificates
$31,925,000.00 6.26% Class A-3 Automobile Receivable Backed Certificates
$44,725,000.00 6.28% Class A-4 Automobile Receivable Backed Certificates
$22,997,164.67 6.41% Class A-5 Automobile Receivable Backed Certificates
Class I Interest Only Automobile Receivable Backed Certificates
UAC Securitization Corporation
Depositor
Union Acceptance Corporation
Servicer
Interest at the applicable pass-through rate shown above, will be distributed to
Class A Certificateholders (as defined herein) on the third business day after
the 5th day of each month (the "Distribution Date"), beginning December 10,
1997. Principal will be distributed to Class A Certificateholders on each
Distribution Date in the sequence described herein. The Class I Certificates
will not receive principal payments, but interest at the Class I Pass-Through
Rate of 1.65% per annum on the Notional Principal Amount (as defined herein) of
the Class I Certificates on each Distribution Date until the Notional Principal
Amount has been reduced to zero as provided herein. Each Certificate offered
hereby will represent an undivided interest in the UACSC 1997-D Auto Trust (the
"Trust") to be formed by UAC Securitization Corporation, a Delaware corporation,
having its principal office and place of business in Bonita Springs, Florida
(the "Depositor"). The Trust property will include an irrevocable surety bond
guaranteeing payments of interest and principal on the Class A Certificates and
Class I Monthly Interest (the "Surety Bond") issued by Capital Markets Assurance
Corporation and a Spread Account for the benefit of the Class A
Certificateholders and the Class I Certificateholders, as well as the Surety
Bond Issuer.
Concurrently with the issuance of the Class A Certificates and the Class I
Certificates, the Trust will issue a Class IC Automobile Receivable Backed
Certificate (the "Class IC Certificate"). The Class IC Certificate will be
issued to UAC Securitization Corporation, the Depositor, and will not be offered
hereby. The Class A Certificates and the Class I Certificates are together
referred to herein as the "Offered Certificates."
Prior to their issuance there has been no market for the Offered Certificates
nor can there be any assurance that one will develop, or if it does develop,
that it will provide the holders of the Offered Certificates with liquidity or
will continue for the life of the Offered Certificates. The Underwriters intend,
but are not obligated, to make a market in the Offered Certificates.
The yield to maturity of the Class I Certificates will be sensitive to the rate
and timing of principal payments (including prepayments) on the Receivables.
Investors in the Class I Certificates should fully consider the associated
risks, including the risk that a rapid rate of principal payments could result
in the failure of such investors to recoup their initial investments. See "Risk
Factors -- Prepayment Risks Associated with the Class I Certificates," "Yield
and Prepayment Considerations" and "The Offered Certificates -- The Class I
Certificates -- Calculation of Notional Principal Amount" herein.
Prospective investors should consider, among other things, the information set
forth under "Risk Factors" on page S-12 hereof and page 10 of the Prospectus.
THE OFFERED CERTIFICATES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF UAC
SECURITIZATION CORPORATION OR ANY AFFILIATE THEREOF. NEITHER THESE SECURITIES
NOR THE UNDERLYING RECEIVABLES WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discounts (1) Depositor (2)
<S> <C> <C> <C>
Per Class A-1 Certificate... 100.000000% 0.160% 99.840000%
Per Class A-2 Certificate... 99.999440% 0.200% 99.799440%
Per Class A-3 Certificate... 99.993820% 0.220% 99.773820%
Per Class A-4 Certificate... 99.982770% 0.250% 99.732770%
Per Class A-5 Certificate... 99.986430% 0.320% 99.666430%
Per Class I Certificate..... 2.221495% 0.375% 2.213164%
Total....................... $207,489,033.07 $463,919.92 $207,025,113.15
- -----------------------------------------------------------------------------------------
</TABLE>
(1) With respect to the Class I Certificates, the Price to Public and Proceeds
to Depositor are expressed as a percentage of the Notional Principal Amount
(initially $151,027,447.84), and the Underwriting Discounts are expressed
as a percentage of the related Price to Public.
(2) Before deducting expenses, estimated to be $410,000.00.
The Offered Certificates are offered, subject to prior sale, when, as and if
accepted by the Underwriters, and subject to approval of certain legal matters
by Cadwalader, Wickersham & Taft, counsel for the Underwriters. It is expected
that delivery of the Offered Certificates in book-entry form will be made on or
about November 25, 1997 through the facilities of The Depository Trust Company,
against payment therefor in immediately available funds.
Underwriters of the Class A Certificates
Salomon Brothers Inc NationsBanc Montgomery
Underwriter of the Class I Certificates
Salomon Brothers Inc
The date of this Prospectus Supplement is November 19, 1997
<PAGE>
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN
THE PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT
BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT CONTAINS INFORMATION THAT IS
SPECIFIC TO THE TRUST AND THE OFFERED CERTIFICATES AND, TO THAT EXTENT,
SUPPLEMENTS AND REPLACES THE MORE GENERAL INFORMATION PROVIDED IN THE
PROSPECTUS.
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver this Prospectus Supplement and
the Prospectus. This is in addition to the obligation of dealers to deliver this
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
REPORTS TO CERTIFICATEHOLDERS
Unless and until definitive certificates are issued (which will occur
only under the limited circumstances described herein), Harris Trust and Savings
Bank, as Trustee, will provide to Cede & Co., the nominee of The Depository
Trust Company, as registered holder of the Offered Certificates, monthly and
annual statements concerning the Trust and the Offered Certificates. Such
statements will not constitute financial statements prepared in accordance with
generally accepted accounting principles. A copy of the most recent monthly or
annual statement concerning the Trust and the Offered Certificates may be
obtained by contacting the Servicer at Union Acceptance Corporation, 250 North
Shadeland Avenue, Indianapolis, Indiana 46219 (telephone (317) 231-7965).
<PAGE>
SUMMARY OF TERMS
This Summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Certain capitalized terms used in this Summary are defined elsewhere
in this Prospectus Supplement on the pages indicated in the "Index of Principal
Terms" or, to the extent not defined herein, have the meanings assigned to such
terms in the Prospectus.
Issuer ................................UACSC 1997-D Auto Trust (the "Trust").
Depositor...............................UAC Securitization Corporation (the
"Depositor").
Servicer ...............................Union Acceptance Corporation (in its
capacity as servicer, the "Servicer,"
otherwise "UAC").
Trustee ...............................Harris Trust and Savings Bank.
The Certificates........................The Trust will be formed and will issue
the Certificates on or about November
25, 1997 (the "Closing Date") pursuant
to a pooling and servicing agreement
(the "Pooling and Servicing Agreement").
The "Certificates" will consist of: (i)
6.4507% Class A-1 Money Market
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $33,250,000.00 (the "Class A-1
Certificates"); (ii) 6.20% Class A-2
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $71,250,000.00 (the "Class A-2
Certificates"); (iii) 6.26% Class A-3
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $31,925,000.00 (the "Class A-3
Certificates"); (iv) 6.28% Class A-4
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $44,725,000.00 (the "Class A-4
Certificates"); (v) 6.41% Class A-5
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $22,997,164.67 (the "Class A-5
Certificates" and together with the
Class A-1 Certificates, the Class A-2
Certificates, the Class A-3
Certificates, the Class A-4 Certificates
and the Class A-5 Certificates, the
"Class A Certificates"); (vi) the Class
I Interest Only Automobile Receivable
Backed Certificates (the "Class I
Certificates") and (vii) the Class IC
Automobile Receivable Backed Certificate
(the "Class IC Certificate"). The Class
I Certificates are interest only
certificates and will not receive
distributions of principal. The Class IC
Certificate will be issued to the
Depositor on the Closing Date and is not
being offered hereby. The Class A
Certificates and the Class I
Certificates are referred to herein as
the "Offered Certificates."
<PAGE>
Each of the Certificates will represent
a fractional undivided interest in the
Trust. The Trust assets will include a
pool of simple and precomputed interest
installment sale and installment loan
contracts originated in various states
in the United States of America, secured
by new and used automobiles, light
trucks and vans (the "Receivables"),
certain monies due thereunder as of and
after November 12, 1997 (the "Cutoff
Date"), security interests in the
related vehicles financed thereby (the
"Financed Vehicles"), monies on deposit
in the Certificate Account and the
proceeds thereof, any proceeds from
claims on certain insurance policies
relating to the Financed Vehicles or the
related Obligors, any lender's single
interest insurance policy, the Spread
Account for the benefit of the Class A
Certificateholders, the Class I
Certificateholders and the Surety Bond
Issuer, the Surety Bond for the benefit
of the Class A Certificateholders and
Class I Certificateholders and certain
rights under the Pooling and Servicing
Agreement. Interest paid to the
Certificateholders on the first
Distribution Date will be based upon the
amount of interest accruing from the
Closing Date and will therefore not
include a full month's interest.
The Class A Certificates................Interest. Interest will be distributable
on the third business day after the 5th
day of each month (each, a "Distribution
Date") beginning December 10, 1997, to
holders of record as of the last day of
the calendar month immediately preceding
the calendar month in which such
Distribution Date occurs (the "Record
Date") of the Class A Certificates (the
"Class A Certificateholders," which
includes the "Class A-1
Certificateholders," the "Class A-2
Certificateholders," the "Class A-3
Certificateholders", the "Class A-4
Certificateholders" and the "Class A-5
Certificateholders"). The maximum amount
of interest distributable to the Class
A-1 Certificateholders on any
Distribution Date is the product of
1/360th of the applicable pass-through
rate of 6.4507% for the Class A-1
Certificates (the "Class A-1
Pass-Through Rate"), the actual number
of days elapsed during the related
Collection Period and the aggregate
outstanding principal balance of the
Class A-1 Certificates (the "Class A-1
Certificate Balance") as of the
preceding Distribution Date (after
giving effect to all distributions to
Certificateholders on such date) or, in
the case of the first Distribution Date,
as of the Closing Date.
<PAGE>
The maximum amount of interest
distributable to the Class A-2
Certificateholders, the Class A-3
Certificateholders and the Class A-4
Certificateholders on any Distribution
Date is the product of one-twelfth of
the applicable pass-through rate of
6.20% for the Class A-2 Certificates
(the "Class A-2 Pass-Through Rate"), the
applicable pass-through rate of 6.26%
for the Class A-3 Certificates (the
"Class A-3 Pass-Through Rate") and the
applicable pass-through rate of 6.28%
for the Class A-4 Certificates (the
"Class A-4 Pass-Through Rate")
multiplied by the aggregate outstanding
principal balance of the Class A-2
Certificates, the Class A-3 Certificates
and the Class A-4 Certificates
(respectively, the "Class A-2
Certificate Balance," the "Class A-3
Certificate Balance" and the "Class A-4
Certificate Balance") as of the
preceding Distribution Date (after
giving effect to all distributions to
Certificateholders on such date) or, in
the case of the first Distribution Date,
as of the Closing Date.
The maximum amount of interest
distributable to the Class A-5
Certificateholders on any Distribution
Date is the product of one-twelfth of
the applicable pass-through rate of
6.41% for the Class A-5 Certificates
(which per annum rate shall be increased
by 0.50% on and after the Clean-Up Call
Date, if required) (the "Class A-5
Pass-Through Rate") multiplied by the
aggregate outstanding principal balance
of the Class A-5 Certificates (the
"Class A-5 Certificate Balance" and
together with the Class A-1 Certificate
Balance, the Class A-2 Certificate
Balance, the Class A-3 Certificate
Balance and the Class A-4 Certificate
Balance, the "Certificate Balance" ) as
of the preceding Distribution Date
(after giving effect to all
distributions to Certificateholders on
such date) or, in the case of the first
Distribution Date, as of the Closing
Date. Interest on the Class A-1
Certificates will be calculated on the
basis of a 360-day year and the actual
number of days elapsed during the
preceding Collection Period or, in the
case of the first Distribution Date, the
number of days from the Closing Date
remaining in the month of the closing.
Interest on the Class A-2 Certificates,
the Class A-3 Certificates, the Class
A-4 Certificates and the Class A-5
Certificates will be calculated on the
basis of a 360-day year consisting of
twelve 30-day months or, in the case of
the first Distribution Date, the number
of days from the Closing Date remaining
in the month of the closing (assuming a
30-day month). See "The Offered
<PAGE>
Certificates -- Distributions on the
Offered Certificates." The effective
yield on the Class A Certificates will
be below that otherwise produced by the
applicable pass-through rate because the
distribution of Monthly Principal (as
defined below) and Class A Monthly
Interest in respect of any given month
will not be made until the third
business day after the fifth calendar
day of the following month. See "Yield
and Prepayment Considerations" herein.
Principal. On each Distribution Date,
the Trustee will distribute as principal
to the Class A Certificateholders in a
maximum aggregate amount equal to the
aggregate outstanding principal amount
of the Receivables (the "Pool Balance")
on the last day of the second preceding
calendar month (or, in the case of the
first Distribution Date, as of the
Cutoff Date) less the Pool Balance on
the last day of the immediately
preceding calendar month ("Monthly
Principal"). Monthly Principal will be
distributed sequentially to the Class A
Certificateholders in accordance with
the Principal Distribution Sequence. For
purposes of determining Monthly
Principal, the unpaid principal balance
of a Defaulted Receivable or a Purchased
Receivable will be deemed to be zero on
and after the date such Receivable
became a Defaulted Receivable or a
Purchased Receivable.
The final scheduled Distribution Date of
the Class A-1 Certificates will be
November 10, 1998 (the "Class A-1 Final
Scheduled Distribution Date"). The final
scheduled Distribution Date of the Class
A-2 Certificates will be March 8, 2001
(the "Class A-2 Final Scheduled
Distribution Date"). The final scheduled
Distribution Date of the Class A-3
Certificates will be February 8, 2002
(the "Class A-3 Final Scheduled
Distribution Date"). The final scheduled
Distribution Date of the Class A-4
Certificates will be July 9, 2003 (the
"Class A-4 Final Scheduled Distribution
Date"). The final scheduled Distribution
Date of the Class A-5 Certificates will
be May 10, 2005 (the "Class A-5 Final
Scheduled Distribution Date").
No Monthly Principal will be distributed
(i) to the Class A-2 Certificateholders
until the Class A-1 Certificate Balance
has been reduced to zero; (ii) to the
Class A-3 Certificateholders until the
Class A-2 Certificate Balance has been
reduced to zero; (iii) to the Class A-4
Certificateholders until the Class A-3
Certificate Balance has been reduced to
zero; and (iv) to the Class A-5
Certificateholders until the Class A-4
Certificate Balance has been reduced to
zero. Since the rate of payment of
<PAGE>
principal of each class of Class A
Certificates depends upon the rate of
payment of principal (including
prepayments) of the Receivables, the
final distribution in respect of each
class of Class A Certificates could
occur significantly earlier than the
respective final scheduled distribution
dates. See "The Offered Certificates --
Distributions on the Offered
Certificates" herein.
The Class I Certificates................Interest. The Class I Certificates are
interest only certificates which will
not be entitled to any principal
distributions. Interest will accrue on
the Notional Principal Amount (defined
below) of the Class I Certificates at
the rate of 1.65% per annum (the "Class
I Pass-Through Rate"). The Notional
Principal Amount represents a designated
principal component of the Receivables,
originally $151,027,447.84 (the
"Original Notional Principal Amount").
Interest with respect to the Class I
Certificates will accrue on the basis of
a 360-day year consisting of twelve
30-day months or, in the case of the
first Distribution Date, the number of
days from the Closing Date remaining in
the month of the closing (assuming a
30-day month). On each Distribution
Date, the Trustee shall distribute pro
rata to holders of Class I Certificates
(the "Class I Certificateholders") of
record as of the preceding Record Date,
Class I Monthly Interest at the Class I
Pass-Through Rate on the Notional
Principal Amount outstanding on the
immediately preceding Distribution Date
(after giving effect to any reduction of
the Notional Principal Amount on such
Distribution Date) or, in the case of
the first Distribution Date, as of the
Closing Date. Holders of the Class I
Certificates will not be entitled to any
distributions after the Notional
Principal Amount thereof has been
reduced to zero.
Planned Amortization Feature;
Calculation of the Class I Notional
Principal Amount. The Class I
Certificates represent an interest-only
planned amortization class. The planned
amortization feature is intended to
reduce the uncertainty to investors in
the Class I Certificates with respect to
prepayments. Because the Class I
Certificates will receive interest based
on the Notional Principal Amount, this
is accomplished by basing the reduction
in the Notional Principal Amount on a
principal paydown schedule rather than
on the reduction in the actual principal
balances of the Receivables, as
described below. The amount which will
be paid to the Class I
Certificateholders is expected to be
<PAGE>
derived from the excess of interest
earned on the Receivables over the Class
A Monthly Interest and the monthly
Servicing Fee payable to the Servicer
(the "Monthly Servicing Fee"). Solely
for the purpose of calculating the
amount payable with respect to the Class
I Certificates, the Certificate Balance
will be divided into two principal
components, the "PAC Component" and the
"Companion Component." The sum of the
PAC Component and the Companion
Component will at all times equal the
then aggregate unpaid Certificate
Balance. The "Notional Principal Amount"
of the Class I Certificates at any time
will be equal to the principal balance
of the PAC Component as calculated based
on the allocations of principal payments
described below, originally
$151,027,447.84.
The Pooling and Servicing Agreement
establishes a schedule (a "Planned
Notional Principal Amount Schedule")
which is set forth herein under "The
Offered Certificates--The Class I
Certificates-Calculation of Notional
Principal Amount." On each Distribution
Date, Monthly Principal will be
allocated first to the PAC Component in
an amount up to the amount necessary to
reduce the amount thereof to the Planned
Notional Principal Amount for such
Distribution Date, as set forth in the
Planned Notional Principal Amount
Schedule, second, to the Companion
Component until the outstanding amount
thereof is reduced to zero and third, to
the PAC Component, without regard to the
Planned Notional Principal Amount. As
described above, the Notional Principal
Amount of the Class I Certificates will
be equal to the outstanding amount of
the PAC Component and thus will be
reduced as the PAC Component is reduced.
The Planned Notional Principal Amount
Schedule has been prepared on the basis
of the assumption, among other things,
that the Receivables prepay at a
constant rate between 1.6% and 2.5% ABS
(as defined herein), an assumed
annualized constant rate of prepayments
and the prepayment model used in this
Prospectus Supplement. The yield to
maturity of the Class I Certificates
will be sensitive to the rate and timing
of principal payments (including
prepayments) on the Receivables and may
fluctuate significantly from time to
time. If the Receivables prepay at a
constant rate within the range assumed
in preparing the Planned Notional
Principal Amount Schedule, the PAC
Component (and the Notional Principal
Amount of the Class I Certificates) will
be reduced in accordance with the
Planned Notional Principal Amount
Schedule. If the Receivables prepay at a
<PAGE>
constant rate higher than 2.5% ABS, the
amount of the Companion Component will
be reduced to zero more quickly and the
amount of the PAC Component (and the
Notional Principal Amount of the Class I
Certificates) will be reduced more
quickly than provided in the Planned
Notional Principal Amount Schedule,
thereby reducing the yield to holders of
the Class I Certificates. In general, a
rapid rate of principal prepayments
(including liquidations due to losses,
repurchases and other dispositions) will
have a material negative effect on the
yield to maturity of the Class I
Certificates.
The Planned Notional Principal Amount
Schedule is set forth herein under "The
Offered Certificates -- The Class I
Certificates -- Calculation of Notional
Principal Amount." The Planned Notional
Principal Amount Schedule has been
prepared on the basis of certain
assumptions, which are described herein
under "The Offered Certificates -- Class
I Yield Considerations." Prospective
investors in the Class I Certificates
should fully consider the associated
risks, including the risk that a rapid
rate of prepayments could result in the
failure of investors in the Class I
Certificates to recoup their initial
investment. See "Risk Factors --
Prepayment Risks Associated with the
Class I Certificates" and "Yield and
Prepayment Considerations -- The Class I
Certificates" herein.
Subordination; Spread Account...........The Depositor will establish an account
(the "Spread Account") on the Closing
Date. On each Distribution Date
thereafter, the Servicer will deposit
into the Spread Account any amounts
remaining in the Certificate Account
after the payment on such date of all
amounts owing pursuant to the Pooling
and Servicing Agreement to the
Certificateholders (other than the Class
IC Certificateholder), the Surety Bond
Issuer, the Servicer for the Monthly
Servicing Fee and any permitted
reimbursement of outstanding Advances.
In the event that Available Funds are
insufficient on any Distribution Date
prior to the termination of the Trust
(after payment of the Monthly Servicing
Fee) to pay Monthly Principal and
Monthly Interest to the Class A
Certificateholders and the Class I
Certificateholders, draws will be made
on the Spread Account to the extent of
the balance thereof and, if necessary,
the Surety Bond, in the manner and to
the extent described herein. The Spread
Account is solely for the benefit of the
Class A Certificateholders, the Class I
Certificateholders and the Surety Bond
Issuer. In the event the amount on
deposit in the Spread Account is zero,
<PAGE>
after giving effect to any draws thereon
for the benefit of the Class A
Certificateholders and the Class I
Certificateholders, and there is a
default under the Surety Bond, any
losses on the Receivables will be borne
directly pro rata by all classes of
Class A Certificateholders (to the
extent of the classes or class of Class
A Certificates which are outstanding at
such time) and Class I
Certificateholders, as described herein.
Any such reduction of the principal
balance of the Receivables due to losses
on the Receivables may also result in a
reduction of the Class I Notional
Principal Amount. See "The Offered
Certificates-- Distributions on the
Offered Certificates" and "--Accounts"
herein.
The Class A Certificates and Class I
Certificates will be senior in right and
interest to the Class IC Certificate.
The Class A Certificateholders and the
Class I Certificateholders will have
equal rights with respect to amounts
collected on or with respect to the
Receivables and other assets of the
Trust in the event of a shortfall. The
Trustee will first withdraw funds from
the Spread Account on each Distribution
Date to the extent of any shortfall in
the Monthly Servicing Fee, permitted
reimbursements of outstanding Advances,
Monthly Interest and Monthly Principal
as described above. Any amount on
deposit in the Spread Account on any
Distribution Date in excess of the
Required Spread Amount (defined below)
after all other required deposits
thereto and withdrawals therefrom have
been made, and after payment therefrom
of all amounts due the Surety Bond
Issuer will be distributed to the holder
of the Class IC Certificate (the "Class
IC Certificateholder"). Any amount so
distributed to the Class IC
Certificateholder will no longer be an
asset of the Trust.
While it is intended that the amount on
deposit in the Spread Account will grow
over time, through the deposit thereto
of the excess collections, if any, on
the Receivables, to the Required Spread
Amount, there can be no assurance that
such growth will actually occur. The
"Required Spread Amount" with respect to
any Distribution Date will equal 1.25%
of the initial Pool Balance. If the
average aggregate yield of the
Receivables pool in excess of losses
falls below a prescribed level set forth
in the Insurance Agreement, the Required
Spread Amount will be increased to 7% of
the Pool Balance. Upon and during the
continuance of an Event of Default or
upon the occurrence of certain other
events described in the Insurance
<PAGE>
Agreement generally involving a failure
of performance by the Servicer or a
material misrepresentation made by the
Servicer under the Pooling and Servicing
Agreement or the Insurance Agreement,
the Required Spread Amount shall be
equal to the Surety Bond Amount, as
further described below. Under certain
circumstances, the Required Spread
Amount may be reduced. See "The Offered
Certificates -- Accounts" and "--The
Surety Bond" herein.
Surety Bond.............................The Depositor shall obtain an
irrevocable surety bond (the "Surety
Bond") issued by the Surety Bond Issuer
(as specified below), for the benefit of
the Trustee on behalf of the Class A
Certificateholders and the Class I
Certificateholders. The Trustee shall
draw on the Surety Bond in the event
that sufficient funds are not available
(after payment of the Monthly Servicing
Fee and after withdrawals from the
Spread Account to pay the Class A
Certificateholders and the Class I
Certificateholders on any Distribution
Date in accordance with the Pooling and
Servicing Agreement) to distribute
Monthly Interest and Monthly Principal,
up to the Surety Bond Amount. See "The
Offered Certificates -- The Surety
Bond."
Surety Bond Amount......................The term "Surety Bond Amount" means with
respect to any Distribution Date: (x)
the sum of (A) the lesser of (i) the
Certificate Balance (after giving effect
to any distribution of Available Funds
and any funds withdrawn from the Spread
Account to pay Monthly Principal on such
Distribution Date) and (ii) the Net
Principal Surety Bond Amount, plus (B)
Class A Monthly Interest, plus (C) Class
I Monthly Interest, plus (D) the Monthly
Servicing Fee; less (y) all amounts on
deposit in the Spread Account on such
Distribution Date. "Net Principal Surety
Bond Amount" means the Certificate
Balance as of the first Distribution
Date minus all amounts previously drawn
on the Surety Bond or from the Spread
Account with respect to Monthly
Principal.
Legal Investment........................The Class A-1 Certificates will be
eligible securities for purchase by
money market funds under Rule 2a-7 of
the Investment Company Act of 1940, as
amended.
Surety Bond Issuer......................Capital Markets Assurance Corporation.
Optional Sale...........................The Class IC Certificateholder has the
right to cause the Trustee to sell all
of the Receivables (referred to herein
as an "Optional Sale") as of the last
day of any Collection Period on which
(i) the Pool Balance is equal to or less
than 10% of the initial Certificate
Balance and (ii) the Notional Principal
Amount of the Class I Certificates had
been reduced to zero. The purchase price
applicable to the Optional Sale shall be
equal to the fair market value of the
Receivables (but not less than the sum
of (i) their aggregate outstanding
principal balance plus accrued and
unpaid interest thereon and (ii) any
amounts due the Surety Bond Issuer).
<PAGE>
Clean-Up Call Date......................If the Class IC Certificateholder does
not exercise its rights with respect to
the Optional Sale on or before the
Distribution Date on which the Optional
Sale was first permitted (the "Clean-Up
Call Date"), the Class A-5 Pass-Through
Rate will be increased by 0.50% on and
after the Clean-Up Call Date.
Tax Status..............................In the opinion of special tax counsel to
the Depositor, the Trust will not be
treated as an association taxable as a
corporation or as a "publicly traded
partnership" taxable as a corporation.
The Trustee and the Certificateholders
will agree to treat the Trust as a
partnership for federal income tax
purposes, which will not be subject to
federal income tax at the Trust level.
See "Certain Federal Income Tax
Consequences" in the Prospectus.
Ratings.................................As a condition to the issuance of the
Offered Certificates, the Class A
Certificates and the Class I
Certificates must be rated in the
highest category by Moody's Investors
Service, Inc. and Standard & Poor's
Ratings Group, a division of The
McGraw-Hill Companies (each a "Rating
Agency" and collectively, the "Rating
Agencies"). The ratings of the Class I
Certificates do not address the
possibility that rapid rates of
principal prepayments could result in a
failure of the holders of the Class I
Certificates to fully recover their
investment. A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time by
the assigning rating agency. See "Risk
Factors -- Certificate Rating."
ERISA Considerations....................Subject to the considerations discussed
under "ERISA Considerations" herein and
in the Prospectus, the Class A
Certificates and the Class I
Certificates may be eligible for
purchase by employee benefit plans
subject to Title I of the Employee
Retirement Income Security Act of 1974,
as amended ("ERISA"). Any benefit plan
fiduciary considering the purchase of an
Offered Certificate should, among other
things, consult with experienced legal
counsel in determining whether all
required conditions for such purchase
have been satisfied. See "ERISA
Considerations" herein and in the
Prospectus.
<PAGE>
RISK FACTORS
Investors should carefully consider the information set forth below as
well as the other investment considerations described in this prospectus.
Limited Liquidity
There is currently no secondary market for the Offered Certificates.
The Underwriters currently intend to make a market in the Offered Certificates,
but are under no obligation to do so. There can be no assurance that a secondary
market will develop or, if one does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Offered Certificates.
Certificates Solely Obligations of the Trust
The Offered Certificates are interests in the Trust only and do not
represent the obligation of any other person. The Class A Certificateholders and
the Class I Certificateholders are senior in right and interest to the Class IC
Certificateholder (as described under "The Offered Certificates -- Distributions
on the Offered Certificates"). The Trustee will withdraw funds from the Spread
Account, up to the full balance of the funds on deposit in such account, only in
the event that Available Funds are insufficient in accordance with the Pooling
and Servicing Agreement to distribute Monthly Interest and Monthly Principal
(after payment of the Monthly Servicing Fee). The amount on deposit in the
Spread Account is intended to increase over time to an amount equal to the
Required Spread Amount. There is no assurance that such growth will occur or
that the balance in the Spread Account will always be sufficient to assure
payment in full of Monthly Principal and Monthly Interest. If the amount on
deposit in the Spread Account is reduced to zero after giving effect to all
amounts to be deposited to and withdrawn from the Spread Account pursuant to the
Pooling and Servicing Agreement, on any Distribution Date prior to termination
of the Trust, the Trustee will draw on the Surety Bond, in an amount equal to
the shortfall in respect of Monthly Interest and Monthly Principal, up to the
Surety Bond Amount. If the Spread Account is reduced to zero and there is a
default under the Surety Bond, the Trust will depend solely on current
distributions on the Receivables to make distributions on the Offered
Certificates and distributions of interest and principal on the Offered
Certificates may be made pro rata based on the amounts to which
Certificateholders of each class are entitled as set forth under "The Offered
Certificates -- Distributions on the Offered Certificates." See "The Receivables
Pool -- Delinquencies, Repossessions and Net Losses" and "The Offered
Certificates -- Accounts" and "-- Distributions on the Offered Certificates"
herein.
Prepayment Risks Associated with the Class I Certificates
If the Receivables prepay at a constant rate within the range assumed
in preparing the Planned Notional Principal Amount Schedule, the PAC Component
(and the Notional Principal Amount) will be reduced in accordance with the
Planned Notional Principal Amount Schedule. If the Receivables prepay at a
constant rate higher than 2.5% ABS, the Notional Principal Amount will be
reduced more quickly than provided in the Planned Notional Principal Amount
Schedule, thereby reducing the yield to holders of the Class I Certificates. In
general, a rapid rate of principal prepayments will have a material negative
effect on the yield to maturity of the Class I Certificates. Prospective
investors should fully consider the associated risks, including the risk that a
rapid rate of prepayments could result in the failure of investors in the Class
I Certificates to recoup their initial investment. See "Yield and Prepayment
Considerations -- The Class I Certificates" herein.
Certificate Rating
It is a condition of issuance of the Offered Certificates that the
Class A Certificates and the Class I Certificates be rated in the highest
applicable category by the Rating Agencies. Such ratings will reflect only the
views of the relevant rating agency. There is no assurance that any such rating
<PAGE>
will continue for any period of time or that it will not be revised or withdrawn
entirely by such rating agency if, in its judgment, circumstances so warrant. A
revision or withdrawal of such rating may have an adverse effect on the market
price of the Offered Certificates. The ratings of the Class I Certificates do
not address the possibility that rapid rates of principal prepayments could
result in a failure of the holders of the Class I Certificates to fully recover
their investment. A security rating is not a recommendation to buy, sell or hold
securities.
FORMATION OF THE TRUST
The Depositor will establish the Trust by selling and assigning the
Trust property, as described below, to the Trustee in exchange for the Offered
Certificates. The Depositor will retain the Class IC Certificate. UAC will be
responsible for servicing the Receivables pursuant to the Pooling and Servicing
Agreement and will be compensated for acting as the Servicer. See "Description
of the Transfer and Servicing Agreements -- Servicing Compensation and Payment
of Expenses" in the Prospectus. To facilitate servicing and to minimize
administrative burden and expense, the Servicer will be appointed custodian of
the Receivables by the Trustee, but will not stamp the Receivables to reflect
the sale and assignment of the Receivables to the Trust or make any notation of
the Trust's lien on the certificates of title of the Financed Vehicles. In the
absence of such notation on the certificates of title, the Trustee may not have
perfected security interests in the Financed Vehicles securing the Receivables.
See "Certain Legal Aspects of the Receivables" in the Prospectus. Under the
terms of the Pooling and Servicing Agreement, UAC may delegate its duties as
Servicer and custodian; however, any such delegation will not relieve UAC of its
liability and responsibility with respect to such duties.
The Depositor will establish the Spread Account for the benefit of the
Class A Certificateholders, the Class I Certificateholders and the Surety Bond
Issuer, and will obtain the Surety Bond. Withdrawals from the Spread Account
and, only after such withdrawals, draws on the Surety Bond will be made in
accordance with the Pooling and Servicing Agreement in the event that sufficient
funds are not available (after payment of the Monthly Servicing Fee) to
distribute, in the case of Class I Monthly Interest, Class A Monthly Interest
and Monthly Principal, up to the Surety Bond Amount. If the Spread Account is
exhausted and there is a default under the Surety Bond, the Trust will look only
to the Obligors on the Receivables and the proceeds from the repossession and
sale of Financed Vehicles that secure Defaulted Receivables for distributions of
interest and principal on the Certificates. In such event, certain factors, such
as the Trustee's not having perfected security interests in some of the Financed
Vehicles, may affect the Trust's ability to realize on the collateral securing
the Receivables, and thus may reduce the proceeds to be distributed to
Certificateholders. See "The Offered Certificates -- Accounts" herein and
"Certain Legal Aspects of the Receivables" in the Prospectus.
THE RECEIVABLES POOL
The Receivables were selected from UAFC's prime portfolio for purchase
by the Depositor by several criteria, including that each Receivable: (i) has an
original number of payments of not more than 84 payments and not less than 12
payments, (ii) has a remaining maturity of not more than 84 months and not less
than three months, (iii) provides for level monthly payments that fully amortize
the amount financed over the original term, and (iv) has a Contract Rate
(exclusive of prepaid finance charges) of not less than 6.0%. The weighted
average remaining maturity of the Receivables will be approximately 67 months as
of the Cutoff Date.
Approximately 95.54% of the aggregate principal balance of the
Receivables as of the Cutoff Date are simple interest contracts which provide
for equal monthly payments. Approximately 4.46% of the aggregate principal
balance of the Receivables as of the Cutoff Date are Precomputed Receivables (as
defined in the Prospectus) originated in the State of California. All of such
Precomputed Receivables are Rule of 78's Receivables (as defined in the
Prospectus). Approximately 23.30% of the aggregate principal balance of the
Receivables as of the Cutoff Date represent financing of new vehicles; the
remainder of the Receivables represent financing of used vehicles.
Receivables representing more than 10% of the aggregate principal
balance of the Receivables as of the Cutoff Date were originated in metropolitan
areas in the States of California and Texas. The performance of the Receivables
in the aggregate could be adversely affected in particular by the development of
adverse economic conditions in such metropolitan areas.
<PAGE>
Composition of the Receivables as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate Original Weighted
Number of Principal Principal Average
Receivables Balance Balance Rate
----------- ------- ------- ----
<S> <C> <C> <C> <C>
New Automobiles and Light-Duty Trucks............ 3,092 $ 42,070,973.25 $ 55,719,727.11 12.03%
Used Automobiles and Light-Duty Trucks........... 12,427 142,865,446.30 161,225,626.90 13.34%
New Vans (1)..................................... 364 5,496,018.70 7,965,200.52 11.83%
Used Vans (1).................................... 1,240 13,714,726.42 17,072,333.56 13.20%
------ --------------- --------------- -----
All Receivables.................................. 17,123 $204,147,164.67 $241,982,888.09 13.02%
====== =============== =============== =====
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted Percent of
Average Average Aggregate
Remaining Original Principal
Term(2) Term(2) Balance(3)
--------- -------- ---------
<S> <C> <C> <C>
New Automobiles and Light-Duty Trucks.......... 69.065mos. 77.567mos. 20.61%
Used Automobiles and Light-Duty Trucks......... 66.834 69.806 69.98
New Vans (1)................................... 65.423 77.614 2.69
Used Vans (1).................................. 65.037 70.212 6.72
------ ------ ------
All Receivables................................ 67.135mos. 71.643mos. 100.00%
====== ====== ======
</TABLE>
(1) References to vans include minivans and van conversions.
(2) Based on scheduled maturity and assuming no prepayments of the Receivables.
(3) Sum may not equal 100% due to rounding.
<PAGE>
Geographic Distribution of the Receivables as of the Cutoff Date
Percentage of Aggregate
State (1)(2) Principal Balance (3)
------------ ---------------------
Arizona............................................. 3.90%
California.......................................... 11.32
Colorado............................................ 1.83
Florida............................................. 8.99
Georgia............................................. 3.72
Idaho............................................... 0.14
Illinois............................................ 8.20
Indiana............................................. 2.74
Iowa................................................ 2.40
Kansas.............................................. 1.22
Kentucky............................................ 0.54
Maryland............................................ 2.15
Michigan............................................ 2.16
Minnesota........................................... 0.96
Missouri............................................ 2.45
Nebraska............................................ 0.35
Nevada.............................................. 0.32
New Mexico.......................................... 0.28
North Carolina...................................... 8.04
Ohio................................................ 4.60
Oklahoma............................................ 4.36
Oregon.............................................. 0.13
Pennsylvania........................................ 0.59
South Carolina...................................... 3.42
Tennessee........................................... 2.72
Texas............................................... 13.96
Utah................................................ 0.36
Virginia............................................ 6.44
Washington.......................................... 0.62
Wisconsin........................................... 1.10
------
Total ......................................... 100.00%
======
(1) Based on address of the Dealer selling the related Financed Vehicle.
(2) Receivables originated in Ohio were solicited by Dealers for direct
financing by UAC or the Predecessor. All other Receivables were
originated by Dealers and purchased from such Dealers by UAC or the
Predecessor.
(3) Sum may not equal 100% due to rounding.
<PAGE>
Distribution of the Receivables by Remaining Term as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage of
Remaining Aggregate Average Aggregate
Scheduled Number of Principal Principal Principal
Term Range Receivables Balance Balance Balance(1)
---------- ----------- ------- ------- ----------
<S> <C> <C> <C> <C>
0 to 6 months....................... 243 $ 284,507.80 $ 1,170.81 0.14%
7 to 12 months....................... 1,059 2,372,443.00 2,240.27 1.16
13 to 24 months....................... 2,615 12,193,882.91 4,663.05 5.97
25 to 36 months....................... 548 3,629,784.06 6,623.69 1.78
37 to 48 months....................... 974 8,366,309.02 8,589.64 4.10
49 to 60 months....................... 2,771 32,680,364.10 11,793.71 16.01
61 to 66 months....................... 993 13,349,307.28 13,443.41 6.54
67 to 72 months....................... 2,999 44,131,537.05 14,715.42 21.62
73 to 84 months....................... 4,921 87,139,029.45 17,707.59 42.68
------ --------------- ---------- ------
Total....................... 17,123 $204,147,164.67 $11,922.39 100.00%
====== =============== ========== ======
</TABLE>
(1) Sum may not equal 100% due to rounding.
Distribution of Receivables by Financed
Vehicle Model Year as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage Percentage
of Total Aggregate of Aggregate
Model Number of Number of Principal Principal
Year Receivables Receivables(1) Balance Balance(1)
---- ----------- -------------- ------- ----------
<S> <C> <C> <C> <C>
1977 and earlier..... 2 0.01% $ 11,009.79 0.01%
1982................. 2 0.01 10,974.88 0.01
1983................. 3 0.02 13,360.85 0.01
1984................. 7 0.04 30,689.01 0.02
1985................. 5 0.03 31,577.64 0.02
1986................. 19 0.11 113,362.10 0.06
1987................. 43 0.25 199,011.97 0.10
1988................. 166 0.97 607,513.76 0.30
1989................. 726 4.24 2,979,908.03 1.46
1990................. 1,006 5.88 5,411,632.93 2.65
1991................. 1,417 8.28 9,513,757.31 4.66
1992................. 1,901 11.10 15,859,928.08 7.77
1993................. 3,317 19.37 29,030,031.87 14.22
1994................. 2,008 11.73 27,485,678.76 13.46
1995................. 2,208 12.90 34,374,694.51 16.84
1996................. 1,621 9.47 26,145,809.03 12.81
1997................. 2,045 11.94 39,053,701.16 19.13
1998................. 627 3.66 13,274,522.99 6.50
------ ------ --------------- ------
Total.............. 17,123 100.00% $204,147,164.67 100.00%
====== ====== =============== ======
</TABLE>
(1) Sum may not equal 100% due to rounding.
<PAGE>
Distribution of the Receivables by Note Rate as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage of
Aggregate Average Aggregate
Number of Principal Principal Principal
Note Rate Range Receivables Balance Balance Balance(1)
--------------- ----------- ------- ------- ----------
<S> <C> <C> <C> <C>
6.000 to 6.999%.... 1 $ 5,988.81 $ 5,988.81 0.00%
7.000 to 7.999%.... 65 398,829.73 6,135.84 0.20
8.000 to 8.999%.... 336 2,551,718.50 7,594.40 1.25
9.000 to 9.999%.... 1,057 8,691,427.55 8,222.73 4.26
10.000 to 10.999%.... 1,669 16,085,078.75 9,637.55 7.88
11.000 to 11.999%.... 2,522 31,378,214.81 12,441.80 15.37
12.000 to 12.999%.... 3,750 49,313,163.06 13,150.18 24.16
13.000 to 13.999%.... 3,624 45,857,247.51 12,653.77 22.46
14.000 to 14.999%.... 2,020 25,447,570.01 12,597.81 12.47
15.000 to 15.999%.... 1,009 12,395,718.34 12,285.15 6.07
16.000 to 16.999%.... 494 5,912,962.13 11,969.56 2.90
17.000 to 17.999%.... 281 3,220,235.78 11,459.91 1.58
18.000 to 18.999%.... 165 1,798,165.56 10,897.97 0.88
19.000 to 19.999%.... 42 440,446.26 10,486.82 0.22
20.000 to 20.999%.... 61 481,203.53 7,888.58 0.24
21.000 to 21.999%.... 2 5 161,185.97 6,447.44 0.08
24.000 to 24.999%.... 1 5,431.14 5,431.14 0.00
25.000 to 25.999%.... 1 2,577.23 2,577.23 0.00
------ --------------- ---------- ------
Total.... 17,123 $204,147,164.67 $11,922.39 100.00%
====== =============== ========== ======
</TABLE>
(1) Sum may not equal 100% due to rounding.
Delinquencies, Repossessions and Net Losses
Set forth below is certain information concerning the experience of UAC
and the Predecessor pertaining to delinquencies, repossessions, and net losses
on its prime fixed rate retail automobile, light truck and van receivables
serviced by UAC and the Predecessor. There can be no assurance that the
delinquency, repossession, and net loss experience on the Receivables will be
comparable to that set forth below.
<TABLE>
<CAPTION>
Delinquency Experience
At June 30, At September 30,
1995 1996 1997 1997
-------------------- --------------------- ------------------- --------------------
(Dollars in thousands)
Number of Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio....... 117,837 $1,159,349 147,722 $1,548,538 173,693 $1,860,272 177,377 $1,896,748
------- ---------- ------- ---------- ------- ---------- ------- ----------
Delinquencies
30-59 days............. 1,169 $ 12,097 1,602 $ 17,030 2,487 $ 27,373 4,310 45,766
60-89 days............. 377 4,124 694 7,629 1,646 18,931 2,196 25,156
90 days or more........ 0 0 333 3,811 723 8,826 934 11,131
------- ---------- ------- ---------- ------- ---------- ------- ----------
Total delinquencies....... 1,546 $ 16,221 2,629 $ 28,470 4,856 $ 55,130 7,440 $82,053
======= ========== ======= ========== ======= ========== ======= ==========
Total delinquencies as a
percent of servicing
portfolio............ 1.31% 1.40% 1.78% 1.84% 2.80% 2.96% 4.19% 4.33%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Credit Loss Experience (1)
Year Ended June 30, Three Months Ended
1995 1996 1997 September 30, 1997
-------------------- ---------------------- --------------------- -----------------------
(Dollars in thousands)
Number of Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Avg. servicing portfolio(2).... 104,455 $982,875 132,363 $1,343,770 164,858 $1,759,666 175,920 $1,881,603
------- -------- ------- ---------- ------- ---------- ------- ----------
Gross charge-offs.............. 3,493 $ 28,628 3,663 $ 40,815 6,280 70,830 2,054 23,056
Recoveries (4)................. 15,258 19,543 28,511 8,134
-------- ---------- ---------- ----------
Net losses..................... $13,370 $ 21,272 $ 42,319 $14,922
======== ========== ========== ==========
Gross charge-offs as a % of
avg. servicing portfolio(3). 3.34% 2.91% 2.77% 3.04% 3.81% 4.03% 4.67% 4.90%(5)
Recoveries as a % of gross
charge-offs................. 53.30% 47.88% 40.25% 35.28%
Net losses as a % of avg.
servicing portfolio(4)...... 1.36% 1.58% 2.40% 3.17%(5)
</TABLE>
(1) There is generally no recourse to Dealers under any of the receivables in
the portfolio serviced by UAC or the Predecessor, except to the extent of
representations and warranties made by Dealers in connection with such
receivables.
(2) Equals the monthly arithmetic average, and includes receivables sold in
prior securitization transactions.
(3) Variation in the size of the portfolio serviced by UAC will affect the
percentages in "Gross charge-offs as a percentage of average servicing
portfolio" and "Net losses as a percentage of average servicing portfolio."
(4) In fiscal 1995, the method by which recoveries are stated was changed.
Currently, recoveries include recoveries on receivables previously charged
off, cash recoveries and unsold repossessed assets carried at fair market
value. Under the previous method, reported recoveries excluded unsold
repossessed assets carried at fair market value. Prior period credit loss
experience has been restated to conform to current period classifications.
(5) Annualized.
As indicated in the above Delinquency Experience table, delinquency
rates based upon outstanding loan balances of accounts 30 days past due and over
increased to 4.33% at September 30, 1997, from 2.96% and 2.02% at June 30, 1997
and September 30, 1996, respectively, for UAC's prime servicing portfolio. The
increased delinquency is primarily due to the deterioration of consumer credit
trends, especially in those loans securitized in 1995, as discussed below.
As indicated in the above Credit Loss Experience table, credit losses
on the prime auto portfolio totaled $14.9 million for the quarter ended
September 30, 1997, or 3.17% as an annualized percentage of the average
servicing portfolio compared to $12.5 million for the quarter ended June 30,
1997, or 2.69%. Increased credit losses are primarily a result of higher gross
charge-off rates (due to consumer credit trends, especially in the loans
securitized in 1995, as discussed below), as well as a decline in recovery
rates.
<PAGE>
There has been a general deterioration in the consumer credit markets
despite low unemployment and relatively good economic conditions. UAC believes
that this decline is due primarily to debtor overextension, which results in
higher consumer debt levels and the consumer's increased readiness to declare
bankruptcy. These factors have led to increased delinquency and net credit
losses, especially among loans securitized in 1995. According to industry loss
curves, the losses on those loans securitized in 1995 should have peaked as they
are currently in the 23rd to 32nd months of their lives. However, delinquency
and losses on these loan pools have remained higher than expected. The
delinquency and projected losses on those loans securitized in 1996 are also
higher than UAC expectations, however, the credit quality of those loans, as
well as loans securitized in 1997, appears to have improved over those
securitized in 1995. UAC has and is continuing to address this issue through
tightened credit standards in originations and by forming collection teams to
specifically target problem accounts. Additionally, UAC is utilizing new scoring
tools that allow UAC to focus its collection efforts in the most effective
manner.
Recovery rates have continued to decline due to the soft used car
market, resulting from saturation of used leased vehicles and repossessed
vehicles due to bankruptcy. UAC continues to look for ways to improve recovery
rates. One step recently taken was to increase tracking and collection efforts
on insurance and warranty refunds due to UAC.
UAC's expectations with respect to delinquency and credit loss trends
constitute forward-looking statements and are subject to important factors that
could cause actual results to differ materially from those projected by UAC.
Such factors include, but are not limited to, general economic factors affecting
obligors' ability to make timely payments on their indebtedness such as
employment status, rates of consumer bankruptcy, consumer debt levels generally
and the interest rates applicable thereto. In addition, credit losses are
affected by UAC's ability to realize on recoveries of repossessed vehicles,
including, but not limited to, the market for used cars at any given time.
YIELD AND PREPAYMENT CONSIDERATIONS
General
Monthly Interest (as defined herein) on the Receivables will be
distributed to Certificateholders on each Distribution Date to the extent of the
Pass-Through Rate applied to the applicable Certificate Balance or Notional
Principal Amount, as applicable, as of the preceding Distribution Date or the
Closing Date, as applicable (after giving effect to distributions of principal
on such preceding Distribution Date). See "The Offered Certificates --
Distributions on the Offered Certificates" herein. In the event of a full or
partial prepayment on a Receivable, Certificateholders will receive interest for
the full month of such prepayment either through the distribution of interest
paid on other Receivables or from a withdrawal from the Spread Account.
Although the Receivables will have different Contract Rates, each
Receivable's Contract Rate generally will exceed the sum of (a) the weighted
average of the Class A-1 Pass-Through Rate, the Class A-2 Pass-Through Rate, the
Class A-3 Pass-Through Rate, the Class A-4 Pass-Through Rate and the Class A-5
Pass Through Rate, (b) the Class I Pass-Through Rate, (c) the per annum rate
used to calculate the Surety Bond Fee and (d) the per annum rate used to
calculate the Servicing Fee. The Contract Rate on a small percentage of the
Receivables, however, will be less than the foregoing sum. Disproportionate
rates of prepayments between Receivables with higher and lower Contract Rates
could affect the ability of the Trust to distribute Monthly Interest to
Certificateholders.
The effective yield to Certificateholders will be below the yield
otherwise produced by the Pass-Through Rate because the distribution of Monthly
Principal and Monthly Interest in respect of any given month will not be made
until the related Distribution Date, which will not be earlier than the eighth
day of the following month.
<PAGE>
The Class I Certificates
The Class I Certificates are interest only certificates. Although the
planned amortization feature of the Class I Certificates is intended to reduce
the uncertainty of prepayments with respect to the Class I Certificates, if the
Receivables prepay sufficiently quickly, the Notional Principal Amount of the
Class I Certificates may be reduced more quickly than provided in the Planned
Notional Principal Amount Schedule, thereby reducing the yield to the holders of
the Class I Certificates. The yield to maturity on the Class I Certificates will
therefore be very sensitive to the rate of prepayments, including voluntary
prepayments and prepayments due to liquidations. Prospective investors should
fully consider the associated risks, including the risk that a rapid rate of
prepayments could result in the failure of investors in the Class I Certificates
to recoup their initial investment. See "Risk Factors" and "The Offered
Certificates -- The Class I Certificates -- Calculation of Notional Principal
Amount" and "-- Class I Yield Considerations."
THE DEPOSITOR AND UAC
UAC currently acquires loans from over 3,200 manufacturer franchised
automobile dealerships in 30 states. UAC is an Indiana corporation, formed in
December 1993 by the Predecessor to succeed to the indirect automobile finance
business of the Predecessor, which the Predecessor had operated since 1986. UAC
began purchasing and originating Receivables in April 1994. For the fiscal years
ended June 30, 1994, 1995, 1996 and 1997 UAC and/or its Predecessor acquired
prime loans aggregating $615 million, $767 million, $995 million and $1,076
million, respectively, representing annual increases of 25%, 30% and 8%,
respectively. Of the $1.9 billion of loans in the servicing portfolio of UAC and
its Predecessor (consisting of the principal balance of loans held for sale and
securitized loans) at June 30, 1997, approximately 75.43% represented loans on
used cars and approximately 24.57% represented loans on new cars.
Additional information regarding UAC and the Depositor is set forth
under "Union Acceptance Corporation and Affiliates" in the Prospectus.
THE SURETY BOND ISSUER
Capital Markets Assurance Corporation is the surety bond provider (the
"Surety Bond Issuer"). The Surety Bond Issuer is a New York-domiciled monoline
stock insurance company which engages only in the business of financial
guarantee and surety insurance. The Surety Bond Issuer is licensed in 50 states
in addition to the District of Columbia, the Commonwealth of Puerto Rico and the
territory of Guam. The Surety Bond Issuer insures structured asset-backed,
corporate, municipal and other financial obligations in the U.S. and
international capital markets. The Surety Bond Issuer also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
The Surety Bond Issuer's claims-paying ability is rated "Aaa" by
Moody's Investors Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings
Services ("Standard & Poor's"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff
& Phelps") and "AAA" by Nippon Investors Service Inc. Such ratings reflect only
the views of the respective rating agencies, are not recommendations to buy,
sell or hold securities and are subject to revision or withdrawal at any time by
such rating agencies.
The Surety Bond Issuer is a wholly-owned subsidiary of CapMAC Holdings
Inc. ("Holdings"). On November 14, 1997 Holdings announced that it had signed an
agreement to merge with MBIA Inc. The merger, which is subject to approval by
regulatory authorities and the shareholders of Holdings, is anticipated to occur
in the first quarter of 1998. MBIA Inc., through its wholly owned subsidiary,
MBIA Insurance Corporation, is a financial guaranty insurer of municipal bonds
and structured finance transactions, and has a claims paying rating of triple-A
from Moody's, Standard & Poor's and Fitch Investors Service.
Neither Holdings nor any of its stockholders is obligated to pay any
claims under any surety bond issued by the Surety Bond Issuer or any debts of
the Surety Bond Issuer or to make additional capital contributions to the Surety
Bond Issuer.
<PAGE>
The Surety Bond Issuer is regulated by the Superintendent of Insurance
of the State of New York. In addition, the Surety Bond Issuer is subject to
regulation by the insurance laws and regulations of the other jurisdictions in
which it is licensed. Such insurance laws regulate, among other things, the
amount of net exposure per risk that the Surety Bond Issuer may retain, capital
transfers, dividends, investment of assets, changes in control, transactions
with affiliates and consolidations and acquisitions. The Surety Bond Issuer is
subject to periodic regulatory examinations by the same regulatory authorities.
The Surety Bond Issuer's obligations under the Surety Bond may be
reinsured. Such reinsurance does not relieve the Surety Bond Issuer of any of
its obligations under the Surety Bond.
THE SURETY BOND IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As of December 31, 1996 and 1995, the Surety Bond Issuer had qualified
statutory capital (which consists of policyholders' surplus and contingency
reserve) of approximately $260 million and $240 million, respectively, and had
not incurred any debt obligations. Article 69 of the New York State Insurance
Law requires the Surety Bond Issuer to establish and maintain the contingency
reserve, which is available to cover claims under surety bonds issued by the
Surety Bond Issuer.
The audited financial statements of the Surety Bond Issuer prepared in
accordance with generally accepted accounting principles as of December 31, 1996
and 1995 and for each of the years in the three-year period ended December 31,
1996 and the unaudited financial statements of the Surety Bond Issuer for the
nine-month periods ended September 30, 1997 and 1996 are made a part of this
Prospectus Supplement beginning on page F-1. Copies of the Surety Bond Issuer's
financial statements prepared in accordance with statutory accounting standards,
which differ from generally accepted accounting principles, are filed with the
Insurance Department of the State of New York and are available upon request.
The Surety Bond Issuer is located at 885 Third Avenue, New York, New York 10022,
and its telephone number is (212) 755-1155.
THE OFFERED CERTIFICATES
The Offered Certificates will be issued pursuant to the Pooling and
Servicing Agreement. Copies of the Pooling and Servicing Agreement (without
exhibits) may be obtained by Certificateholders upon request in writing to the
Servicer at the address set forth herein under "Reports to Certificateholders".
Citations to the relevant sections of the Pooling and Servicing Agreement appear
below in parentheses. The following summary does not purport to be complete and
is subject to and qualified in its entirety by reference to the Pooling and
Servicing Agreement.
Distributions
In general, it is intended that the Trustee distribute to the Class A
Certificateholders on each Distribution Date beginning December 10, 1997, the
aggregate principal payments, including full and partial prepayments (except
certain prepayments in respect of Precomputed Receivables as described below
under "-- Accounts") received on the Receivables during the related Collection
Period, plus the Class A Monthly Interest. Principal to be distributed to the
Class A Certificateholders will be allocated on the basis of the Principal
Distribution Sequence (as defined herein). It is also intended that the Trustee
distribute to the Class I Certificateholders, on each Distribution Date
beginning on December 10, 1997 and continuing until the Distribution Date on
which the Notional Principal Amount is reduced to zero, the Class I Monthly
Interest. (Section 9.04.) See "-- Distributions on the Offered Certificates".
Interest to Certificateholders may be provided by a payment made by or on behalf
of the Obligor, by an Advance made by the Servicer to cover interest due on a
defaulted Receivable or by a withdrawal from the Spread Account. If such
interest represents Monthly Interest it may be provided by a draw on the Surety
Bond if there are not sufficient funds (after payment of the Monthly Servicing
Fee, permitted reimbursements of outstanding Advances and after giving effect to
any withdrawals from the Spread Account for the benefit of the Class A
Certificateholders and the Class I Certificateholders) to pay Monthly Interest
and Monthly Principal. Draws on the Surety Bond to pay Monthly Interest and
Monthly Principal will be limited to the Surety Bond Amount. See "-- Sale and
Assignment of Receivables" and "-- Accounts" herein.
<PAGE>
The Class I Certificates -- Calculation of Notional Principal Amount
The Class I Certificates are interest only planned amortization
securities. The Class I Certificates are entitled to receive interest at the
Class I Pass-Through Rate on the Notional Principal Amount of the Class I
Certificates, initially $151,027,447.84. The planned amortization feature is
intended to reduce the uncertainty to investors in the Class I Certificates with
respect to prepayments because the Class I Certificates will receive interest
based on their Notional Principal Amount on a principal paydown schedule rather
than on the reduction in the actual Certificate Balance as a result of principal
payments and prepayments, as described below. Solely for the purpose of
calculating the amount payable with respect to the Class I Certificates, the
Certificate Balance will be divided into two principal components, the "PAC
Component" and the "Companion Component". The Notional Principal Amount will be
equal to the PAC Component, originally $151,027,447.84. The sum of the PAC
Component and the Companion Component will at all times equal the then aggregate
unpaid Certificate Balance.
The Pooling and Servicing Agreement establishes a schedule (the
"Planned Notional Principal Amount Schedule") pursuant to which principal will
be allocated to the PAC Component and the Companion Component, as described
below. As the PAC Component is reduced, the Notional Principal Amount and
payments to the holders of the Class I Certificates will also be reduced.
On each Distribution Date, the Monthly Principal will be allocated
first to the PAC Component up to the amount necessary to reduce the PAC
Component to the amount specified in the Planned Notional Principal Amount
Schedule (the "Planned Notional Principal Amount") for such Distribution Date,
second, to the Companion Component until the balance thereof is reduced to zero
and third, to the PAC Component, without regard to the Planned Notional
Principal Amount for such Distribution Date. The foregoing allocations will be
made solely for purposes of calculating the Notional Principal Amount and
correspondingly, the amount of interest payable with respect to the Class I
Certificates. The Class I Certificates are not entitled to receive any principal
payments. The foregoing calculations will not affect distributions of principal
with respect to the Class A Certificates.
Planned Notional Principal Amount Schedule
Planned Notional
Distribution Date in Principal Amount
Initial........................................ $151,027,447.84
December 1997.................................. 144,569,129.94
January 1998................................... 139,851,101.72
February 1998.................................. 135,172,469.66
March 1998..................................... 130,533,989.29
April 1998..................................... 125,936,427.96
May 1998....................................... 121,380,565.02
June 1998...................................... 116,867,192.02
July 1998...................................... 112,397,112.86
August 1998.................................... 107,971,144.03
September 1998................................. 103,590,114.66
October 1998................................... 99,254,866.83
November 1998.................................. 94,966,255.70
December 1998.................................. 90,725,149.66
January 1999................................... 86,532,430.59
February 1999.................................. 82,388,993.98
March 1999..................................... 78,295,749.22
April 1999..................................... 74,253,619.67
May 1999....................................... 70,263,542.96
June 1999...................................... 66,326,471.16
July 1999...................................... 62,443,370.97
August 1999.................................... 58,615,223.89
September 1999................................. 54,843,026.56
October 1999................................... 51,127,790.86
November 1999.................................. 47,470,544.11
December 1999.................................. 43,872,329.38
January 2000................................... 40,334,205.64
February 2000.................................. 36,857,248.02
March 2000..................................... 33,442,548.04
April 2000..................................... 30,091,213.76
May 2000....................................... 26,804,370.15
June 2000...................................... 23,583,159.24
July 2000...................................... 20,428,740.32
August 2000.................................... 17,342,290.30
September 2000................................. 14,325,003.86
October 2000................................... 11,378,093.74
November 2000.................................. 8,502,790.98
December 2000.................................. 5,700,345.19
January 2001................................... 2,972,024.78
February 2001.................................. 337,388.43
March 2001..................................... 0.00
The Class I Certificates will not be entitled to any distributions after the
Notional Principal Amount has been reduced to zero.
<PAGE>
Class I Yield Considerations
Although the planned amortization feature of the Class I Certificates
is intended to reduce the uncertainty relating to prepayments of the Receivables
with respect to the Class I Certificates, the yield to maturity of the Class I
Certificates will remain extremely sensitive to the prepayment experience of the
Receivables, including voluntary prepayments and prepayments due to liquidations
and repurchases. Prospective investors should fully consider the associated
risks, including the risk that such investors may not fully recover their
initial investment. In particular, investors in the Class I Certificates should
note that they will not be entitled to any distributions after the Notional
Principal Amount of the Class I Certificates has been reduced to zero and that
Receivables may be repurchased due to breaches of representations. See "Risk
Factors."
The following tables illustrate the significant effect that prepayments
on the Receivables have upon the yield to maturity of the Class I Certificates.
The first table assumes that the Receivables have been aggregated into five
hypothetical pools having the characteristics described therein and that the
level scheduled monthly payment for each of the five pools (which is based on
its principal balance, weighted average Contract Rate, weighted average
remaining term as of the Cutoff Date and its weighted average original term)
will be such that such pool will be fully amortized by the end of its weighted
average remaining term. Based on such hypothetical pools, the second table shows
the approximate hypothetical pre-tax yields to maturity of the Class I
Certificates, stated on a corporate bond equivalent basis, under five different
prepayment assumptions based on the assumed purchase price and the ABS
prepayment model described below.
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Cutoff Date Weighted Average Remaining Term to Original Term to
Pool Principal Balance Note Rate Maturity (in Months) Maturity (in Months)
---- ----------------- --------- -------------------- --------------------
<S> <C> <C> <C> <C>
1 $ 18,480,617.77 11.725% 20 62
2 8,366,309.02 13.972 46 47
3 32,680,364.10 13.154 59 59
4 57,836,414.62 13.160 70 71
5 86,783,459.16 13.052 80 81
</TABLE>
For purposes of the table, it is also assumed that (i) the purchase
price of the Class I Certificates is as set forth below, (ii) the Receivables
prepay monthly at the specified percentages of ABS as set forth in the table
below, (iii) prepayments representing prepayments in full of individual
Receivables are received on the last day of the month and include a full month's
interest thereon, (iv) the Closing Date for the Offered Certificates is November
25, 1997, (v) distributions on the Offered Certificates are made, in cash, on
the ninth day of each month, commencing on December 9, 1997, (vi) no defaults or
delinquencies in the payment of the Receivables are experienced, and (vii) no
Receivable is repurchased for breach of representation and warranty or
otherwise.
<PAGE>
Sensitivity of the Yield on the Class I Certificates to Prepayments
1.0% 1.6% 1.8% 2.5% 3.0%
Price(1) ABS ABS ABS ABS ABS
-------- ------ ----- ----- ----- -----
2.223646% 10.581% 6.025% 6.025% 6.025% -3.613%
- --------------
(1) Expressed as a percentage of the original Notional Principal Amount.
Based on the assumptions described above and assuming a purchase price
of 2.223646% at approximately 2.851% ABS, the pre-tax yield to maturity of the
Class I Certificates would be approximately 0%.
It is highly unlikely that the Receivables will prepay at a constant
rate until maturity or that all of the Receivables will prepay at the same rate.
The foregoing table assumes that each Receivable bears interest at its specified
Contract Rate, has the same remaining amortization term, and prepays at the same
rate. In fact, receivables will prepay at different rates and have different
terms.
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the Class I Certificates, would cause the discounted
present value of such assumed cash flows to equal the assumed purchase price of
such Class I Certificates and by converting such monthly rates to corporate bond
equivalent rates. Such calculations do not take into account variations that may
occur in the interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class I Certificates and consequently
do not purport to reflect the return on any investment in the Class I
Certificates when such reinvestment rates are considered.
The Receivables will not necessarily have the characteristics assumed
above, and there can be no assurance that (i) the Receivables will prepay at any
of the rates shown in the table or at any other particular rate or will prepay
proportionately, (ii) the pre-tax yield on the Class I Certificates will
correspond to any of the pre-tax yields shown above or (iii) the aggregate
purchase price of the Class I Certificates will be equal to the purchase price
assumed. Because the Receivables will include Receivables that have remaining
terms to stated maturity shorter or longer than those assumed and Contract Rates
higher or lower than those assumed, the pre-tax yield on the Class I
Certificates may differ from those set forth above, even if all of the
Receivables prepay at the indicated constant prepayment rates.
Prepayments on automotive receivables can be measured relative to a
prepayment standard or model. The Absolute Prepayment Model ("ABS") used in the
preceding table represents an assumed rate of prepayment each month relative to
the original number of receivables in a pool of receivables. ABS further assumes
that all the receivables are the same size and amortize at the same rate and
that each receivable in each month of its life will either be paid as scheduled
or be prepaid in full. For example, in a pool of receivables originally
containing 10,000 receivables, a 1% ABS rate means that 100 receivables prepay
each month. ABS does not purport to be an historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
receivables, including the Receivables.
Sale and Assignment of Receivables
Certain information with respect to the conveyance of the Receivables
(i) from Union Acceptance Funding Corporation ("UAFC") to the Depositor pursuant
to the Purchase Agreement dated as of November 13, 1997, among UAFC, UAC and the
Depositor and (ii) from the Depositor to the Trust pursuant to the Pooling and
Servicing Agreement is set forth under "Description of the Transfer and
Servicing Agreements -- Sale and Assignment of the Receivables" in the
Prospectus.
Accounts
In addition to the Certificate Account, the property of the Trust will
include the Spread Account and the Payahead Account.
<PAGE>
Spread Account. On the Closing Date, the Depositor will establish the
Spread Account. Thereafter, the amount held in the Spread Account will be
increased up to the Required Spread Amount by the deposit thereto of payments on
the Receivables not utilized to make payments to the Certificateholders (other
than the Class IC Certificateholder), the Surety Bond Issuer and the Servicer
for the Monthly Servicing Fee and any permitted reimbursements of outstanding
Advances on any Distribution Date. While it is intended that the Spread Account
will grow over time to equal the Required Spread Amount through monthly deposits
of excess collections on the Receivables, if any, there can be no assurance that
such growth will actually occur. The Spread Account will be established for the
benefit of the Class A Certificateholders, the Class I Certificateholders and
the Surety Bond Issuer. On each Distribution Date, any amounts on deposit in the
Spread Account after the payment of any amounts owed to the Surety Bond Issuer
in excess of the Required Spread Amount will be withdrawn from the Spread
Account and distributed to the Class IC Certificateholder.
Under the terms of the Pooling and Servicing Agreement, the Trustee
will withdraw funds from the Spread Account and transfer them to the Certificate
Account for any deficiency of Monthly Interest or Monthly Principal as further
described below under "-- Distributions on the Offered Certificates", to the
extent available, prior to making any draw on the Surety Bond.
In the event that the balance of the Spread Account is reduced to zero
and there is a default under the Surety Bond on any Distribution Date, the Trust
will depend solely on current distributions on the Receivables to make
distributions of principal and interest on the Certificates. Any reduction in
the principal balance of the Receivables due to losses on the Receivables will
also result in a reduction of the Notional Principal Amount of the Class I
Certificates. In addition, because the market value of motor vehicles generally
declines with age and because of difficulties that may be encountered in
enforcing motor vehicle contracts as described in the Prospectus under "Certain
Legal Aspects of the Receivables," the Servicer may not recover the entire
amount due on such Receivables in the event of a repossession and resale of a
Financed Vehicle securing a Receivable in default. In such event, the
Certificateholders may suffer a corresponding loss. Any such losses would be
borne pro rata by the Class A Certificateholders and Class I Certificateholders.
Payahead Account. The Servicer will establish an additional account
(the "Payahead Account"), in the name of the Trustee and for the benefit of
Obligors on the Receivables, into which, to the extent required by the Pooling
and Servicing Agreement, early payments by or on behalf of Obligors on
Precomputed Receivables will be deposited until such time as the payment becomes
due. Until such time as payments are transferred from the Payahead Account to
the Certificate Account, they will not constitute collected interest or
collected principal and will not be available for distribution to
Certificateholders. The Payahead Account will initially be maintained with the
Trustee. Interest earned on the balance in the Payahead Account will be remitted
to the Servicer monthly. Collections on a Precomputed Receivable made during a
Collection Period shall be applied first to any overdue scheduled payment on
such Receivable, then to the scheduled payment on such Receivable due in such
Collection Period. If any collections remaining after the scheduled payment is
made are insufficient to prepay the Precomputed Receivable in full, then
generally such remaining collections shall be transferred to and kept in the
Payahead Account until such later Collection Period as the collections may be
retransferred to the Certificate Account and applied either to a later scheduled
payment or to prepay such Receivable in full.
Advances
With respect to each Receivable delinquent more than 30 days at the end
of a Collection Period, the Servicer will make an Advance in an amount equal to
30 days of interest, but only to the extent that the Servicer in its sole
discretion, expects to recoup the Advance from subsequent collections on the
Receivable. The Servicer will deposit the Advance in the Certificate Account on
or before the fifth calendar day of the month following the Collection Period.
The Servicer will recoup its Advance from subsequent payments by or on behalf of
the respective Obligor, from insurance proceeds or, upon the Servicer's
determination that reimbursement from the preceding sources is unlikely, will
recoup its Advance from any collections made on other Receivables. (Section
9.05.)
<PAGE>
Distributions on the Class IC Certificate
The Class IC Certificate will be initially issued to the Depositor and
will entitle it to receive monthly all funds held in the Spread Account in
excess of the Required Spread Amount after payment of all amounts owed to the
Surety Bond Issuer. Upon termination of the Trust the Class IC Certificateholder
is entitled to receive any amounts remaining in the Spread Account (only after
all required payments to the Surety Bond Issuer are made) after the payment of
expenses and distributions to Certificateholders. See "-- Accounts" above.
Distributions on the Offered Certificates
The Servicer will deposit in the Certificate Account the amount of
payments on all Receivables received with respect to the preceding Collection
Period. All such payments on the Simple Interest Receivables, the scheduled
payments on Precomputed Receivables, plus the net amount to be transferred from
the Payahead Account to the Certificate Account for the related Distribution
Date, all Advances for such Collection Period and the Purchase Amount for all
Receivables that became Purchased Receivables during the preceding Collection
Period, will be available for distribution pursuant to the terms of the Pooling
and Servicing Agreement on the next succeeding Distribution Date ("Available
Funds"). The Servicer will determine the amount of funds necessary to make
distributions of Monthly Principal and Monthly Interest to the
Certificateholders and to pay the Monthly Servicing Fee to the Servicer. If
there is a deficiency with respect to Monthly Interest or Monthly Principal on
any Distribution Date, after giving effect to payments of the Monthly Servicing
Fee and permitted reimbursements of outstanding Advances to the Servicer on such
Distribution Date, the Servicer will withdraw amounts, to the extent available,
from the Spread Account, in the amount of such deficiency and notify the Trustee
of any remaining deficiency, whereupon the Trustee will draw on the Surety Bond,
up to the Surety Bond Amount, to pay Monthly Interest and Monthly Principal.
Moreover, if the Available Funds for a Distribution Date are insufficient to pay
current and past due Surety Bond Fees, and other amounts owed to the Surety Bond
Issuer, pursuant to the Insurance Agreement, plus accrued interest thereon, to
the Surety Bond Issuer, the Servicer will notify the Trustee of such deficiency,
and the amount, if any, then on deposit in the Spread Account (after giving
effect to any withdrawal to satisfy a deficiency described in this and the
preceding sentences) will be available to cover such deficiency.
If acceptable to each Rating Agency without a reduction in the rating
of any class of Offered Certificates, the Monthly Servicing Fee due to the
Servicer in respect of each Collection Period will be distributed to the
Servicer during such Collection Period from Collections during such Collection
Period.
On each Distribution Date, the Trustee will apply or cause to be
applied the Available Funds (plus, to the extent required for payment of Monthly
Interest or Monthly Principal any amounts withdrawn from the Spread Account or
drawn on the Surety Bond, as applicable) to make the following payments in the
following priority:
(a) without duplication, an amount equal to the sum of the amount of
outstanding Advances in respect of Receivables (x) that became
Defaulted Receivables during the prior Collection Period plus (y) that
the Servicer determines to be unrecoverable, to the Servicer;
(b) the Monthly Servicing Fee, including any overdue Monthly Servicing
Fee, to the Servicer, to the extent not previously distributed to the
Servicer;
(c) pro rata, (y) Monthly Principal, in accordance with the Principal
Distribution Sequence (described below), and Class A Monthly Interest,
including any overdue Monthly Principal and Class A Monthly Interest,
to the Class A Certificateholders and (z) Class I Monthly Interest,
including any overdue Class I Monthly Interest, to the Class I
Certificateholders;
(d) the Surety Bond Fee to the Surety Bond Issuer;
<PAGE>
(e) the amount of recoveries of Advances (to the extent such recoveries
have not previously been reimbursed to the Servicer pursuant to clause
(a) above), to the Servicer;
(f) the aggregate amount of any unreimbursed draws on the Surety Bond
payable to the Surety Bond Issuer, under the Insurance Agreement, for
Class A Monthly Interest, Class I Monthly Interest and Monthly
Principal, plus accrued interest thereon and any other amounts owing to
the Surety Bond Issuer under the Insurance Agreement; and
(g) the balance into the Spread Account.
After all distributions pursuant to clauses (a) through (g) above have
been made for each Distribution Date, the amount of funds remaining in the
Spread Account on such date, if any, in excess of the Required Spread Amount,
will be distributed by the Trustee to the Class IC Certificateholder. Any
amounts so distributed to the Class IC Certificateholder will no longer be
property of the Trust and Certificateholders will have no rights with respect
thereto.
If on any Distribution Date there are not sufficient Available Funds
(together with amounts withdrawn from the Spread Account and/or the Surety Bond)
to pay the distribution required by (c) above, the Available Funds distributable
thereunder shall be distributed proportionately on the basis of the ratio of the
required distribution due each of the Class A Certificateholders and the Class I
Certificateholders, respectively, to the sum of the distributions required by
(c) to the Class A Certificateholders and the Class I Certificateholders. The
amount so distributed to the Class A Certificateholders hereunder shall be
allocated first to Class A Monthly Interest, and second to Monthly Principal pro
rata among the Class A Certificateholders.
"Monthly Interest" for any Distribution Date will equal the sum of the
Class A Monthly Interest and the Class I Monthly Interest.
"Class A Monthly Interest" for any Distribution Date will equal the sum
of Class A-1 Monthly Interest, Class A-2 Monthly Interest, Class A-3 Monthly
Interest, Class A-4 Monthly Interest and Class A-5 Monthly Interest.
"Class A-1 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: 1/360th of the Class A-1 Pass-Through Rate,
the actual number of days elapsed during the related Collection Period from the
Closing Date and the Class A-1 Certificate Balance at the Closing Date and (ii)
with respect to each subsequent Distribution Date, the product of 1/360th of the
Class A-1 Pass-Through Rate, the actual number of days elapsed during the
related Collection Period and the Class A-1 Certificate Balance on the preceding
Distribution Date (after giving effect to any distribution of Monthly Principal
required to be made on such preceding Distribution Date).
"Class A-2 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class A-2 Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Class A-2 Certificate Balance at the Closing Date) and (ii) with respect
to each subsequent Distribution Date, the product of one-twelfth of the Class
A-2 Pass-Through Rate and the Class A-2 Certificate Balance on the preceding
Distribution Date (after giving effect to any distribution of Monthly Principal
required to be made on such preceding Distribution Date).
"Class A-3 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class A-3 Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Class A-3 Certificate Balance at the Closing Date) and (ii) with respect
to each subsequent Distribution Date, the product of one-twelfth of the Class
A-3 Pass-Through Rate and the Class A-3 Certificate Balance on the preceding
Distribution Date (after giving effect to any distribution of Monthly Principal
required to be made on such preceding Distribution Date).
<PAGE>
"Class A-4 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class A-4 Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Class A-4 Certificate Balance at the Closing Date) and (ii) with respect
to each subsequent Distribution Date, the product of one-twelfth of the Class
A-4 Pass-Through Rate and the Class A-4 Certificate Balance on the preceding
Distribution Date (after giving effect to any distribution of Monthly Principal
required to be made on such preceding Distribution Date).
"Class A-5 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class A-5 Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Class A-5 Certificate Balance at the Closing Date) and (ii) with respect
to each subsequent Distribution Date, the product of one-twelfth of the Class
A-5 Pass-Through Rate (as adjusted on and after the Clean-Up Call Date, if
required) and the Class A-5 Certificate Balance on the preceding Distribution
Date (after giving effect to any distribution of Monthly Principal required to
be made on such preceding Distribution Date).
"Monthly Principal" for any Distribution Date will equal the amount
necessary to reduce the Certificate Balance to the aggregate unpaid principal
balance of the Receivables on the last day of the preceding Collection Period;
provided, however, that Monthly Principal on the final scheduled Distribution
Date for each class of Class A Certificates will be increased by the amount, if
any, which is necessary to reduce the Certificate Balance of such class to zero
on such date. For the purpose of determining Monthly Principal, the unpaid
principal balance of a Defaulted Receivable or a Purchased Receivable is deemed
to be zero on and after the last day of the Collection Period in which such
Receivable became a Defaulted Receivable or a Purchased Receivable.
"Principal Distribution Sequence" means the order in which Monthly
Principal shall be distributed among the Class A Certificateholders in the
following sequence: (i) to the Class A-1 Certificateholders until the Class A-1
Certificate Balance has been reduced to zero; (ii) to the Class A-2
Certificateholders until the Class A-2 Certificate Balance has been reduced to
zero; (iii) to the Class A-3 Certificateholders until the Class A-3 Certificate
Balance has been reduced to zero; (iv) to the Class A-4 Certificateholders until
the Class A-4 Certificate Balance has been reduced to zero; and (v) to the Class
A-5 Certificateholders until the Class A-5 Certificate Balance has been reduced
to zero.
"Class I Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class I Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Notional Principal Amount at the Closing Date) and (ii) with respect to
each subsequent Distribution Date, the product of one-twelfth of the Class I
Pass-Through Rate and the Notional Principal Amount on the preceding
Distribution Date (after giving effect to any application of Monthly Principal
on such preceding Distribution Date).
"Surety Bond Fee" for any Distribution Date will equal one-twelfth of
the product of the Surety Bond per annum fee rate set forth in the Insurance
Agreement and the Certificate Balance calculated as of the first day of the
Collection Period to which such Distribution Date relates and payable monthly in
arrears.
"Defaulted Receivable" will mean, for any Collection Period, a
Receivable as to which any of the following has occurred: (i) any payment is 120
days or more delinquent as of the last day of such Collection Period; (ii) the
Financed Vehicle that secures the Receivable has been repossessed; or (iii) the
Receivable has been determined to be uncollectable in accordance with the
Servicer's customary practices on or prior to the last day of such Collection
Period; provided, however, that any Receivable which the Depositor or the
Servicer is obligated to repurchase or purchase pursuant to the Pooling and
Servicing Agreement shall be deemed not to be a Defaulted Receivable.
<PAGE>
As an administrative convenience, the Servicer will be permitted to
make the deposit of Collections and aggregate Advances and Purchase Amounts for
or with respect to the Collection Period, net of distributions to be made to the
Servicer or Depositor with respect to the Collection Period. The Servicer,
however, will account to the Trustee and to the Certificateholders as if all
deposits and distributions were made individually. (Section 9.06.)
The following chart sets forth an example of the application of the
foregoing provisions to a monthly distribution:
December 1-31...........................Collection Period. The Servicer receives
monthly payments, prepayments, and other
proceeds in respect of the Receivables
and deposits them in the Certificate
Account. The Servicer may deduct the
Monthly Servicing Fee from such
deposits.
December 31.............................Record Date. Distributions on the
Distribution Date are made to
Certificateholders of record at the
close of business on this date.
January 5...............................On the fifth calendar day after the end
of the Collection Period (the
"Determination Date") the Servicer
notifies the Trustee of the amounts to
be distributed on the Distribution Date
and of any deficiencies.
January 8...............................On the third business day after the
Determination Date (the "Distribution
Date") the Trustee withdraws funds from
the Spread Account and/or draws on the
Surety Bond, if necessary, to pay
Monthly Principal and Monthly Interest
to Certificateholders as described
herein. The Trustee distributes to
Certificateholders amounts payable in
respect of the Offered Certificates, and
pays the Monthly Servicing Fee to the
extent not previously paid, the Surety
Bond Fee and any amounts owing to the
Surety Bond Issuer.
The Surety Bond
On or before the Closing Date, the Depositor and UAC, in its individual
capacity and as Servicer, and the Surety Bond Issuer will enter into an
Insurance and Reimbursement Agreement (the "Insurance Agreement") pursuant to
which the Surety Bond Issuer will issue the Surety Bond. Under the terms of the
Pooling and Servicing Agreement, after withdrawal of any amounts in the Spread
Account with respect to a Distribution Date to pay a deficiency in Monthly
Interest or Monthly Principal, the Trustee will be authorized to draw on the
Surety Bond for the benefit of the Class A Certificateholders and the Class I
Certificateholders and credit the Certificate Account for such draws as
described above under "--Distributions on the Offered Certificates." The maximum
amount that may be drawn under the Surety Bond on any Distribution Date is
limited to the Surety Bond Amount for such Distribution Date. The Surety Bond
Amount, with respect to any Distribution Date, shall equal (x) the sum of (A)
the lesser of (i) the Certificate Balance (after giving effect to any
distribution of Available Funds and any funds withdrawn from the Spread Account
to pay Monthly Principal on such Distribution Date) and (ii) the Net Principal
Surety Bond Amount, plus (B) Class A Monthly Interest, plus (C) Class I Monthly
Interest, plus (D) the Monthly Servicing Fee; less (y) all amounts on deposit in
the Spread Account on such Distribution Date. "Net Principal Surety Bond Amount"
means the Certificate Balance as of the first Distribution Date minus all
amounts previously drawn on the Surety Bond or from the Spread Account with
respect to Monthly Principal.
<PAGE>
The Surety Bond Issuer will be entitled to receive the Surety Bond Fee
and certain other amounts on each Distribution Date as described under
"--Distributions on the Offered Certificates" and to receive amounts on deposit
in the Spread Account as described above under "--Accounts." The Surety Bond
Issuer will not be entitled to reimbursement of any amounts from the
Certificateholders. The Surety Bond Issuer's obligation under the Surety Bond is
irrevocable. The Surety Bond Issuer will have no obligation other than its
obligations under the Surety Bond to the Certificateholders or the Trustee.
In the event that the balance in the Spread Account is reduced to zero
and there has been a default under the Surety Bond, the Trust may depend solely
on current collections on the Receivables to make distributions of principal and
interest on the Offered Certificates. Any reduction in the principal balance of
the Receivables due to losses on the Receivables may also result in a reduction
of the Notional Principal Amount of the Class I Certificates. In addition,
because the market value of motor vehicles generally declines with age and
because of difficulties that may be encountered in enforcing motor vehicle
contracts as described in the Prospectus under "Certain Legal Aspects of the
Receivables," the Servicer may not recover the entire amount due on such
Receivables in the event of a repossession and resale of a Financed Vehicle
securing a Receivable in default. In such event, the Certificateholders may
suffer a corresponding loss. Any such losses would be borne pro rata by the
Class A Certificateholders and Class I Certificateholders. See " --
Distributions on the Offered Certificates."
Rights of the Surety Bond Issuer upon Events of Default, Amendment or Waiver
Upon the occurrence of an Event of Default, the Surety Bond Issuer, or
the Trustee upon the consent of the Surety Bond Issuer, will be entitled to
appoint a successor Servicer. In addition to the events constituting an Event of
Default as described in the Prospectus, the Pooling and Servicing Agreement will
also permit the Surety Bond Issuer to appoint a successor Servicer and to
redirect payments made under the Receivables to the Trustee upon the occurrence
of certain additional events involving a failure of performance by the Servicer
or a material misrepresentation made by the Servicer under the Insurance
Agreement.
The Pooling and Servicing Agreement cannot be amended or any provisions
thereof waived without the consent of the Surety Bond Issuer if such amendment
or waiver would have a materially adverse effect upon the rights of the Surety
Bond Issuer.
ERISA CONSIDERATIONS
Subject to the considerations set forth under "ERISA Considerations" in
the Prospectus, the Class A Certificates and the Class I Certificates may be
eligible for purchase by an employee benefit plan or an individual retirement
account (a "Plan") subject to Title I of ERISA or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan must
determine that the purchase of a Class A Certificate or of a Class I
Certificates is consistent with its fiduciary duties under ERISA and does not
result in a nonexempt prohibited transaction as defined in Section 406 of ERISA
or Section 4975 of the Code. For additional information regarding treatment of
the Class A Certificates and the Class I Certificates under ERISA, see "ERISA
Considerations" in the Prospectus.
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in the
underwriting agreement for the sale of the Offered Certificates, dated November
19, 1997, the Depositor has agreed to sell and each of the underwriters named
below (the "Underwriters") severally agreed to purchase the principal amount of
the Offered Certificates set forth below its name below:
<TABLE>
<CAPTION>
Salomon NationsBanc Montgomery
Brothers Inc Securities, Inc. Total
------------ ---------------- -----
Principal Amount
<S> <C> <C> <C>
of Class A-1 Certificates........ $ 16,625,000.00 16,625,000.00 $ 33,250,000.00
Principal Amount
of Class A-2 Certificates........ $ 35,625,000.00 35,625,000.00 $ 71,250,000.00
Principal Amount
of Class A-3 Certificates........ $ 15,962,500.00 15,962,500.00 $ 31,925,000.00
Principal Amount
of Class A-4 Certificates........ $ 22,362,500.00 22,362,500.00 $ 44,725,000.00
Principal Amount
of Class A-5 Certificates........ $ 11,498,582.34 11,498,582.33 $ 22,997,164.67
Notional Principal Amount
of Class I Certificates.......... $151,027,447.84 0.00 $151,027,447.84
</TABLE>
In the underwriting agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Offered
Certificates offered hereby if any of the Offered Certificates are purchased.
The Underwriters propose to offer part of the Offered Certificates
directly to the public at the prices set forth on the cover page hereof, and
part to certain dealers at a price that represents a concession not in excess of
0.1000% of the denominations of the Class A-1 Certificates, 0.1250% of the
denominations of the Class A-2 Certificates, 0.1375% of the denominations of the
Class A-3 Certificates, 0.1500% of the denominations of the Class A-4
Certificates, 0.2000% of the denominations of the Class A-5 Certificates or
0.2000% of the gross proceeds of the Class I Certificates. The Underwriters may
allow and such dealers may reallow a concession not in excess of 0.0750% of the
denominations of the Class A-1 Certificates, 0.1000% of the denominations of the
Class A-2 Certificates, 0.1125% of the denominations of the Class A-3
Certificates, 0.1250% of the denominations of the Class A-4 Certificates,
0.1500% of the denominations of the Class A-5 Certificates or 0.1500% of the
gross proceeds of the Class I Certificates to certain other dealers.
The Depositor and UAC have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
The Depositor has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Offered Certificates, as
permitted by applicable laws and regulations. The Underwriters are not
obligated, however, to make a market in the Offered Certificates and any such
market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Offered Certificates.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Depositor by Barnes & Thornburg, Indianapolis, Indiana, and
for the Underwriters by Cadwalader, Wickersham & Taft. Certain federal income
tax consequences with respect to the Offered Certificates will be passed upon
for the Depositor by Cadwalader, Wickersham & Taft.
EXPERTS
The financial statements of the Surety Bond Issuer, Capital Markets
Assurance Corporation, as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 are included herein
beginning on page F-1 and have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as set forth in their audit report
thereon and are included in reliance upon the authority of such firm as experts
in accounting and auditing.
<PAGE>
INDEX OF PRINCIPAL TERMS
TERM PAGE
ABS ........................................................ S-24
Available Funds.............................................. S-26
Certificates................................................. S-3
Certificate Balance.......................................... S-5
Class A Certificates......................................... S-3, S-4
Class A Certificateholders................................... S-4
Class A Monthly Interest ................................... S-27
Class A-1 Certificate Balance................................ S-4
Class A-1 Certificateholders................................. S-4
Class A-1 Certificates....................................... S-3
Class A-1 Final Scheduled Distribution Date.................. S-5
Class A-1 Monthly Interest................................... S-27
Class A-1 Pass-Through Rate.................................. S-4
Class A-2 Certificate Balance................................ S-4
Class A-2 Certificateholders................................. S-4
Class A-2 Certificates....................................... S-3
Class A-2 Final Scheduled Distribution Date.................. S-5
Class A-2 Monthly Interest................................... S-27
Class A-2 Pass-Through Rate.................................. S-4
Class A-3 Certificate Balance................................ S-4
Class A-3 Certificateholders................................. S-4
Class A-3 Certificates....................................... S-3
Class A-3 Final Scheduled Distribution Date.................. S-6
Class A-3 Monthly Interest .................................. S-27
Class A-3 Pass-Through Rate.................................. S-4
Class A-4 Certificate Balance................................ S-4
Class A-4 Certificateholders................................. S-4
Class A-4 Certificates....................................... S-3
Class A-4 Final Scheduled Distribution Date.................. S-6
Class A-4 Monthly Interest .................................. S-27
Class A-4 Pass-Through Rate.................................. S-4
Class A-5 Certificate Balance................................ S-4
Class A-5 Certificateholders................................. S-4
Class A-5 Certificates....................................... S-3
Class A-5 Final Scheduled Distribution Date.................. S-6
Class A-5 Monthly Interest .................................. S-27
Class A-5 Pass-Through Rate.................................. S-5
Class I Certificateholders................................... S-6
Class I Certificates......................................... S-3, S-6
Class I Monthly Interest..................................... S-28
Class I Pass-Through Rate.................................... S-6
Class IC Certificate......................................... S-1, S-3
Class IC Certificateholder................................... S-9
Clean-Up Call Date........................................... S-10
Closing Date................................................. S-3
Code......................................................... S-30
Companion Component.......................................... S-7, S-21
Cutoff Date.................................................. S-3
Defaulted Receivable ........................................ S-28
Depositor.................................................... S-1, S-3
Determination Date........................................... S-28
Distribution Date............................................ S-1, S-4, S-29
Duff & Phelps................................................ S-19
ERISA........................................................ S-11
Financed Vehicles............................................ S-3
Holdings..................................................... S-19
Insurance Agreement ......................................... S-29
Issuer....................................................... S-3
Legal Investment............................................. S-10
Moody's...................................................... S-19
Monthly Interest............................................. S-27
Monthly Principal .......................................... S-5, S-28
Monthly Servicing Fee........................................ S-7
Net Principal Surety Bond Amount............................. S-10, S-29
Notional Principal Amount.................................... S-7
Offered Certificates......................................... S-1, S-3
<PAGE>
Optional Sale................................................ S-10
Original Notional Principal Amount........................... S-6
PAC Component................................................ S-7, S-21
Payahead Account ............................................ S-25
Plan ........................................................ S-30
Planned Notional Principal Amount............................ S-21
Planned Notional Principal Amount Schedule ................. S-7, S-21
Pool Balance................................................. S-5
Pooling and Servicing Agreement.............................. S-3
Principal Distribution Sequence.............................. S-28
Rating Agency................................................ S-10
Receivables.................................................. S-3
Record Date.................................................. S-4
Required Spread Amount....................................... S-9
Servicer..................................................... S-3
Spread Account............................................... S-8
Standard & Poor's............................................ S-19
Surety Bond.................................................. S-1, S-9
Surety Bond Amount........................................... S-10
Surety Bond Fee ............................................. S-28
Surety Bond Issuer .......................................... S-10, S-19
Trust........................................................ S-1, S-3
Trustee...................................................... S-3
UAC.......................................................... S-3
UAFC......................................................... S-24
Underwriters................................................. S-30
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those 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 Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 29, 1997
F-2
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $294,861 at December 31,
1996 and $210,651 at December 31, 1995) $ 297,893 215,706
Short-term investments (at amortized cost which approximates
fair value) 16,810 68,646
- ------------------------------------------------------------------------------------------------------
Total investments 314,703 284,352
- ------------------------------------------------------------------------------------------------------
Cash 371 344
Accrued investment income 3,807 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 6,424 3,428
- ------------------------------------------------------------------------------------------------------
Total assets $ 394,315 343,133
======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 8,019 10,844
Current income taxes 679 136
Deferred income taxes 15,139 11,303
- ------------------------------------------------------------------------------------------------------
Total liabilities 104,822 77,067
- ------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding
at December 31, 1996 and 1995 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 1,970 3,286
Retained earnings 64,048 41,972
- ------------------------------------------------------------------------------------------------------
Total stockholder's equity 289,493 266,066
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 394,315 343,133
======================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31,1995 December 31, 1994
Revenues:
<S> <C> <C> <C>
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992) (11,069)
- -----------------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242) (10,490)
- -----------------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Net investment income 16,992 11,953 10,072
Net realized capital gains 236 1,301 92
Other income 146 2,273 120
- -----------------------------------------------------------------------------------------------------
Total revenues 57,931 44,769 33,387
- -----------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 14,613 13,808 11,833
Policy acquisition costs 7,824 7,203 4,529
- -----------------------------------------------------------------------------------------------------
Total expenses 27,252 24,152 17,791
- -----------------------------------------------------------------------------------------------------
Income before income taxes 30,679 20,617 15,596
- -----------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 5,235 2,113 865
Deferred income tax 3,368 3,102 2,843
- -----------------------------------------------------------------------------------------------------
Total income taxes 8,603 5,215 3,708
- -----------------------------------------------------------------------------------------------------
Net Income $ 22,076 15,402 11,888
=====================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31,1996 December 31, 1995 December 31, 1994
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 205,808 146,808 146,808
Capital contribution 2,667 59,000 -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 208,475 205,808 146,808
Unrealized appreciation (depreciation)
on investments, net of tax:
Balance at beginning of year 3,286 (5,499) 3,600
Unrealized appreciation (depreciation)
on investments (1,316) 8,785 (9,099)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 1,970 3,286 (5,499)
- ---------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 41,972 26,570 14,682
Net income 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 64,048 41,972 26,570
- ---------------------------------------------------------------------------------------------------------
Total stockholder's equity $ 289,493 266,066 182,879
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollar in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,076 15,402 11,888
- ----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment
expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (671) (390) (848)
Income taxes payable 3,911 3,621 2,611
Net realized capital gains (236) (1,301) (92)
Accounts payable and other accrued
expenses 1,020 472 3,726
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (3,396) 992 689
- ----------------------------------------------------------------------------------------------------------
Total adjustments 10,424 6,530 6,292
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,500 21,932 18,180
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (199,989) (158,830) (77,980)
Proceeds from sales of investments 57,210 49,354 39,967
Proceeds from maturities of investments 110,306 28,803 19,665
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (32,473) (80,673) (18,348)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution - 59,000 -
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities - 59,000 -
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27 259 (168)
Cash balance at beginning of year 344 85 253
- ----------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 371 344 85
==========================================================================================================
Supplemental disclosure of cash flow
information:
Income taxes paid $ 4,525 1,450 1,063
==========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1996 and 1995
1) Background
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a
New York- domiciled monoline stock insurance company which engages only
in the business of financial guarantee and surety insurance. CapMAC is
a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC
is licensed in all 50 states in addition to the District of Columbia,
the Commonwealth of Puerto Rico and the territory of Guam. CapMAC
insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets.
CapMAC also provides financial guarantee reinsurance for structured
asset- backed, corporate, municipal and other financial obligations
written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
and "AAA" by Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies,
are not recommendations to buy, sell or hold securities and are subject
to revision or withdrawal at any time by such rating agencies.
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the
basis of generally accepted accounting principles ("GAAP").
Such accounting principles differ from statutory reporting
practices used by insurance companies in reporting to state
regulatory authorities.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Management believes the most
significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and
disclosures of financial guarantees outstanding. Actual
results could differ from those estimates.
b) Investments
As of December 31, 1996 and 1995, all of the Company's
securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair
value is generally based upon quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholder's equity
until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. A decline in
the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security.
F-7
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Short-term investments are those investments having a maturity
of less than one year at purchase date. Short-term investments
are carried at amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses are included
in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
c) Premium Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in
income when due, net of amounts payable to reinsurers.
Premiums which are payable quarterly, semi-annually or
annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding
policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the
principal amount and earning it straight-line over the term of
each bond maturity. For the years ended December 31, 1996 and
1995, 91% of net premiums earned were attributable to premiums
payable in installments and 9% were attributable to premiums
collected on an up-front basis.
d) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are
primarily related to the production of new business, are
deferred. These costs include direct and indirect expenses
related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized over
the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections
due to various factors such as renewal or early termination of
insurance contracts or different run-off patterns of exposure
resulting in a corresponding change in the amortization
pattern of the deferred acquisition costs.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists
of a supplemental loss reserve ("SLR") and a case basis loss
reserve. The SLR is established for expected levels of losses
resulting from credit failures on currently insured issues and
reflects the estimated portion of earned premiums required to
cover those losses.
A case basis loss reserve is established for insured
obligations when, in the judgment of management, a default in
the timely payment of debt service is imminent. For defaults
considered temporary, a case basis loss reserve is established
in an amount equal to the present value of the anticipated
defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the
present value of all remaining defaulted debt service payments
is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss
reserves when such amounts are reasonably estimable. Case
basis loss reserves may be allocated from any SLR outstanding
at the time the case basis reserves are established.
F-8
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Management believes that the current level of reserves is
adequate to cover the ultimate net cost of claims and the
related expenses with respect to financial guarantees issued
by CapMAC. The establishment of the appropriate level of loss
reserves is an inherently uncertain process involving
estimates and subjective judgments by management, and
therefore there can be no assurance that ultimate losses in
CapMAC's insured portfolio will not exceed the current
estimate of loss reserves.
f) Depreciation
Leasehold improvements, furniture, fixtures and electronic
data processing equipment are being amortized or depreciated
over the lease term or useful life, whichever is shorter,
using the straight-line method.
g) Income Taxes
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the
enactment date.
F-9
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) Insured Portfolio
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding), was
$19.7 billion and $12.6 billion, respectively, with a weighted average
life of 6.4 years and 6.0 years, respectively. CapMAC's insured
portfolio was broadly diversified by geographic distribution and type
of insured obligations, with no single insured obligation in excess of
statutory single risk limits, after giving effect to any reinsurance
and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory
contingency reserve). At December 31, 1996 and 1995, the statutory
qualified capital was approximately $260 million and $240 million,
respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1996 December 31, 1995
------------------------------ -----------------------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ----------------------------------------- -------------- --------------- ---- -------------- -------------
<S> <C> <C> <C> <C>
Consumer receivables $ 10,362 52.8 $ 6,959 55.1
Trade and other corporate
obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
- ----------------------------------------- -------------- --------------- ---- -------------- -------------
Total $ 19,655 100.0 $ 12,628 100.0
========================================= ============== =============== ==== ============== =============
</TABLE>
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and
interest outstanding) was $23.3 billion and $15.1 billion,
respectively. At December 31, 1996, approximately 93% of CapMAC's
insured portfolio was comprised of structured asset-backed
transactions. Under these structures, a pool of assets covering at
least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying
assets. CapMAC, therefore, evaluates all the factors affecting past and
future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction
is reviewed to ensure that an appropriate legal structure is used to
protect against the bankruptcy risk of the originator of the assets.
Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to
a third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is
typically several times the normal historical loss experience for the
underlying type of assets.
During 1995, the Company sold without recourse its interest in
potential cash flows from transactions included in its insured
portfolio and recognized $2,200,000 of income which has been included
in other income in the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
--------------------------- ---------------------------- ----------------------------
% of % of % of
Revenues Revenues Revenues
----------- -- ----------- ------------ -- ----------- ----------- ----------------
<S> <C> <C> <C>
Citicorp 14.5 15.2 16.3
</TABLE>
F-10
<PAGE>
4) Investments
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value for available-for-sale securities by major
security type at December 31, 1996 and 1995 were as follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,059 10 - 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 109,436 265 1,160 108,541
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate and asset-backed
securities 20,365 23 153 20,235
-----------------------------------------------------
Total $ 311,671 4,900 1,868 314,703
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
-----------------------------------------------------
Total $ 279,297 5,222 167 284,352
=====================================================================================================
</TABLE>
F-11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996 by contractual maturity are shown below
($ in thousands):
December 31, 1996
Amortized Estimated
Securities Available-for-sale Cost Fair Value
- ------------------------------------------------------------- -----------------
Due in one year or less $ 11,627 11,644
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 82,337 83,503
- ------------------------------------------------------------- -----------------
Sub-total 202,235 206,162
Mortgage-backed securities 109,436 108,541
- ------------------------------------------------------------- -----------------
Total $ 311,671 314,703
============================================================= =================
Actual maturities may differ from contractual maturities because
borrowers may call or prepay obligations with or without call or
prepayment penalties.
Proceeds from sales of investment securities were approximately $57.2
million, $49.3 million and $39.9 million in 1996, 1995 and 1994,
respectively. Gross realized capital gains of $772,000, $1,320,000 and
$714,000, and gross realized capital losses of $536,000, $19,000 and
$622,000 were realized on those sales for the years ended December 31,
1996, 1995 and 1994, respectively.
Investments include bonds having a fair value of approximately
$3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
1995, respectively, with state regulators as required by law.
Investment income is comprised of interest and dividends, net of
related expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 15,726 11,105 9,193
Short-term investments 1,534 1,245 484
Mutual funds - (162) 579
Investment expenses (268) (235) (184)
- -----------------------------------------------------------------------------------------------------
Total $ 16,992 11,953 10,072
=====================================================================================================
</TABLE>
F-12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on
available-for-sale securities is included as a separate component of
stockholder's equity as shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 3,286 (5,499)
Change in unrealized (depreciation) appreciation (2,024) 13,386
Income tax effect 708 (4,601)
Net change (1,316) 8,785
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,970 3,286
======================================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 2% of stockholder's equity as of
December 31, 1996 and 1995, respectively.
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy
acquisition costs) (7,824) (7,203) (4,529)
- -----------------------------------------------------------------------------------------------------
Balance at end of year $ 45,380 35,162 24,860
=====================================================================================================
</TABLE>
6) Employee Benefits
CapMAC has a service agreement with CapMAC Financial Services, Inc.
("CFS"). Under the service agreement, CFS has agreed to provide various
services, including underwriting, reinsurance, marketing, data
processing and other services to CapMAC in connection with the
operation of CapMAC's insurance business. CapMAC pays CFS a fee for
providing such services, but not in excess of CFS's cost for such
services. CFS incurred, on behalf of CapMAC, total compensation
expenses, excluding bonuses, of $13,374,000, $13,484,000 and
$11,081,000 in 1996, 1995 and 1994, respectively.
The Company, through CFS, maintains an incentive compensation plan for
its employees. The plan is an annual discretionary bonus award. For the
years ended December 31, 1996, 1995 and 1994, the Company had provided
approximately $8,810,000, $7,804,000 and $5,253,000, respectively, for
the plan. CFS also provides health and welfare benefits to
substantially all of its employees. The Company incurred $551,943,
$598,530, and $562,508 of expense for the years ended December 31,
1996, 1995 and 1994, respectively, for such plan. The Company also has
a defined contribution retirement plan which allows participants to
make voluntary contributions by salary reduction pursuant to section
401 (k) of the Internal Revenue Code. The Company provides for the
administrative cost for the 401 (k) plan.
F-13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers
agreed to defer receipt of such cash amount in exchange for receiving
the same number of new shares of restricted stock of Holdings as the
number of RSU's such officers previously held. During 1995 and 1994,
the expense was $1.3 million and $0.1 million, respectively. During
1996, Holdings assumed the liability of $3.7 million less the related
deferred tax asset of $1.1 million as capital contribution. The cash
amount is held by Holdings and invested in accordance with certain
guidelines. Such amount, including the investment earnings thereon,
will be paid to each officer upon the occurrence of certain events but
no later than December 2000.
7) Employee Stock Ownership Plan
Holdings maintains an Employee Stock Ownership Plan ("ESOP") to provide
its employees the opportunity to obtain beneficial interests in the
stock of Holdings through a trust (the "ESOP Trust"). Compensation
expense related to the ESOP and allocated to CapMAC was approximately
$2,764,000, $2,087,000 and $2,086,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
F-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the
aggregate amount of claims and related expenses not to exceed $2.7
million, although no assurance can be given that such claims and
related expenses will not exceed that amount. Such loss amount was
covered through a recovery under a quota share reinsurance agreement of
$0.2 million and a reduction in the SLR of $2.5 million. The portion of
such claims and expenses not covered under the quota share agreement is
being funded through payments to CapMAC from the Lureco Trust Account
(see note 12).
The following is a summary of the activity in the case basis loss
reserve account and the components of the reserve for losses and loss
adjustment expenses ($ in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Case basis loss reserve:
Net balance at January 1 $ 620 - -
- ------------------------------------------------------------------------ --------------- ----------
Incurred related to:
Current year - 2,473 -
Prior years - - -
- ------------------------------------------------------------------------ --------------- ----------
Total incurred - 2,473 -
- ------------------------------------------------------------------------ --------------- ----------
Paid related to:
Current year - 1,853 -
Prior years 309 - -
- ------------------------------------------------------------------------ --------------- ----------
Total paid 309 1,853 -
- ------------------------------------------------------------------------ --------------- ----------
Net balance at December 31 311 620 -
Reinsurance recoverable - 69 -
- ------------------------------------------------------------------------ --------------- ----------
Gross balance at December 31 311 689 -
- ------------------------------------------------------------------------ --------------- ----------
Supplemental loss reserve
Balance at January 1 5,859 5,191 3,762
- ------------------------------------------------------------------------ --------------- ----------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve - (2,473) -
- ------------------------------------------------------------------------ --------------- ----------
Balance at December 31 10,674 5,859 5,191
- ------------------------------------------------------------------------ --------------- ----------
Total reserve for losses and loss adjustment
expenses $10,985 6,548 5,191
======================================================================== =============== ==========
</TABLE>
F-15
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return. The
Company's annual Federal income tax liability is determined by
computing its pro rata share of the consolidated group Federal income
tax liability.
Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
$ in thousands Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 10,738 35.0 $7,216 35.0 $5,303 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (9.5) (2,335) (11.3) (1,646) (10.6)
Other, net 781 2.5 334 1.6 51 0.4
- -----------------------------------------------------------------------------------------------------
Total income tax expense $ 8,603 28.0 $5,215 25.3 $3,708 23.8
=====================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1996 December 31, 1995
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 200 1,901
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 96 98
Total gross deferred tax assets 2,689 3,853
- -----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,061 1,769
Other, net 884 1,080
Total gross deferred tax liabilities 17,828 15,156
Net deferred tax liability $ 15,139 11,303
=====================================================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the deferred tax assets will be fully realized
in the future.
F-16
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
10) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that
may be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income
as defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1996, 1995 and 1994. No dividends could be
paid during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1996 and 1995 was approximately
$193,726,000 and $195,018,000, respectively. Statutory surplus differs
from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting
purposes and differences in accounting for investments, deferred
acquisition costs, SLR and deferred taxes provided under GAAP.
Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Statutory
net income differs from net income determined under GAAP principally
due to deferred acquisition costs, SLR and deferred income taxes.
11) Commitments and Contingencies
The Company's lease agreement for the space occupied in New York
expires on November 20, 2008. CapMAC has a lease agreement for its
London office, which expires on October 1, 2002. As of December 31,
1996, future minimum payments under the lease agreements are as
follows:
$ in thousands Payment
- -----------------------------------------------------------------------------
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
Total $ 40,251
=============================================================================
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1996, 1995 and 1994 amounted to $1,618,000, $1,939,000 and
$2,243,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity
facility (the "Liquidity Facility") scheduled to terminate in September
1999. The Liquidity Facility is provided by a consortium of banks,
headed by Bank of Montreal, as agent, which is rated "A-1+" and "P- 1"
by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
will be able, subject to satisfying certain conditions, to borrow funds
from time to time in order to enable it to fund any claim payments or
payments made in settlement or mitigation of claim payments under its
insurance contracts. There have been no draws under the Liquidity
Facility.
CapMAC has agreed to make an investment of 50 million French Francs
(approximately $10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. This
investment is anticipated to be made in 1997.
F-17
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty and facultative reinsurance contracts, both on a pro rata and
excess of loss basis, primarily designed to minimize losses from large
risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
------------------------ ---------------------- -----------------------
$ in thousands Written Earned Written Earned Written Earned
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,069) (5,716)
- -----------------------------------------------------------------------------------------------------
Net premiums $ 57,734 40,557 41,484 29,242 33,593 23,103
=====================================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists
with respect to the aforementioned reinsurance arrangements, which may
become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At
December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
$69,000, respectively, and had ceded unearned premiums of $18,489,000
and $13,171,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The
agreement reinsured and indemnified the Company for any loss incurred
by CapMAC during the agreement period up to the limits of the
agreement. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's
fee payable to Lureco, be deposited in a trust account (the "Lureco
Trust Account") to be applied by CapMAC, at its option, to offset
losses and loss expenses incurred by CapMAC in connection with incurred
claims. Amounts on deposit in the Lureco Trust Account which have not
been applied against claims are contractually due to CapMAC at the
termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement.
Premiums in excess of the deposit amounts have been recorded as ceded
premiums in the statements of income. For the 1996 policy year, the
agreement provides $7 million of loss coverage in excess of the premium
deposit amount of $5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200%
of the net premiums earned up to $4 million for any one agreement year.
In September 1995, a claim of approximately $2.5 million on an
insurance policy was applied against the Lureco Trust Account.
F-18
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
In addition to its capital (including statutory contingency reserves),
CapMAC has other reinsurance available to pay claims under its
insurance contracts. Effective November 30, 1995, CapMAC entered into a
Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
required to pay any losses in excess of $100 million in the aggregate
incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
the insurance policies in effect on December 1, 1995 and written during
the one-year period thereafter, up to an aggregate limit payable under
the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
Agreement has a term of seven years and is subject to early termination
by CapMAC in certain circumstances. Effective January 1, 1997 the
stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses of $150 million increasing annually based on increases
in CapMAC's statutory qualified capital. The new stop-loss reinsurance
is provided by Mitsui, AXA Re Finance S.A. ("AXA Re") and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").
On November 30, 1995, CapMAC canceled the quota share reinsurance
agreement with Winterthur Swiss Insurance Company ("Winterthur")
pursuant to which Winterthur had the right to reinsure on a quota share
basis 10% of each policy written by CapMAC. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur
on January 1, 1996. In connection with the commutation, Winterthur
returned $2.0 million of unearned premiums, net of ceding commission
and Federal excise tax.
13) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
1995. The fair value amounts were determined by the Company using
independent market information when available, and appropriate
valuation methodologies when market information was not available. Such
valuation methodologies require significant judgment and are not
necessarily indicative of the amount the Company could recognize in a
current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- --------------------------------------------------------------- --------------------------------------
Financial Assets:
<S> <C> <C> <C> <C>
Available-for-sale securities $ 314,703 314,703 284,352 284,352
- --------------------------------------------------------------- --------------------------------------
Off-Balance-Sheet Instruments:
Financial guarantees outstanding $ - 219,989 - 147,840
Less: ceding commission - 65,997 - 44,352
- --------------------------------------------------------------- --------------------------------------
Net financial guarantees outstanding $ - 153,992 103,488
=============================================================== ======================================
</TABLE>
F-19
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
Available-for-sale Securities
The fair values of fixed maturities are based upon quoted market
prices. The fair value of short-term investments approximates amortized
cost.
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2)
the fair value of installment revenue which is derived by calculating
the present value of the estimated future cash inflow to CapMAC of
policies in force having installment premiums, net of amounts payable
to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
The amount calculated is assumed to be equivalent to the consideration
that would be paid by CapMAC under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a
third party under reinsurance and other agreements. Ceding commission
represents the expected amount that would be paid to CapMAC to
compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management
makes assumptions regarding prepayments for amortizing asset-backed
securities which are consistent with relevant historical experience.
For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of
future installment revenue actually realized by the Company could be
reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations
or lower than anticipated utilization of insured structured programs,
such as commercial paper conduits. Although increases in future
installment revenue earnings due to renewals of existing insurance
contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there
can be no assurance that future circumstances might not cause a
material net reduction in the future installment revenue.
14) Capitalization
In 1995, $59.0 million of the proceeds received by Holdings from the
sale of shares in connection with an initial public offering and
private placements were contributed to CapMAC.
F-20
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
F - 21
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
September 30, 1997 December 31,1996
(Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $323,043 at September
30, 1997 and $294,861 at December 31, 1996) $ 328,035 297,893
Short-term investments (at amortized cost which
approximates fair value) 21,119 16,810
- -----------------------------------------------------------------------------------------------------
Total investments 349,154 314,703
- -----------------------------------------------------------------------------------------------------
Cash 999 371
Accrued investment income 3,998 3,807
Deferred acquisition costs 51,137 45,380
Premiums receivable 7,132 5,141
Prepaid reinsurance 23,348 18,489
Other assets 5,666 6,424
- -----------------------------------------------------------------------------------------------------
Total assets $ 441,434 394,315
=====================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 76,023 68,262
Reserve for losses and loss adjustment expenses 15,389 10,985
Ceded reinsurance 5,653 1,738
Accounts payable and other accrued expenses 14,270 8,019
Current income taxes 626 679
Deferred income taxes 17,383 15,139
- -----------------------------------------------------------------------------------------------------
Total liabilities 129,344 104,822
- -----------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000 shares
are authorized, issued and outstanding at September 30, 1997
and December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized appreciation on investments, net of tax 3,251 1,970
Retained earnings 85,440 64,048
Cumulative translation adjustment, net of tax (76) -
- -----------------------------------------------------------------------------------------------------
Total stockholder's equity 312,090 289,493
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 441,434 394,315
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F - 22
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 22,345 17,206 57,525 49,983
Assumed premiums written 225 8 1,141 1,032
Ceded premiums written (7,428) (4,129) (18,049) (11,142)
- -----------------------------------------------------------------------------------------------
Net premiums written 15,142 13,085 40,617 39,873
Increase in unearned premiums (1,663) (3,042) (2,903) (11,014)
- -----------------------------------------------------------------------------------------------
Net premiums earned 13,479 10,043 37,714 28,859
Net investment income 4,958 4,307 14,344 12,296
Net realized capital gains (loss) - (57) 2,549 111
Other income 51 25 139 104
- -----------------------------------------------------------------------------------------------
Total revenues 18,488 14,318 54,746 41,370
- -----------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,528 1,248 4,404 3,432
Underwriting and operating expenses 4,430 3,780 13,309 11,142
Policy acquisition costs 2,372 2,126 7,425 6,249
- -----------------------------------------------------------------------------------------------
Total expenses 8,330 7,154 25,138 20,823
- -----------------------------------------------------------------------------------------------
Income before income taxes 10,158 7,164 29,608 20,547
- -----------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 2,502 1,027 6,652 3,008
Deferred income tax 172 718 1,564 2,689
- -----------------------------------------------------------------------------------------------
Total income taxes 2,674 1,745 8,216 5,697
- -----------------------------------------------------------------------------------------------
Net Income $ 7,484 5,419 21,392 14,850
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F - 23
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30, 1997
Common stock:
Balance at beginning of period $ 15,000
- --------------------------------------------------------------------------------
Balance at end of period 15,000
- --------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 208,475
- --------------------------------------------------------------------------------
Balance at end of period 208,475
Unrealized appreciation on investments, net of tax:
Balance at beginning of period 1,970
Unrealized appreciation on investments 1,281
- --------------------------------------------------------------------------------
Balance at end of period 3,251
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 64,048
Net income 21,392
- --------------------------------------------------------------------------------
Balance at end of period 85,440
- --------------------------------------------------------------------------------
Cumulative translation adjustment, net of tax:
Balance at beginning of period -
Translation adjustment (76)
- --------------------------------------------------------------------------------
Balance at end of period (76)
- --------------------------------------------------------------------------------
Total stockholder's equity $ 312,090
================================================================================
See accompanying notes to consolidated financial statements.
F - 24
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,392 14,850
- -------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 4,404 3,054
Unearned premiums, net 7,761 15,643
Deferred acquisition costs (5,757) (7,188)
Premiums receivable (1,991) (528)
Accrued investment income (191) (468)
Income taxes payable 1,511 2,341
Net realized capital gains (2,549) (111)
Accounts payable and other accrued expenses 6,251 5,445
Prepaid reinsurance (4,859) (4,630)
Other, net 5,089 (381)
- -------------------------------------------------------------------------------------------
Total adjustments 9,669 13,177
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,061 28,027
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (137,369) (154,308)
Proceeds from sales of investments 74,768 35,388
Proceeds from maturities of investments 32,168 91,063
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (30,433) (27,857)
- -------------------------------------------------------------------------------------------
Net increase in cash 628 170
Cash balance at beginning of period 371 344
- -------------------------------------------------------------------------------------------
Cash balance at end of period $ 999 514
===========================================================================================
Supplemental disclosures of cash flow
information:
Income taxes paid $ 6,550 3,225
Tax and loss bonds purchased $ 155 131
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F - 25
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Notes to Unaudited Consolidated Financial Statements
September 30, 1997
1. Background
Capital Markets Assurance Corporation ("CapMAC") is a New
York-domiciled monoline stock insurance company which engages only in
the business of financial guaranty and surety insurance. CapMAC is a
wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). In early
1997, CapMAC made an investment of 50 million French francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. CapMAC
Assurance, S.A., is licensed to write financial guarantee insurance in
the European Union member states.
CapMAC is licensed in all 50 states in addition to the District of
Columbia, the Commonwealth of Puerto Rico and the territory of Guam.
CapMAC insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets.
CapMAC also provides financial guaranty reinsurance for structured
asset-backed, corporate, municipal and other financial obligations
written by other major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating
agency. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating
agencies.
2. Basis of Presentation
CapMAC's consolidated unaudited interim financial statements have been
prepared on the basis of generally accepted accounting principles and,
in the opinion of management, reflect all adjustments necessary for a
fair presentation of the CapMAC's financial condition, results of
operations and cash flows for the periods presented. The results of
operations for the nine months ended September 30, 1997 may not be
indicative of the results that may be expected for the full year ending
December 31, 1997. These consolidated financial statements and notes
should be read in conjunction with the financial statements and notes
included in the audited financial statements of CapMAC as of December
31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
F - 26
<PAGE>
PROSPECTUS
================================================================================
UACSC Auto Trusts
Asset Backed Certificates
UAC Securitization Corporation
Depositor
Union Acceptance Corporation
Servicer
The asset backed certificates described herein (the "Certificates") may be sold
from time to time in one or more series (each, a "Series"), in amounts, at
prices and on terms to be determined at the time of sale and to be set forth in
a supplement to this Prospectus (a "Prospectus Supplement"). Each Series of
Certificates will be issued by a trust (each, a "Trust") to be formed with
respect to such Series and will include one or more classes of Certificates. The
property of each Trust will include a pool of motor vehicle installment sale
and/or installment loan contracts secured by new and used automobiles, light
trucks and vans (the "Receivables"), certain monies received thereunder after
the applicable cutoff date, security interests in the vehicles financed thereby
and certain other property, as more fully described herein and in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
property of a Trust will include monies on deposit in a trust account, which
will be used to purchase additional Receivables after the related closing date.
Union Acceptance Corporation will act as servicer of the Receivables for each
Trust.
Except as otherwise specified in the related Prospectus Supplement, each class
of Certificates of any Series will represent the right to receive a specified
amount of payments of principal and interest on the related Receivables, at the
rates, on the dates and in the manner described herein and in the related
Prospectus Supplement. If so provided in the related Prospectus Supplement, a
Series of Certificates may include one or more classes of Certificates entitled
to interest distributions with disproportionate, nominal or no distributions in
respect of principal, or to principal distributions with disproportionate,
nominal or no distributions in respect of interest. As more fully described
herein and in the related Prospectus Supplement, distributions on any class of
Certificates may be senior or subordinate to distributions on one or more other
classes of Certificates of the same Series.
Prospective investors should consider the factors set forth under "Risk Factors"
on page 10 of this Prospectus and in the related Prospectus Supplement.
EXCEPT AS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT,
THE CERTIFICATES OF A SERIES WILL REPRESENT BENEFICIAL INTERESTS
IN THE RELATED TRUST ONLY, AND WILL
NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN, AND ARE NOT GUARANTEED OR
INSURED BY, UAC SECURITIZATION CORPORATION, ANY AFFILIATE THEREOF OR
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates of any Series unless accompanied by the
related Prospectus Supplement.
November 19, 1997
<PAGE>
AVAILABLE INFORMATION
The Depositor, as originator of the Trusts, has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Certificates being offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information, reference is made to the Registration
Statement, which is available for inspection without charge at the public
reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and the regional offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a web site on the
internet that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Registration Statement. The address of such site is:
http://www.sec.gov.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from an Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or such
Underwriter will promptly deliver, or cause to be delivered, without charge, to
such investor a paper copy of the Prospectus Supplement and Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Servicer or the Depositor on behalf of the
Trust referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the termination of the offering of the Certificates offered by such
Trust shall be deemed to be incorporated by reference in this Prospectus and to
be a part hereof from the dates of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any subsequently filed document that
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Servicer on behalf of any Trust will provide without charge to each
person to whom a copy of this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference, except the exhibits to such documents. Requests to the
Servicer for such copies should be addressed to Union Acceptance Corporation,
250 North Shadeland Avenue, Indianapolis, Indiana 46219, (317) 231-7965.
<PAGE>
SUMMARY OF TERMS
This Summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and by reference to the
information with respect to each Series of Certificates contained in the related
Prospectus Supplement to be prepared and delivered in connection with the
offering of such Certificates. Certain capitalized terms used in this summary
are defined elsewhere in this Prospectus on the pages indicated in the "Index of
Principal Terms".
Issuer ................................ With respect to any Series of
Certificates, a Trust formed pursuant to
a pooling and servicing agreement (each,
a "Pooling and Servicing Agreement")
among the Depositor, the Servicer and
the Trustee for such Trust.
Depositor ..............................UAC Securitization Corporation, a
Delaware corporation having its
principal office and place of business
in Bonita Springs, Florida (the
"Depositor"). The Depositor's principal
executive offices are located at 9240
Bonita Beach Road, Suite 1109-A, Bonita
Springs, Florida 34135, and its
telephone number is (941) 948-1850.
Servicer ...............................Union Acceptance Corporation, an Indiana
corporation having its principal office
and place of business in Indianapolis,
Indiana (in its capacity as servicer the
"Servicer", otherwise "UAC"). The
Servicer's principal offices are located
at 250 North Shadeland Avenue,
Indianapolis, Indiana 46219, and its
telephone number is (317) 231-7965.
Trustee ...............................With respect to each Trust, the trustee
specified in the related Prospectus
Supplement (the "Trustee").
Securities Offered ....................Each Series of asset backed securities
issued by a Trust will consist of one or
more classes of Certificates. Each class
of Certificates of a Series will be
issued pursuant to the related Pooling
and Servicing Agreement. The related
Prospectus Supplement will specify which
class or classes of Certificates of the
related Series are being offered
thereby.
Unless otherwise specified in the
related Prospectus Supplement, each
class of Certificates will have a stated
certificate principal balance (the
"Class Certificate Balance") and will
accrue interest on such Class
Certificate Balance at a specified rate
(with respect to each class of
Certificates, the "Pass-Through Rate").
If so specified in the related
Prospectus Supplement, one or more
classes of Certificates ("Strip
Certificates") may be entitled to (i)
interest distributions with
disproportionate, nominal or no
principal distributions or (ii)
principal distributions with
disproportionate, nominal or no interest
distributions. See "Description of the
Certificates -- Distributions of
Principal and Interest".
<PAGE>
Each class of Certificates may have a
different Pass-Through Rate, which may
be a fixed, variable or adjustable
Pass-Through Rate, or any combination of
the foregoing. The related Prospectus
Supplement will specify the Pass-Through
Rate, or the method for determining the
applicable Pass-Through Rate, for each
class of Certificates.
A Series of Certificates may include two
or more classes of Certificates that
differ as to timing and/or priority of
distributions, seniority, allocations of
losses, Pass-Through Rate, amount of
distributions in respect of principal or
interest, or any combination of the
foregoing. Additionally, distributions
in respect of principal or interest in
respect of any such class or classes may
or may not be made upon the occurrence
of specified events or on the basis of
collections from designated portions of
the related Receivables Pool.
Unless otherwise specified in the
related Prospectus Supplement,
Certificates will be available in
book-entry form only and will be
available for purchase in minimum
denominations of $1,000 and integral
multiples thereof, except that one
Certificate of each class may be issued
in such denomination as is required to
include any residual amount. Unless
otherwise specified in the related
Prospectus Supplement,
Certificateholders will be able to
receive Definitive Certificates only in
the limited circumstances described
herein or in the related Prospectus
Supplement. See "Description of the
Certificates -- Definitive
Certificates".
If so provided in the related Prospectus
Supplement, the Servicer or one or more
other entities may be entitled to
purchase the Receivables of a Trust or
to cause such Receivables to be
purchased by another entity, in the
manner and subject to the conditions
described in such Prospectus Supplement.
If the Servicer or any such other entity
exercises any such option to purchase
the Receivables or to cause the
Receivables to be purchased, the
Certificates will be prepaid as set
forth in the related Prospectus
Supplement. See "Description of the
Transfer and Servicing Agreements --
Termination" herein. In addition, if the
related Prospectus Supplement provides
that the property of a Trust will
include a Pre-Funding Account, one or
more classes of Certificates may be
subject to a partial prepayment of
principal following the end of the
Funding Period, in the manner and to the
extent specified in the related
Prospectus Supplement. See "Description
of the Transfer and Servicing Agreements
-- Accounts -- Pre-Funding Account"
herein.
<PAGE>
The Trust Property......................The property of each Trust will include
a pool of simple interest and
precomputed interest installment sale
and installment loan contracts secured
by new and used automobiles, light
trucks and vans (the "Receivables"),
certain monies due or received
thereunder after the date specified in
the related Prospectus Supplement (each,
a "Cutoff Date"), security interests in
the vehicles financed thereby (the
"Financed Vehicles"), any right to
recourse of UAC against the dealers who
sold the Financed Vehicles (the
"Dealers"), proceeds from claims on
certain insurance policies, and certain
rights under the purchase agreement
(each, a "Purchase Agreement") among
UAC, the Depositor and Union Acceptance
Funding Corporation ("UAFC") pursuant to
which the Depositor will purchase the
related Receivables from UAFC. The
property of each Trust also will include
amounts on deposit in, or certain rights
with respect to, certain accounts,
including the related Certificate
Account and any Pre-Funding Account,
Cash Collateral Account (or Spread
Account), yield supplement account or
any other account identified in the
applicable Prospectus Supplement. See
"Description of the Transfer and
Servicing Agreements-- Accounts".
The Receivables arise, or will arise,
from motor vehicle installment sale
contracts that were originated by
dealers for assignment to UAC (directly
or through UAC Finance Corporation, a
wholly-owned subsidiary of UAC ("UACFC")
or Union Federal Savings Bank of
Indianapolis (the "Predecessor"), UAC's
parent corporation before the completion
on August 7, 1995 of a spin-off) or
motor vehicle loan contracts that were
solicited by dealers for origination by
UAC, UACFC or the Predecessor
(collectively, the "Contracts"). In the
ordinary course of its business,
immediately after UAC originates or
otherwise acquires the Contracts, UAC
sells the Contracts to UAFC. Payment of
the amount due under each Contract is
secured by a first perfected security
interest in the related Financed
Vehicle. UAFC, UAC, UACFC or the
Predecessor is or will be the registered
lienholder on the certificate of title
of each of the Financed Vehicles. The
Receivables for each Receivables Pool
will be selected from the Contracts
owned by UAFC based on the criteria
specified in the related Pooling and
Servicing Agreement and described herein
under "The Receivables Pools" and
"Description of the Transfer and
Servicing Agreement -- Sale and
Assignment of Receivables" and in the
related Prospectus Supplement under "The
Receivables Pool".
<PAGE>
On the date of issuance of a Series of
Certificates (each, a "Closing Date"),
the Depositor will convey Receivables to
the related Trust in the aggregate
principal amount provided in the related
Prospectus Supplement and, if so
provided in such Prospectus Supplement,
will deposit the amount specified in
such Prospectus Supplement (the
"Pre-Funded Amount") into a trust
account established in the name of the
Trustee for the benefit of the
Certificateholders (the "Pre-Funding
Account"). The Pre-Funded Amount with
respect to any Trust will not exceed 25%
of the initial aggregate Class
Certificate Balances for the related
Series (the "Certificate Balance").
Ifthe property of a Trust includes a
Pre-Funding Account, UAFC will be
obligated under the related Purchase
Agreement to sell additional Receivables
(the "Subsequent Receivables") to the
Depositor from time to time during the
period provided in the related
Prospectus Supplement (the "Funding
Period") having an aggregate principal
balance approximately equal to the
Pre-Funded Amount. The Depositor, in
turn, will be obligated under the
Pooling and Servicing Agreement to sell
such Subsequent Receivables to the
related Trust, and the Trust will be
obligated to purchase the Subsequent
Receivables, subject to the satisfaction
of certain conditions set forth in the
Pooling and Servicing Agreement and
described herein under "Description of
the Transfer and Servicing Agreements --
Sale and Assignment of Receivables". As
used in this Prospectus, the term
Receivables will include the Receivables
transferred to a Trust on the related
Closing Date as well as any Subsequent
Receivables transferred to such Trust
during the related Funding Period.
Amounts on deposit in any Pre-Funding
Account during the Funding Period will
be invested by the Trustee (as directed
by the Servicer) in Eligible
Investments, and any resultant
investment income (less any related
investment expenses) will be included,
on the Distribution Date immediately
following the date on which such
investment income is paid to the Trust,
in the Available Funds for such
Distribution Date. Any funds remaining
in a Pre-Funding Account at the end of
the related Funding Period will be
distributed to holders of the related
Series of Certificates (the
"Certificateholders") as a prepayment of
principal of the Certificates, in the
amounts and priority described in the
related Prospectus Supplement. No
Funding Period will continue for more
than three calendar months after the
related Closing Date. See "Description
of the Transfer and Servicing Agreements
-- Accounts -- Pre-Funding Account".
<PAGE>
In each Purchase Agreement, UAC and UAFC
will make certain representations and
warranties with respect to the related
Receivables and will undertake to
repurchase from the Depositor any
Receivable with respect to which there
exists an uncured breach of any of its
representations or warranties, if such
breach materially and adversely affects
the rights of the Depositor, or the
Depositor's assignee, in such
Receivable. In each Pooling and
Servicing Agreement, the Depositor will
assign to the related Trust certain
rights under the related Purchase
Agreement, including the right to cause
UAC to repurchase any Receivable in
respect of which it is in breach of a
breach or warranty that materially and
adversely affects the interest of the
Trust in such Receivable. None of UAC,
UAFC or the Depositor will have any
other obligation with respect to the
Receivables or the Certificates. See
"Description of the Transfer and
Servicing Agreements -- Sale and
Assignment of Receivables".
Credit and Cash
Flow Enhancement........................If and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to a Trust or
any class or classes of Certificates may
include any one or more of the
following: subordination of one or more
other classes of Certificates of the
same Series, Cash Collateral Accounts,
Spread Accounts, yield supplement
accounts, surety bonds, insurance
policies, letters of credit, credit or
liquidity facilities,
over-collateralization, guaranteed
investment contracts, swaps or other
interest rate protection agreements,
repurchase obligations, other agreements
with respect to third-party payments or
other support, cash deposits, or other
arrangements. To the extent specified in
the related Prospectus Supplement, a
form of credit enhancement with respect
to a Trust or class or classes of
Certificates may be subject to certain
limitations and exclusions from coverage
thereunder.
Transfer and Servicing
Agreements............................Pursuant to each Purchase Agreement,
UAFC will sell the related Receivables
to the Depositor without recourse and,
if so stated in the related Prospectus
Supplement, will undertake to sell
Subsequent Receivables, in the aggregate
amount specified therein, to the
Depositor during the related Funding
Period. The Depositor, in turn, will
sell such Receivables to the related
Trust, without recourse, and will
undertake to sell any such Subsequent
Receivables to the related Trust during
the related Funding Period. In addition,
the Servicer will agree in each Pooling
and Servicing Agreement to be
responsible for servicing, managing,
maintaining custody of and making
collections on the related Receivables.
<PAGE>
Unless otherwise provided in the related
Prospectus Supplement, the Servicer will
advance funds (each, an "Advance") on
the Receivables made during the
preceding calendar month (the
"Collection Period") to cover 30 days of
interest due on a Receivable that is
more than 30 days delinquent (each, an
"Interest Shortfall"), but only to the
extent that the Servicer, in its sole
discretion, expects to be able to recoup
such Advance from subsequent payments on
the Receivable. Advances by the Servicer
will add to the funds available for
distributions to Certificateholders on a
Distribution Date, but the Servicer will
be entitled to reimbursement for such
Advances from subsequent payments of the
Receivables or, to the extent set forth
in the related Prospectus Supplement,
from insurance proceeds or withdrawals
from any Cash Collateral Account or
similar form of credit enhancement. See
"Description of the Transfer and
Servicing Agreements -- Advances".
Unless otherwise provided in the related
Prospectus Supplement, UAC will be
obligated to repurchase from the Trust
any Receivable in which the interest of
such Trust is materially and adversely
affected as a result of a breach of any
representation or warranty made by UAC
and/or UAFC in the related Purchase
Agreement if such breach is not cured in
a timely manner following the discovery
by or notice to UAC. In addition, unless
otherwise provided in the related
Prospectus Supplement, the Servicer will
be obligated under each Pooling and
Servicing Agreement to purchase any
Receivable if (i) among other things,
the Servicer reduces the rate of
interest under the related Contract (the
"Contract Rate"), changes the amount of
the scheduled monthly payments or the
amount financed or fails to maintain a
perfected security interest in the
related Financed Vehicle and (ii) the
interest of the Certificateholders in
such Receivable is materially and
adversely affected by such action or
failure to act of the Servicer. If the
Servicer extends the date for final
payment by the obligor on the related
Contract (each, an "Obligor") beyond the
latest final scheduled maturity date for
any class specified in the related
Prospectus Supplement (the "Final
Scheduled Maturity Date"), the Servicer
will be obligated to purchase the
Receivable on such Final Scheduled
Maturity Date.
Unless otherwise specified in the
related Prospectus Supplement, the
Servicer will receive a fee for
servicing the Receivables of each Trust
equal to the Servicing Fee Rate times
the aggregate outstanding principal
balance of the related Receivables (the
"Pool Balance"), plus certain late fees,
prepayment charges and other
administrative fees or similar charges.
UAC may also receive investment earnings
from certain accounts and other cash
flows with respect to a Trust. See
"Description of the Transfer and
Servicing Agreements -- Servicing
Compensation and Payment of Expenses"
herein.
<PAGE>
Certain Legal Aspects
of the Receivables;
Repurchase Obligations................In connection with each sale of
Receivables by UAFC to the Depositor and
by the Depositor to a Trust, security
interests in the related Financed
Vehicles will be assigned by UAFC to the
Depositor and by the Depositor to the
Trust; due to administrative burden and
expense, however, the certificates of
title to such Financed Vehicles will not
be amended to reflect the assignment
either to the Depositor or to the Trust.
In the absence of such an amendment, the
Trust may not have a perfected security
interest in the Financed Vehicles
securing the Receivables in some states.
Unless otherwise specified in the
related Prospectus Supplement, UAC will
be obligated to repurchase from a Trust
any Receivable sold to such Trust as to
which all action necessary to secure a
first perfected security interest in the
name of UAFC, UAC, UACFC or the
Predecessor in the Financed Vehicle
securing such Receivable shall not have
been taken as of the date such
Receivable is purchased by such Trust,
if such breach materially and adversely
affects the interest of the related
Certificateholders in such Receivable
and if such failure or breach is not
cured by the last day of the second
month following the discovery by or
notice to UAC of such breach. If a Trust
does not have a perfected security
interest in a Financed Vehicle, its
ability to realize on such Financed
Vehicle in the event of a default may be
adversely affected. To the extent the
security interest is perfected, a Trust
will have a prior claim over subsequent
purchasers of the Financed Vehicle and
holders of subsequently perfected
security interests. However, as against
liens for repairs of Financed Vehicles
or for taxes unpaid by the related
Obligor, or through fraud or negligence,
a Trust could lose its security interest
or the priority of its security interest
in a Financed Vehicle. None of the
Depositor, UAC, UACFC or UAFC will be
obligated to repurchase a Receivable
with respect to which a Trust loses its
security interest or the priority of its
security interest in the related
Financed Vehicle after the Closing Date
as the result of any such tax lien or
mechanic's lien or the fraud or
negligence of a third party.
Federal and state consumer protection
laws impose requirements on creditors in
connection with extensions of credit and
collections of retail installment loans,
and certain of these laws make an
assignee of such a loan liable to the
obligor thereon for any violation by the
lender. Unless otherwise specified in
the related Prospectus Supplement, UAC
will be required to repurchase from the
Trust any Receivable that fails to
comply with the requirements of such
consumer protection laws on or before
the last day of the month following
discovery by or notice to UAC of such
failure, if such failure materially and
adversely affects the interests of the
related Certificateholders in such
Receivable. See "Certain Legal Aspects
of the Receivables".
<PAGE>
Tax Considerations......................If a Prospectus Supplement specifies
that the related Trust is a grantor
trust and except as otherwise provided
in such Prospectus Supplement, upon the
issuance of the related Series of
Certificates, special federal tax
counsel to the Trust identified in the
related Prospectus Supplement (the
"Federal Tax Counsel") will deliver an
opinion to the effect that such Trust
will be treated as a grantor trust for
federal income tax purposes and will not
be subject to federal income tax.
If a Prospectus Supplement does not
specify that the related Trust is a
grantor trust, upon the issuance of the
related Series of Certificates Federal
Tax Counsel will deliver an opinion to
the effect that such Trust will not be
treated as an association taxable as a
corporation or as a "publicly traded
partnership" taxable as a corporation.
See "Certain Federal Income Tax
Consequences" for additional information
regarding the application of federal tax
laws to a Trust and the related Series
of Certificates.
ERISA Considerations....................Subject to the considerations discussed
under "ERISA Considerations" herein and
in the related Prospectus Supplement and
unless otherwise provided therein, any
Certificates that meet certain
Department of Labor requirements are
eligible for purchase by employee
benefit plans and plans subject to the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). Unless
otherwise specified in the related
Prospectus Supplement, any class of
Certificates that is subordinated to any
other class of Certificates of the same
Series may not be acquired by any such
employee benefit plan, plan subject to
ERISA or an individual retirement
account. See "ERISA Considerations"
herein and in the related Prospectus
Supplement.
Ratings ...............................It is a condition to the issuance of the
Certificates to be offered hereunder
that they be rated in one of the four
highest rating categories by at least
one nationally recognized statistical
rating organization (each, a "Rating
Agency"). A rating is not a
recommendation to purchase, hold or sell
Certificates inasmuch as a rating does
not comment as to market price or
suitability for a particular investor.
Ratings of Certificates will address the
likelihood of the payment of principal
of and interest on the Certificates
pursuant to their terms. There can be no
assurance that a rating will remain for
a given period of time or that a rating
will not be lowered or withdrawn
<PAGE>
entirely by a Rating Agency if in its
judgment circumstances in the future so
warrant. See "Risk Factors-- Ratings of
the Certificates" herein. For more
detailed information regarding the
ratings assigned to any class of
Certificates of a particular Series, see
"Summary of Terms-- Ratings" and "Risk
Factors-- Certificate Rating" in the
related Prospectus Supplement.
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus and
in the related Prospectus Supplement to be prepared and delivered in connection
with the offering of any Series of Certificates, prospective investors should
carefully consider the following risk factors before investing in any class or
classes of Certificates of any such Series.
Pre-Funding Accounts. If so provided in the related Prospectus
Supplement, on the Closing Date the Depositor will deposit the Pre-Funded Amount
specified in such Prospectus Supplement into the Pre-Funding Account. In no
event will the Pre-Funded Amount exceed 25% of the initial Certificate Balance
of the related Series of Certificates. The Pre-Funded Amount will be used to
purchase Subsequent Receivables from the Depositor (which, in turn, will acquire
such Subsequent Receivables from UAFC) from time to time during the Funding
Period. During the Funding Period and until such amounts are applied by the
Trustee to purchase Subsequent Receivables, amounts on deposit in the
Pre-Funding Account will be invested by the Trustee (as instructed by the
Servicer) in Eligible Investments, and any investment income with respect
thereto (net of any related investment expenses) will be distributed on each
Distribution Date during the Funding Period as part of the Available Funds for
the related Collection Period. No Funding Period will end more than three
calendar months after the related Closing Date.
To the extent that the entire Pre-Funded Amount has not been applied to
the purchase of Subsequent Receivables by the end of the related Funding Period,
any amounts remaining in the Pre-Funded Account will be distributed as a
prepayment of principal to Certificateholders following the end of the Funding
Period, in the amounts and pursuant to the priorities set forth in the related
Prospectus Supplement. Such prepayment will reduce the Certificateholder's
outstanding principal balance and anticipated yield.
Sales of Subsequent Receivables. If so provided in the related
Prospectus Supplement, (i) UAFC will be obligated pursuant to the Purchase
Agreement to sell Subsequent Receivables (subject only to the availability
thereof) to the Depositor from time to time during the Funding Period in an
aggregate principal amount approximately equal to the Pre-Funded Amount, (ii)
the Depositor, in turn, will be obligated pursuant to the Pooling and Servicing
Agreement to sell such Subsequent Receivables to the Trust and (iii) the Trust
will be obligated to purchase such Subsequent Receivables, subject only to the
satisfaction of certain conditions set forth in the Pooling and Servicing
Agreement and described in the related Prospectus Supplement. If the principal
amount of eligible Subsequent Receivables originated or acquired by UAC during a
Funding Period is less than the Pre-Funded Amount, UAFC and the Depositor may
have insufficient Subsequent Receivables to transfer to a Trust, and holders of
one or more classes of the related Series of Certificates may receive a full or
partial prepayment of principal at the end of the Funding Period as described
above under "-- Pre-Funding Accounts".
Any conveyance of Subsequent Receivables to a Trust is subject to the
satisfaction, on or before the related transfer date (each, a "Subsequent
Transfer Date"), of the following conditions precedent, among others: (i) each
such Subsequent Receivable must satisfy the eligibility criteria specified in
the related Pooling and Servicing Agreement; (ii) the Subsequent Receivables
shall have been selected based on the criteria specified in the applicable
Prospective Supplement and neither UAFC nor the Depositor shall have selected
such Subsequent Receivables in a manner that it deems is adverse to the
interests of holders of the related Certificates; (iii) as of the respective
Cutoff Date for such Subsequent Receivables, all of the Receivables in the
Trust, including the Subsequent Receivables to be conveyed to the Trust as of
such date, must satisfy the parameters described under "The Receivables Pools"
herein and "The Receivables Pool" in the related Prospectus Supplement; (iv) any
required deposit to any Cash Collateral Account or other similar account shall
have been made; and (v) UAFC must execute and deliver to the Depositor, and the
Depositor must execute and deliver to such Trust, a written assignment conveying
such Subsequent Receivables to the Depositor or such Trust, as applicable. In
addition, the conveyance of Subsequent Receivables to a Trust is subject to the
satisfaction of the following conditions subsequent, among others, each of which
must be satisfied within the applicable time period specified in the related
Prospectus Supplement: (a) the Depositor must deliver certain opinions of
<PAGE>
counsel to the related Trustee with respect to the validity of the conveyance of
the Subsequent Receivables to the Trust; (b) the Trustee must receive written
confirmation from a firm of certified independent public accountants that, as of
the end of the period specified therein, the Receivables in the Trust, including
the Subsequent Receivables, satisfied the parameters described under "The
Receivables Pools" herein and "The Receivables Pool" in the related Prospectus
Supplement; and (c) each of the Rating Agencies must notify the Depositor in
writing that, following the conveyance of the Subsequent Receivables to the
Trust, each class of Certificates will have the same rating assigned to it by
such Rating Agency that it had on the Closing Date. Such confirmation of the
ratings of the Certificates may depend on factors other than the characteristics
of the Subsequent Receivables, including the delinquency, repossession and net
loss experience on the automobile, light truck and van receivables in the
portfolio serviced by UAC. UAC will be required pursuant to each Purchase
Agreement and Pooling and Servicing Agreement to repurchase immediately from a
Trust any Subsequent Receivable, at a price equal to the Purchase Amount
thereof, with respect to which any of the foregoing conditions is not satisfied.
Certain Legal Aspects -- Security Interests in Financed Vehicles.
Simultaneously with each sale of Receivables, UAFC will assign to the Depositor,
and the Depositor will assign to the related Trust, security interests in the
related Financed Vehicles; due to administrative burden and expense, however,
the certificates of title to such Financed Vehicles will not be amended to
reflect the assignment to either the Depositor or the Trust. In the absence of
such amendments, a Trust may not have a perfected security interest in such
Financed Vehicles in some states. Except as otherwise provided in the related
Prospectus Supplement, UAC will be obligated to repurchase from the related
Trust any Receivable sold to a Trust as to which all actions necessary to secure
a first perfected security interest in the name of UAFC (or, in certain cases,
UAC, UACFC or the Predecessor) in the Financed Vehicle securing such Receivable
shall not have been taken as of the date such Receivable is transferred to such
Trust, if such breach materially and adversely affects the interest of the
Certificateholders in such Receivable and if such failure or breach is not
timely cured following discovery by or notice thereof to the Depositor or UAC.
If a Trust does not have a perfected security interest in a Financed
Vehicle, its ability to realize on such Financed Vehicle in the event of a
default may be adversely affected. To the extent the security interest is
perfected, the Trust will have a prior claim over subsequent purchasers of such
Financed Vehicle and holders of subsequently perfected security interests;
however, the Trust could lose its security interest or the priority of its
security interest in a Financed Vehicle as against liens for repairs of such
Financed Vehicle or for taxes unpaid by the related Obligor or through fraud or
negligence. None of the Depositor, UAFC, UACFC or UAC will have any obligation
to repurchase a Receivable in respect of which a Trust loses its security
interest or the priority of its security interest in the related Financed
Vehicle as the result of any such mechanic's or tax lien or the fraud or
negligence of a third party occurring after the date such security interest was
conveyed to the Trust. See "Certain Legal Aspects of the Receivables -- Security
Interest in Vehicles".
Certain Legal Aspects -- Consumer Protection Laws. Federal and state
consumer protection laws impose requirements on creditors in connection with
extensions of credit and collections of retail installment loans, and certain of
these laws make an assignee of such a loan (such as a Trust) liable to the
obligor thereon for any violation by the lender. To the extent specified herein
and in the related Prospectus Supplement, UAC will be obligated to repurchase
from the related Trust any Receivable that fails to comply with such
requirements. See "Certain Legal Aspects of the Receivables -- Consumer
Protection Laws".
Certain Legal Aspects -- Insolvency Considerations. UAC and UAFC will
warrant to the Depositor in each Purchase Agreement (the benefit of which
warranty will be assigned by the Depositor to each Trust in the related Pooling
and Servicing Agreement) that the sale of the Receivables by UAFC to the
Depositor, and by the Depositor to such Trust, respectively, is a valid sale of
the Receivables to the Depositor and to such Trust. Notwithstanding the
foregoing, if UAC, UACFC, UAFC or the Depositor were to become a debtor in a
bankruptcy case and a creditor or trustee-in-bankruptcy of such debtor or such
debtor itself were to take the position that the sale of Receivables to the
<PAGE>
Depositor or such Trust, as applicable, should be treated as a pledge of such
Receivables to secure a borrowing of such debtor, then delays in payments of
collections of Receivables to Certificateholders could occur or (should the
court rule in favor of any such trustee, creditor or debtor) reductions in the
amounts of such payments could result. If the transfer of Receivables to the
Depositor or any Trust is treated as a pledge instead of a sale, a tax or
government lien on the property of UAFC or the Depositor, as applicable, arising
before the transfer of such Receivables to such Trust may have priority over
such Trust's interest in such Receivables. If the transactions contemplated
herein are treated as a sale, the Receivables would not be part of UAFC's or the
Depositor's bankruptcy estate and would not be available to creditors of UAFC or
the Depositor. See "Certain Legal Aspects of the Receivables -- Bankruptcy
Matters".
The decision of the U.S. Court of Appeals for the Tenth Circuit,
Octagon Gas Systems, Inc. v. Rimmer (In re Meridian Reserve, Inc.) (decided May
27, 1993), contains language to the effect that under the UCC accounts sold by a
debtor would remain property of the debtor's bankruptcy estate, whether or not
the sale of the accounts was perfected. Although the Receivables constitute
chattel paper under the UCC, rather than accounts, Article 9 of the UCC applies
to the sale of chattel paper as well as the sale of accounts, and perfection of
a security interest in both chattel paper and accounts may be accomplished by
the filing of a UCC-1 financing statement. If, following a bankruptcy of UAC,
UAFC, UACFC or the Depositor, a court were to follow the reasoning of the Tenth
Circuit reflected in the above case, then the Receivables could be included in
the bankruptcy estate of UAC, UAFC, UACFC or the Depositor, as applicable, and
delays in payments of collections on or in respect of the Receivables could
occur. UAC and UAFC will warrant to the Depositor in each Purchase Agreement,
and the Depositor will warrant to the Trust in each Pooling and Servicing
Agreement, that the sale of the related Receivables to the Depositor or the
related Trust is a sale of such Receivables to the Depositor and to the Trust,
respectively.
Limited Obligations of UAC, UAFC, UACFC and the Depositor. None of UAC,
UAFC, UACFC or the Depositor (or any affiliates thereof) will be generally
obligated to make any payments to a Trust in respect of the related Certificates
or Receivables. However, in connection with the sale of the Receivables, UAC and
UAFC will make representations and warranties regarding the characteristics of
such Receivables and, in certain circumstances, UAC will be required to
repurchase from the Trust any Receivables with respect to which such
representations and warranties have been breached. See "Description of the
Transfer and Servicing Agreements -- Sale and Assignment of Receivables". In
addition, UAC, as Servicer, may be required to purchase Receivables from a Trust
under certain circumstances set forth in the Pooling and Servicing Agreement.
See "Description of the Transfer and Servicing Agreements -- Servicing
Procedures".
Subordination of Certain Classes of Certificates. To the extent
specified in the related Prospectus Supplement, distributions of interest and
principal on one or more classes of Certificates may be subordinated in priority
of payment to interest and principal due on one or more other classes of
Certificates of the same Series.
Limited Assets of each Trust. None of the Trusts will have, nor will
any such Trust be permitted or expected to have, any significant assets or
sources of funds other than the related Receivables and, to the extent provided
in the related Prospectus Supplement, a Pre-Funding Account or Cash Collateral
Account, yield supplement account or other form of credit enhancement. The
Certificates of each Series will represent interests solely in the related Trust
and will not represent obligations of or interests in, or be insured or
guaranteed by, UAC, UAFC, UACFC, the Depositor, the Trustee or any other entity.
Consequently, holders of the Certificates of any Series must rely for repayment
upon payments on the related Receivables and, if and to the extent available,
amounts available under any available form of credit enhancement, all as
specified in the related Prospectus Supplement.
<PAGE>
Maturity and Prepayment Considerations. All of the Receivables are
prepayable at any time by the related Obligor. As used herein with respect to
any Receivable, the term prepayment includes prepayments in full, partial
prepayments (including those related to rebates of extended warranty contract
costs and insurance premiums) and liquidations due to defaults, as well as
receipts of proceeds from physical damage, credit life and disability insurance
policies and any lender's single insurance policy, and Purchase Amounts with
respect to certain other Receivables repurchased by UAC as a result of a breach
of a representation or warranty or purchased by the Servicer for administrative
reasons. The rate of prepayments on the Receivables may be influenced by a
variety of economic, social and other factors, including the fact that an
Obligor generally may not sell or transfer the Financed Vehicle securing a
Receivable without the consent of UAFC. The rate of prepayment on the
Receivables may also be influenced by the structure of the underlying loans. To
the extent prepayments on the Receivables are more rapid than expected,
Certificateholders' anticipated yield will be reduced. See "Weighted Average
Life of the Certificates". In addition, if so provided in the related Prospectus
Supplement, the Servicer or one or more other entities may be entitled to
purchase, or to cause another person or entity to purchase, the Receivables of a
given Receivables Pool under the circumstances described in such Prospectus
Supplement. See "Description of the Transfer and Servicing Agreements -
Termination".
In addition, a Series of Certificates may include one or more classes
of interest-only or other Strip Certificates that may be more sensitive than
other classes of Certificates of such Series to the rate of payment on the
related Receivables. Prospective investors in any such class of Certificates
should carefully consider the information provided with respect to such
Certificates under "Risk Factors" and elsewhere in the related Prospectus
Supplement.
Ratings of the Certificates. It is a condition of the issuance of the
Certificates to be offered hereunder that they be rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating organization. A rating is not a recommendation to purchase, hold or sell
Certificates inasmuch as a rating does not comment as to market price or
suitability for a particular investor. The ratings of the Certificates will
address the likelihood of the payment of principal and interest thereon pursuant
to their terms. There can be no assurance that a rating will remain in effect
for any given period of time or that a rating will not be lowered or withdrawn
entirely by a Rating Agency if in its judgment circumstances in the future so
warrant. For more detailed information regarding the ratings assigned to any
class of a particular Series of Certificates, see "Summary of Terms -- Ratings"
and "Risk Factors -- Certificate Rating" in the related Prospectus Supplement.
Book-Entry Registration. Unless otherwise specified in the related
Prospectus Supplement, each class of the Certificates of a given Series
initially will be represented by one or more certificates registered in the name
of Cede & Co. ("Cede"), or any other nominee of The Depository Trust Company
("DTC") set forth in the related Prospectus Supplement, and will not be
registered in the names of the holders of such Certificates or their nominees.
Because of this, unless and until Definitive Certificates for such Series are
issued, the beneficial owners of such Certificates will not be recognized by the
Trustee as "Certificateholders" (as such term is used herein or in the related
Pooling and Servicing Agreement). Hence, until Definitive Certificates are
issued, beneficial owners of the Certificates will be able to exercise the
rights of Certificateholders only indirectly through DTC and its participating
organizations. See "Description of the Certificates -- Book-Entry Registration"
and " -- Definitive Certificates".
THE TRUSTS
Each Series of Certificates will be issued by a separate Trust
established by the Depositor pursuant to a Pooling and Servicing Agreement for
the transactions described herein and in the related Prospectus Supplement. The
property of each Trust will include a pool (a "Receivables Pool") of simple
interest or precomputed interest retail installment sale or installment loan
contracts secured by new or used automobiles, light trucks or vans and certain
payments due or received thereunder after the applicable Cutoff Date. The
Receivables in each Receivables Pool were or will be either (a) originated by
<PAGE>
Dealers for assignment to UAC (either directly or indirectly through the
Predecessor) or (b) solicited by Dealers for origination by UAC or the
Predecessor. Immediately after the origination or other acquisition of the
Contracts by UAC, UAC sells the Contracts to UAFC in the ordinary course of
business. UAFC, UAC, UACFC or the Predecessor will be the registered lienholder
listed on the certificates of title of the Financed Vehicles. The Receivables
will continue to be serviced by UAC as the initial Servicer under each Pooling
and Servicing Agreement.
On or prior to the applicable Closing Date, UAFC will sell to the
Depositor, pursuant to the Purchase Agreement, Receivables in the aggregate
principal amount specified in the related Prospectus Supplement. Thereafter, on
such Closing Date, the Depositor will convey such Receivables and, if so
provided in the related Prospectus Supplement, the Pre-Funded Amount to the
related Trust in exchange for the delivery to the Depositor of the Series of
Certificates issued on such date by such Trust. If the Prospectus Supplement
provides for the conveyance of a Pre-Funded Amount to the related Trust, UAFC
will also be required under the Purchase Agreement, and the Depositor will be
required under the related Pooling and Servicing Agreement, to convey to the
Depositor and the Trust, respectively, Subsequent Receivables from time to time
during the Funding Period in an aggregate principal amount approximately equal
to such Pre-Funded Amount. Any Subsequent Receivables so conveyed to a Trust
will also be assets of such Trust. Except as otherwise provided in the related
Prospectus Supplement, the property of each Trust will also include (i)
interests in certain amounts that may from time to time be held in separate
trust accounts established and maintained pursuant to the related Pooling and
Servicing Agreement and, if so provided in the related Prospectus Supplement,
the proceeds of such accounts; (ii) security interests in the Financed Vehicles
and any other interest of UAC, the Predecessor, UAFC, UACFC and the Depositor in
such Financed Vehicles; (iii) any recourse rights of UAC, UACFC or the
Predecessor against Dealers; (iv) any rights of UAC or the Predecessor to
proceeds from claims on or refunds of premiums with respect to certain physical
damage, credit life and disability insurance policies covering the Financed
Vehicles or the Obligors, as the case may be, including any lender's single
interest insurance policy; (v) any property that secures a Receivable and that
has been acquired by the Trust; (vi) certain rights under the related Purchase
Agreement; and (vii) any and all proceeds of the foregoing. UAFC will not convey
to the Depositor, and the Depositor will not convey to a Trust, and the related
Certificateholders will have no interest in, any contract with a Dealer
establishing "dealer reserves" or any rights to recapture dealer reserves
pursuant to such a contract. To the extent specified in the related Prospectus
Supplement, a Pre-Funding Account or a Cash Collateral Account, a yield
supplement account, surety bond, swap or other interest rate protection, or any
other form of credit enhancement may be a part of the property of a Trust or may
be held by the Trustee for the benefit of holders of the related Certificates.
UAC, as initial Servicer under each Pooling and Servicing Agreement,
will continue to service the Receivables held by each Trust and will receive
fees for such services. See "Description of the Transfer and Servicing
Agreements -- Servicing Compensation and Payment of Expenses" herein. To
facilitate the servicing of the Receivables, the Depositor and each Trustee will
designate the Servicer as custodian of the Receivables and the related documents
for the related Trust; due to the administrative burden and expense, however,
the certificates of title to the Financed Vehicles will not be amended to
reflect the sale and assignment of the security interest in the Financed
Vehicles to either the Depositor or the Trust. In the absence of such an
amendment, a Trust may not have a perfected security interest in certain of the
Financed Vehicles in some states. See "Certain Legal Aspects of the Receivables"
and "Description of the Transfer and Servicing Agreements -- Sale and Assignment
of Receivables".
If the protection provided to the holders of the Certificates of any
Series (the "Certificateholders") by the subordination, if any, of one or more
classes of Certificates of such Series and by any Cash Collateral Account, yield
supplement account or other available form of credit enhancement for such Series
is insufficient, such Certificateholders will have to look to payments by or on
behalf of Obligors on the related Receivables and the proceeds from the
repossession and sale of Financed Vehicles that secure defaulted Receivables for
distributions of principal of and interest on the related Certificates. In such
event, certain factors, such as the Trust's not having perfected security
<PAGE>
interests in all of the Financed Vehicles, may limit the ability of a Trust to
realize on the collateral securing the related Receivables or may limit the
amount realized to less than the amount due thereunder. Certificateholders may
thus be subject to delays in payment on, or may incur losses on their investment
in, such Certificates as a result of defaults or delinquencies by Obligors and
depreciation in the value of the related Financed Vehicles. See "Description of
the Transfer and Servicing Agreements -- Credit and Cash Flow Enhancement" and
"Certain Legal Aspects of the Receivables".
The Trustee
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale of
the related Certificates is limited solely to the express obligations of such
Trustee set forth in the related Pooling and Servicing Agreement. A Trustee may
resign at any time, in which event the Servicer will be obligated to appoint a
successor Trustee. The Servicer may also remove a Trustee if such Trustee ceases
to be eligible to continue as Trustee under the related Pooling and Servicing
Agreement or if such Trustee becomes insolvent. If the Servicer so removes a
Trustee, the Servicer will be obligated to appoint a successor to such Trustee.
Any resignation or removal of a Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
THE RECEIVABLES POOLS
General
The Receivables in each Receivables Pool were or will be acquired by
UAC, UACFC or the Predecessor from Dealers or originated by UAC, UACFC or the
Predecessor through Dealers in the ordinary course of business. Immediately
after their origination or acquisition by UAC, the Receivables were or will be
conveyed to UAFC. UAFC, UAC, UACFC or the Predecessor will be the registered
lienholder on the certificates of title to each of the Financed Vehicles.
The Receivables to be sold to each Trust will be selected from UAFC's
portfolio for inclusion in a Receivables Pool based on several criteria,
including that, unless otherwise provided in the related Prospectus Supplement,
each Receivable (i) is secured by a new or used vehicle, (ii) provides for level
monthly payments (except for the last payment, which may be different from the
level payments) that fully amortize the amount financed over the original term
to maturity of the Receivable, (iii) is a Precomputed Receivable or a Simple
Interest Receivable and (iv) satisfies the other criteria, if any, set forth in
the related Prospectus Supplement. No selection procedures believed by UAFC or
the Depositor to be adverse to Certificateholders were or will be used in
selecting the Receivables.
Underwriting Procedures
UAC uses the degree of the applicant's creditworthiness as the basic
criterion when originating an installment sale contract or purchasing such a
contract from a Dealer. Each credit application requires that the applicant
provide current information regarding the applicant's employment history, bank
accounts, debts, credit references, and other factors that bear on
creditworthiness. UAC applies uniform underwriting standards when originating
loans on new and used vehicles. UAC also typically obtains credit reports from
major credit reporting agencies summarizing the applicant's credit history and
paying habits, including such items as open accounts, delinquent payments,
bankruptcies, repossessions, lawsuits, and judgments. UAC's credit analysts may
verify an applicant's employment or, where appropriate, check directly with the
applicant's creditors. On the basis of such information, extensive historical
data and the experience of its senior management, UAC is in a position to assess
an applicant's ability to repay a loan. Since December 1988, the criteria
applied by UAC to evaluate applicants have included credit scoring using models
developed by independent firms experienced in developing credit scoring models.
Credit scoring evaluates an applicant's credit profile to arrive at an estimate
of the associated credit risk. Credit scoring models are developed by
statistically evaluating common characteristics of applicants and their
correlation with credit risk.
<PAGE>
While UAC adheres to no specific loan-to-value ratios, the amount
financed by UAC under an installment contract generally will not exceed, in the
case of new vehicles, the manufacturer's suggested retail price of the financed
vehicle, including sales tax, license fees and title fees, plus the cost of
service and warranty contracts and premiums for physical damage, credit life and
disability insurance obtained in connection with the vehicle or the financing.
In the case of used vehicles, if the applicant meets UAC's creditworthiness
criteria, the amount financed may exceed the "average black book value" (as
published by National Auto Research, a standard reference source for dealers in
used cars) of the financed vehicle, including sales tax, license fees and title
fees, plus the cost of service and warranty contracts and premiums for physical
damage, credit life and disability insurance obtained in connection with the
vehicle or financing. UAC believes that the resale value of a new vehicle
purchased by an obligor will generally decline below the manufacturer's
suggested retail price and, in some cases, may decline for a period of time
below the principal balance outstanding on the related installment contract. UAC
also believes that the resale value of a used vehicle purchased by an obligor
will generally decline, but believes that the percentage of such decline
generally will be less than the percentage of decline in the resale value of a
new vehicle. UAC regularly reviews the quality of the Contracts purchased from
Dealers and periodically conducts quality audits to ensure compliance with its
established policies and procedures.
The underwriting procedures and standards employed by the Predecessor
are substantially similar to those used by UAC and, accordingly, references to
UAC in the foregoing discussion of UAC's underwriting procedures apply also to
any Receivables included in a Receivables Pool that was acquired by UAC from
UACFC or the Predecessor or Receivables that are otherwise originated by UACFC
or the Predecessor. See also "Union Acceptance Corporation and Affiliates"
herein.
Allocation of Payments
The Receivables will be either Simple Interest Receivables or
Precomputed Receivables. "Simple Interest Receivables" provide for equal monthly
payments that are applied, first, to interest accrued to the date of such
payment, then to principal due on such date, then to pay any applicable late
charges, and then to further reduce the outstanding principal balance.
Accordingly, if an Obligor pays a fixed monthly installment before its due date
under a Simple Interest Receivable, the portion of the payment allocable to
interest for the period since the preceding payment will be less than it would
have been had the payment been made on the contractual due date, and the portion
of the payment applied to reduce the principal balance of the Receivable will be
correspondingly greater. Conversely, if an Obligor pays a fixed monthly
installment under a Simple Interest Receivable after its contractual due date,
the portion of such payment allocable to interest for the period since the
preceding payment will be greater than it would have been had the payment been
made when due, and the portion of such payment applied to reduce the principal
balance of the Receivable will be correspondingly less, in which case a larger
portion of the principal balance may be due on the final scheduled payment date.
"Precomputed Receivables" consist of either (i) monthly actuarial
receivables ("Actuarial Receivables") or (ii) receivables that provide for
allocation of payments according to the "sum of periodic balances" method,
similar to the Rule of 78's ("Rule of 78's Receivables"). An Actuarial
Receivable provides for amortization of the loan over a series of fixed level
payment monthly installments. Each monthly installment, including the monthly
installment representing the final payment of the receivable, consists of an
amount of interest equal to 1/12 of the annual percentage rate of the loan
multiplied by the unpaid principal balance of the loan, and an amount of
principal equal to the remainder of the monthly payment. A Rule of 78's
Receivable provides for the payment by the Obligor of a specified total amount
of payments, payable in equal monthly installments on each due date, which total
represents the principal amount financed and add-on interest for the term of the
receivable. The rate at which the amount of add-on interest is earned and,
correspondingly, the amount of each fixed monthly payment allocated to reduction
of the outstanding principal amount of the Receivable are calculated in
accordance with the sum of the periodic time balances or the "Rule of 78's". If
a Precomputed Receivable is prepaid in full (voluntarily or by liquidation,
acceleration or otherwise), under the terms of the Contract a "refund" or
<PAGE>
"rebate" will be made to the Obligor of the portion of the total amount of
payments then due and payable under the Contract allocable to "unearned"
interest. Unearned interest is calculated in accordance with the sum of the
periodic time balances method or a method equivalent to the "Rule of 78's". The
amount of any such rebate under a Precomputed Receivable generally will be less
than or equal to the remaining scheduled payments of interest that would have
been due under a Simple Interest Receivable for which all payments were made on
schedule and generally will be significantly less than such amount.
Unless otherwise stated in the related Prospectus Supplement, all of
the Receivables that are Precomputed Receivables will be Rule of 78's
Receivables; however, the Trust will account for all Rule of 78's Receivables as
if such Receivables were Actuarial Receivables. Except as otherwise indicated in
the related Prospectus Supplement, early payments on Precomputed Receivables
("Payaheads") will be deposited to the Payahead Account as described under
"Description of the Transfer and Servicing Agreements -- Accounts". Amounts
received upon prepayment in full of a Rule of 78's Receivable in excess of the
then outstanding principal balance of such Receivable (computed on an actuarial
basis) will not be passed through to Certificateholders, except to the extent
necessary to pay interest and principal on the Certificates.
In the event of the liquidation of a Receivable or the repossession of
a Financed Vehicle, amounts recovered are applied first to the expenses of
repossession, and then to unpaid interest and principal and any related payment
or other fee.
Delinquencies, Repossessions and Net Losses
Certain information concerning the experience of UAC pertaining to
delinquencies, repossessions and net losses with respect to new and used retail
automobile, light truck and van receivables (including receivables previously
sold by UAC or the Predecessor but which UAC continues to service) will be set
forth in each Prospectus Supplement. There can be no assurance that the
delinquency, repossession and net loss experience with respect to any
Receivables Pool will be comparable to prior experience or to such information.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The weighted average life of the Certificates of any Series generally
will be influenced by the rate at which the principal balances of the related
Receivables are paid, which payment may be in the form of scheduled amortization
or prepayments. For this purpose, the term prepayments includes prepayments in
full, partial prepayments (including those related to rebates of extended
warranty contract costs and insurance premiums), liquidations due to defaults,
as well as receipts of proceeds, if any, from physical damage, credit life and
disability and/or any lender's single interest insurance policies, and the
Purchase Amount of Receivables repurchased by UAC due to a breach of a
representation or warranty or purchased by the Servicer for administrative
purposes. All of the Receivables are prepayable at any time without penalty to
the Obligor. The rate of prepayment of automotive receivables is influenced by a
variety of economic, social and other factors, including the fact that an
Obligor generally may not sell or transfer the Financed Vehicle securing a
Receivable without the consent of UAFC, UAC, UACFC or the Predecessor, as the
registered lienholder (or the Servicer on behalf of such lienholder). The rate
of prepayment on the Receivables may also be influenced by the structure of the
loan. In addition, under certain circumstances, UAC will be obligated to
repurchase Receivables from a Trust pursuant to the related Purchase Agreement
and Pooling and Servicing Agreement as a result of breaches of representations
and warranties, and the Servicer will be obligated to purchase Receivables from
a Trust pursuant to the related Pooling and Servicing Agreement as a result of
breaches of certain covenants. See "Description of the Transfer and Servicing
Agreements -- Sale and Assignment of Receivables" and " -- Servicing
Procedures". See also "Description of the Transfer and Servicing Agreements --
Termination" regarding the option of the Servicer or any other entity to
purchase or cause the Receivables to be purchased from a Trust.
A Series of Certificates may include one or more classes of Strip
Certificates that are more sensitive than certain other classes of Certificates
of the same Series to the rate of payment of the related Receivables.
Prospective investors in any such Strip Certificates should consider carefully
the information regarding such Certificates in the related Prospectus
Supplement.
<PAGE>
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the Certificates of a Series on
any Distribution Date since such amount will depend, in part, on the amount of
principal collected on the related Receivables Pool during the applicable
Collection Period. Any reinvestment risks resulting from a faster or slower
incidence of prepayment of Receivables will be borne entirely by the
Certificateholders. The related Prospectus Supplement may set forth certain
additional information with respect to the maturity and prepayment
considerations applicable to the particular Receivables Pool and the related
Series of Certificates or particular classes of Certificates.
POOL FACTORS AND OTHER CERTIFICATE INFORMATION
The "Certificate Pool Factor" for each class of Certificates will be a
seven-digit decimal which the Servicer will compute prior to each distribution
with respect to such class of Certificates and which will indicate the remaining
Certificate Balance of such class of Certificates, as of the applicable
Distribution Date (after giving effect to distributions to be made on such
Distribution Date), as a fraction of the initial Certificate Balance of such
class of Certificates. Each Certificate Pool Factor will be 1.0000000 as of the
related Closing Date and thereafter will decline to reflect reductions in the
applicable Class Certificate Balance. A Certificateholder's portion of the
aggregate outstanding Class Certificate Balance will equal the product of (a)
the original denomination of such Certificateholder's Certificate and (b) the
applicable Certificate Pool Factor at the time of determination.
Unless otherwise provided in the related Prospectus Supplement, the
Certificateholders will receive reports on or about each Distribution Date
concerning payments received on the Receivables, the Pool Balance and each
Certificate Pool Factor. In addition, Certificateholders of record during any
calendar year will be furnished information for tax reporting purposes not later
than the latest date permitted by law. See "Description of the Certificates --
Statements to Certificateholders".
USE OF PROCEEDS
On each Closing Date, the Depositor will convey the Receivables and, if
so provided in the related Prospectus Supplement, the applicable Pre-Funded
Amount to the related Trust in exchange for the related Series of Certificates.
Unless otherwise provided in the related Prospectus Supplement, the Depositor
will apply the net proceeds from the sale of the Certificates to the purchase of
the Receivables from UAFC and, if so provided in the related Prospectus
Supplement, to fund the Pre-Funding Account. UAFC will use the portion of such
proceeds paid to it to repay short-term borrowings and/or to purchase Contracts
from UAC and for general corporate purposes, and UAC will use such proceeds for
general corporate purposes.
UNION ACCEPTANCE CORPORATION AND AFFILIATES
UAC is an automotive finance company engaged primarily in the indirect
financing (the purchase of loan contracts from Dealers) of automobile purchases
by individuals.
UAC consummated its initial public offering of its Class A Common Stock
on August 7, 1995. In conjunction with such offering, the Predecessor effected a
spin-off of UAC. UAC is no longer a subsidiary of the Predecessor.
UACFC is a wholly-owned subsidiary of UAC, formed in November 1996 as
an Indiana corporation. UACFC is organized primarily for the purpose of
purchasing automobile installment sale and installment loan contracts from
Dealers in certain states where UAC is not licensed to do so, reselling such
receivables to UAC and conducting activities incidental thereto.
UAFC is a wholly-owned subsidiary of UAC, formed in April 1994 as a
Delaware corporation, and is organized for the limited purpose of acquiring from
UAC and holding automobile installment sale and installment loan contracts,
reselling such receivables and conducting activities incidental thereto.
Immediately upon its acquisition of receivables, UAC sells such receivables to
UAFC, together with its security interest in the related Financed Vehicle and
other collateral. UAFC (or, with respect to certain Receivables, UAC or the
Predecessor) is registered as lienholder on the certificates of title for the
Financed Vehicles.
<PAGE>
The Depositor is a wholly-owned subsidiary of UAC, formed in October
1994 as a Delaware corporation and is organized for the limited purpose of
acquiring automobile installment sale and installment loan contracts from UAC or
UAFC, reselling such receivables and conducting activities incidental thereto.
The Depositor has taken steps in structuring the transactions
contemplated hereby that are intended to ensure that the voluntary or
involuntary application for relief by UAC or UAFC under the United States
Bankruptcy Code or similar applicable state laws ("Insolvency Laws") will not
result in the consolidation of the assets and liabilities of the Depositor with
those of UAC, UACFC or UAFC. These steps include the creation of the Depositor
as a separate, limited-purpose subsidiary pursuant to a certificate of
incorporation containing certain limitations (including restrictions on the
nature of the Depositor's business, as described above, and restrictions on the
Depositor's ability to commence a voluntary case or proceeding under any
Insolvency Law without the unanimous affirmative vote of all its directors).
However, there can be no assurance that the activities of the Depositor would
not result in a court concluding that the assets and liabilities of the
Depositor should be consolidated with those of UAC or UAFC in a proceeding under
an Insolvency Law. See "Certain Legal Aspects of the Receivables -- Bankruptcy
Matters".
In addition, tax and certain other statutory liabilities, such as
liabilities to the Pension Benefit Guaranty Corporation, if any, relating to the
underfunding of pension plans of UAC or its affiliates can be asserted against
the Depositor. To the extent that any such liabilities arise after the transfer
of Receivables to a Trust, the Trust's interest in the Receivables would be
prior to the interest of the claimant with respect to any such liabilities.
However, the existence of a claim against the Depositor could permit the
claimant to subject the Depositor to an involuntary proceeding under the
Bankruptcy Code or other Insolvency Laws. See "Certain Legal Aspects of the
Receivables -- Bankruptcy Matters".
DESCRIPTION OF THE CERTIFICATES
General
Each Trust will issue a Series of Certificates pursuant to a Pooling
and Servicing Agreement. A form of the Pooling and Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. The following summary does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the provisions of the related
Certificates and Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be available for purchase in minimum denominations of $1,000
and integral multiples in excess thereof in book-entry form only.
Distributions of Principal and Interest
The timing and priority of distributions, seniority, allocations of
losses, Pass-Through Rate and amount of or method of determining distributions
with respect to principal and interest on each class of Certificates of a Series
will be described in the related Prospectus Supplement. Distributions on such
Certificates will be made on the dates specified in the related Prospectus
Supplement (the "Distribution Date") and may be made prior to distributions with
respect to principal of such Certificates. To the extent provided in the related
Prospectus Supplement, a Series of Certificates may include one or more classes
of Strip Certificates entitled to (i) interest distributions with
disproportionate, nominal or no principal distributions or (ii) principal
distributions with disproportionate, nominal or no interest distributions. Each
class of Certificates may have a different Pass-Through Rate, which may be a
fixed, variable or adjustable Pass-Through Rate (and which may be zero for
certain classes of Strip Certificates) or any combination of the foregoing. The
related Prospectus Supplement will specify the Pass-Through Rate for each class
of Certificates of a Series or the method for determining such Pass-Through
Rate.
To the extent specified in any Prospectus Supplement, one or more
classes of Certificates of a given Series may have fixed principal and/or
interest distribution schedules, as set forth in such Prospectus Supplement.
<PAGE>
In the case of a Series of Certificates that includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
such class shall be as set forth in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, distributions in
respect of interest on and principal of any class of Certificates will be made
on a pro rata basis among all holders of Certificates of such class.
Book-Entry Registration
Unless otherwise specified in the related Prospectus Supplement, each
class of Certificates initially will be represented by one or more certificates,
in each case registered in the name of the nominee of DTC. Unless another
nominee is specified in the related Prospectus Supplement, the nominee of DTC
will be Cede & Co. Accordingly, such nominee is expected to be the holder of
record of the Certificates of each Series, except for Certificates, if any,
retained by the Depositor or UAC. Unless and until Definitive Certificates are
issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Certificateholder will be entitled to receive a
physical certificate representing a Certificate, all references herein and in
the related Prospectus Supplement to actions by Certificateholders will refer to
actions taken by DTC upon instructions from the Participants, and all references
herein and in the related Prospectus Supplement to distributions, notices,
reports and statements to Certificateholders will refer to distributions,
notices, reports and statements to DTC or its nominee, as the case may be, as
the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC's procedures with respect thereto.
Beneficial owners of the Certificates ("Certificate Owners") will not be
recognized as "Certificateholders" by the related Trustee, as such term is used
in each Pooling and Servicing Agreement, and Security Owners will be permitted
to exercise the rights of Certificateholders only indirectly through DTC and its
participating members ("Participants").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code (the "UCC") in effect in the
State of New York, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for the
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Unless otherwise specified in the related Prospectus Supplement,
Certificate Owners that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or an interest in, the
Certificates may do so only through Participants and Indirect Participants. In
addition, all Certificate Owners will receive all distributions of principal and
interest from the related Trustee through Participants. Under a book-entry
format, Certificate Owners may experience some delay in their receipt of
payments, since such payments will be forwarded by the Trustee to DTC's nominee.
DTC will then forward such payments to the Participants, which thereafter will
forward them to Indirect Participants or Certificate Owners.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
to receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and to receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess physical certificates representing the Certificates, the Rules
provide a mechanism by which Participants and Indirect Participants will receive
payments and transfer interests, directly or indirectly, on behalf of
Certificate Owners.
<PAGE>
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge Certificates to persons or entities that do not participate in
the DTC system, or otherwise take actions with respect to such Certificates, may
be limited due to the lack of a physical certificate representing such
Certificates.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Certificate Owner under the Pooling and Servicing Agreement only
at the direction of one or more Participants to whose account with DTC the
Certificates are credited. DTC may take conflicting actions with respect to
other undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
Except as required by law, the related Trustee will not have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests of Certificates of any Series held by DTC's
nominee, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Definitive Certificates
Unless otherwise stated in the related Prospectus Supplement, the
Certificates of a given Series will be issued in fully registered, certificated
form ("Definitive Certificates") to Certificateholders or their respective
nominees, rather than to DTC or its nominee, only if (i) the related Trustee
determines that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the related Certificates and such
Trustee is unable to locate a qualified successor, (ii) the Trustee elects, at
its option, to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default, Certificate Owners representing at least a
majority of the outstanding principal amount of the Certificates of such Series,
advise the related Trustee through DTC that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in the best interests
of the related Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the related Trustee will be required to notify the related
Certificate Owners, through Participants, of the availability of Definitive
Certificates. Upon surrender by DTC of the certificates representing all
Certificates of any affected class and the receipt of instructions for
re-registration, the Trustee will issue Definitive Certificates to the related
Certificate Owners. Distributions on the related Definitive Certificates will be
made thereafter by the related Trustee directly to the holders in whose name the
related Definitive Certificates are registered at the close of business on the
applicable record date, in accordance with the procedures set forth herein and
in the related Pooling and Servicing Agreement. Distributions will be made by
check mailed to the address of such holders as they appear on the register
specified in the related Pooling and Servicing Agreement; however, the final
payment on any Certificates (whether Definitive Certificates or Certificates
registered in the name of a depository or its nominee) will be made only upon
presentation and surrender of such Certificates at the office or agency
specified in the notice of final distribution to Certificateholders.
Definitive Certificates will be transferable and exchangeable at the
offices of the related Trustee (or any security registrar appointed thereby). No
service charge will be imposed for any registration of transfer or exchange, but
such Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
Statements to Certificateholders
With respect to each Series of Certificates, on or prior to each
Distribution Date, the Servicer (to the extent applicable to such
Certificateholder) will prepare and forward to the related Trustee to be
included with the distribution to each Certificateholder of record a statement
setting forth for the related Collection Period the following information (and
any other information specified in the related Prospectus Supplement):
(i) the amount of the distribution allocable to principal of each class
of Certificates of such Series;
<PAGE>
(ii) the amount of the distribution allocable to interest on each class
of Certificates of such Series;
(iii) the amount of the Servicing Fee paid to the Servicer with respect
to the related Collection Period;
(iv) the Class Certificate Balance and Certificate Pool Factor for each
class of Certificates of such Series as of the Distribution Date after giving
effect to all payments under clause (i) above on such date;
(v) the balance of any Cash Collateral Account or other form of credit
enhancement, after giving effect to any additions thereto or withdrawals
therefrom or reductions thereto to be made on the following Distribution Date;
(vi) with respect to any Series of Certificates as to which a
Pre-Funding Account has been established, for Distribution Dates during the
Funding Period, the remaining Pre-Funded Amount; and
(vii) with respect to any Series of Certificates as to which a
Pre-Funding Account has been established, for the Distribution Date that falls
on or immediately after the end of the Funding Period, if any, the amount of the
Pre-Funded Amount that has not been used to purchase Subsequent Receivables.
Dollar amounts described in items (i), (ii) and (iv) above will be
expressed as a dollar amount per $1,000 of initial Class Certificate Balance of
such Certificates.
In addition, within the prescribed period of time for tax reporting
purposes after the end of each calendar year during the term of each Trust, the
related Trustee or Indenture Trustee, as applicable, will mail to each person
who at any time during such calendar year shall have been a registered
Certificateholder a statement containing certain information for the purposes of
such Certificateholder's preparation of federal income tax returns. See "Certain
Federal Income Tax Consequences".
List of Certificateholders
Unless otherwise specified in the related Prospectus Supplement, each
Trustee, within 15 days after receipt of written request of the Servicer, will
provide the Servicer with a list of the names and addresses of all holders of
record as of the most recent record date of the related Series of Certificates.
In addition, three or more holders of the Certificates of any Series or one or
more holders of such Certificates evidencing not less than 25% of the applicable
Certificate Balance may, by written request to the related Trustee, obtain
access to the list of all Certificateholders maintained by such Trustee for the
purpose of communicating with other Certificateholders with respect to their
rights under the related Pooling and Servicing Agreement or under such
Certificates.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of each Purchase
Agreement and Pooling and Servicing Agreement (collectively, the "Transfer and
Servicing Agreements") pursuant to which the Depositor will purchase Receivables
from UAFC, a Trust will purchase Receivables from the Depositor, and the
Servicer will agree to service such Receivables. Forms of the Purchase Agreement
and Pooling and Servicing Agreement have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of the related Transfer and
Servicing Agreements.
<PAGE>
Sale and Assignment of Receivables
On the related Closing Date, (i) UAFC will sell and assign to the
Depositor pursuant to the related Purchase Agreement, without recourse, its
entire right in the related Receivables, including its security interests in the
related Financed Vehicles and (ii) the Depositor will sell and assign to the
related Trust pursuant to the related Pooling and Servicing Agreement, without
recourse, (a) its entire right in such Receivables, including the security
interests in the Financed Vehicles, and (b) if so provided in the related
Prospectus Supplement, the applicable Pre-Funded Amount. Each Receivable will be
identified in a schedule appearing as an exhibit to the related Purchase
Agreement and Pooling and Servicing Agreement. The Trustee will, concurrently
with such sale and assignment of the Receivables and, if applicable, the
Pre-Funded Amount, to the related Trust, execute, authenticate and deliver the
related Series of Certificates to the Depositor in exchange for such Receivables
and such Pre-Funded Amount, if any. The related Prospectus Supplement will
specify whether the property of a Trust will include the Pre-Funded Amount and,
if so, the terms, conditions and manner under which Subsequent Receivables will
be sold and assigned by the Depositor to the related Trust.
In each Purchase Agreement, UAFC and UAC will represent and warrant to
the Depositor, among other things, that (i) the information provided with
respect to the related Receivables is correct in all material respects; (ii) the
Obligor on each such Receivable has obtained or agreed to obtain and maintain
physical damage insurance covering the Financed Vehicle in accordance with UAC's
normal requirements; (iii) at the Closing Date, with respect to Receivables
conveyed to a Trust on the Closing Date, and on the applicable Subsequent
Transfer Date with respect to any Subsequent Receivables, the Receivables are
free and clear of all security interests, liens, charges and encumbrances, other
than the lien of the Depositor, and no offsets, defenses or counterclaims
against the Depositor, UAFC, UACFC or UAC have been asserted or threatened with
respect to the related Receivables; (iv) at the Closing Date or Subsequent
Transfer Date, as applicable, each of the related Receivables is secured by a
first perfected security interest in the related Financed Vehicle in favor of
UAFC (or UAC, UACFC or the Predecessor) or all necessary action has been taken
by UAC, UACFC or the Predecessor to secure such a first perfected security
interest; and (v) each of the related Receivables, at the time it was
originated, complied and, at the Closing Date or Subsequent Transfer Date, as
applicable, complies, in all material respects with applicable federal and state
laws, including, without limitation, consumer credit, truth in lending, equal
credit opportunity and disclosure laws. As of the last day of any Collection
Period following the discovery by or notice to UAC of a breach of any such
representation or warranty that materially and adversely affects the interests
of the Depositor or its assignee in a Receivable (or as of the last day of the
preceding Collection Period, if UAC so elects), UAC, unless it has cured such
breach, will repurchase the Receivable at a price equal to the unpaid principal
balance owed by the Obligor thereon plus, if the nonpayment of interest on such
Receivable would require a withdrawal from or on any Cash Collateral Account or
other form of credit enhancement in connection with the purchase of such
Receivable on such date, accrued interest thereon at the applicable Contract
Rate to the date of purchase (the "Purchase Amount"), and such Receivable will
be considered a "Purchased Receivable" as of such date. In each Pooling and
Servicing Agreement, the Depositor will assign certain rights under the related
Purchase Agreement to the related Trust, including the right to cause UAC to
repurchase Receivables with respect to which it is in breach of any such
representation and warranty. The repurchase obligation of UAC pursuant to each
Purchase Agreement and Pooling and Servicing Agreement will constitute the sole
remedy available to the related Certificateholders or Trustee for any uncured
breach of a representation or warranty.
If the related Prospectus Supplement provides that the property of a
Trust will include a Pre-Funding Account, UAFC will be obligated to sell and
assign to the Depositor pursuant to the related Purchase Agreement, and the
Depositor will be obligated to sell and assign to the related Trust pursuant to
the related Pooling and Servicing Agreement, Subsequent Receivables from time to
time during the Funding Period in an aggregate outstanding principal amount
approximately equal to the Pre-Funded Amount. The related Trust will be
obligated pursuant to the related Pooling and Servicing Agreement to purchase
all such Subsequent Receivables from the Depositor subject to the satisfaction,
on or before the related Subsequent Transfer Date, of the following conditions
<PAGE>
precedent, among others: (i) each such Subsequent Receivable shall satisfy the
eligibility criteria specified in the related Pooling and Servicing Agreement
and shall not have been selected from among the eligible Receivables in a manner
that UAFC or the Depositor deems adverse to the interests the related
Certificateholders; (ii) as of the applicable Cutoff Date for such Subsequent
Receivables, all of the Receivables in the related Trust, including the
Subsequent Receivables to be conveyed to the Trust as of such date, must satisfy
the parameters described under "The Receivables Pools" herein and "The
Receivables Pool" in the related Prospectus Supplement; (iii) any required
deposit to any Cash Collateral Account or other similar account must have been
made; and (iv) UAFC must execute and deliver to the Depositor, and the Depositor
must execute and deliver to such Trust, a written assignment conveying such
Subsequent Receivables to the Depositor and the related Trust, respectively. In
addition, the conveyance of Subsequent Receivables to a Trust is subject to the
satisfaction of the following conditions subsequent, among others, each of which
must be satisfied within the applicable time period specified in the related
Prospectus Supplement: (a) the Depositor must deliver certain opinions of
counsel to the related Trustee with respect to the validity of the conveyance of
such Subsequent Receivables to the Trust; (b) the Trustee must receive written
confirmation from a firm of certified independent public accountants that, as of
the end of the period specified therein, the Receivables in the related
Receivables Pool, including all such Subsequent Receivables, satisfied the
parameters described under "The Receivables Pools" herein and "The Receivables
Pool" in the related Prospectus Supplement; and (c) each of the Rating Agencies
must have notified the Depositor in writing that, following the conveyance of
the Subsequent Receivables to the Trust, each class of Certificates of the
related Series will have the same rating assigned to it by such Rating Agency
that it had on the related Closing Date. If any such conditions precedent or
conditions subsequent are not met with respect to any Subsequent Receivables
within the time period specified in the related Prospectus Supplement, UAC will
be required under the related Purchase Agreement and Pooling and Servicing
Agreement to repurchase such Subsequent Receivables from the related Trust, at a
purchase price equal to the related Purchase Amounts therefor.
Accounts
Certificate Account. With respect to each Trust, the Servicer will
establish and maintain with the related Trustee one or more accounts, in the
name of the Trustee on behalf of the related Certificateholders, into which all
payments made on or in respect of the related Receivables will be deposited and
from which all distributions with respect to the related Certificates will be
made (the "Certificate Account"). The amounts on deposit in the Certificate
Account will be invested by the Trustee in Eligible Investments.
Payahead Account. If so provided in the related Prospectus Supplement,
the Servicer will establish an additional account (the "Payahead Account"), in
the name of the Trustee and for the benefit of Obligors on the Receivables, into
which, to the extent required by the Agreement, Payaheads on Precomputed
Receivables will be deposited until such time as the payment becomes due. Until
such time as payments are transferred from the Payahead Account to the
Certificate Account, they will not constitute collected interest or collected
principal and will not be available for distribution to Certificateholders. The
Payahead Account will initially be maintained with the Trustee. Interest earned
on the balance in the Payahead Account will be remitted to the Servicer monthly.
Collections on a Precomputed Receivable made during a Collection Period shall be
applied first to any overdue scheduled payment on such Receivable, then to the
scheduled payment on such Receivable due in such Collection Period. If any
collections remaining after the scheduled payment is made are insufficient to
prepay the Precomputed Receivable in full, then generally such remaining
collections shall be transferred to and kept in the Payahead Account until such
later Collection Period as the collections may be retransferred to the
Certificate Account and applied either to a later scheduled payment or to prepay
such Receivable in full.
<PAGE>
Pre-Funding Account. If so provided in the related Prospectus
Supplement, the Servicer will establish and maintain an account, in the name of
the related Trustee on behalf of the related Certificateholders, into which the
Depositor will deposit the Pre-Funded Amount on the related Closing Date (the
"Pre-Funding Account"). In no event will the Pre-Funded Amount exceed 25% of the
aggregate Certificate Balance of the related Series of Certificates. The
Pre-Funded Amount will be used by the related Trustee to purchase Subsequent
Receivables from the Depositor from time to time during the Funding Period. The
amounts on deposit in the Pre-Funding Account during the Funding Period will be
invested by the Trustee in Eligible Investments. Any investment income received
on the Eligible Investments during a Collection Period (such amounts, net of any
related investment expenses, "Investment Income") will be included in the
interest distribution amount on the following Distribution Date. The Funding
Period, if any, for a Trust will begin on the related Closing Date and will end
on the date specified in the related Prospectus Supplement, which in no event
will be later than the date that is three calendar months after the related
Closing Date. Any amounts remaining in the Pre-Funding Account at the end of the
Funding Period will be distributed to the related Certificateholders, in the
manner and priority specified in the related Prospectus Supplement, as a
prepayment of principal of the related Certificates.
Any other accounts to be established with respect to a Trust, including
any Cash Collateral Account or yield supplement account, will be described in
the related Prospectus Supplement.
For each Series of Certificates, funds in the Certificate Account,
Pre-Funding Account and any other account identified as such in the related
Prospectus Supplement (collectively, the "Trust Accounts") will be invested as
provided in the related Pooling and Servicing Agreement in Eligible Investments
and any related Investment Income will be distributed as described herein and in
the related Prospectus Supplement. "Eligible Investments" generally will be
limited to investments acceptable to the Rating Agencies as being consistent
with the rating of the related Certificates. Except as may be otherwise
indicated in the applicable Prospectus Supplement, Eligible Investments will
include (i) direct obligations of, and obligations guaranteed by, the United
States of America, the Federal National Mortgage Association, or any
instrumentality of the United States of America; (ii) demand and time deposits
in or similar obligations of any depository institution or trust company
(including the Trustee or any agent of the Trustee, acting in their respective
commercial capacities) rated P-1 by Moody's or A-1+ by Standard & Poor's (an
"Approved Rating") or any other deposit which is fully insured by the Federal
Deposit Insurance Corporation; (iii) repurchase obligations with respect to any
security issued or guaranteed by an instrumentality of the United States of
America entered into with a depository institution or trust company having an
Approved Rating (acting as principal); (iv) short-term corporate securities
bearing interest or sold at a discount issued by any corporation incorporated
under the laws of the United States of America or any State, the short-term
unsecured obligations of which have an Approved Rating, or higher, at the time
of such investment; (v) commercial paper having an Approved Rating at the time
of such investment; (vi) a guaranteed investment contract issued by any
insurance company or other corporation acceptable to the Rating Agencies; (vii)
interests in any money market fund having a rating of Aaa by Moody's Investors
Service, Inc. or AAAm by Standard & Poor's Ratings Services; and (viii) any
other investment approved in advance in writing by the Rating Agencies.
Except as described herein or in the related Prospectus Supplement,
Eligible Investments will be limited to obligations or securities that mature on
or before the date of the next scheduled distribution to Certificateholders of
such Series; provided, however, that, unless the related Prospectus Supplement
requires otherwise, each Pooling and Servicing Agreement will generally permit
the investment of funds in any Cash Collateral Account or similar type of credit
enhancement account to be invested in Eligible Investments without the
limitation that such Eligible Investments mature not later than the business day
prior to the next succeeding Distribution Date if (i) the Servicer obtains a
liquidity facility or similar arrangement with respect to such Cash Collateral
Account or other account and (ii) each rating agency that initially rated the
related Certificates confirms in writing that the ratings of such Certificates
will not be lowered or withdrawn as a result of eliminating or modifying such
limitation.
<PAGE>
The Accounts will be maintained as Eligible Deposit Accounts. "Eligible
Deposit Account" means either (a) a segregated account with an Eligible
Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories that signifies investment grade.
"Eligible Institution" means, with respect to a Trust, (a) the corporate trust
department of the related Trustee or (b) a depository institution organized
under the laws of the United States of America or any one of the states thereof
or the District of Columbia (or any domestic branch of a foreign bank) (i) that
has either (A) a long-term unsecured debt rating of at least Baa3 from Moody's
Investor's Service, Inc. or (B) a long-term unsecured debt rating, a short-term
unsecured debt rating or a certificate of deposit rating acceptable to the
Rating Agencies and (ii) whose deposits are insured by the FDIC.
Servicing Procedures
The Servicer will make reasonable efforts to collect all payments due
with respect to the Receivables and will, consistent with the related Pooling
and Servicing Agreement, follow such collection procedures as it follows with
respect to comparable automotive installment contracts that it owns or services
for others. The Servicer will continue to follow such normal collection
practices and procedures as it deems necessary or advisable to realize upon any
Receivables with respect to which the Servicer determines that eventual payment
in full is unlikely. The Servicer may sell the Financed Vehicle securing such
Receivables at a public or private sale, or take any other action permitted by
applicable law.
Consistent with its normal procedures, the Servicer may, in its
discretion, arrange with the Obligor on a Receivable to extend or modify the
payment schedule; if, however, the extension of a payment schedule causes a
Receivable to remain outstanding on the latest final scheduled Distribution Date
of any class of Certificates with respect to a Series of Certificates specified
in the related Prospectus Supplement (the "Final Scheduled Distribution Date"),
the Servicer will purchase such Receivable as of the last day of the Collection
Period preceding such Final Scheduled Distribution Date. The Servicer's purchase
obligation will constitute the sole remedy available to the related
Certificateholders or Trustee for any such modification of a Contract.
Collections
With respect to each Trust, the Servicer will deposit all payments
(from whatever source) on and all proceeds of the related Receivables collected
during a Collection Period into the related Certificate Account not later than
two business days after receipt thereof. However, at any time that and for so
long as (i) UAC is the Servicer, (ii) no Event of Default shall have occurred
and be continuing with respect to the Servicer and (iii) each other condition to
making deposits less frequently than daily as may be specified by the Rating
Agencies or set forth in the related Prospectus Supplement is satisfied, the
Servicer will not be required to deposit such amounts into the Certificate
Account until on or before the applicable Distribution Date. Pending deposit
into the Certificate Account, collections may be invested by the Servicer at its
own risk and for its own benefit and will not be segregated from its own funds.
If the Servicer were unable to remit such funds, Certificateholders might incur
a loss. To the extent set forth in the related Prospectus Supplement, the
Servicer may, in order to satisfy the requirements described above, obtain a
letter of credit or other security for the benefit of the related Trust to
secure timely remittances of collections on the related Receivables and payment
of the aggregate Purchase Amounts with respect to Receivables purchased by the
Servicer.
Unless otherwise provided in the applicable Prospectus Supplement,
Payaheads on Precomputed Receivables will be transferred from the Certificate
Account and deposited into the Payahead Account for subsequent transfer to the
Certificate Account, as described above under "-- Accounts"
<PAGE>
Advances
Unless otherwise provided in the related Prospectus Supplement, if a
Receivable is delinquent more than 30 days at the end of a Collection Period,
the Servicer will make an Advance in the amount of 30 days of interest due on
such Receivable, but only to the extent that the Servicer, in its sole
discretion, expects to recoup the Advance from subsequent collections on the
Receivable or from withdrawals from any Cash Collateral Account or other form of
credit enhancement. The Servicer will deposit Advances in the Certificate
Account on or prior to the date specified therefor in the related Prospectus
Supplement. If the Servicer determines that reimbursement of an Advance from
subsequent payments on or with respect to the related Receivable is unlikely,
the Servicer may recoup such Advance from insurance proceeds, collections made
on other Receivables or from any other source specified in the related
Prospectus Supplement.
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to receive a fee with respect to each Trust (the
"Servicing Fee"), equal to one percent (1.00%) per annum (the "Servicing Fee
Rate"), payable monthly at one-twelfth the annual rate, of the related aggregate
Certificate Balance as of the preceding Distribution Date (after giving effect
to distributions to be made on such preceding Distribution Date). Unless
otherwise provided in the related Prospectus Supplement, the Servicer also will
collect and retain any late fees, prepayment charges, other administrative fees
or similar charges allowed by applicable law with respect to the Receivables and
will be entitled to reimbursement from each Trust for certain liabilities.
The Servicing Fee will compensate the Servicer for performing the
functions of a third-party servicer of automotive receivables as an agent for
the related Trust, including collecting and posting all payments, making
Advances, responding to inquiries of Obligors on the Receivables, investigating
delinquencies, sending payment coupons to Obligors, and overseeing the
collateral in cases of Obligor default. The Servicing Fee will also compensate
the Servicer for administering the related Receivables Pool, including
accounting for collections and furnishing monthly and annual statements to the
related Trustee with respect to distributions, and generating federal income tax
information for such Trust and for the related Certificateholders. The Servicing
Fee also will reimburse the Servicer for certain taxes, accounting fees, outside
auditor fees, data processing costs, and other costs incurred in connection with
administering the applicable Receivables Pool.
Distributions
With respect to each Series of Certificates, beginning on the
Distribution Date specified in the related Prospectus Supplement, distributions
of principal and interest (or, where applicable, of interest only or principal
only) on each class of Certificates entitled thereto will be made by the related
Trustee to the related Certificateholders. The timing, calculation, allocation,
order, source and priorities of, and requirements for, all distributions to the
holders of each class of Certificates will be set forth in the related
Prospectus Supplement.
With respect to each Trust, collections on or with respect to the
related Receivables will be deposited into the related Certificate Account for
distribution to the related Certificateholders on each Distribution Date to the
extent and in the priority provided in the related Prospectus Supplement. Credit
enhancement, such as a Cash Collateral Account or yield supplement account or
other arrangement, may be available to cover shortfalls in the amount available
for distribution on such date to the extent specified in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement, and
unless otherwise specified therein, distributions in respect of principal of a
class of Certificates of a Series will be subordinate to distributions in
respect of interest on such class, and distributions in respect of one or more
classes of Certificates of a Series may be subordinate to payments in respect of
other classes of Certificates. Distributions of principal on the Certificates of
a Series may be based on the amount of principal collected or due, or the amount
of realized losses incurred, in a Collection Period.
<PAGE>
Credit and Cash Flow Enhancement
The amounts and types of any credit and cash flow enhancement
arrangements and the provider thereof, if applicable, with respect to each class
of Certificates of a Series will be set forth in the related Prospectus
Supplement. To the extent provided in the related Prospectus Supplement, credit
or cash flow enhancement may be in the form of subordination of one or more
classes of Certificates, Cash Collateral Accounts, Spread Accounts, reserve
accounts, yield supplement accounts, letters of credit, surety bonds, insurance
policies, over-collateralization, credit or liquidity facilities, guaranteed
investment contracts, swaps or other interest rate protection agreements,
repurchase obligations, other agreements with respect to third-party payments or
other support, cash deposits, or such other arrangements as may be described in
the related Prospectus Supplement, or any combination of the foregoing. If
specified in the applicable Prospectus Supplement, credit or cash flow
enhancement for a class of Certificates may cover one or more other classes of
Certificates of the same Series, and credit enhancement for a Series of
Certificates may cover one or more other Series of Certificates.
The existence of a Cash Collateral Account or other form of credit
enhancement for the benefit of any class or Series of Certificates is intended
to enhance the likelihood of receipt by the Certificateholders of such class or
Series of the full amount of principal and interest due thereon and to decrease
the likelihood that such Certificateholders will experience losses. Unless
otherwise specified in the related Prospectus Supplement, the credit enhancement
for a class or Series of Certificates will not provide protection against all
risks of loss and will not guarantee repayment of all principal and interest
thereon. If losses occur which exceed the amount covered by such credit
enhancement or which are not covered by such credit enhancement,
Certificateholders will bear their allocable share of such losses, as described
in the related Prospectus Supplement. In addition, if a form of credit
enhancement covers more than one Series of Certificates, Certificateholders of
any such Series will be subject to the risk that such credit enhancement may be
exhausted by the claims of Certificateholders of other Series.
Cash Collateral Account. If so provided in the related Prospectus
Supplement, pursuant to the related Pooling and Servicing Agreement the
Depositor will establish an account (a "Cash Collateral Account" or "Spread
Account") for a Series or class or classes of Certificates, which will be
maintained with the related Trustee. Unless otherwise provided in the related
Prospectus Supplement, a Cash Collateral Account will be funded by an initial
deposit by the Depositor on the Closing Date in the amount set forth in the
related Prospectus Supplement and, if the related Series has a Funding Period,
may also be funded on each Subsequent Transfer Date to the extent described in
the related Prospectus Supplement. As further described in the related
Prospectus Supplement, the amount on deposit in the Cash Collateral Account may
be increased or reinstated on each Distribution Date, to the extent described in
the related Prospectus Supplement, by the deposit thereto of the amount of
collections on the related Receivables remaining on such Distribution Date after
the payment of all other required payments and distributions on such date. The
related Prospectus Supplement will describe the circumstances under which and
the manner in which distributions may be made out of any such Cash Collateral
Account, either to holders of the Certificates covered thereby or to the
Depositor or to any other entity.
Evidence as to Compliance
Each Pooling and Servicing Agreement will provide that a firm of
independent public accountants will furnish annually to the related Trustee a
statement as to compliance by the Servicer during the preceding twelve months
with certain standards relating to the servicing of the Receivables.
Each Pooling and Servicing Agreement will also provide for delivery to
the related Trustee each year of a certificate signed by an officer of the
Servicer stating that the Servicer has fulfilled its obligations under the
related Pooling and Servicing Agreement throughout the preceding twelve months
or, if there has been a default in the fulfillment of any such obligation,
describing each such default. The Servicer has agreed or will agree to give each
Trustee notice of the occurrence of certain Events of Defaults under the related
Pooling and Servicing Agreement.
<PAGE>
Copies of the foregoing statements and certificates may be obtained by
Certificateholders by a request in writing addressed to the related Trustee at
the Corporate Trust Office for such Trustee specified in the related Prospectus
Supplement.
Certain Matters Regarding the Servicer
Each Pooling and Servicing Agreement will provide that UAC may not
resign from its obligations and duties as Servicer thereunder, except upon
determination that UAC's performance of such duties is no longer permissible
under applicable law. No such resignation will become effective until the
related Trustee or a successor servicer has assumed UAC's servicing obligations
and duties under the related Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement will further provide that neither
the Servicer nor any of its directors, officers, employees and agents will be
under any liability to the related Trust or Certificateholders for taking any
action or for refraining from taking any action pursuant to the related Pooling
and Servicing Agreement or for errors in judgment; provided, however, that
neither the Servicer nor any such person will be protected against any liability
that would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of the Servicer's duties or by reason of reckless
disregard of its obligations and duties thereunder. In addition, each Pooling
and Servicing Agreement will provide that the Servicer is under no obligation to
appear in, prosecute or defend any legal action that is not incidental to its
servicing responsibilities under such Pooling and Servicing Agreement and that,
in its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in each Pooling and Servicing
Agreement, any entity into which UAC may be merged or consolidated, or any
entity resulting from any merger or consolidation to which UAC is a party, or
any entity succeeding to the indirect automobile financing and receivable
servicing business of UAC, which corporation or other entity assumes the
obligations of the Servicer, will be the successor to the Servicer under the
related Pooling and Servicing Agreement.
Events of Default
Unless otherwise provided in the related Prospectus Supplement, "Events
of Default" under each Pooling and Servicing Agreement will consist of: (i) any
failure by the Servicer or UAC to deliver to the related Trustee for
distribution to the related Certificateholders any required payment, which
failure continues unremedied for five business days after written notice to the
Servicer of such failure from the Trustee or holders of the related Certificates
evidencing not less than 25% of the aggregate Certificate Balance (or notional
principal amount, if applicable); (ii) any failure by the Servicer, UAC or the
Depositor duly to observe or perform in any material respect any covenant or
agreement in the related Pooling and Servicing Agreement, which failure
materially and adversely affects the rights of the related Certificateholders
and which continues unremedied for 60 days after written notice of such failure
is given (1) to the Servicer, UAC or the Depositor, as the case may be, by the
related Trustee or (2) to the Servicer, UAC or the Depositor, as the case may
be, and to the related Trustee by holders of the related Certificates evidencing
not less than 25% of the related Certificate Balance (or notional principal
amount, if applicable); and (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Servicer and certain actions by the Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations.
<PAGE>
Rights Upon Event of Default
Unless otherwise provided in the related Prospectus Supplement, as long
as an Event of Default under the related Pooling and Servicing Agreement remains
unremedied, the related Trustee, upon direction to do so by holders of
Certificates of the related Series evidencing not less than 25% of the
Certificate Balance (or notional principal amount, if applicable), may terminate
all the rights and obligations of the Servicer under such Pooling and Servicing
Agreement, whereupon a successor Servicer appointed by the related Trustee or
such Trustee will succeed to all the responsibilities, duties and liabilities of
the Servicer under such Pooling and Servicing Agreement and will be entitled to
similar compensation arrangements. If, however, a bankruptcy trustee or similar
official has been appointed for the Servicer, and no Event of Default other than
such appointment has occurred, such trustee or official may have the power to
prevent the related Trustee or the related Certificateholders from effecting a
transfer of servicing. In the event that the related Trustee is unwilling or
unable to act as successor to the Servicer, such Trustee may appoint, or may
petition a court of competent jurisdiction to appoint, a successor with assets
of at least $50,000,000 and whose regular business includes the servicing of
automotive receivables. The related Trustee may arrange for compensation to be
paid to such successor Servicer, which in no event may be greater than the
servicing compensation paid to the Servicer under the related Pooling and
Servicing Agreement.
Waiver of Past Defaults
Unless otherwise provided in the related Prospectus Supplement, holders
of Certificates evidencing not less than a majority of the related aggregate
Certificate Balance (or notional principal amount, if applicable) may, on behalf
of all such Certificateholders, waive any default by the Servicer in the
performance of its obligations under the related Pooling and Servicing Agreement
and its consequences, except a default in making any required deposits to or
payments from any Account in accordance with the Pooling and Servicing
Agreement. No such waiver will impair the Certificateholders' rights with
respect to subsequent Events of Default.
Amendment
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may be amended from time to time by the
Depositor, the Servicer and the related Trustee, without the consent of the
related Certificateholders, to cure any ambiguity, correct or supplement any
provision therein that may be inconsistent with other provisions therein, or to
make any other provisions with respect to matters or questions arising under
such Pooling and Servicing Agreement that are not inconsistent with the
provisions of the Pooling and Servicing Agreement; provided that such action
shall not, in the opinion of counsel satisfactory to the related Trustee,
materially and adversely affect the interests of any related Certificateholder.
Each Pooling and Servicing Agreement may also be amended by the Depositor, the
Servicer and the related Trustee with the consent of the holders of the related
Certificates evidencing not less than 51% of the related aggregate Certificate
Balance (and notional principal amount, if applicable) for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of such Pooling and Servicing Agreement or of modifying in any manner the rights
of such Certificateholders; provided, however, that no such amendment may (i)
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments on or in respect of the related Receivables
or distributions that are required to be made for the benefit of such
Certificateholders or (ii) reduce the aforesaid percentage of the Certificate
Balance of such Series that is required to consent to any such amendment,
without the consent of the holders of all of the outstanding Certificates of
such Series. No amendment of a Pooling and Servicing Agreement shall be
permitted unless an opinion of counsel is delivered to the Trustee to the effect
that such amendment will not adversely affect the tax status of the Trust.
Termination
Unless otherwise specified in the related Prospectus Supplement, the
obligations of the Servicer, the Depositor and the related Trustee pursuant to
the related Pooling and Servicing Agreement will terminate upon the earliest to
occur of (i) the maturity or other liquidation of the last Receivable in the
related Receivables Pool and the disposition of any amounts received upon
liquidation of any such remaining Receivables and (ii) the payment to the
related Certificateholders of all amounts required to be paid to them pursuant
to the Pooling and Servicing Agreement.
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, in order
to avoid excessive administrative expenses, the Servicer or one or more other
entities identified in the related Prospectus Supplement, will be permitted, at
its option, to purchase from each Trust or to cause such Trust to sell all
remaining Receivables in the related Receivables Pool as of the end of any
Collection Period, if the Certificate Balance as of the Distribution Date
following such Collection Period would be less than or equal to 10% of the
initial Pool Balance, at a purchase price equal to the fair market value of such
Receivables, but not less than the sum of (x) the outstanding Pool Balance and
(y) accrued and unpaid interest on such amount computed at a rate equal to the
weighted average Contract Rate, minus any amount representing payments received
on the Receivables and not yet applied to reduce the principal balance thereof
or interest related thereto.
If and to the extent provided in the related Prospectus Supplement, the
related Trustee will, within ten days following a Distribution Date as of which
the Pool Balance is equal to or less than 10% of the original Pool Balance,
solicit bids for the purchase of the Receivables remaining in such Trust, in the
manner and subject to the terms and conditions set forth in such Prospectus
Supplement. If such Trustee receives satisfactory bids as described in such
Prospectus Supplement, then the Receivables remaining in such Trust will be sold
to the highest bidder.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
Security Interest in Vehicles
Installment sale contracts such as those included in the Receivables
evidence the credit sale of automobiles, light trucks and vans by dealers to
obligors; the contracts and the installment loan and security agreements also
constitute personal property security agreements and include grants of security
interests in the vehicles under the UCC. Perfection of security interests in the
vehicles is generally governed by the motor vehicle registration laws of the
state in which the vehicle is located. In all of the States where UAC currently
acquires or originates Receivables, a security interest in a vehicle is
perfected by notation of the secured party's lien on the vehicle's certificate
of title. With respect to the Receivables, the lien is or will be perfected in
the name of UAC, UAFC, UACFC or, in certain cases, the Predecessor. Each
Receivable prohibits the sale or transfer of the Financed Vehicle without the
lienholder's consent.
Pursuant to each Purchase Agreement, UAFC will assign its security
interests in the Financed Vehicles to the Depositor along with the Receivables.
Pursuant to each Pooling and Servicing Agreement, the Depositor will assign its
security interests in the Financed Vehicles to the related Trustee along with
the Receivables. Because of the administrative burden and expense, neither the
Depositor nor the related Trustee will amend any certificate of title to
identify itself as the secured party.
In most states, an assignment such as that under a Pooling and
Servicing Agreement is an effective conveyance of a security interest without
amendment of any lien noted on a vehicle's certificate of title, and the
assignee succeeds thereby to the assignor's rights as secured party. In many
states in which the Receivables were originated, the laws governing certificates
of title are silent on the question of the effect of an assignment on the
continued validity and perfection of a security interest in vehicles. However,
with respect to security interests perfected by a central filing, the UCC in
these states provides that a security interest continues to be valid and
perfected even though the security interest has been assigned to a third party
and no amendments or other filings are made to reflect the assignment. An
official comment to the UCC states that this rule should control a security
interest in a vehicle which is perfected by the notation of the lien on the
certificate of title. Although the comment does not have the force of law,
official comments are typically given substantial weight by the courts.
The other states in which the Receivables were originated have
statutory provisions that address or could be interpreted as addressing
assignments. However, nearly all of these statutory provisions either do not
require compliance with the procedure outlined to insure the continued validity
and perfection of the lien or are ambiguous on the issue of whether the
procedure must be followed. Under the official comment noted above, if these
procedures for noting an assignee's name on a certificate of title are
determined to be merely permissive in nature, the procedures would not have to
be followed as a condition to the continued validity and perfection of the
security interest.
<PAGE>
By not identifying the Trust as the secured party on the certificate of
title, the security interest of the Trust in the vehicle could be defeated
through fraud or negligence. In the absence of fraud or forgery by the vehicle
owner, UAC, UAFC, UACFC or the Predecessor or administrative error by state or
local agencies, the notation of the UAFC's or the Predecessor's lien on the
certificates should be sufficient to protect the Trust against the right of
subsequent purchasers of a vehicle or subsequent lenders who take a security
interest in a vehicle securing a Receivable. If there are any vehicles as to
which UAC, UAFC, UACFC or the Predecessor failed to obtain a perfected security
interest, its security interest would be subordinate to, among others,
subsequent purchasers of the vehicles and holders of perfected security
interests. Such a failure, however, would constitute a breach of warranties
under the related Pooling and Servicing Agreement and Purchase Agreement and
would create an obligation of UAC to repurchase the related Receivable, unless
such breach were cured in a timely manner. See "Description of the Transfer and
Servicing Agreements -- Sale and Assignment of Receivables."
Under the laws of most states, including most of the states in which
the Receivables have been or will be originated, the perfected security interest
in a vehicle continues for four months after a vehicle is moved to a state other
than the state which issued the certificate of title and thereafter until the
vehicle owner re-registers the vehicle in the new state. A majority of states
require surrender of a certificate of title to re-register a vehicle. Since UAFC
(or UAC, UACFC or the Predecessor) will have its lien noted on the certificates
of title and the Servicer will retain possession of the certificates issued by
most states in which Receivables were or will be originated, the Servicer would
ordinarily learn of an attempt at re-registration through the request from the
obligor to surrender possession of the certificate of title or would receive
notice of surrender from the state of re-registration since the security
interest would be noted on the certificate of title. Thus, the secured party
would have the opportunity to re-perfect its security interest in the vehicle in
the state of relocation. In states that do not require a certificate of title
for registration of a motor vehicle, re-registration could defeat perfection.
In the ordinary course of servicing receivables, the Servicer takes
steps to effect re-perfection upon receipt of notice of re-registration or
information from the obligor as to relocation. Similarly, when an obligor sells
a vehicle, the Servicer must surrender possession of the certificate of title or
will receive notice as a result of UAFC's (or UAC's, UACFC's or the
Predecessor's) lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related Receivable before release of the lien. Under
each Pooling and Servicing Agreement, the Servicer is obligated to take
appropriate steps, at its own expense, to maintain perfection of security
interests in the Financed Vehicles.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes would take priority over even a perfected
security interest in a Financed Vehicle. In some states, a perfected security
interest in a Financed Vehicle may take priority over liens for repairs.
UAC and UAFC will represent and warrant in each Purchase Agreement and
Pooling and Servicing Agreement that, as of the date of issuance of the
Certificates, each security interest in a Financed Vehicle is or will be prior
to all other present liens (other than tax liens and liens that arise by
operation of law) upon and security interests in such Financed Vehicle. However,
liens for repairs or taxes could arise at any time during the term of a
Receivable. No notice will be given to the Trustee or Certificateholders in the
event such a lien arises.
Repossession
In the event of a default by vehicle purchasers, the holder of a retail
installment sale contract or an installment loan and security agreement has all
of the remedies of a secured party under the UCC, except where specifically
limited by other state laws. The remedy employed by the Servicer in most cases
of default is self-help repossession and is accomplished simply by taking
possession of the Financed Vehicle. The self-help repossession remedy is
available under the UCC in most of the states in which Receivables have been or
will be originated as long as the repossession can be accomplished without a
breach of the peace.
<PAGE>
In cases where the obligor objects or raises a defense to repossession,
or if otherwise required by applicable state law, a court order must be obtained
from the appropriate state court. The vehicle must then be repossessed in
accordance with that order.
Notice of Sale; Redemption Rights
In the event of default by an obligor, some jurisdictions require that
the obligor be notified of the default and be given a time period within which
the obligor may cure the default prior to repossession. Generally, this right of
reinstatement may be exercised on a limited number of occasions in any one-year
period.
The UCC and other state laws require the secured party to provide an
obligor with reasonable notice of the date, time and place of any public sale
and/or the date after which any private sale of the collateral may be held. The
obligor generally has the right to redeem the collateral prior to actual sale by
paying the secured party the unpaid principal balance of the obligation plus
reasonable expenses for repossessing, holding, and preparing the collateral for
disposition and arranging for its sale, and, to the extent provided in the
related retail installment sale contract, and, as permitted by law, reasonable
attorneys' fees.
Deficiency Judgments and Excess Proceeds
The proceeds of resale of the vehicles generally will be applied first
to the expenses of resale and repossession and then to the satisfaction of the
indebtedness. If the net proceeds from resale do not cover the full amount of
the indebtedness, a deficiency judgment may be sought. However, the deficiency
judgment would be a personal judgment against the obligor for the shortfall, and
a defaulting obligor can be expected to have very little capital or sources of
income available following repossession. Therefore, in many cases, it may not be
useful to seek a deficiency judgment or, if one is obtained, it may be settled
at a significant discount.
Occasionally, after resale of a vehicle and payment of all expenses and
all indebtedness, there is a surplus of funds. In that case, the UCC requires
the lender to remit the surplus to any holder of a lien with respect to the
vehicle or if no such lienholder exists, the UCC requires the lender to remit
the surplus to the former owner of the vehicle.
Consumer Protection Laws
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. These laws include the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B
and Z, state adaptations of the National Consumer Act and of the Uniform
Consumer Credit Code and state motor vehicle retail installment sales acts, and
other similar laws. Also, state laws impose finance charge ceilings and other
restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. Those requirements impose specific
statutory liabilities upon creditors who fail to comply with their provisions.
In some cases, this liability could affect an assignee's ability to enforce
consumer finance contracts such as the Receivables.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule"), the provisions of which are generally duplicated by
the Uniform Consumer Credit Code, other state statutes, or the common laws in
certain states, has the effect of subjecting a seller (and certain related
lenders and their assignees) in a consumer credit transaction and any assignee
of the seller to all claims and defenses that the obligor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by the obligor under the contract, and the holder of
the contract may also be unable to collect any balance remaining due thereunder
from the obligor. Most of the Receivables will be subject to the requirements of
the FTC Rule. Accordingly, the Trustee, as holder of the Receivables, will be
subject to any claims or defenses that the purchaser of the related financed
vehicle may assert against the seller of the vehicle. Such claims are limited to
a maximum liability equal to the amounts paid by the Obligor on the Receivable.
<PAGE>
Under most state motor vehicle dealer licensing laws, dealers of motor
vehicles are required to be licensed to sell motor vehicles at retail sale. In
addition, with respect to used vehicles, the Federal Trade Commission's Rule on
Sale of Used Vehicles requires that all sellers of used vehicles prepare,
complete and display a "Buyer's Guide" which explains the warranty coverage for
such vehicles. Furthermore, Federal Odometer Regulations promulgated under the
Motor Vehicle Information and Cost Savings Act requires that all sellers of used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if
either a Buyer's Guide or Odometer Disclosure Statement was not provided to the
purchaser of the related financed vehicle, the obligor may be able to assert a
defense against the seller of the vehicle. If an Obligor were successful in
asserting any such claim or defense, such claim or defense would constitute a
breach of UAC's representations and warranties under each Purchase Agreement and
Pooling and Servicing Agreement and would create an obligation of UAC to
repurchase the Receivable unless such breach were cured in a timely manner. See
"Description of the Transfer and Servicing Agreements -- Sale and Assignment of
Receivables."
Courts have applied general equitable principles to secured parties
pursuing repossession or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an obligor from some or
all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies
of secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. Courts have generally upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by the
creditor do not involve sufficient state action to afford constitutional
protection to consumers.
UAC will represent and warrant in each Purchase Agreement that each
Receivable complies with all requirements of law in all material respects.
Accordingly, if an Obligor has a claim against a Trust for violation of any law
and such claim materially and adversely affects the Trust's interest in a
Receivable, such violation would constitute a breach of UAC's representations
and warranties under the Purchase Agreement and would create an obligation of
UAC to repurchase such Receivable unless the breach were cured. See "Description
of the Transfer and Servicing Agreements -- Sale and Assignment of Receivables."
Other Limitations
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing an automobile, and, as part of the rehabilitation plan,
reduce the amount of the secured indebtedness to the market value of the
automobile at the time of bankruptcy (as determined by the court), leaving the
party providing financing as a general unsecured creditor for the remainder of
the indebtedness. A bankruptcy court may also reduce the monthly payments due
under a contract or change the rate of interest and time of repayment of the
indebtedness.
Bankruptcy Matters
UAC and UAFC will represent and warrant to the Depositor in each
Purchase Agreement, and the Depositor will warrant to the related Trust in each
Pooling and Servicing Agreement, that the sales of the Receivables by UAC to
UAFC, by UAFC to the Depositor and by the Depositor to the Trust are valid sales
of the Receivables to UAFC, the Depositor and such Trust, respectively.
Notwithstanding the foregoing, if UAC, UAFC, UACFC or the Depositor were to
become a debtor in a bankruptcy case and a creditor or trustee-in-bankruptcy of
such debtor or such debtor itself were to take the position that the sale of
Receivables to UAFC, the Depositor or the Trust should instead be treated as a
pledge of such Receivables to secure a borrowing of such debtor, delays in
<PAGE>
payments of collections of Receivables to Certificateholders could occur or
(should the court rule in favor of any such trustee, debtor or creditor)
reductions in the amounts of such payments could result. If the transfer of
Receivables to the Trust is treated as a pledge instead of a sale, a tax or
government lien on the property of UAC, UAFC or the Depositor arising before the
transfer of the related Receivables to such Trust may have priority over such
Trust's interest in such Receivables. If the transactions contemplated herein
are treated as a sale, the Receivables would not be part of the UAC's, UAFC's,
UACFC's or the Depositor's bankruptcy estate and would not be available to the
bankrupt entity's creditors.
The decision of the U.S. Court of Appeals for the Tenth Circuit,
Octagon Gas System, Inc. v. Rimmer (In re Meridian Reserve, Inc.) (decided May
27, 1993), contains language to the effect that under the UCC accounts sold by a
debtor would remain property of the debtor's bankruptcy estate, whether or not
the sale of the accounts was perfected. Although the Receivables constitute
chattel paper under the UCC, rather than accounts, Article 9 of the UCC applies
to the sale of chattel paper as well as the sale of accounts, and perfection of
a security interest in both chattel paper and accounts may be accomplished by
the filing of a UCC-1 financing statement. If, following a bankruptcy of UAC,
UAFC or the Depositor, a court were to follow the reasoning of the Tenth Circuit
reflected in the above case, then the Receivables could be included in the
bankruptcy estate of UAC, UAFC, UACFC or the Depositor, as applicable, and
delays in payments of collections on or in respect of the Receivables could
occur. UAC and UAFC will warrant to the Depositor in each Purchase Agreement,
and the Depositor will warrant to the Trust in each Pooling and Servicing
Agreement, that the sale of the related Receivables to the Depositor or the
related Trust is a sale of such Receivables to the Depositor and to the Trust,
respectively.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
summary does not purport to deal with federal income tax consequences applicable
to all categories of holders, some of which may be subject to special rules. For
example, its does not discuss the tax treatment of Certificateholders that are
insurance companies, regulated investment companies or dealers in securities.
Prospective investors are urged to consult their own tax advisors in determining
the federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of federal tax counsel regarding certain federal income tax
matters discussed below. Such opinions, however, are not binding on the IRS or
the courts. No ruling on any of the issues discussed below will be sought from
the IRS. For purposes of the following summary, references to the Trust, the
Certificates and related terms, parties and documents shall be deemed to refer,
unless otherwise specified herein, to each Trust and the Certificates and the
related terms, parties and documents applicable to such Trust.
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust as a partnership
under the Code or whether the Trust will be treated as a grantor trust. The
Prospectus Supplement for each Series of Certificates will specify whether a
partnership election will be made or whether the Trust will be treated as a
grantor trust.
<PAGE>
New Legislation
Recently enacted provisions of the Code provide for the creation of a
new type of entity for federal income tax purposes, the "financial asset
securitization investment trust" ("FASIT"). These provisions are in effect as of
September 1, 1997, but many technical issues concerning FASIT's must be
addressed by Treasury regulations. To qualify as a FASIT, an entity must meet
certain requirements under Section 860L and must elect such treatment. The
applicable Pooling and Servicing Agreement may be amended in accordance with the
provisions thereof to provide that the Depositor and trustee will cause a FASIT
election to be made for the Trust if the Depositor delivers to the trustee and
the Certificate Insurer an opinion of counsel to the effect that, for federal
income tax purposes, (i) the deemed issuance of FASIT regular interests
(occuring in connection with such election) will not adversely affect the
federal income tax treatment of Certificates, (ii) following such election such
Trust will not be deemed to be an association (or publicly traded partnership)
taxable as a corporation and (iii) such election will not cause or constitute an
event in which gain or loss would be recognized by any Certificateholder or the
Trust.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
Tax Characterization of the Trust as a Partnership
Federal Tax Counsel will deliver its opinion that a Trust for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Pooling and
Servicing Agreement and related documents will be complied with, including the
use of the elective "check-the-box" procedure under which partnership (as
opposed to association) status may be elected by an unincorporated entity for
federal income tax purposes without lacking some or all of the characteristics
necessary for a business trust to be classified as an association taxable as a
corporation pursuant to prior regulations. Such counsel's opinion will also
conclude that the nature of the income of the Trust will exempt it from the rule
that certain publicly traded partnerships are taxable as corporations.
If a Trust were taxable as a corporation for federal income tax
purposes, it would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all of its income on the related
Receivables, less servicing fees and other deductible expenses. Any such
corporate income tax could materially reduce cash available to make
distributions on the Certificates, and beneficial owners of Certificates (the
"Certificate Owners") could be liable for any such tax that is unpaid by the
Trust.
Tax Consequences to Holders of the Certificates
Treatment of the Trust as a Partnership. The Depositor and the Servicer
will agree, and the related Certificate Owners will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificate Owners (including
the holder of the Class IC Certificate). However, the proper characterization of
the arrangement involving the Trust, the Certificates, the Depositor and the
Servicer is not certain because there is no authority on transactions closely
comparable to that contemplated herein.
Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificate Owner will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the related Receivables
(including appropriate adjustments for market discount, original issue discount
("OID") and bond premium) and any gain upon collection or disposition of such
Receivables. The Trust's deductions will consist primarily of servicing and
other fees, and losses or deductions upon collection or disposition of
Receivables.
<PAGE>
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Pooling and Servicing Agreement and related documents). The Pooling
and Servicing Agreement will provide, in general, that the Certificate Owners
will be allocated taxable income of the Trust for each month equal to the sum
of: (i) the interest that accrues on the Certificates in accordance with their
terms for such month, including interest accruing at the related Pass-Through
Rate for such month and interest, if any, on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust income attributable to
discount on the related Receivables that corresponds to any excess of the
principal amount of the Certificates over their initial issue price; (iii) any
other amounts of income payable to the Certificate Owners for such month; and
(iv) in the case of an individual, estate or trust, such Certificate Owner's
share of income corresponding to the miscellaneous itemized deductions described
in the next paragraph. Such allocation will be reduced by any amortization by
the Trust of premium on Receivables that corresponds to any excess of the issue
price of Certificates over their principal amount. Unless otherwise provided in
the related Prospectus Supplement, all remaining taxable income of the Trust
will be allocated to the Class IC Certificateholder. In the event the Trust
issues interest-only Class I Certificates, the amount allocated to such
Certificate Owners will equal the excess of (i) the Class I Pass-Through Rate
times the Notional Principal Amount for such month over (ii) the portion of the
amount distributed with respect to the Class I Certificates for such month that
would constitute a return of basis if the Class I Certificates constituted an
instrument described in Section 860G(a)(1)(B)(ii) of the Code, applying the
principles of Section 1272(a)(6) of the Code and employing the constant yield
method of accrual (utilizing the appropriate prepayment assumption); provided,
that no negative accruals shall be permitted, and, provided further, that other
deductions derived by the Trust equal to the aggregate remaining capital account
balances of the Class I Certificate Owners will be allocated to the Class I
Certificates in proportion to the respective capital account balances
immediately before the final redemption.
The portion of expenses of the Trust (including fees to the Servicer,
but not interest expense) allocated to taxpayers that are individuals, estates
or trusts would be miscellaneous itemized deductions to such taxpayers. Such
deductions might be disallowed to such taxpayers in whole or in part and might
result in such taxpayers being taxed on an amount of income that exceeds the
amount of cash actually distributed to such taxpayers over the life of the
Trust. Any net loss of the Trust will be allocated first to the Class IC
Certificateholder to the extent of its adjusted capital account then to the
other Certificate Owners in the priorities set forth in the Pooling and
Servicing Agreement to the extent of their respective adjusted capital accounts,
and thereafter to the Class IC Certificateholder.
The Trust intends to make all calculations relating to market discount
income and amortization of premium with respect to both Simple Interest
Receivables and Precomputed Receivables on an aggregate basis rather than a
Receivable-by-Receivable basis. If the IRS were to require that such
calculations be made separately for each Receivable, the Trust might be required
to incur additional expense, but it is believed that there would not be a
material adverse effect on Certificate Owners.
Discount and Premium. Except as otherwise provided in the related
Prospectus Supplement, it is believed that the Receivables were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust for the related Receivables may be greater or less than
the remaining principal balance of the Receivables at the time of purchase. If
so, the Receivables will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on a
Receivable-by-Receivable basis.)
If the Trust acquires the related Receivables at a market discount or
premium, it will elect to include any such discount in income currently as it
accrues over the life of such Receivables or to offset any such premium against
interest income on such Receivables. As indicated above, a portion of such
market discount income or premium deduction may be allocated to Certificate
Owners.
<PAGE>
Section 708 Termination. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. Under applicable Treasury regulations, such a 50% or greater
transfer would cause a deemed contribution of the assets of the Trust to a new
partnership in exchange for interests in the Trust. Such interests in a new
partnership would be deemed distributed to the partners of the Trust in
liquidation thereof, which would not constitute a sale or exchange. The Trust
will not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
With respect to noncorporate Certificate Owners, under recently enacted law,
such capital gain or loss will be short-term, mid-term, or long-term, depending
on whether the Grantor Trust Certificate has been held for 12 months or less,
more than 12 months but not more than 18 months, or more than 18 months,
respectively. (Long-term capital gain tax rates provide a further reduction as
compared with mid-term rates; short-term capital gains are taxed at ordinary
income tax rates.) A Certificate Owner's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Trust
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the holder's
share of the liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates and, upon sale or other disposition of some of the
Certificates, to allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the related Receivables would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust will elect to include
market discount in income as it accrues.
If a Certificate Owner is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificate Owners
in proportion to the principal amount of Certificates (or notional principal
amount, in the case of any interest only Certificates) owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificate Owners. The Class IC
Certificateholder, acting as tax matters partner for the Trust, will be
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
<PAGE>
Section 754 Election. In the event that a Certificate Owner sells its
Certificates at a profit (loss), the purchasing Certificate Owner will have a
higher (lower) basis in the Certificates than the selling Certificate Owner had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificate Owners might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis, and the fiscal year of
the Trust is expected to be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust and will report each Certificate Owner's allocable share of
items of Trust income and expense to holders and the IRS on Schedule K-1. The
Trust will provide the Schedule K-l information to nominees that fail to provide
the Trust with the information statement described below and such nominees will
be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (a) the name, address and identification number of such person, (b)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
Unless otherwise specified in the related Prospectus Supplement, the
Class IC Certificateholder will be designated as the tax matters partner for
each Trust in the related Pooling and Servicing Agreement and, as such, will be
responsible for representing the Certificate Owners in any dispute with the IRS.
The Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificate Owners, and, under certain circumstances, a Certificate Owner may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificate Owner's
returns and adjustments of items not related to the income and losses of the
Trust.
Tax Consequences to Foreign Certificate Owners. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
<PAGE>
allocable to foreign Certificate Owners pursuant to Section 1446 of the Code, as
if such income were effectively connected to a U.S. trade or business, at a rate
of 35% for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to change
its withholding procedures. In determining a holder's withholding status, the
Trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a Certificate
Owner who is a foreign person generally will be considered guaranteed payments
to the extent such payments are determined without regard to the income of the
Trust. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, Certificate Owners will be subject to United States federal income tax
and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a foreign holder would only be
entitled to claim a refund for that portion of the taxes in excess of the taxes
that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificate Owner fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TRUSTS TREATED AS GRANTOR TRUSTS
Tax Characterization of Grantor Trusts
If specified in the related Prospectus Supplement, Federal Tax Counsel
will deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that such Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of Certificates (referred to herein as "Grantor Trust
Certificateholders") will be treated for federal income tax purposes as owners
of a portion of the Trust's assets as described below. The Certificates issued
by a Trust that is treated as a grantor trust are referred to herein as "Grantor
Trust Certificates".
Characterization. Each Grantor Trust Certificateholder will be treated
as the owner of a pro rata undivided interest in the interest and principal
portions of the Trust represented by the Grantor Trust Certificates and will be
considered the equitable owner of a pro rata undivided interest in each of the
Receivables in the Trust. Any amounts received by a Grantor Trust
Certificateholder in lieu of amounts due with respect to any Receivable because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Receivables in the Trust represented by Grantor Trust Certificates,
including interest, OID, if any, prepayment fees, assumption fees, any gain
recognized upon an assumption and late payment charges received by the Servicer.
Under Code Sections 162 or 212, each Grantor Trust Certificateholder will be
entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees and late payment charges retained by the Servicer, provided that
such amounts are reasonable compensation for services rendered to the Trust.
Grantor Trust Certificateholders that are individuals, estates or trusts will be
entitled to deduct their share of expenses only to the extent such expenses plus
all other Section 212 expenses exceed two percent of their respective adjusted
<PAGE>
gross incomes. A Grantor Trust Certificateholder using the cash method of
accounting must take into account its pro rata share of income and deductions as
and when collected by or paid to the Servicer. A Grantor Trust Certificateholder
using an accrual method of accounting must take into account its pro rata share
of income and deductions as they become due or are paid to the Servicer,
whichever is earlier. If the servicing fees paid to the Servicer are deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Servicer (or any person to
whom the Servicer assigned for value all or a portion of the servicing fees) in
a portion of the interest payments on the Receivables. The Receivables would
then be subject to the "coupon stripping" rules of the Code discussed below.
Stripped Bonds and Stripped Coupons
Although the tax treatment of stripped bonds is not entirely clear,
based on recent guidance by the IRS, it appears that each purchaser of a Grantor
Trust Certificate will be treated as the purchaser of a stripped bond which
generally should be treated as a single debt instrument issued on the day it is
purchased for purposes of calculating any original issue discount. Generally,
under recently issued Treasury regulations (the "Section 1286 Treasury
Regulations"), if the discount on a stripped bond is larger than a de minimis
amount (as calculated for purposes of the OID rules of the Code) such stripped
bond will be considered to have been issued with OID. For these purposes, OID is
the excess of the "stated redemption price at maturity" (generally, principal
and any interest which is not "qualified stated interest") of a debt instrument
over its issue price. See "-- Original Issue Discount" below. Based on the
preamble to the Section 1286 Treasury Regulations, Federal Tax Counsel is of the
opinion that, although the matter is not entirely clear, the interest income on
the Certificates at the sum of the Pass-Through Rate and the portion of the
Servicing Fee Rate that does not constitute excess servicing will be treated as
"qualified stated interest" within the meaning of the Section 1286 Treasury
Regulations and such income will be so treated in the Trustee's tax information
reporting. It is possible that the treatment described in this paragraph will
apply only to that portion of the Receivables in a particular trust as to which
there is "excess servicing" and that the remainder of such Receivables will not
be treated as stripped bonds, but as undivided interests as described above.
Unless indicated otherwise in the applicable Prospectus Supplement, it is not
anticipated that Grantor Trust Certificates will be issued with greater than de
minimis OID.
Original Issue Discount. The rules of the Code relating to OID
(currently Sections 1271 though 1273 and 1275) will be applicable to a person
comparable to a Grantor Trust Certificateholder that acquires an undivided
interest in a stripped bond issued or acquired with OID, and such person must
include in gross income the sum of the "daily portions," as defined below, of
the OID on such stripped bond for each day on which it owns a Certificate,
including the date of purchase but excluding the date of disposition. Because
payments on such stripped bonds may be accelerated by prepayments on the
underlying obligations, OID will be determined as required under Code Section
1272(a)(6). Pursuant to Code Section 1272(a)(6), OID accruals will be calculated
based on a constant interest method and a prepayment assumption indicated in
such Prospectus Supplement. In the case of an original Grantor Trust
Certificateholder, the daily portions of OID generally would be determined as
follows. A calculation will be made of the portion of OID that accrues on the
stripped bond during each successive monthly accrual period (or shorter period
in respect of the date of original issue or the final Distribution Date). This
will be done, in the case of each full monthly accrual period, by adding (i) the
present value of all remaining payments to be received on the stripped bond
under the prepayment assumption used in respect of the Grantor Trust
Certificates and (ii) any payments received during such accrual period, and
subtracting from the total the "adjusted issue price" of the stripped bond at
the beginning of such accrual period. No representation is made that the Grantor
Trust Certificates will prepay at any prepayment assumption. The "adjusted issue
price" of a stripped bond at the beginning of the first accrual period is its
issue price (as determined for purposes of the OID rules of the Code) and the
"adjusted issue price" of a stripped bond at the beginning of a subsequent
accrual period is the "adjusted issue price" at the beginning of the immediately
preceding accrual period plus the amount of OID allocable to that accrual period
and reduced by the amount of any payment (other than "qualified stated
interest") made at the end of or during that accrual period. The OID accruing
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of OID for each day in the period. A
subsequent Grantor Trust Certificateholder will be required to adjust its OID
accrual to reflect its purchase price, the remaining period to maturity and,
possibly, a new prepayment assumption. The Servicer will report to all Grantor
Trust Certificateholders as if they were original holders.
<PAGE>
With respect to the Receivables, the method of calculating OID as
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in any given accrual period to reflect the fact that
prepayments are occurring at a faster or slower rate than the prepayment
assumption used in respect of the Receivables. Subsequent purchasers that
purchase Grantor Trust Certificates at more than a de minimis discount should
consult their tax advisors with respect to the proper method to accrue such OID.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Receivables may be subject to the market discount rules of
Sections 1276 though 1278 to the extent an undivided interest in a Receivable or
stripped bond is considered to have been purchased at a "market discount".
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Receivable or stripped bond allocable to such
holder's undivided interest over such holder's tax basis in such interest.
Market discount with respect to a Grantor Trust Certificate will be considered
to be zero if the amount allocable to the Grantor Trust Certificate is less than
0.25% of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Section 1276 and 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain or disposition of a market discount bond
shall be treated as ordinary income to the extent that it does not exceed the
accrued market discount at the time of such payment. The amount of accrued
market discount for purposes of determining the tax treatment of subsequent
principal payments or dispositions of the market discount bond is to be reduced
by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described in
the relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includible in income. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
<PAGE>
Premium. To the extent a Grantor Trust Certificateholder is considered
to have purchased an undivided interest in a Receivable or stripped bond for an
amount that is greater than its stated redemption price at maturity of such
Receivable or stripped bond, such Grantor Trust Certificateholder will be
considered to have purchased the Receivable with "amortizable bond premium"
equal in amount to such excess. A Grantor Trust Certificateholder (who does not
hold the Certificate for sale to customers or in inventory) may elect under
Section 171 of the Code to amortize such premium. Under the Code, premium is
allocated among the interest payments on the Receivables or stripped bonds to
which it relates and is considered as an offset against (and thus a reduction
of) such interest payments. With certain exceptions, such an election would
apply to all debt instruments held or subsequently acquired by the electing
holder. Absent such an election, the premium will be deductible as an ordinary
loss only upon disposition of the Certificate or pro rata as principal is paid
on the Receivables or stripped bonds.
Election to Treat All Interest as OID. The OID regulations permit a
Grantor Trust Certificateholder to elect to accrue all interest, discount
(including de minimis market discount or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
to be made with respect to a Grantor Trust Certificate with market discount, the
Certificate Owner would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Grantor Trust Certificateholder acquires during the
year of the election or thereafter. Similarly, a Grantor Trust Certificateholder
that makes this election for a Grantor Trust Certificate that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Grantor Trust Certificateholder owns or acquires. See "-- Premium" herein. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Grantor Trust Certificate is irrevocable.
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the OID and any market discount included in the seller's gross
income with respect to the Grantor Trust Certificate, and reduced by any market
premium amortized by the Depositor and by principal payments on the Grantor
Trust Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Grantor Trust Certificate is a
"capital asset" within the meaning of Section 1221 (except in the case of gain
attributable to accrued market discount, as noted above under "--Market
Discount") and, with respect to noncorporate owners, under recently enacted law,
will be short-term, mid-term, or long-term, depending on whether the Grantor
Trust Certificate has been held for 12 months or less, more than 12 months but
not more than 18 months, or more than 18 months, respectively. (Long-term
capital gain tax rates provide a further reduction as compared with mid-term
rates; short-term capital gains are taxed at ordinary income tax rates.)
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
Non-U.S. Persons. Interest or OID paid to non-U.S. Owners of Grantor
Trust Certificates will be treated as "portfolio interest" for purposes of
United States withholding tax. Such interest (including OID, if any)
attributable to the underlying Receivables will not be subject to the normal 30%
(or such lower rate provided for by an applicable tax treaty) withholding tax
imposed on such amounts provided that (i) the Non-U.S. Certificate Owner is not
a "10% shareholder" (within the definition of Section 871(h)(3)) of any obligor
on the Receivables; and is not a controlled foreign corporation (within the
definition of Section 957) related to any Obligor on the Receivables and (ii)
such Certificate Owner fulfills certain certification requirements. Under these
requirements, the Certificate Owner must certify, under penalty of perjury, that
it is not a "United States person" and must provide its name and address. For
this purpose "United States person" means a citizen or resident of the United
States, a corporation, partnership (except to the extent provided in applicable
<PAGE>
Treasury regulations), or other entity created or organized in or under the laws
of the United States or any political subdivision thereof, or an estate that is
subject to U.S. federal income tax regardless of the source of its income or a
trust if (A) for taxable years beginning after December 31, 1996 (or for taxable
years ending after August 20, 1996, if the trustee has made an applicable
election), a court within the United States is able to exercise primary
supervision over the administration of such trust, and one or more such United
States persons have the authority to control all substantial decisions of such
trust, or (B) for all other taxable years, such trust is subject to United
States federal income tax regardless of the source of its income (or, to the
extent provided in applicable Treasury regulations, certain trusts in existence
on August 20, 1996, which are eligible to and elect to be treated as United
States persons). If, however, such interest or gain is effectively connected to
the conduct of a trade or business within the United States by such Certificate
Owner, such owner will be subject to United States federal income tax thereon at
graduated rates. Potential investors who are not United States persons should
consult their own tax advisors regarding the specific tax consequences of owning
a Certificate.
Information Reporting and Backup Withholding. The Servicer will furnish
or make available, within a reasonable time after the end of each calendar year,
to each person who was a Grantor Trust Certificateholder at any time during such
year, such information as may be deemed necessary or desirable to assist Grantor
Trust Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to beneficial owners or
financial intermediaries that hold Grantor Trust Certificates as nominees on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
***
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF CERTIFICATES SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL AND FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA, and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each, a "Plan"), from engaging in
certain transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the Plan. ERISA also imposes certain duties on persons who are fiduciaries of
Plans subject to ERISA and prohibits certain transactions between a Plan and
parties in interest with respect to such Plans. Under ERISA, any person who
exercises any authority or control with respect to the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant). A violation of these "prohibited
transaction" rules may generate excise tax and other liabilities under ERISA and
the Code for such persons.
Certain transactions involving a Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Certificates if assets of the Trust were deemed to be assets of
the Benefit Plan. Under a regulation issued by the United States Department of
Labor (the "Plan Assets Regulations"), the assets of a Trust would be treated as
plan assets of a Benefit Plan for the purposes of ERISA and the Code only if the
Benefit Plan acquired an "equity interest" in the Trust and none of the
exceptions contained in the Plan Assets Regulation was applicable. An equity
interest is defined under the Plan Assets Regulation as an interest other than
an instrument that is treated as indebtedness under applicable local law and
which has no substantial equity features. The likely treatment in this context
of Certificates of a given Series will be discussed in the related Prospectus
Supplement.
<PAGE>
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Certificates of a given
Series should consult its tax and/or legal advisors regarding whether the assets
of the related Trust would be considered plan assets, the possibility of
exemptive relief from the prohibited transaction rules and other issues and
their potential consequences.
The U.S. Department of Labor has granted to the underwriter (or in the
case of series offered by more than one underwriter, the lead underwriter) named
in each Prospectus Supplement an exemption (the "Exemption") from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Benefit Plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption include
motor vehicle installment sales contracts such as the Receivables. The Exemption
will apply to the acquisition, holding and resale of nonsubordinated
Certificates (referred to herein as "Senior Certificates") by a Plan, provided
that certain conditions (certain of which are described below) are met.
Among the conditions that must be satisfied for the Exemption to apply
to the Senior Certificates are the following:
(1) The Trust is considered to consist solely of obligations which bear
interest or are purchased at a discount and which are secured by motor vehicles
or equipment, or "qualified motor vehicle leases" (as defined in the Exemption),
property that had secured such obligations or qualified motor vehicle leases,
cash or temporary investments maturing no later than the next date on which
distributions are to be made to the Senior Certificate Owners, and rights of the
Trustee under the Pooling and Servicing Agreement and under credit support
arrangements with respect to such obligations or qualified motor vehicle leases.
(2) The acquisition of the Senior Certificates by a Plan is on terms
(including the price for the Senior Certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an unrelated
party;
(3) The rights and interests evidenced by the Senior Certificates
acquired by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the Trust;
(4) The Senior Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, L.P.;
(5) The related Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(6) The sum of all payments made to the underwriters in connection with
the distribution of the Senior Certificates represents not more than reasonable
compensation for underwriting the Senior Certificates; the sum of all payments
made to and retained by the Depositor pursuant to the sale of the Contracts to
the related Trust represents not more than the fair market value of such
Contracts; and the sum of all payments made to and retained by the Servicer
represents not more than reasonable compensation for the Servicer's services
under the related Pooling and Servicing Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith; and
(7) The Plan investing in the Senior Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933, as amended.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest or prohibited transactions only if, among
other requirements, (i) in the case of the acquisition of Senior Certificates in
connection with the initial issuance, at least fifty percent of the Senior
<PAGE>
Certificates are acquired by persons independent of the Restricted Group (as
defined below), (ii) the Benefit Plan's investment in Senior Certificates does
not exceed twenty-five percent of all of the Senior Certificates outstanding at
the time of the acquisition and (ii) immediately after the acquisition, no more
than twenty-five percent of the assets of the benefit Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by the Depositor, any underwriter, the related Trustee, the Servicer,
any obligor with respect to Contracts included in the related Trust constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the Trust, or any affiliate of such parties (the "Restricted Group").
As mentioned above, whether or not the Exemption will apply to the
purchase and holding of Senior Certificates by Plans will depend on, among other
things, whether the Trust consists solely of permitted assets. The Exemption
provides that a Trust may include, among other assets, undistributed cash or
temporary investments made therewith maturing no later than the next date on
which distributions are to be made to Certificateholders. There can be no
assurance that the cash or Eligible Investments in the Cash Collateral Account
and the Yield Supplement Account or the cash or Eligible Investments in the
Pre-Funding Account or any pre-funding reserve account held by the Trust would
meet this definition, and not render the Exemption inapplicable. In view of the
foregoing, any Plan fiduciary who proposes to cause a Plan to purchase Senior
Certificates should consult with its own counsel with respect to the
applicability of the Exemption and should determine whether all of the
conditions of the Exemption have been satisfied.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to a given Series (the "Underwriting Agreement"), the Depositor will
agree to cause the related Trust to sell to the underwriters named therein and
in the related Prospectus Supplement, and each of such underwriters will
severally agree to purchase, the principal amount of each class of Certificates
of the related Series set forth therein and in the related Prospectus
Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all of the
Certificates described therein that are offered hereby and by the related
Prospectus Supplement if any of such Certificates are purchased.
Each Prospectus Supplement will either (i) set forth the price at which
each class of Certificates being offered thereby will be offered to the public
and any concessions that may be offered to certain dealers participating in the
offering of such Certificates or (ii) specify that the related Certificates are
to be resold by the underwriters in negotiated transactions at varying prices to
be determined at the time of such sale. After the initial public offering of any
such Certificates, such public offering prices and such concessions may be
changed.
Each Underwriting Agreement will provide that UAC and the Depositor
will indemnify the related underwriters against certain civil liabilities,
including liabilities under the Securities Act, or contribute to payments the
several underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in the related
Accounts in Eligible Investments acquired from such underwriters.
Pursuant to each Underwriting Agreement, the closing of the sale of any
class of Certificates subject thereto will be conditioned on the closing of the
sale of all other classes of Certificates of such Series.
The place and time of delivery for the Certificates in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the Certificates of any Series will
be passed upon for the related Trust, the Depositor and the Servicer by Barnes &
Thornburg, Indianapolis, Indiana, and for the underwriters by Cadwalader,
Wickersham & Taft, New York, New York or such other firm as shall be identified
in the related Prospectus Supplement. Certain federal income tax and other
matters will be passed upon for each Trust by Cadwalader, Wickersham & Taft,
Barnes & Thornburg or such other firm as shall be identified in the related
Prospectus Supplement.
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below is a list of certain of the more significant terms used in
this Prospectus and the pages on which the definitions of such terms may be
found herein.
TERM PAGE
Actuarial Receivables.......................................... 16
Advance ..................................................... 7
Approved Rating................................................ 24
Cash Collateral Account........................................ 27
Cede ......................................................... 13
Certificate Account .......................................... 23
Certificate Balance ......................................... 5
Certificate Owners ...........................................19, 34
Certificate Pool Factor ...................................... 17
Certificateholders ......................................... 6, 14
Certificates ................................................ 1
Class Certificate Balance ................................... 3
Closing Date ................................................. 5
Code ......................................................... 33
Collection Period ............................................ 7
Commission .................................................. 2
Contracts...................................................... 5
Contract Rate.................................................. 7
Cutoff Date ................................................. 4
Dealers ..................................................... 4
Definitive Certificates ...................................... 20
Depositor...................................................... 3
Distribution Date ............................................ 19
DTC .......................................................... 13
Eligible Deposit Account .................................... 24
Eligible Institution ........................................ 25
Eligible Investments ......................................... 24
ERISA ........................................................ 9
Events of Default ............................................ 28
Exchange Act................................................... 2
Exemption...................................................... 42
FASIT.......................................................... 34
Federal Tax Counsel............................................ 9
Final Scheduled Distribution Date.............................. 25
Final Scheduled Maturity Date ............................... 7
Financed Vehicles ............................................ 4
FTC Rule ..................................................... 32
Funding Period .............................................. 5
Grantor Trust Certificates ................................... 38
Grantor Trust Certificateholders............................... 38
Indirect Participants ....................................... 19
Interest Shortfall............................................. 7
Investment Income.............................................. 24
IRS .......................................................... 36
Obligor ..................................................... 7
OID ......................................................... 34
Participants ................................................ 19
Pass-Through Rate .......................................... 3
Payaheads...................................................... 16
Payahead Account ............................................ 23
Plan ......................................................... 42
Plan Assets Regulations........................................ 42
Pooling and Servicing Agreement ............................. 3
Pool Balance................................................... 7
Precomputed Receivables ..................................... 16
Predecessor.................................................... 5
Pre-Funded Amount .......................................... 5
Pre-Funding Account ........................................ 5, 24
Prospectus Supplement ....................................... 1
Purchase Agreement............................................. 5
Purchase Amount .............................................. 22
Purchased Receivable........................................... 22
Rating Agency ............................................... 9
<PAGE>
Receivables ................................................ 1, 4
Receivables Pool ............................................. 13
Registration Statement ...................................... 2
Restricted Group............................................... 43
Rules ....................................................... 20
Rule of 78's Receivables....................................... 16
Section 1286 Treasury Regulations.............................. 38
Senior Certificates ........................................... 42
Series ...................................................... 1
Servicer .................................................... 3
Servicing Fee ............................................... 26
Servicing Fee Rate ........................................... 26
Simple Interest Receivables .................................. 15
Spread Account................................................. 27
Strip Certificates .......................................... 3
Subsequent Receivables ..................................... 5
Subsequent Transfer Date ...................................... 10
Transfer and Servicing Agreements ............................. 22
Trust ...................................................... 1
Trust Accounts .............................................. 24
Trustee .................................................... 3
UAC............................................................ 3
UACFC.......................................................... 5
UAFC........................................................... 4
UCC ......................................................... 19
Underwriting Agreement ....................................... 43
<PAGE>
[BACK COVER, LEFT COLUMN]
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the Prospectus in connection with the offer contained
herein, and, if given or made, such information or representations must not be
relied upon as having been authorized by the Depositor, the Servicer or the
Underwriters. This Prospectus Supplement and the Prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. The delivery of this Prospectus
Supplement and the Prospectus at any time does not imply that the information
herein or therein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Prospectus Supplement
Reports to Certificateholders.......................................... S-2
Summary of Terms....................................................... S-3
Risk Factors .......................................................... S-12
Formation of the Trust ............................................... S-13
The Receivables Pool................................................... S-14
Yield and Prepayment Considerations.................................... S-18
The Depositor and UAC ................................................ S-19
The Surety Bond Issuer................................................. S-19
The Offered Certificates ............................................. S-20
ERISA Considerations................................................... S-30
Underwriting........................................................... S-30
Legal Opinions......................................................... S-31
Experts................................................................ S-31
Index of Principal Terms .............................................. S-32
Financial Statements of the
Surety Bond Issuer.................................................. F-1
Prospectus
Available Information .............................................. 2
Incorporation of Certain Documents
by Reference........................................................ 2
Summary of Terms....................................................... 3
Risk Factors........................................................... 10
The Trusts............................................................. 13
The Receivables Pools.................................................. 14
Weighted Average Life of the Certificates.............................. 16
Pool Factors and Other
Certificate Information............................................. 17
Use of Proceeds........................................................ 17
Union Acceptance Corporation and Affiliates............................ 18
Description of the Certificates........................................ 18
Description of the Transfer
and Servicing Agreements............................................ 22
Certain Legal Aspects of the Receivables............................... 29
Certain Federal Income Tax Consequences................................ 33
ERISA Considerations................................................... 42
Plan of Distribution................................................... 43
Legal Matters.......................................................... 44
Index of Principal Terms............................................... 45
<PAGE>
[BACK COVER, RIGHT COLUMN]
$204,147,164.67
UACSC 1997-D Auto Trust
$33,250,000.00
6.4507% Class A-1 Money Market
Automobile Receivable Backed Certificates
$71,250,000.00
6.20% Class A-2 Automobile
Receivable Backed Certificates
$31,925,000.00
6.26% Class A-3 Automobile
Receivable Backed Certificates
$44,725,000.00
6.28% Class A-4 Automobile
Receivable Backed Certificates
$22,997,164.67
6.41% Class A-5 Automobile
Receivable Backed Certificates
Class I Interest Only Automobile
Receivable Backed Certificates
Union Acceptance Corporation
Servicer
UAC Securitization Corporation
Depositor
[UACSC LOGO]
Underwriters of the Class A Certificates
Salomon Brothers Inc
NationsBanc Montgomery
Underwriter of the Class I Certificates
Salomon Brothers Inc
Prospectus Supplement
Dated November 19, 1997
