Prospectus Supplement
(To Prospectus Dated May 7, 1998)
$267,980,468.00
UACSC 1998-B Auto Trust
$44,250,000.00 5.6011% Class A-1 Money Market Automobile Receivable
Backed Certificates
$92,750,000.00 5.830% Class A-2 Automobile Receivable Backed Certificates
$39,925,000.00 5.875% Class A-3 Automobile Receivable Backed Certificates
$63,025,000.00 5.900 Class A-4 Automobile Receivable Backed Certificates
$28,030,468.00 6.020% Class A-5 Automobile Receivable Backed Certificates
Class I Interest Only Automobile Receivable Backed Certificates
UAC Securitization Corporation
Depositor
[UACSC LOGO]
Union Acceptance Corporation
Servicer
Interest at the applicable pass-through rate shown above, will be
distributed to Class A Certificateholders (as defined herein) on each
Distribution Date (as defined herein), beginning July 8, 1998. 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 1.0% 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 1998-B Auto Trust (the "Trust") to be formed by
UAC Securitization Corporation, a Delaware corporation, having its principal
office and principal place of business in Bonita Springs, Florida (the
"Depositor"). The Trust property will include an irrevocable insurance policy
guaranteeing payments of interest and principal on the Class A Certificates and
Class I Monthly Interest issued by MBIA Insurance Corporation (the "Insurer")
and a Spread Account for the benefit of the Class A Certificateholders and the
Class I Certificateholders, as well as the Insurer. 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 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 (as defined herein) 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-13 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.
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 Depositor (2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1 Certificate......... 100.000000% 0.140% 99.860000%
- ------------------------------------------------------------------------------------------------
Per Class A-2 Certificate......... 99.996690% 0.200% 99.796690%
- ------------------------------------------------------------------------------------------------
Per Class A-3 Certificate......... 99.995420% 0.220% 99.775420%
- ------------------------------------------------------------------------------------------------
Per Class A-4 Certificate......... 99.989520% 0.270% 99.719520%
- ------------------------------------------------------------------------------------------------
Per Class A-5 Certificate......... 99.997000% 0.300% 99.697000%
- ------------------------------------------------------------------------------------------------
Per Class I Certificate (1)....... 1.350597% 0.375% 1.345532%
- ------------------------------------------------------------------------------------------------
Total............................. $270,787,033.50 $600,114.80 $270,186,918.70
================================================================================================
</TABLE>
(1) The Price to Public and Proceeds to Depositor are expressed as a percentage
of the Notional Principal Amount (initially $208,715,851.64), and the
Underwriting Discount is expressed as a percentage of the related Price to
Public.
(2) Before deducting expenses, estimated to be $460,000.00.
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 June 19, 1998 through the facilities of The Depository Trust
Company, against payment therefor in immediately available funds.
Underwriters of the Class A Certificates
NationsBanc Montgomery Securities LLC Bear, Stearns & Co. Inc.
Underwriter of the Class I Certificates
NationsBanc Montgomery Securities LLC
The date of this Prospectus Supplement is June 12, 1998
<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) 231-2717).
<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 1998-B 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 June 19,
1998 (the "Closing Date") pursuant to a
pooling and servicing agreement (the
"Pooling and Servicing Agreement"). The
"Certificates" will consist of: (i)
5.6011% Class A-1 Money Market
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $44,250,000.00 (the "Class A-1
Certificates"); (ii) 5.830% Class A-2
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $92,750,000.00 (the "Class A-2
Certificates"); (iii) 5.875% Class A-3
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $39,925,000.00 (the "Class A-3
Certificates"); (iv) 5.900% Class A-4
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $63,025,000.00 (the "Class A-4
Certificates"); (v) 6.020% Class A-5
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $28,030,468.00 (the "Class A-5
Certificates" and together with the
<PAGE>
Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates
and the Class A-4 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."
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 May 31, 1998 (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 (as
defined herein) for the benefit of the
Class A Certificateholders, the Class I
Certificateholders and the Insurer, the
Policy 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 through the day before the
first Distribution Date and therefore
may include more or less than a full
month's interest.
<PAGE>
The Class A Certificates ..............Interest. Interest will be distributable
on the eighth calendar day of each month
or, if such day is not a business day,
on the first business day thereafter
(each, a "Distribution Date"), beginning
July 8, 1998, 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").
Interest on the Class A-1 Certificates
will be calculated on the basis of a
360-day year and the actual number of
days from the previous Distribution Date
through the day before the related
Distribution Date or, in the case of the
first Distribution Date, the number of
days from the Closing Date through the
day before the first Distribution Date.
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 through
the day before the first Distribution
Date (assuming the month of the Closing
Date has 30 days). See "Yield and
Prepayment Considerations" and "The
Offered Certificates -- Distributions on
the Offered Certificates" herein .
The amount of interest distributable to
the Class A-1 Certificateholders on any
Distribution Date, other than the first
Distribution Date, is the product of
1/360th of the applicable pass-through
rate of 5.6011% for the Class A-1
Certificates (the "Class A-1
Pass-Through Rate"), the number of days
from the previous Distribution Date
through the day before the related
Distribution Date and the aggregate
outstanding principal balance of the
<PAGE>
Class A-1 Certificates (the "Class A-1
Certificate Balance") on the preceding
Distribution Date (after giving effect
to all distributions to
Certificateholders on such date).
The 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, other than the first
Distribution Date, is the product of
one-twelfth of the applicable
pass-through rate of 5.830% for the
Class A-2 Certificates (the "Class A-2
Pass-Through Rate"), the applicable
pass-through rate of 5.875% for the
Class A-3 Certificates (the "Class A-3
Pass-Through Rate") and the applicable
pass-through rate of 5.900% 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).
The amount of interest distributable to
the Class A-5 Certificateholders on any
Distribution Date, other than the first
Distribution Date, is the product of
one-twelfth of the applicable
pass-through rate of 6.020% for the
Class A-5 Certificates (which per annum
rate shall be increased by 0.50% 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
<PAGE>
Certificateholders on such date).
Principal. On each Distribution Date,
the Trustee will distribute as principal
to the Class A Certificateholders in a
maximum aggregate amount equal to the
Certificate Balance as of the previous
Distribution Date (after giving effect
to any distributions of Monthly
Principal required to be made on such
Distribution Date) (or, in the case of
the first Distribution Date, as of the
Closing Date) less the aggregate
outstanding principal amount of the
Receivables (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 June
8, 1999 (the "Class A-1 Final Scheduled
Distribution Date"). The final scheduled
Distribution Date of the Class A-2
Certificates will be October 9, 2001
(the "Class A-2 Final Scheduled
Distribution Date"). The final scheduled
Distribution Date of the Class A-3
Certificates will be August 8, 2002 (the
"Class A-3 Final Scheduled Distribution
Date"). The final scheduled Distribution
Date of the Class A-4 Certificates will
be February 9, 2004 (the "Class A-4
Final Scheduled Distribution Date"). The
final scheduled Distribution Date of the
Class A-5 Certificates will be January
9, 2006 (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
<PAGE>
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
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 1.0% per annum (the "Class I
Pass-Through Rate"). The Notional
Principal Amount represents a designated
principal component of the Receivables,
originally $208,715,851.64 (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 through the
day before the first Distribution Date
(assuming the month of the Closing Date
has 30 days). 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,
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 (the "Class I Monthly Interest").
Holders of the Class I Certificates will
not be entitled to any distributions
after the Notional Principal Amount
thereof has been reduced to zero.
<PAGE>
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
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
$208,715,851.64.
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 distributed to
Class A Certificateholders will be
allocated first to the PAC Component in
an amount up to the amount necessary to
reduce the amount thereof to the amount
specified in the Planned Notional
<PAGE>
Principal Amount Schedule (the "Planned
Notional Principal Amount") for such
Distribution Date, 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,
an assumed 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
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.
<PAGE>
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 Insurer, 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 Policy, 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
Insurer. In the event the amount on
deposit in the Spread Account is zero,
after giving effect to any draws thereon
for the benefit of the Class A
<PAGE>
Certificateholders and the Class I
Certificateholders, and there is a
default under the Policy, any remaining
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 -- Accounts" and "--
Distributions on the Offered
Certificates" 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 Insurer 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.
<PAGE>
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 the
lesser of (i) 1.0% of the initial Pool
Balance or (ii) the Certificate Balance
as of the previous Distribution Date
(after giving effect to all
distributions to Certificateholders on
such date). If the average aggregate
yield of the Receivables pool in excess
of losses falls below a prescribed level
set forth in the Insurance and
Reimbursement Agreement, entered into on
or before the Closing Date among the
Depositor, UAFC, UAC, in its individual
capacity and as Servicer, and the
Insurer (the "Insurance Agreement"), the
Required Spread Amount will be increased
to 6.0% 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 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 Policy Amount, as
further described below. Under certain
circumstances, the Required Spread
Amount may be reduced. See "The Offered
Certificates -- Accounts" and "-- The
Policy" herein.
The Policy .............................The Depositor shall obtain an
irrevocable insurance policy (the
"Policy") issued by the Insurer (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 Policy 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
<PAGE>
Certificateholders on any Distribution
Date in accordance with the Pooling and
Servicing Agreement) to distribute
Monthly Interest and Monthly Principal,
up to the Policy Amount. In addition,
the Policy will cover any amount
distributed or required to be
distributed by the Trust to
Certificateholders that is sought to be
recovered as a voidable preference by a
trustee in bankruptcy of UAC, the
Depositor or UAFC pursuant to the United
States Bankruptcy Code (11 U.S.C.), as
amended from time to time, in accordance
with a final nonappealable order of a
court having competent jurisdiction. See
"The Offered Certificates -- The
Policy."
Policy Amount ........................The term "Policy 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 Policy 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 (after giving effect
to any funds withdrawn from the Spread
Account to pay Monthly Principal on such
Distribution Date). "Net Principal
Policy Amount" means the Certificate
Balance as of the first Distribution
Date minus all amounts previously drawn
on the Policy or from the Spread Account
with respect to Monthly Principal.
Insurer ...............................MBIA Insurance Corporation.
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.
<PAGE>
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 will
have been reduced to zero on or before
the related Distribution Date. 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) 100% of the
outstanding Certificate Balance, (ii)
accrued and unpaid interest on such
amount at the weighted average note
rates of the Receivables less any
payments received but not applied to
interest or principal and (iii) any
amounts due the Insurer).
Clean-Up Call Date......................If the Class IC Certificateholder does
not exercise its rights with respect to
the Optional Sale on 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% 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.
<PAGE>
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 Services, a division of The
McGraw-Hill Companies, Inc. (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" 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
Supplement.
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 the Trustee will draw
on the Policy, in an amount equal to the shortfall in respect of Monthly
Interest and Monthly Principal, up to the Policy Amount. If the Spread Account
is reduced to zero and there is a default under the Policy, 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.
<PAGE>
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
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.
<PAGE>
The Depositor will establish the Spread Account for the benefit of the
Class A Certificateholders, the Class I Certificateholders and the Insurer and
will obtain the Policy. Withdrawals from the Spread Account and, only after such
withdrawals, draws on the Policy 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
Policy Amount. If the Spread Account is exhausted and there is a default under
the Policy, 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 the prime portfolio of UAFC, 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 one month, (iii) provides for level monthly payments that fully
amortize the amount financed over the remaining term, and (iv) has a Contract
Rate (exclusive of prepaid finance charges) of not less than 5.90%. The weighted
average remaining maturity of the Receivables will be approximately 68 months as
of the Cutoff Date.
Approximately 97.68% of the aggregate principal balance of the
Receivables as of the Cutoff Date are simple interest contracts which provide
for equal monthly payments. Approximately 2.32% 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 24.83% 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.
<PAGE>
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.
Composition of the Receivables as of the Cutoff Date
<TABLE>
<CAPTION>
Weighted
Aggregate Original Average
Number of Principal Principal Contract
Receivables Balance Balance Rate
----------- ------- ------- ----
<S> <C> <C> <C> <C>
New Automobiles and Light-Duty Trucks............ 4,151 $ 59,016,369.54 $ 77,232,155.80 11.44%
Used Automobiles and Light-Duty Trucks........... 15,083 181,930,372.60 206,587,281.93 12.88
New Vans (1)..................................... 457 7,516,125.70 10,029,852.60 11.37
Used Vans (1).................................... 1,626 19,517,600.16 23,578,694.99 12.68
------ --------------- --------------- -----
All Receivables.................................. 21,317 $267,980,468.00 $317,427,985.32 12.51%
====== =============== =============== =====
</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.......... 69.3mos. 77.3mos. 22.02%
Used Automobiles and Light-Duty Trucks......... 66.9 70.5 67.89
New Vans (1)................................... 71.5 79.1 2.80
Used Vans (1).................................. 66.0 71.0 7.28
---- ---- ------
All Receivables................................ 67.5mos. 72.3mos. 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
Percent of Aggregate
State (1)(2) Principal Balance (3)
------------ ---------------------
Arizona............................................ 3.08%
California......................................... 10.03
Colorado........................................... 2.21
Florida............................................ 6.78
Georgia............................................ 3.30
Idaho.............................................. 0.10
Illinois........................................... 6.25
Indiana............................................ 3.48
Iowa............................................... 2.18
Kansas............................................. 1.05
Kentucky........................................... 0.82
Maryland........................................... 1.58
Michigan........................................... 2.46
Minnesota.......................................... 2.15
Missouri........................................... 2.14
Nebraska........................................... 0.52
Nevada............................................. 0.24
New Mexico......................................... 0.31
North Carolina..................................... 9.60
Ohio............................................... 7.66
Oklahoma........................................... 4.11
Oregon............................................. 0.46
Pennsylvania....................................... 1.04
South Carolina..................................... 3.46
South Dakota....................................... 0.07
Tennessee.......................................... 3.23
Texas.............................................. 13.39
Utah............................................... 1.23
Virginia........................................... 5.52
Washington......................................... 0.75
Wisconsin.......................................... 0.81
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>
Percent of
Remaining Aggregate Average Aggregate
Scheduled Number of Principal Principal Principal
Term Range Receivables Balance Balance Balance(1)
---------- ----------- ------- ------- ----------
<S> <C> <C> <C> <C>
1 to 6 months.............. 485 $ 608,099.40 $ 1,253.81 0.23%
7 to 12 months.............. 1,199 2,849,180.06 2,376.30 1.06
13 to 24 months.............. 2,888 13,385,776.39 4,634.96 5.00
25 to 36 months.............. 586 3,880,970.02 6,622.82 1.45
37 to 48 months.............. 1,142 10,172,188.73 8,907.35 3.80
49 to 60 months.............. 3,418 41,864,941.01 12,248.37 15.62
61 to 66 months.............. 1,278 17,368,831.62 13,590.64 6.48
67 to 72 months.............. 4,292 66,043,953.86 15,387.69 24.65
73 to 84 months.............. 6,029 111,806,526.91 18,544.79 41.72
------ --------------- ---------- ------
Total.............. 21,317 $267,980,468.00 $12,571.21 100.00%
====== =============== ========== ======
</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>
Percent Percent
of Total Aggregate of Aggregate
Model Number of Number of Principal Principal
Year Receivables Receivables(1) Balance Balance(1)
---- ----------- -------------- ------- ----------
<S> <C> <C> <C> <C>
1983 and earlier..................... 1 0.00% $ 3,213.80 0.00%
1984................................. 2 0.01 8,762.88 0.00
1985................................. 2 0.01 15,902.29 0.01
1986................................. 16 0.08 78,105.97 0.03
1987................................. 37 0.17 150,831.68 0.06
1988................................. 99 0.46 428,389.50 0.16
1989................................. 439 2.06 1,422,631.59 0.53
1990................................. 949 4.45 4,645,002.59 1.73
1991................................. 1,382 6.48 7,788,309.13 2.91
1992................................. 1,724 8.09 12,996,316.08 4.85
1993................................. 3,266 15.32 26,900,525.19 10.04
1994................................. 2,988 14.02 32,505,401.20 12.13
1995................................. 2,970 13.93 44,601,684.17 16.64
1996................................. 2,386 11.19 39,256,376.25 14.65
1997................................. 2,588 12.14 46,045,503.11 17.18
1998................................. 2,404 11.28 49,411,223.24 18.44
1999................................. 64 0.30 1,722,289.33 0.64
------ ------ --------------- ------
Total.............................. 21,317 100.00% $267,980,468.00 100.00%
====== ====== =============== ======
</TABLE>
(1) Sum may not equal 100% due to rounding.
<PAGE>
Distribution of the Receivables by Contract Rate as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of
Aggregate Average Aggregate
Number of Principal Principal Principal
Contract Rate Range Receivables Balance Balance Balance(1)
- ------------------- ----------- ------- ------- ----------
<S> <C> <C> <C> <C>
Less than 6.000%...................... 1 $ 25,415.29 $ 25,415.29 0.01%
6.000 to 6.999%...................... 225 861,980.29 3,831.02 0.32
7.000 to 7.999%...................... 589 5,706,370.57 9,688.24 2.13
8.000 to 8.999%...................... 904 7,906,476.86 8,746.10 2.95
9.000 to 9.999%...................... 1,417 13,294,617.91 9,382.23 4.96
10.000 to 10.999%...................... 2,407 28,211,407.20 11,720.57 10.53
11.000 to 11.999%...................... 3,344 45,682,537.43 13,661.05 17.05
12.000 to 12.999%...................... 4,748 66,351,555.46 13,974.63 24.76
13.000 to 13.999%...................... 3,714 50,107,681.62 13,491.57 18.70
14.000 to 14.999%...................... 2,072 26,726,537.17 12,898.91 9.97
15.000 to 15.999%...................... 981 12,039,740.08 12,272.93 4.49
16.000 to 16.999%...................... 410 5,074,013.64 12,375.64 1.89
17.000 to 17.999%...................... 219 2,627,837.84 11,999.26 0.98
18.000 to 18.999%...................... 217 2,748,144.71 12,664.26 1.03
19.000 to 19.999%...................... 23 247,665.01 10,768.04 0.09
20.000 to 20.999%...................... 34 306,764.27 9,022.48 0.11
21.000 to 21.999%...................... 9 37,658.64 4,184.29 0.01
22.000 to 22.999%...................... 1 14,339.96 14,339.96 0.01
23.000 to 23.999%...................... 1 2,147.45 2,147.45 0.00
25.000 to 25.999%...................... 1 7,576.60 7,576.60 0.00
------ --------------- ---------- ------
Total...................... 21,317 $267,980,468.00 $12,571.21 100.00%
====== =============== ========== ======
</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.
<PAGE>
Delinquency Experience
<TABLE>
<CAPTION>
At June 30,
1995 1996 1997
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio....... 117,837 $1,159,349 147,722 $1,548,538 173,693 $1,860,272
Delinquencies
30-59 days............. 1,169 $ 12,097 1,602 $ 17,030 2,487 $ 27,373
60-89 days............. 377 4,124 694 7,629 1,646 18,931
90 days or more........ 0 0 333 3,811 723 8,826
----- ---------- ----- ---------- ----- ----------
Total delinquencies....... 1,546 $ 16,221 2,629 $ 28,470 4,856 $ 55,130
===== ========== ===== ========== ===== ==========
Total delinquencies as a
percent of servicing
portfolio............ 1.31% 1.40% 1.78% 1.84% 2.80% 2.96%
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31, At March 31,
1997 1997 1998
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio...... 177,377 $1,896,748 179,962 $1,920,930 181,026 $1,929,151
Delinquencies
30-59 days............ 4,310 $ 45,766 3,954 $ 41,778 3,426 $ 35,449
60-89 days............ 2,196 25,156 2,274 25,933 1,923 21,818
90 days or more....... 934 11,131 688 8,048 623 7,088
----- ---------- ----- ---------- ----- ----------
Total delinquencies...... 7,440 $ 82,053 6,916 $ 75,759 5,972 $ 64,355
===== ========== ===== ========== ===== ==========
Total delinquencies as a
percent of servicing
portfolio........... 4.19% 4.33% 3.84% 3.94% 3.30% 3.34%
</TABLE>
<PAGE>
Credit Loss Experience (1)
<TABLE>
<CAPTION>
Year ended June 30,
1995 1996 1997
------------------ --------------------- ---------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing
portfolio(2)........ 104,455 $982,875 132,363 $1,343,770 164,858 $1,759,666
Gross charge-offs......... 3,493 $ 28,628 3,663 $ 40,815 6,280 $ 70,830
Recoveries (3)............ 15,258 19,543 28,511
-------- ---------- ----------
Net losses................ $ 13,370 $ 21,272 $ 42,319
======== ========== ==========
Gross charge-offs as a % of
avg. servicing
portfolio(4)........... 3.34% 2.91% 2.77% 3.04% 3.81% 4.03%
Recoveries as a % of gross
charge-offs............ 53.30% 47.88% 40.25%
Net losses as a % of avg.
servicing portfolio(4). 1.36% 1.58% 2.40%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
September 30, 1997 (5) December 31, 1997 (5) March 31, 1998 (5)
------------------------ ---------------------- ----------------------
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing
portfolio(2)........ 175,920 $1,881,603 179,334 $1,916,778 180,631 $1,924,930
Gross charge-offs......... 2,054 $ 23,056 1,977 $ 22,373 1,886 $ 20,767
Recoveries (3)............ 8,134 8,527 8,186
---------- ---------- ----------
Net losses................ $ 14,922 $ 13,846 $ 12,581
========== ========== ==========
Gross charge-offs as a % of
avg. servicing
portfolio(4)........... 4.67% 4.90% 4.41% 4.67% 4.18% 4.32%
Recoveries as a % of gross
charge-offs............ 35.28% 38.11% 39.42%
Net losses as a % of avg.
servicing portfolio(4). 3.17% 2.89% 2.61%
</TABLE>
- ---------------
<PAGE>
(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) 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.
(4) 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."
(5) Percentages are annualized in "Gross charge-offs as a percentage of
average servicing portfolio" and "Net losses as a percentage of average
servicing portfolio" for partial years.
As indicated by the foregoing delinquency experience table, delinquency
rates based upon outstanding loan balances of accounts 30 days past due and over
decreased to 3.34% at March 31, 1998, compared to 3.94% at December 31, 1997 and
4.33% at September 30, 1997. However, the delinquency rate has increased from
2.96% at June 30, 1997, for UAC's prime servicing portfolio. The decreased
delinquency from December 31, 1997 and September 30, 1997, is primarily
attributed to collection strategies implemented to target problem accounts as
well as the utilization of new scoring tools to focus collection efforts most
effectively.
As indicated in the foregoing credit loss experience table, credit
losses on the prime auto portfolio totaled approximately $12.6 million for the
quarter ended March 31, 1998, or 2.61% (annualized) of the average servicing
portfolios compared to 2.89% (annualized) and 3.17% (annualized) for the
quarters ended December 31, 1997 and September 30, 1997, respectively and 2.40%
for the year ended June 30, 1997. Decreased credit losses from December 31, 1997
and September 30, 1997, are primarily a result of strategic efforts made by UAC
to improve the overall credit-quality of loans as well as a slight improvement
in recovery rates.
UAC has seen steady improvement in delinquency and credit losses over
the last two quarters. UAC attributes the improvement to strategic efforts made
by UAC including implementing tighter credit standards in March 1997, forming
specialized collection teams to concentrate on specific groups of accounts and
increasing collection efforts on charged-off accounts.
<PAGE>
A decline in delinquency and credit losses on those loans originated
and securitized in 1995 has also contributed to the improved delinquency and
credit losses for the portfolio. In the past, these pools have had higher credit
losses and delinquency than anticipated and have had continued higher credit
losses in the latter months of the pool life rather than reflecting a typical
loss life cycle which should peak between the 12th and 18th month. Over the last
six months, those loans originated and securitized in 1995 have become a smaller
proportion of the total portfolio's credit losses and delinquency as the dollar
amount of credit losses and delinquency in those pools has been decreasing.
Recovery rates have been a contributing factor to credit loss
experience. Recoveries have, however, shown gradual improvements over the last
two quarters which contributed to the improvement in credit losses. Recoveries
as a percentage of gross charge-offs improved to 39.42% for the quarter ended
March 31, 1998, from 38.11% and 35.28% for the quarters ended December 31, 1997,
and September 30, 1997, respectively. Although recovery rates showed signs of
improvement during the past two quarters, UAC continues to look for ways to
improve recovery rates, including more diligently monitoring and expanding the
repossession and remarketing operations.
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) 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 (i) through the distribution of interest paid on other
Receivables, (ii) from a withdrawal from the Spread Account, (iii) by an Advance
by the Servicer or (iv) by a draw on the Policy.
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 Insurance Premium and (d) the per annum rate used to
calculate the Monthly 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.
<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 and repurchases. 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 3,400 manufacturer franchised
automobile dealerships in 31 states. UAC is an Indiana corporation, formed in
December 1993 by UAC's predecessor, Union Federal Savings Bank of Indianapolis
(the "Predecessor"), to succeed to the Predecessor's indirect automobile finance
business, 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 the 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 (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.
THE INSURER
MBIA Insurance Corporation (the "Insurer") is the principal operating
subsidiary of MBIA Inc., a New York Stock Exchange listed company (the
"Company"). The Company is not obligated to pay the debts of or claims against
the Insurer. The Insurer is domiciled in the State of New York and licensed to
do business in and subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Insurer, changes in control and transactions among
affiliates. Additionally, the Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
<PAGE>
Effective February 17, 1998, the Company acquired all of the
outstanding stock of Capital Markets Assurance Corporation ("CMAC") through a
merger with its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement,
CMAC has ceded all of its net insured risks, as well as its unearned premiums
and contingency reserves, to the Insurer and the Insurer has reinsured CMAC's
net outstanding exposure. The Company is not obligated to pay the debts of or
claims against CMAC.
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") as well as generally
accepted accounting principles ("GAAP"):
SAP
-----------------------------------------
December 31 March 31
1997 1998
----------- -----------
(Audited) (Unaudited)
(in millions)
Admitted Assets $5,256 $5,475
Liabilities 3,496 3,658
Capital and Surplus 1,760 1,817
GAAP
-----------------------------------------
December 31 March 31
1997 1998
----------- -----------
(Audited) (Unaudited)
(in millions)
Assets $5,988 $6,196
Liabilities 2,624 2,725
Shareholder's Equity 3,364 3,471
As of December 31, 1997 the Insurer had admitted assets of $5.3 billion
(audited), total liabilities of $3.5 billion (audited), and total capital and
surplus of $1.8 billion (audited) determined in accordance with SAP. As of March
31, 1998, the Insurer had admitted assets of $5.5 billion (unaudited), total
liabilities of $3.7 billion (unaudited), and total capital and surplus of $1.8
billion (unaudited) determined in accordance with SAP.
Audited financial statements of the Insurer as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997 are
included herein beginning on page F-1. Unaudited financial statements of the
Insurer as of March 31, 1998 and for the three-month periods ended March 31,
1998 and 1997 are included herein beginning on page F-30. Such financial
statements have been prepared on the basis of GAAP. Furthermore, copies of the
Insurer's 1997 year-end financial statements prepared in accordance with SAP are
available without charge from the Insurer. A copy of the Annual Report on Form
10-K of the Company is available from the Insurer or the Securities and Exchange
Commission. The address of the Insurer is 113 King Street, Armonk, New York
10504. The telephone number of the Insurer is (914) 273-4545.
<PAGE>
The Policy is not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law.
Moody's Investors Service, Inc. rates the claims paying ability of the
Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the claims paying ability of the Insurer "AAA."
Each rating of the Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Insurer and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Offered Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the
Offered Certificates. The Insurer does not guaranty the market price of the
Offered Certificates nor does it guaranty that the ratings on the Offered
Certificates will not be revised or withdrawn.
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.
<PAGE>
Distributions
In general, it is intended that the Trustee distribute to the Class A
Certificateholders on each Distribution Date beginning July 8, 1998, 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 Class A Monthly Interest. Principal to be distributed to the Class
A Certificateholders will be allocated on the basis of the Principal
Distribution Sequence. It is also intended that the Trustee distribute to the
Class I Certificateholders, on each Distribution Date beginning on July 8, 1998
and continuing through 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." Monthly Interest 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. Monthly Interest may be provided by a draw on the Policy 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 Policy to pay Monthly Interest and Monthly
Principal will be limited to the Policy Amount. See "-- Sale and Assignment of
Receivables" and "-- Accounts" herein.
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 $208,715,851.64. 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 $208,715,851.64. 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 distributed to Class A
Certificateholders 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.
<PAGE>
Planned Notional Principal Amount Schedule
Planned Notional
Distribution Date in Principal Amount
-------------------- ----------------
Initial........................................... $208,715,851.64
July 1998......................................... 199,638,160.80
August 1998....................................... 192,374,224.18
September 1998.................................... 185,272,646.82
October 1998...................................... 178,327,567.92
November 1998..................................... 171,533,453.89
December 1998..................................... 164,885,074.62
January 1999...................................... 158,377,481.92
February 1999..................................... 152,005,989.69
March 1999........................................ 145,766,156.01
April 1999........................................ 139,653,766.56
May 1999.......................................... 133,664,819.53
June 1999......................................... 127,770,469.87
July 1999......................................... 121,945,657.38
August 1999....................................... 116,191,608.50
September 1999.................................... 110,509,567.81
October 1999...................................... 104,900,798.24
November 1999..................................... 99,366,581.35
December 1999..................................... 93,908,217.56
January 2000...................................... 88,527,026.44
February 2000..................................... 83,224,346.90
March 2000........................................ 78,001,537.55
April 2000........................................ 72,859,976.87
May 2000.......................................... 67,801,063.54
June 2000......................................... 62,826,216.68
July 2000......................................... 57,936,876.14
August 2000....................................... 53,134,502.80
September 2000.................................... 48,420,578.79
October 2000...................................... 43,796,607.86
November 2000..................................... 39,264,115.58
December 2000..................................... 34,824,649.73
January 2001...................................... 30,479,780.51
February 2001..................................... 26,231,100.90
March 2001........................................ 22,080,226.93
April 2001........................................ 18,028,798.02
May 2001.......................................... 14,078,477.26
June 2001......................................... 10,230,951.76
July 2001......................................... 6,520,810.99
August 2001....................................... 2,969,708.70
September 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 $ 16,843,055.85 10.702% 16 68
2 14,053,158.75 12.834 42 49
3 41,864,941.01 12.617 58 60
4 83,412,785.48 12.614 70 71
5 111,806,526.91 12.616 80 81
</TABLE>
For purposes of the following 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 June 24, 1998, (v) distributions on the Offered Certificates are
made, in cash, commencing on July 8, 1998, and on the eighth day of each month
thereafter, (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
-------- --- --- --- --- ---
1.336179% 19.051% 5.910% 5.910% 5.910% - 4.454%
(1) Expressed as a percentage of the original Notional Principal Amount.
Based on the assumptions described above and assuming a purchase price
of 1.336179% at approximately 2.825% 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.
<PAGE>
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 June 1, 1998, 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 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.
Spread Account. On the Closing Date, the Trustee 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 Insurer 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 Insurer. On each Distribution Date, any amounts on deposit in the Spread
Account after the payment of any amounts owed to the Insurer 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 Policy.
In the event that the balance of the Spread Account is reduced to zero
and there is a default under the Policy 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.
<PAGE>
Payahead Account. The Servicer will establish an additional account
(the "Payahead Account"), in the name of the Trustee on behalf of Obligors on
the Receivables and Certificateholders, 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 Determination Date. 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.)
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
Insurer. On or after the 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 Insurer are made) after the
payment of expenses and distributions to Certificateholders. See "-- Accounts"
above.
<PAGE>
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 Policy, up
to the Policy 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 Insurance Premiums, and other amounts owed to the Insurer, pursuant
to the Insurance Agreement, plus accrued interest thereon, to the Insurer, 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.
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 received 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 Policy, 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 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;
<PAGE>
(d) the Insurance Premium including any overdue Insurance Premium plus
interest thereon to the Insurer;
(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 Policy
payable to the Insurer, under the Insurance Agreement, for Class A
Monthly Interest, Class I Monthly Interest and Monthly Principal and
any other amounts owing to the Insurer under the Insurance Agreement
plus accrued interest thereon; 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 Policy) 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.
"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" means, (i) for the first Distribution
Date, the product of the following: (one-three hundred sixtieth (1/360th) of the
Class A-1 Pass-Through Rate) multiplied by (the number of days from the Closing
Date through the day before the first Distribution Date) multiplied by the Class
A-1 Certificate Balance at the Closing Date and (ii) for any subsequent
Distribution Date, one-three hundred sixtieth (1/360th) of the product of the
Class A-1 Pass-Through Rate, the actual number of days from the previous
Distribution Date through the day before the related Distribution Date and the
Class A-1 Certificate Balance as of the immediately preceding Distribution Date
(after giving effect to any distribution of Monthly Principal made on such
immediately preceding Distribution Date).
<PAGE>
"Class A-2 Monthly Interest" means, (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 from the Closing Date (assuming the
month of the Closing Date has 30 days) through the day before the first
Distribution Date divided by 30) multiplied by the Class A-2 Certificate Balance
at the Closing Date and (ii) for any subsequent Distribution Date, one-twelfth
of the product of the Class A-2 Pass-Through Rate and the Class A-2 Certificate
Balance as of the immediately preceding Distribution Date (after giving effect
to any distribution of Monthly Principal made on such immediately preceding
Distribution Date).
"Class A-3 Monthly Interest" means, (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 from the Closing Date (assuming the
month of the Closing Date has 30 days) through the day before the first
Distribution Date divided by 30) multiplied by the Class A-3 Certificate Balance
at the Closing Date and (ii) for any subsequent Distribution Date, one-twelfth
of the product of the Class A-3 Pass-Through Rate and the Class A-3 Certificate
Balance as of the immediately preceding Distribution Date (after giving effect
to any distribution of Monthly Principal made on such immediately preceding
Distribution Date).
"Class A-4 Monthly Interest" means, (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 from the Closing Date (assuming the
month of the Closing Date has 30 days) through the day before the first
Distribution Date divided by 30) multiplied by the Class A-4 Certificate Balance
at the Closing Date and (ii) for any subsequent Distribution Date, one-twelfth
of the product of the Class A-4 Pass-Through Rate and the Class A-4 Certificate
Balance as of the immediately preceding Distribution Date (after giving effect
to any distribution of Monthly Principal made on such immediately preceding
Distribution Date).
"Class A-5 Monthly Interest" means, (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 from the Closing Date (assuming the
month of the Closing Date has 30 days) through the day before the first
Distribution Date divided by 30) multiplied by the Class A-5 Certificate Balance
at the Closing Date and (ii) for any subsequent Distribution Date, one-twelfth
of the product of the Class A-5 Pass-Through Rate (as adjusted after the
Clean-Up Call Date) and the Class A-5 Certificate Balance as of the immediately
preceding Distribution Date (after giving effect to any distribution of Monthly
Principal made on such immediately preceding Distribution Date).
"Class I Monthly Interest" means (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 from the Closing Date (assuming the month of
the Closing Date has 30 days) through the day before the first Distribution Date
divided by 30) multiplied by the Notional Principal Amount of the Class I
Certificates at the Closing Date, and (ii) for any subsequent Distribution Date,
one-twelfth of the product of the Class I Pass-Through Rate and the Notional
Principal Amount as of the immediately preceding Distribution Date (after giving
effect to any application of Monthly Principal on such preceding Distribution
Date); provided, however, that after the Class A-5 Final Scheduled Distribution
Date, the Class I Monthly Interest shall be zero.
<PAGE>
"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.
"Insurance Premium" for any Distribution Date will equal one-twelfth of
the product of the Policy per annum fee rate set forth in the Insurance
Agreement and the Certificate Balance calculated as of the last day of the
Collection Period to which such Distribution Date relates and payable monthly in
arrears.
"Monthly Interest" for any Distribution Date will equal the sum of the
Class A Monthly Interest and the Class I Monthly Interest.
"Monthly Principal" for any Distribution Date will equal the amount
necessary to reduce the Certificate Balance as of the prior Distribution Date
(after giving effect to the distribution of Monthly Principal on such date) (or
as of the Closing Date in the case of the first Distribution Date) to the
aggregate unpaid principal balance of the Receivables on the last day of the
related 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.
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 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.)
<PAGE>
The following chart sets forth an example of the application of the
foregoing provisions to a monthly distribution:
June 1 - June 30 .......................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.
June 30 ...............................Record Date. Distributions on the
Distribution Date are made to
Certificateholders of record at the
close of business on this date.
July 6.................................."Determination Date" (second business
day before the Distribution Date). On or
before this date, the Servicer delivers
the Servicer's Certificate setting forth
the amounts to be distributed on the
Distribution Date and of any
deficiencies. If necessary, the Trustee
notifies the Insurer of any draws in
respect of the Policy.
July 8.................................."Distribution Date" (eighth calendar day
of the month, or if such day is not a
business day, the first business day
thereafter). The Trustee withdraws funds
from the Spread Account and/or draws on
the Policy, 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,
pays the Monthly Servicing Fee to the
extent not previously paid, pays the
Insurance Premium and all other amounts
owing to the Insurer.
<PAGE>
The Policy
On or before the Closing Date, the Depositor, UAFC, UAC, in its
individual capacity and as Servicer, and the Insurer will enter into an
Insurance and Reimbursement Agreement (the "Insurance Agreement") pursuant to
which the Insurer will issue the Policy. 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 Policy 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 Policy on any Distribution Date is limited to the Policy Amount
for such Distribution Date. The Policy 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 Policy 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
(after giving effect to any funds withdrawn from the Spread Account to pay
Monthly Principal on such Distribution Date). "Net Principal Policy Amount"
means the Certificate Balance as of the first Distribution Date minus all
amounts previously drawn on the Policy or from the Spread Account with respect
to Monthly Principal.
The Policy will also cover any amount distributed or required to be
distributed by the Trust to Certificateholders that is sought to be recovered as
a voidable preference by a trustee in bankruptcy of UAC, the Depositor or UAFC
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time
to time, in accordance with a final nonappealable order of a court having
competent jurisdiction.
The Insurer will be entitled to receive the Insurance Premium 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 Insurer will
not be entitled to reimbursement of any amounts from the Certificateholders. The
Insurer's obligation under the Policy is irrevocable. The Insurer will have no
obligation other than its obligations under the Policy 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 Policy, 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."
<PAGE>
Rights of the Insurer upon Events of Default, Amendment or Waiver
Upon the occurrence of an Event of Default, the Insurer, or the Trustee
upon the consent of the Insurer, 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 Insurer 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 Insurer if such amendment or waiver
would have a materially adverse effect upon the rights of the Insurer.
<PAGE>
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 " PlanPlan") 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 June 12,
1998, 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>
NationsBanc Montgomery Bear,
Securities LLC Stearns & Co. Inc. Total
-------------- ------------------ -----
Principal Amount
<S> <C> <C> <C>
of Class A-1 Certificates........ $ 22,125,000.00 $22,125,000.00 $ 44,250,000.00
Principal Amount
of Class A-2 Certificates........ $ 46,375,000.00 $46,375,000.00 $ 92,750,000.00
Principal Amount
of Class A-3 Certificates........ $ 19,962,500.00 $19,962,500.00 $ 39,925,000.00
Principal Amount
of Class A-4 Certificates........ $ 31,512,500.00 $31,512,500.00 $ 63,025,000.00
Principal Amount
of Class A-5 Certificates........ $ 14,015,234.00 $14,015,234.00 $ 28,030,468.00
Notional Principal Amount
of Class I Certificates.......... $208,715,851.64 $ 0.00 $208,715,851.64
</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, 0.1600% of the denominations of the Class A-4
Certificates, 0.1750% of the denominations of the Class A-5 Certificates or
0.2250% 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, 0.1150% 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 0.2000% 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.
<PAGE>
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 consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997, included in this
Prospectus Supplement have been included herein in reliance upon the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in accounting and auditing.
<PAGE>
INDEX OF PRINCIPAL TERMS
TERM PAGE
---- ----
ABS ..................................................... S-26
Available Funds ......................................... S-28
Certificates .......................................... S-3
Certificate Balance....................................... S-5
Class A Certificates ................................. S-3
Class A Certificateholders ............................ S-4
Class A Monthly Interest ................................ S-29
Class A-1 Certificate Balance............................. S-5
Class A-1 Certificateholders.............................. S-4
Class A-1 Certificates.................................... S-3
Class A-1 Final Scheduled Distribution Date............... S-6
Class A-1 Monthly Interest .............................. S-29
Class A-1 Pass-Through Rate............................... S-4
Class A-2 Certificate Balance............................. S-5
Class A-2 Certificateholders.............................. S-4
Class A-2 Certificates.................................... S-3
Class A-2 Final Scheduled Distribution Date............... S-6
Class A-2 Monthly Interest .............................. S-29
Class A-2 Pass-Through Rate............................... S-5
Class A-3 Certificate Balance............................. S-5
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-29
Class A-3 Pass-Through Rate............................... S-5
Class A-4 Certificate Balance............................. S-5
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-29
Class A-4 Pass-Through Rate............................... S-5
Class A-5 Certificate Balance............................. S-5
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-30
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-7, S-30
Class I Pass-Through Rate ............................. S-6
Class IC Certificate .................................. S-1, S-3
Class IC Certificateholder ............................ S-9
<PAGE>
Clean-Up Call Date....................................... S-11
Closing Date ......................................... S-3
CMAC..................................................... S-21
Code .................................................. S-32
Companion Component...................................... S-7, S-22
Company.................................................. S-20
Cutoff Date .......................................... S-4
Defaulted Receivable .................................... S-30
Depositor ............................................ S-1, S-3
Determination Date....................................... S-31
Distribution Date ..................................... S-4, S-31
ERISA ................................................ S-12
Financed Vehicles........................................ S-4
GAAP..................................................... S-21
Insurance Premium ....................................... S-30
Insurance Agreement ..................................... S-10, S-31
Insurer ................................................. S-1, S-11, S-20
Issuer................................................... S-3
Legal Investment......................................... S-11
Monthly Interest ....................................... S-30
Monthly Principal ...................................... S-5, S-30
Monthly Servicing Fee.................................... S-7
Net Principal Policy Amount.............................. S-11, S-31
Notional Principal Amount................................ S-7
Offered Certificates .................................. S-1, S-3
Optional Sale ....................................... S-11
Original Notional Principal Amount....................... S-6
PAC Component............................................ S-7, S-22
Payahead Account ........................................ S-27
Plan ................................................... S-32
Planned Notional Principal Amount........................ S-7, S-23
Planned Notional Principal Amount Schedule ............. S-7, S-23
Policy................................................... S-10
Policy Amount............................................ S-10
Pool Balance ........................................ S-5
Pooling and Servicing Agreement ..................... S-3
Predecessor.............................................. S-20
Principal Distribution Sequence.......................... S-30
Rating Agency............................................ S-11
Receivables .......................................... S-3
Record Date .......................................... S-4
Required Spread Amount ............................... S-10
SAP...................................................... S-21
Servicer ............................................. S-3
Spread Account........................................... S-8
Trust ................................................ S-1, S-3
Trustee .............................................. S-3
UAC .................................................. S-3
UAFC .................................................. S-26
Underwriters ........................................... S-33
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997 and 1996
and for the years ended
December 31, 1997, 1996 and 1995
F - 1
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
Report of Independent Accountants
To the Board of Directors and Shareholder of
MBIA Insurance Corporation:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYRAND L.L.P.
New York, New York
February 3, 1998.
F - 2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------- -------------------
<S> <C> <C>
Assets
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $4,600,528 and $4,001,562) $4,867,254 $4,149,700
Short-term investments, at amortized cost
(which approximates fair value) 242,730 169,889
Other investments 16,802 14,851
---------- ----------
Total investments 5,126,786 4,334,440
Cash and cash equivalents 3,983 3,288
Securities purchased under agreements to resell 182,820 108,900
Accrued investment income 78,601 65,194
Deferred acquisition costs 154,100 147,750
Prepaid reinsurance premiums 252,893 216,846
Goodwill (less accumulated amortization of
$47,152 and $42,262) 95,829 100,718
Property and equipment, at cost (less accumulated
depreciation of $18,256 and $14,782) 53,484 47,176
Receivable for investments sold 1,616 975
Other assets 37,437 40,871
---------- ----------
Total assets $5,987,549 $5,066,158
========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue $1,984,104 $1,785,875
Loss and loss adjustment expense reserves 78,872 59,314
Securities sold under agreements to repurchase 182,820 108,900
Deferred income taxes 251,134 195,704
Payable for investments purchased 23,020 48,811
Other liabilities 103,740 63,683
---------- ----------
Total liabilities 2,623,690 2,262,287
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,139,949 1,041,876
Retained earnings 2,042,323 1,651,315
Cumulative translation adjustment (8,699) (1,188)
Unrealized appreciation of investments,
net of deferred income tax provision
of $94,416 and $52,175 175,286 96,868
---------- ----------
Total shareholder's equity 3,363,859 2,803,871
---------- ----------
Total liabilities and shareholder's equity $5,987,549 $5,066,158
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F - 3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Gross premiums written $544,974 $462,444 $349,812
Ceded premiums (79,781) (54,852) (45,050)
------------- ------------ ------------
Net premiums written 465,193 407,592 304,762
Increase in deferred premium revenue (165,858) (154,111) (88,365)
------------- ------------ ------------
Premiums earned (net of ceded
premiums of $43,734,
$38,893 and $30,655) 299,335 253,481 216,397
Net investment income 282,460 247,286 219,834
Net realized gains 17,478 11,740 7,777
Other 1,201 3,163 2,168
------------- ------------ ------------
Total revenues 600,474 515,670 446,176
------------- ------------ ------------
Expenses:
Losses and loss adjustment 18,673 15,334 10,639
Policy acquisition costs, net 27,873 24,660 21,283
Operating 50,016 46,654 41,812
------------- ------------ ------------
Total expenses 96,562 86,648 73,734
------------- ------------ ------------
Income before income taxes 503,912 429,022 372,442
Provision for income taxes 112,904 90,562 81,748
------------- ------------ ------------
Net income $391,008 $338,460 $290,694
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F - 4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1997, 1996 and 1995
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Cumulative Appreciation
------------------------- Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
----------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 100,000 $ 15,000 $ 953,655 $ 1,134,061 $ 427 $ (47,640)
Net income -- -- -- 290,694 -- --
Change in foreign currency translation -- -- -- -- 2,277 --
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) -- -- -- -- -- 192,369
Dividends declared (per
common share $829.00) -- -- -- (82,900) -- --
Capital contribution from MBIA Inc. -- -- 52,800 -- -- --
Tax reduction related to tax sharing
agreement with MBIA Inc. -- -- 15,129 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 100,000 15,000 1,021,584 1,341,855 2,704 144,729
----------- ----------- ----------- ----------- ----------- -----------
Net income -- -- -- 338,460 -- --
Change in foreign currency translation -- -- -- -- (3,892) --
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $26,197 -- -- -- -- -- (47,861)
Dividends declared (per
common share $290.00) -- -- -- (29,000) -- --
Tax reduction related to tax sharing
agreement with MBIA Inc. -- -- 20,292 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 100,000 15,000 1,041,876 1,651,315 (1,188) 96,868
----------- ----------- ----------- ----------- ----------- -----------
Net income -- -- -- 391,008 -- --
Change in foreign
currency translation -- -- -- -- (7,511) --
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of ($42,241) -- -- -- -- -- 78,418
Capital contribution from
MBIA Inc. -- -- 80,000 -- -- --
Tax reduction related to tax
sharing agreement
with MBIA Inc. -- -- 18,073 -- -- --
=========== =========== =========== =========== =========== ===========
Balance, December 31, 1997 100,000 $ 15,000 $ 1,139,949 $ 2,042,323 ($ 8,699) $ 175,286
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F - 5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 391,008 $ 338,460 $ 290,694
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (13,407) (4,947) (4,900)
Increase in deferred acquisition costs (6,350) (7,402) (7,300)
Increase in prepaid reinsurance premiums (36,047) (15,959) (14,395)
Increase in deferred premium revenue 201,905 170,070 104,104
Increase in loss and loss adjustment
expense reserves 19,558 16,809 2,357
Depreciation 3,934 2,952 2,676
Amortization of goodwill 4,889 4,896 4,929
Amortization of bond (discount) premium, net (10,830) (7,526) (2,426)
Net realized gains on sale of investments (17,478) (11,740) (7,777)
Deferred income taxes 13,382 8,982 11,391
Other, net 50,258 26,687 29,079
--------------- ---------------- ----------------
Total adjustments to net income 209,814 182,822 117,738
--------------- ---------------- ----------------
Net cash provided by operating activities 600,822 521,282 408,432
--------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (2,090,236) (1,519,213) (897,128)
Sale of fixed-maturity securities, net of
receivable for investments sold 1,247,860 873,823 473,352
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 190,803 158,087 83,448
Sale (purchase) of short-term investments, net (18,922) 4,676 (32,281)
Sale (purchase) of other investments, net 664 468 (692)
Capital expenditures, net of disposals (10,296) (8,970) (4,228)
--------------- ---------------- ----------------
Net cash used by investing activities (680,127) (491,129) (377,529)
--------------- ---------------- ----------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 80,000 -- 52,800
Dividends paid -- (29,000) (82,900)
--------------- ---------------- ----------------
Net cash used by financing activities 80,000 (29,000) (30,100)
--------------- ---------------- ----------------
Net increase in cash and cash equivalents 695 1,153 803
Cash and cash equivalents - beginning of year 3,288 2,135 1,332
--------------- ---------------- ----------------
Cash and cash equivalents - end of year $ 3,983 $ 3,288 $ 2,135
=============== ================ ================
Supplemental cash flow disclosures:
Income taxes paid $ 82,125 $ 63,018 $ 50,790
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F - 6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Organization
MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through a series of transactions during December 1986, became the successor
to the business of the Municipal Bond Insurance Association (the Association), a
voluntary unincorporated association of insurers writing municipal bond and note
insurance as agent for the member insurance companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of
Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently
renamed MBIA Insurance Corp. of Illinois (MBIA Illinois).
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. (IMC). IMC provides guaranteed investment agreements to states,
municipalities and municipal authorities that are guaranteed as to principal and
interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities.
F - 7
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp.,
which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides
fixed-income investment management services for MBIA Inc., its municipal cash
management service businesses and public pension funds. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to CMC; the management of the balance of this portfolio was
transferred in January 1996.
In early 1998, MBIA Inc. and CapMAC Holdings Inc. consummated a merger to
be accounted for as a pooling of interests. See Note 16 for details regarding
this merger.
2. Significant Accounting Policies
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates. Significant
accounting policies are as follows:
Consolidation
The consolidated financial statements include the accounts of MBIA Corp. and its
wholly owned subsidiaries. All significant intercompany balances have been
eliminated. Certain amounts have been reclassified in prior years' financial
statements to conform to the current presentation.
Investments
MBIA Corp.'s entire investment portfolio is considered available-for-sale and is
reported in the financial statements at fair value, with unrealized gains and
losses, net of deferred taxes, reflected as a separate component of
shareholder's equity.
Bond discounts and premiums are amortized using the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value, and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned.
F - 8
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realized gains or losses on the sale of investments are determined by specific
identification and are included as a separate component of revenues.
Other investments include MBIA Corp.'s interest in a limited partnership
and a mutual fund which invests principally in marketable equity securities.
MBIA Corp. records dividends from these investments as a component of investment
income. In addition, MBIA Corp. records its share of the unrealized gains and
losses on these investments, net of applicable deferred income taxes, as a
separate component of shareholder's equity.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits with banks.
Securities Purchased Under Agreements to Resell and Securities Sold Under
Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are accounted for as collateralized transactions and
are recorded at principal or contract value. It is MBIA Corp.'s policy to take
possession of securities purchased under agreements to resell.
MBIA Corp. minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and requiring additional collateral to be
deposited with MBIA Corp. when deemed necessary.
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in underwriting and policy
issuance functions, certain rating agency fees, state premium taxes and certain
other underwriting expenses, reduced by ceding commission income on premiums
ceded to reinsurers. Policy acquisition costs are deferred and amortized over
the period in which the related premiums are earned.
Premium Revenue Recognition
Upfront premiums are earned pro rata over the period of risk. Premiums are
allocated to each bond maturity based on par amount and are earned on a
straight-line basis over the term of each maturity. Installment premiums are
F - 9
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earned over each installment period - generally one year or less. When an
insured issue is retired early, is called by the issuer, or is in substance paid
in advance through a refunding or defeasance accomplished by placing U.S.
Government securities in escrow, the remaining deferred premium revenue, net of
the portion which is credited to a new policy in those cases where MBIA Corp.
insures the refunding issue, is earned at that time, since there is no longer
risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion
of premiums written that is applicable to the unexpired risk of insured bonds
and notes.
Advisory Fee Revenue Recognition
MBIA Corp. collects certain advisory fees for services rendered in connection
with advising clients as to the most appropriate structure to use for a given
structured finance transaction that the company will insure. Advisory fees are
deferred and earned consistent with the premium revenues generated on the
transactions.
Goodwill
Goodwill represents the excess of the cost of acquisitions over the tangible net
assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
Property and Equipment
Property and equipment consists of MBIA Corp.'s headquarters, furniture,
fixtures and equipment, which are recorded at cost and are depreciated on the
straight-line method over their estimated service lives ranging from 3 to 31
years. Maintenance and repairs are charged to expenses as incurred.
Losses and Loss Adjustment Expenses
Loss and loss adjustment expense (LAE) reserves are established in an amount
equal to MBIA Corp.'s estimate of identified or case basis reserves and
unallocated losses, including costs of settlement, on the obligations it has
insured.
Case basis reserves are established when specific insured issues are
identified as currently or likely to be in default. Such a reserve is based on
the present value of the expected loss and LAE payments, net of recoveries,
under salvage and subrogation rights. The total reserve is calculated by
F - 10
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
applying a loss factor, determined based on an independent rating agency study
of bond defaults, to net debt service written. When a case basis reserve is
recorded, a corresponding reduction is made to the unallocated reserve.
Management of MBIA Corp. periodically evaluates its estimates for losses
and LAE and any resulting adjustments are reflected in current earnings.
Management believes that the reserves are adequate to cover the ultimate net
cost of claims, but the reserves are necessarily based on estimates, and there
can be no assurance that the ultimate liability will not exceed such estimates.
Income Taxes
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided with respect to the temporary
differences between the tax bases of assets and liabilities and the reported
amounts in the financial statements that will result in deductible or taxable
amounts in future years when the reported amount of the asset or liability is
recovered or settled. Such temporary differences relate principally to premium
revenue recognition, deferred acquisition costs and the contingency reserve.
The Internal Revenue Code permits companies writing financial guarantee
insurance to deduct from taxable income amounts added to the statutory
contingency reserve, subject to certain limitations. The tax benefits obtained
from such deductions must be invested in non-interest bearing U.S. Government
tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as
payments of federal income taxes. The amounts deducted must be restored to
taxable income when the contingency reserve is released, at which time MBIA
Corp. may present the tax and loss bonds for redemption to satisfy the
additional tax liability.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's
F - 11
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equity. Gains and losses resulting from transactions in foreign currencies are
recorded in current income.
3. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This statement
will require MBIA Corp. to report in the financial statements, in addition to
net income, comprehensive income and its components including, as applicable,
foreign currency items, unearned compensation from restricted stock awards and
unrealized gains and losses on certain investments in debt and equity
securities. Upon adoption, MBIA Corp. will be required to reclassify financial
statements for earlier periods provided for comparative purposes. Adoption of
the statement will not change the content of the financial statements; instead
it will only change the presentation. MBIA Corp. has not yet determined the
manner in which comprehensive income will be displayed.
Also, in June 1997, FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements, and
requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas and major customers.
Under SFAS 131, operating segments are to be determined consistent with the way
that management organizes and evaluates financial information internally for
making operating decisions and assessing performance. MBIA Corp.'s future
segment presentation has not yet been determined.
4. Statutory Accounting Practices
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o upfront premiums are earned only when the related risk has expired rather
than over the period of the risk;
F - 12
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o acquisition costs are charged to operations as incurred rather than
deferred and amortized as the related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements,
and reserves for case basis losses and LAE are established, at present
value, for specific insured issues that are identified as currently or
likely to be in default. Under GAAP, reserves are established based on MBIA
Corp.'s reasonable estimate of the identified and unallocated losses and
LAE on the insured obligations it has written;
o federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries:
<TABLE>
<CAPTION>
As of December 31
--------------------------------------
In thousands 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
GAAP shareholder's equity $3,363,859 $2,803,871
Premium revenue recognition (408,654) (368,762)
Deferral of acquisition costs (154,100) (147,750)
Unrealized (gains) losses (266,727) (148,138)
Contingency reserve (1,094,117) (892,793)
Loss and loss adjustment
expense reserves 53,938 39,065
Deferred income taxes 251,134 195,704
Tax and loss bonds 129,508 103,008
Goodwill (95,829) (100,718)
Other (18,814) (16,465)
- - --------------------------------------------------------------------------------
Statutory capital and surplus $1,760,198 $1,467,022
- - --------------------------------------------------------------------------------
</TABLE>
F - 13
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1997, 1996 and
1995 was $377.1 million, $316.6 million and $278.3 million, respectively.
5. Premiums Earned from Refunded and Called Bonds
Premiums earned include $50.9 million, $44.4 million and $34.0 million for 1997,
1996 and 1995, respectively, related to refunded and called bonds.
6. Investments
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital through maintenance of
high-quality investments with adequate liquidity. MBIA Corp.'s investment
policies limit the amount of credit exposure to any one issuer. The
fixed-maturity portfolio is comprised of high-quality (average rating Double-A)
taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997
Taxable bonds
United States Treasury
and Government Agency $ 6,451 $ 191 $ -- $ 6,642
Corporate and other
obligations 1,193,321 36,106 (472) 1,228,955
Mortgage-backed 541,898 18,659 (732) 559,825
Tax-exempt bonds
State and municipal
obligations 3,101,588 213,551 (577) 3,314,562
- - --------------------------------------------------------------------------------------------------------------
Total $ 4,843,258 $268,507 $(1,781) $5,109,984
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
F - 14
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996
Taxable bonds
United States Treasury
and Government Agency $ 6,585 $ 171 $ (10) $ 6,746
Corporate and other
obligations 767,472 13,978 (7,272) 774,178
Mortgage-backed 472,295 12,185 (4,003) 480,477
Tax-exempt bonds
State and municipal
obligations 2,925,099 137,389 (4,300) 3,058,188
- - --------------------------------------------------------------------------------------------------------------
Total $4,171,451 $163,723 $(15,585) $ 4,319,589
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed-maturity investments carried at fair value of $7.7 million and $7.8
million as of December 31, 1997 and 1996, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
The following table sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1997. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair
In thousands Cost Value
- - --------------------------------------------------------------------------------
<S> <C> <C>
Maturity
Within 1 year $ 231,793 $ 231,777
Beyond 1 year but within 5 years 639,988 670,038
Beyond 5 years but within 10 years 1,414,321 1,490,227
Beyond 10 years but within 15 years 908,776 980,729
Beyond 15 years but within 20 years 851,402 910,878
Beyond 20 years 255,080 266,510
- - --------------------------------------------------------------------------------
4,301,360 4,550,159
Mortgage-backed 541,898 559,825
- - --------------------------------------------------------------------------------
Total fixed-maturities and
short-term investments $4,843,258 $ 5,109,984
- - --------------------------------------------------------------------------------
</TABLE>
F - 15
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Investment Income and Gains and Losses
Investment income consists of:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------
In thousands 1997 1996 1995
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturities $279,900 $245,109 $216,653
Short-term investments 5,676 4,961 6,008
Other investments (4) 61 17
- - --------------------------------------------------------------------------------------------------
Gross investment income 285,572 250,131 222,678
Investment expenses 3,112 2,845 2,844
- - --------------------------------------------------------------------------------------------------
Net investment income 282,460 247,286 219,834
Net realized gains (losses):
Fixed-maturities:
Gains 22,791 16,760 9,941
Losses (5,877) (5,353) (2,537)
- - --------------------------------------------------------------------------------------------------
Net 16,914 11,407 7,404
- - --------------------------------------------------------------------------------------------------
Other investments:
Gains 564 333 382
Losses --- --- (9)
- - --------------------------------------------------------------------------------------------------
Net 564 333 373
- - --------------------------------------------------------------------------------------------------
Total realized gains 17,478 11,740 7,777
- - --------------------------------------------------------------------------------------------------
Total investment income $299,938 $259,026 $227,611
- - --------------------------------------------------------------------------------------------------
</TABLE>
Net unrealized gains consist of:
<TABLE>
<CAPTION>
As of December 31
-------------------------------
In thousands 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Fixed-maturities:
Gains $268,507 $163,723
Losses (1,781) (15,585)
- - --------------------------------------------------------------------------------
Net 266,726 148,138
- - --------------------------------------------------------------------------------
Other investments:
Gains 3,033 934
Losses (57) (29)
- - --------------------------------------------------------------------------------
Net 2,976 905
- - --------------------------------------------------------------------------------
Total 269,702 149,043
Deferred income taxes 94,416 52,175
- - --------------------------------------------------------------------------------
Unrealized gains, net $175,286 $ 96,868
- - --------------------------------------------------------------------------------
</TABLE>
The deferred income taxes relate primarily to unrealized gains and losses
on MBIA Corp.'s fixed-maturity investments, which are reflected in shareholder's
equity.
F - 16
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------
In thousands 1997 1996 1995
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturities $118,588 $(75,497) $295,567
Other investments 2,071 1,439 508
- - ---------------------------------------------------------------------------------------------------
Total 120,659 (74,058) 296,075
Deferred income taxes 42,241 (26,197) 103,706
- - ---------------------------------------------------------------------------------------------------
Unrealized gains (losses), net $78,418 $(47,861) $192,369
- - ---------------------------------------------------------------------------------------------------
</TABLE>
8. Income Taxes
The provision for income taxes is composed of:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------
In thousands 1997 1996 1995
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 99,522 $81,580 $70,357
Deferred 13,382 8,982 11,391
- - ---------------------------------------------------------------------------------------------
Total $112,904 $90,562 $81,748
- - ---------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------
1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 35.0% 35.0%
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (10.6) (12.0) (12.5)
Amortization of goodwill 0.3 0.4 0.5
Other (2.3) (2.3) (1.1)
- - --------------------------------------------------------------------------------
Provision for income taxes 22.4% 21.1% 21.9%
- - --------------------------------------------------------------------------------
</TABLE>
MBIA Corp. recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on tax assets and
F - 17
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
In thousands 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Tax and loss bonds $130,080 $102,222
Alternative minimum tax credit carryforward 62,279 58,068
Loss and loss adjustment expense reserves 18,878 13,673
Other 7,444 3,305
- - ---------------------------------------------------------------------------------
Total gross deferred tax assets 218,681 177,268
- - ---------------------------------------------------------------------------------
Deferred tax liabilities
Contingency reserve 234,904 186,173
Deferred premium revenue 77,150 76,526
Deferred acquisition costs 53,935 51,713
Unrealized gains 94,416 52,175
Contingent commissions 408 491
Other 9,002 5,894
- - ---------------------------------------------------------------------------------
Total gross deferred tax liabilities 469,815 372,972
- - ---------------------------------------------------------------------------------
Net deferred tax liability $251,134 $195,704
- - ---------------------------------------------------------------------------------
</TABLE>
MBIA Corp. believes that no valuation allowance is necessary in connection
with the deferred tax assets.
9. Dividends and Capital Requirements
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Corp. had $176 million available for the
payment of dividends as of December 31, 1997. In 1997, no dividends were
declared or paid by MBIA Corp. to MBIA Inc. In 1996 and 1995, MBIA Corp.
declared and paid dividends of $29 million and $83 million, respectively, to
MBIA Inc.
F - 18
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Illinois had $14 million available for the
payment of dividends as of December 31, 1997.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies that rate the bonds insured by
MBIA Corp. and its subsidiaries have various requirements relating to the
maintenance of certain minimum ratios of statutory capital and reserves to net
insurance in force. MBIA Corp. and its subsidiaries were in compliance with
these requirements as of December 31, 1997.
10. Lines of Credit
MBIA Corp. has a standby line of credit commitment in the amount of $825 million
with a group of major Triple-A rated banks to provide loans to MBIA Corp. if it
incurs cumulative losses (net of any recoveries) from September 30, 1997 in
excess of the greater of $825 million or 4.00% of average annual debt service.
The obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term expiring on
September 30, 2004 and contains an annual renewal provision subject to approval
by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$300 million. At December 31, 1997 and 1996, $20.0 million and $29.1 million,
respectively, were outstanding under these facilities.
11. Net Insurance In Force
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
F - 19
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance policies issued by MBIA Corp. are unconditional commitments
to guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
As of December 31, 1997, insurance in force, net of cessions to reinsurers,
had a range of maturity of 1-41 years. The distribution of net insurance in
force by geographic location and type of bond, including $3.2 billion and $3.3
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1997 and 1996, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------------------------------------------------------
$ in billions 1997 1996
- - ------------------------------------------------------------------------ ------------------------------------------------------
Net Number % of Net Net Number % of Net
Geographic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- - ------------------------------------------------------------------------ ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
California $ 68.4 3,441 14.1% $ 60.7 3,378 14.6%
New York 40.4 5,265 8.3 33.7 5,057 8.1
Florida 33.0 1,577 6.8 29.6 1,632 7.1
Texas 24.6 2,086 5.1 21.9 2,052 5.3
New Jersey 24.5 1,859 5.0 18.8 1,863 4.6
Pennsylvania 22.7 2,209 4.7 21.2 2,216 5.1
Illinois 20.0 1,191 4.1 18.5 1,145 4.5
Massachusetts 15.5 1,085 3.2 10.9 1,100 2.6
Ohio 12.4 1,005 2.5 11.1 1,032 2.7
Michigan 11.1 1,016 2.3 9.5 1,021 2.3
- - ------------------------------------------------------------------------ ------------------------------------------------------
Subtotal 272.6 20,734 56.1 235.9 20,496 56.9
Other states 203.1 11,931 41.8 170.1 11,502 41.1
- - ------------------------------------------------------------------------ ------------------------------------------------------
Total domestic 475.7 32,665 97.9 406.0 31,998 98.0
International 10.1 207 2.1 8.4 169 2.0
- - ------------------------------------------------------------------------ ------------------------------------------------------
Total $485.8 32,872 100.0% $414.4 32,167 100.0%
- - ------------------------------------------------------------------------ ------------------------------------------------------
</TABLE>
F - 20
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------------------------------------------------
$ in billions 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Municipal:
General obligation $118.8 12,016 24.5% $110.5 11,763 26.7%
Utilities 75.1 4,739 15.5 67.9 4,799 16.4
Health care 62.2 2,246 12.8 54.0 2,386 13.0
Transportation 40.5 1,487 8.3 30.3 1,520 7.3
Special revenue 34.0 1,641 7.0 28.9 1,543 7.0
Higher education 20.4 1,359 4.2 17.8 1,309 4.3
Industrial
development and
pollution control
revenue 19.6 943 4.0 18.1 931 4.4
Housing 18.9 1,891 3.9 17.7 2,455 4.3
Other 11.4 539 2.4 3.8 169 0.9
- - ---------------------------------------------------------------------------------------------------------------------------------
Total municipal 400.9 26,861 82.6 349.0 26,875 84.3
- - ---------------------------------------------------------------------------------------------------------------------------------
Structured finance* 56.1 510 11.5 38.6 349 9.3
- - ---------------------------------------------------------------------------------------------------------------------------------
Other:
Investor owned utility 9.4 4,610 1.9 8.3 4,293 2.0
Financial Institution 5.8 366 1.2 6.4 237 1.5
Other 3.5 318 0.7 3.7 244 0.9
- - ---------------------------------------------------------------------------------------------------------------------------------
Total other 18.7 5,294 3.8 18.4 4,774 4.4
- - ---------------------------------------------------------------------------------------------------------------------------------
Total domestic 475.7 32,665 97.9 406.0 31,998 98.0
- - ---------------------------------------------------------------------------------------------------------------------------------
International
Infrastructure:
Sub-sovereign 1.4 53 0.3 1.5 48 0.4
Sovereign 1.3 21 0.3 0.4 7 0.1
Utilities 0.8 60 0.2 0.7 59 0.2
Transportation 0.8 5 0.2 0.9 4 0.2
Higher education 0.6 1 0.1 -- -- --
Housing 0.3 2 0.1 -- -- --
Health care 0.2 6 -- 0.1 3 --
- - ---------------------------------------------------------------------------------------------------------------------------------
Total infrastructure 5.4 148 1.2 3.6 121 0.9
- - ---------------------------------------------------------------------------------------------------------------------------------
Structured finance* 2.6 32 0.5 2.1 22 0.5
- - ---------------------------------------------------------------------------------------------------------------------------------
Other:
Financial institution 1.9 24 0.4 2.6 25 0.6
Investor owned utility 0.2 3 -- 0.1 1 --
- - ---------------------------------------------------------------------------------------------------------------------------------
Total other 2.1 27 0.4 2.7 26 0.6
- - ---------------------------------------------------------------------------------------------------------------------------------
Total international 10.1 207 2.1 8.4 169 2.0
- - ---------------------------------------------------------------------------------------------------------------------------------
Total $485.8 32,872 100.0% $414.4 32,167 100.0%
- - ---------------------------------------------------------------------------------------------------------------------------------
* Asset-/mortgage-backed
</TABLE>
F - 21
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Reinsurance
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp. and its subsidiaries were $67.0 billion and $57.6 billion, at
December 31, 1997 and 1996, respectively. The distribution of ceded insurance in
force by geographic location and type of bond is set forth in the following
tables:
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------------------------------
In billions 1997 1996
- - ---------------------------------------------------------------- --------------------------------------
% of % of
Ceded Ceded Ceded Ceded
Geographic Location Insurance Insurance Insurance Insurance
In Force In Force In Force In Force
- - ---------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Domestic
California $ 10.4 15.5% $ 9.4 16.2%
New York 5.8 8.7 6.2 10.7
Texas 4.0 6.0 2.9 5.1
New Jersey 3.7 5.5 3.3 5.7
Massachusetts 3.0 4.5 1.4 2.5
Pennsylvania 2.9 4.3 2.9 5.1
Illinois 2.7 4.0 2.6 4.5
Florida 2.6 3.9 2.4 4.1
Colorado 2.4 3.6 1.2 2.1
Puerto Rico 2.3 3.4 1.2 2.1
Washington 1.9 2.8 1.9 3.2
District of Columbia 1.5 2.2 1.5 2.7
- - ---------------------------------------------------------------- --------------------------------------
Subtotal 43.2 64.4 36.9 64.0
Other states 19.1 28.6 17.0 29.6
- - ---------------------------------------------------------------- --------------------------------------
Total domestic 62.3 93.0 53.9 93.6
International 4.7 7.0 3.7 6.4
- - ---------------------------------------------------------------- --------------------------------------
Total $ 67.0 100.0% $ 57.6 100.0%
- - ---------------------------------------------------------------- --------------------------------------
</TABLE>
F - 22
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------------------
In billions 1997 1996
- - ------------------------------------------------------------------------ --------------------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- - ------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Domestic
Municipal:
General obligation $12.1 18.1% $14.4 24.9%
Utilities 11.5 17.2 10.2 17.7
Transportation 9.6 14.3 6.4 11.1
Health care 8.0 12.0 6.3 11.0
Special revenue 5.0 7.5 3.4 5.9
Industrial
development and
pollution control revenue 3.2 4.7 3.2 5.6
Housing 1.7 2.5 1.6 2.7
Higher education 1.3 1.9 1.5 2.6
Other 2.7 4.0 1.0 1.7
- - ------------------------------------------------------------------------ --------------------------------
Total municipal 55.1 82.2 48.0 83.2
- - ------------------------------------------------------------------------ --------------------------------
Structured finance* 5.6 8.3 4.5 7.9
- - ------------------------------------------------------------------------ --------------------------------
Other:
Financial institution 1.3 1.9 1.3 2.3
Corporate direct 0.2 0.3 0.1 0.2
Investor-owned utility 0.1 0.3 -- --
- - ------------------------------------------------------------------------ --------------------------------
Total other 1.6 2.5 1.4 2.5
- - ------------------------------------------------------------------------ --------------------------------
Total domestic 62.3 93.0 53.9 93.6
- - ------------------------------------------------------------------------ --------------------------------
International
Infrastructure:
Sovereign 0.7 1.1 0.3 0.5
Higher education 0.6 0.9 -- --
Sub-sovereign 0.6 0.9 0.8 1.4
Transportation 0.4 0.6 0.4 0.7
Health care 0.2 0.3 0.1 0.1
Utilities 0.1 0.1 -- --
- - ------------------------------------------------------------------------ --------------------------------
Total infrastructure 2.6 3.9 1.6 2.7
- - ------------------------------------------------------------------------ --------------------------------
Structured finance* 1.3 1.9 1.0 1.9
- - ------------------------------------------------------------------------ --------------------------------
Other:
Financial institution 0.8 1.2 1.0 1.8
- - ------------------------------------------------------------------------ --------------------------------
Total other 0.8 1.2 1.0 1.8
- - ------------------------------------------------------------------------ --------------------------------
Total international 4.7 7.0 3.7 6.4
- - ------------------------------------------------------------------------ --------------------------------
Total $67.0 100.0% $57.6 100.0%
- - ------------------------------------------------------------------------ --------------------------------
</TABLE>
* Asset-/mortgage-backed
F - 23
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee Benefits
MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1997, 1996 and 1995 was $3.9 million,
$3.4 million and $3.2 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.6 million, $1.5 million and $1.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $3.4 million, $3.0 million and $2.7 million for the
years ended December 31, 1997, 1996 and 1995, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in the "MBIA Long-Term Incentive Program". The
incentive program includes a stock option program and adds a compensation
component linked to the growth in adjusted book value per share (ABV) of MBIA
Inc.'s stock. Awards under the long-term program are divided equally between the
two components, with 50% of the award given in stock options and 50% of the
award (multiplied by a 1.5 conversion factor for the December 1995 award only)
paid in cash or shares of MBIA Inc.'s stock. Target levels for the
option/incentive award are established as a percentage of total salary and
bonus, based upon the recipient's position. The awards under the long-term
program typically will be granted from the vice president level up to and
including the chairman and chief executive officer.
The ABV portion of the long-term incentive program may be awarded every
year. The December 1997 award will cover growth in ABV from December 31, 1997
through December 31, 2000 and the December 1995 award will cover growth in ABV
from December 31, 1995 through December 31, 1998, with a base line growth of 12%
on both awards. The amount to be paid in respect of such award will be adjusted
upward or downward based on the actual ABV growth with a minimum growth of 8%
necessary to receive any payment and an 18% growth needed to receive the maximum
payment of 200% of the target levels. The amount, if any, to be paid under this
portion of the program will be paid in early 2001 for the December 1997 award
and
F - 24
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
early 1999 for the December 1995 award in the form of cash or shares of MBIA
Inc.'s common stock. Subsequent awards, if any, will be made every year with
concomitant payments occurring after the three-year cycle. During 1997 and 1996,
$3.2 million and $2.6 million, respectively, were recorded as a charge related
to the December 1997 and December 1995 ABV awards. Of these amounts, $2.0
million and $1.6 million were included in policy acquisition costs for the same
respective periods.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 required MBIA Inc. to adopt, at its election,
either 1) the provisions in SFAS 123 which require the recognition of
compensation expense for employee stock-based compensation plans, or 2) the
provisions in SFAS 123 which require the pro forma disclosure of net income and
earnings per share as if the recognition provisions of SFAS 123 had been
adopted. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective
January 1, 1996 and continues to account for its employee stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no
impact on MBIA Corp.'s financial position or results of operations. Had
compensation cost for the MBIA Inc. stock option program been recognized based
on the fair value at the grant date consistent with the recognition provisions
of SFAS 123, the impact on MBIA Corp.'s net income would not have been material.
14. Related Party Transactions
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association who had their Standard & Poor's
Corporation claims-paying rating downgraded from Triple-A on their previously
issued Association policies. In the event that they do not meet their
Association policy payment obligations, MBIA Corp. will pay the required amounts
directly to the paying agent. The aggregate outstanding exposure on these surety
bonds as of December 31, 1997 is $340 million.
F - 25
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MBIA Corp. had investment management and advisory agreements with an
affiliate of a former principal shareholder of MBIA Inc., which provided for
payment of fees on assets under management. Total related expenses for the year
ended December 31, 1995 amounted to $2.5 million. These agreements were
terminated on January 1, 1996 at which time CMC assumed full management of MBIA
Corp.'s consolidated investment portfolios. Total fees paid to CMC on assets
under management for the years ended December 31, 1997 and 1996 amounted to $3.0
million and $2.8 million, respectively.
MBIA Corp. has various insurance coverages provided by a former principal
shareholder of MBIA Inc., the cost of which totaled $2.2 million, $2.1 million
and $1.9 million, respectively, for the years ended December 31, 1997, 1996 and
1995.
Included in other liabilities at December 31, 1997 is $27.1 million of net
payables to MBIA Inc. and other subsidiaries. As of December 31, 1996, included
in other assets is a $2.0 million net receivable from MBIA Inc. and other
subsidiaries.
MBIA Corp. held securities subject to agreements to resell of $182.8
million and $108.9 million as of December 31, 1997 and 1996, respectively, and
transferred securities subject to agreements to repurchase of $182.8 million and
$108.9 million as of December 31, 1997 and 1996. These agreements have a term of
less than one year. The interest expense relating to these agreements was $8.3
million and $2.3 million, respectively, for the years ended December 31, 1997
and 1996. The interest income relating to these agreements was $8.4 million and
$2.4 million, respectively, for the years ended December 31, 1997 and 1996.
15. Fair Value of Financial Instruments
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
F - 26
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fixed-maturity securities - The fair value of fixed-maturity securities is based
upon quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Short-term investments - Short-term investments are carried at amortized cost
which approximates fair value.
Other investments - Other investments include MBIA Corp.'s interest in a limited
partnership and a mutual fund that invests principally in marketable equity
securities. The fair value of these investments is based on quoted market
prices.
Cash and cash equivalents, receivable for investments sold and payable for
investments purchased - The carrying amounts of these items are a reasonable
estimate of their fair value.
Securities purchased under agreements to resell - The fair value is estimated
based upon the quoted market prices of the transactions' underlying collateral.
Prepaid reinsurance premiums - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
Deferred premium revenue - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
Loss and loss adjustment expense reserves - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unallocated claims. Therefore, the carrying amount
is a reasonable estimate of the fair value of the reserve.
Securities sold under agreements to repurchase - The fair value is estimated
based upon the quoted market prices of the transactions' underlying collateral.
F - 27
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Installment premiums - The fair value is derived by calculating the present
value of the estimated future cash flow stream discounted at 9%.
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- - ---------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Assets:
Fixed-maturity securities $4,867,254 $4,867,254 $4,149,700 $4,149,700
Short-term investments 242,730 242,730 169,889 169,889
Other investments 16,802 16,802 14,851 14,851
Cash and cash equivalents 3,983 3,983 3,288 3,288
Securities purchased under
agreements to resell 182,820 203,333 108,900 124,471
Prepaid reinsurance
premiums 252,893 218,571 216,846 189,631
Receivable for
investments sold 1,616 1,616 975 975
Liabilities:
Deferred premium
revenue 1,984,104 1,716,477 1,785,875 1,545,976
Loss and loss adjustment
expense reserves 78,872 78,872 59,314 59,314
Securities sold under
agreements to repurchase 182,820 191,932 108,900 115,838
Payable for investments
purchased 23,020 23,020 48,811 48,811
Off-balance sheet instruments:
Installment premiums --- 349,619 --- 287,969
</TABLE>
16. Subsequent Event - CapMAC Merger
On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a
merger to be accounted for as a pooling of interests. Under the terms of the
merger, CapMAC shareholders received 0.4675 of a share of MBIA Inc. common stock
for each CapMAC share, for a total of 8,102,255 newly issued shares of MBIA Inc.
common stock, the value of which is $536 million. Subsequent to the completion
date, MBIA Inc. made a capital contribution to MBIA Corp. of Capital Markets
Assurance Corporation (CapMAC Corp.), a wholly owned financial guarantee
insurance subsidiary of CapMAC.
F - 28
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CapMAC, through its subsidiaries, provides structured financial solutions;
financial guarantee insurance of structured securities - primarily asset-backed
securities; advisory and structuring services in connection with structured
financings; investment management services, and access to funding for its
customers through third-party owned and managed securitization funding vehicles.
CapMAC Corp. is a worldwide provider of financial guarantee insurance for
structured securities. It is rated Triple-A by Moody's Investors Service,
Standard & Poor's Rating Services, Duff and Phelps Credit Rating Co., and Nippon
Investors Service.
The following unaudited proforma data summarizes the combined results of
the two insurance entities to be accounted for as a pooling of interests under
APB 16 "Business Combinations":
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------
In millions 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $690 $583 $497
Net income 416 359 305
</TABLE>
The unaudited proforma financial information presented is not necessarily
indicative of either the results of operations that would have occurred had the
merger taken place at the beginning of these periods or the future results of
operations of the combined companies.
F - 29
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
AND FOR THE PERIODS ENDED MARCH 31, 1998 AND 1997
F - 30
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
-----
Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 (Audited) 3
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
F - 31
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited) (Audited)
Assets
Investments:
Fixed-maturity securities held
as available-for-sale at fair value
(amortized cost $4,738,452
and $4,600,528) $4,993,562 $4,867,254
Short-term investments, at amortized cost
(which approximates fair value) 284,348 242,730
Other investments 16,951 16,802
----------- ----------
Total investments 5,294,861 5,126,786
Cash and cash equivalents 9,357 3,983
Securities purchased under agreements to resell 208,420 182,820
Accrued investment income 75,233 78,601
Deferred acquisition costs 159,350 154,100
Prepaid reinsurance premiums 251,124 252,893
Goodwill (less accumulated amortization
of $48,372 and $47,152) 94,608 95,829
Property and equipment, at cost (less accumulated
depreciation of $19,456 and $18,256) 54,375 53,484
Receivable for investments sold 8,246 1,616
Other assets 40,397 37,437
----------- ----------
Total assets $6,195,971 $5,987,549
=========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue $1,991,051 $1,984,104
Loss and loss adjustment expense reserves 82,622 78,872
Securities sold under agreements to repurchase 208,420 182,820
Deferred income taxes 257,556 251,134
Payable for investments purchased 87,770 23,020
Other liabilities 97,529 103,740
---------- ----------
Total liabilities 2,724,948 2,623,690
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share;
authorized, issued and outstanding -
100,000 shares 15,000 15,000
Additional paid-in capital 1,145,123 1,139,949
Retained earnings 2,154,131 2,042,323
Accumulated other comprehensive income, net
of deferred income tax provision
of $90,317 and $94,416 156,769 166,587
--------- ----------
Total shareholder's equity 3,471,023 3,363,859
--------- ----------
Total liabilities and
shareholder's equity $6,195,971 $5,987,549
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F - 32
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
--------------------------
1998 1997
------------ -----------
Revenues:
Gross premiums written $ 101,641 $ 92,586
Ceded premiums (7,786) (5,979)
------------ -----------
Net premiums written 93,855 86,607
Increase in deferred premium revenue (8,956) (14,736)
------------ -----------
Premiums earned (net of ceded
premiums of $9,555 and $10,325) 84,899 71,871
Net investment income 76,967 66,477
Advisory fees 1,470 ---
Net realized gains 6,088 4,374
Other 42 324
------------ -----------
Total revenues 169,466 143,046
------------ -----------
Expenses:
Losses and loss adjustment 4,219 3,435
Policy acquisition costs, net 7,996 6,745
Operating 14,256 12,159
------------ -----------
Total expenses 26,471 22,339
------------ -----------
Income before income taxes 142,995 120,707
Provision for income taxes 31,187 25,380
------------ -----------
Net income $ 111,808 $ 95,327
============ ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F - 33
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the three months ended March 31, 1998
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------ Paid-in Retained Comprehensive Shareholder's
Shares Amount Capital Earnings Adjustment Equity
-------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 100,000 $15,000 $1,139,949 $2,042,323 $166,587 $3,363,859
Comprehensive income:
Net income --- --- --- 111,808 --- 111,808
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $4,099 --- --- --- --- (7,868) (7,868)
Change in foreign
currency translation --- --- --- --- (1,950) (1,950)
---------
Other comprehensive income (9,818)
---------
Comprehensive income 101,990
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 5,174 --- --- 5,174
========== ========== =========== =========== ============= ============
Balance, March 31, 1998 100,000 $15,000 $1,145,123 $2,154,131 $156,769 $ 3,471,023
========== ========== =========== =========== ============= ============
</TABLE>
Disclosure of
reclassification amount:
Unrealized depreciation of
investments arising
during the period $(3,925)
Reclassification of adjustment,
net of taxes (3,943)
-----------
Net unrealized depreciation,
net of taxes $(7,868)
===========
The accompanying notes are an integral part of the
consolidated financial statements.
F - 34
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
-------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income $111,808 $ 95,327
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in accrued
investment income 3,368 (2,266)
Increase in deferred acquisition costs (5,250) (3,521)
Decrease in prepaid reinsurance premiums 1,769 4,346
Increase in deferred premium revenue 7,182 10,390
Increase in loss and loss adjustment
expense reserves 3,750 2,988
Depreciation 1,150 888
Amortization of goodwill 1,221 1,222
Amortization of bond discount, net (4,308) (2,588)
Net realized gains on sale of investments (6,088) (4,374)
Deferred income taxes 10,572 5,485
Other, net (6,228) (28,760)
----------- -------------
Total adjustments to net income 7,138 (16,190)
----------- -------------
Net cash provided by operating activities 118,946 79,137
----------- -------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (390,951) (393,049)
Sale of fixed-maturity securities, net of
receivable for investments sold 251,987 304,773
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 62,178 25,921
Purchase of short-term investments, net (34,971) (11,628)
Sale of other investments, net 226 205
Capital expenditures, net of disposals (2,041) (1,734)
----------- -------------
Net cash used in investing activities (113,572) (75,512)
----------- -------------
Net increase in cash and cash equivalents 5,374 3,625
Cash and cash equivalents - beginning of period 3,983 3,288
----------- -------------
Cash and cash equivalents - end of period $ 9,357 $ 6,913
=========== =============
Supplemental cash flow disclosures:
Income taxes paid $ 1,565 $ 4,346
The accompanying notes are an integral part of the
consolidated financial statements.
F - 35
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and include the
accounts of MBIA Insurance Corporation and its Subsidiaries (the "company"). The
statements do not include all of the information and disclosures required by
generally accepted accounting principles. These statements should be read in
conjunction with the company's consolidated financial statements and notes
thereto for the year ended December 31, 1997. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards but in the opinion of
management such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to summarize fairly the company's
financial position and results of operations. The results of operations for the
three months ended March 31, 1998 may not be indicative of the results that may
be expected for the year ending December 31, 1998. The December 31, 1997
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. DIVIDENDS DECLARED
No dividends were declared by the company during the three months ended March
31, 1998.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
company's net income or shareholder's equity. The company's comprehensive income
consists of unrealized gains or losses on available-for-sale securities and
foreign currency translation adjustments, which are presented net of deferred
taxes. Prior to adoption these accounts were reported separately in
shareholder's equity.
4. SUBSEQUENT EVENT
On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a
merger. Under the terms of the merger, CapMAC shareholders received 0.4675 of a
share of MBIA Inc. common stock for each CapMAC share, for a total of 8,102,255
newly issued shares of MBIA Inc. common stock, the value of which is $536
million. Subsequent to March 31, 1998, MBIA Inc. made a capital contribution to
MBIA Insurance Corporation of Capital Markets Assurance Corporation, a wholly
owned financial guarantee insurance subsidiary of CapMAC.
F - 36
<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-13
Formation of the Trust ............................................ S-14
The Receivables Pool................................................ S-15
Yield and Prepayment Considerations................................. S-19
The Depositor and UAC ............................................. S-20
The Insurer......................................................... S-20
The Offered Certificates .......................................... S-22
ERISA Considerations................................................ S-32
Underwriting........................................................ S-33
Legal Opinions...................................................... S-33
Experts............................................................. S-34
Index of Principal Terms ........................................... S-35
Financial Statements of the
Insurer.......................................................... 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]
$267,980,468.00
UACSC 1998-B Auto Trust
$44,250,000.00
5.6011% Class A-1 Money Market
Automobile Receivable Backed Certificates
$92,750,000.00
5.830% Class A-2 Automobile
Receivable Backed Certificates
$39,925,000.00
5.875% Class A-3 Automobile
Receivable Backed Certificates
$63,025,000.00
5.900% Class A-4 Automobile
Receivable Backed Certificates
$28,030,468.00
6.020% 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
NationsBanc Montgomery
Securities LLC
Bear, Stearns & Co. Inc.
Underwriter of the Class I Certificates
NationsBanc Montgomery
Securities LLC
Prospectus Supplement
Dated June 12, 1998
