Reg. No. 333-06929-03
Prospectus Supplement
(To Prospectus Dated November 8, 1996)
$283,085,347.28
UACSC 1996-D Auto Trust
$171,000,000.00 5.96% Class A-1 Automobile Receivable Backed Certificates
$ 91,085,000.00 6.17% Class A-2 Automobile Receivable Backed Certificates
$ 21,000,347.28 6.30% Class A-3 Automobile Receivable Backed Certificates
Class I Interest Only Automobile Receivable Backed Certificates
UAC Securitization Corporation
Depositor
Union Acceptance Corporation
Servicer
Interest at the applicable Pass-Through Rate shown above, will be distributed to
Class A-1 Certificateholders, Class A-2 Certificateholders, and Class A-3
Certificateholders (collectively, the "Class A Certificateholders") on the third
business day after the 5th day of each month (the "Distribution Date"),
beginning December 10,1996. Principal will be distributed to Class A
Certificateholders on each Distribution Date in the sequence described herein.
The final scheduled Distribution Date of the Class A-1 Certificates will be
October 10, 2000 (the "Class A-1 Final Scheduled Distribution Date"). The final
scheduled Distribution Date of the Class A-2 Certificates will be October 9,
2002 (the "Class A-2 Final Scheduled Distribution Date"). The final scheduled
Distribution Date of the Class A-3 Certificates will be January 8, 2004 (the
"Class A-3 Final Scheduled Distribution Date"). The Class I Certificates will
not receive principal payments, but interest at the Class I Pass-Through Rate of
3.0% per annum on the Notional Principal Amount (as defined herein) of the Class
I Certificates will be distributed to Class I Certificateholders on each
Distribution Date until the Notional Principal Amount has been reduced to zero.
The Original Notional Principal Amount will be $231,119,724.27 and will decrease
on each Distribution Date. Each Certificate offered hereby will represent an
undivided interest in the UACSC 1996-D Auto Trust (the "Trust") to be formed by
UAC Securitization Corporation, a Delaware corporation, having its principal
office and place of business in Indianapolis, Indiana (the "Depositor"). The
Trust property 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
October 31, 1996 (the "Cutoff Date"), security interests in the vehicles
financed thereby and certain other property. The Trust Property will also
include an irrevocable surety bond guaranteeing payments of interest and
principal on the Class A Certificates and Class I Monthly Interest (the "Surety
Bond") issued by Capital Markets Assurance Corporation and a Spread Account for
the benefit of the Class A and the Class I Certificateholders, as well as the
Surety Bond Issuer.
Concurrently with the issuance of the Class A Certificates and the Class I
Certificates, the Trust will issue a Class IC Automobile Receivable Backed
Certificate (the "Class IC Certificate"). The Class IC Certificate will be
issued to UAC Securitization Corporation, the Depositor, and will not be offered
hereby. The Class A Certificates and the Class I Certificates are together
sometimes referred to herein as the "Offered Certificates."
Prior to their issuance there has been no market for the Offered Certificates
nor can there be any assurance that one will develop, or if it does develop,
that it will provide the holders of the Offered Certificates with liquidity or
will continue for the life of the Offered Certificates. The Underwriters intend,
but are not obligated, to make a market in the Offered Certificates.
The yield to maturity of the Class I Certificates will be sensitive to the rate
and timing of principal payments (including prepayments) on the Receivables.
Investors in the Class I Certificates should fully consider the associated
risks, including the risk that a rapid rate of principal payments could result
in the failure of such investors to recoup their initial investments. See "Risk
Factors -- Prepayment Risks Associated with Offered Certificates" and
"Termination Upon Insolvency Event of the Class IC Certificateholder", "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-10 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 (1) Depositor (2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1 Certificate...................... 99.993690% 0.150% 99.843690%
Per Class A-2 Certificate...................... 99.979900% 0.320% 99.659900%
Per Class A-3 Certificate...................... 99.968870% 0.355% 99.613870%
Per Class I Certificate........................ 3.960636% 0.375% 3.945784%
Total.......................................... $292,203,522.69 $656,849.13 $291,546,673.56
=============================================================================================================================
</TABLE>
(1) With respect to the Class I Certificates, the Price to Public and Proceeds
to Depositor are expressed as a percentage of the Notional Principal Amount
(initially $231,119,724.27), and the Underwriting Discounts are expressed
as a percentage of the related Price to Public.
(2) Before deducting expenses, estimated to be $534,327.00.
The Offered Certificates are offered, subject to prior sale, when, as and if
accepted by the Underwriters, and subject to approval of certain legal matters
by Cadwalader, Wickersham & Taft, counsel for the Underwriters. It is expected
that delivery of the Offered Certificates in book-entry form will be made on or
about November 21, 1996 through the facilities of The Depository Trust Company,
against payment therefor in immediately available funds.
Underwriters of the Class A Certificates
Salomon Brothers Inc Goldman, Sachs & Co. NationsBanc Capital Markets, Inc.
Underwriter of the Class I Certificates
Salomon Brothers Inc
The date of this Prospectus Supplement is November 13, 1996.
<PAGE>
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN
THE PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT
BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT CONTAINS INFORMATION THAT IS
SPECIFIC TO THE TRUST AND THE OFFERED CERTIFICATES AND, TO THAT EXTENT,
SUPPLEMENTS AND REPLACES THE MORE GENERAL INFORMATION PROVIDED IN THE
PROSPECTUS.
----------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver this Prospectus Supplement and
the Prospectus. This is in addition to the obligation of dealers to deliver this
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
----------
REPORTS TO CERTIFICATEHOLDERS
Unless and until definitive certificates are issued (which will occur
only under the limited circumstances described herein), Harris Trust and Savings
Bank, as Trustee, will provide to Cede & Co., the nominee of The Depository
Trust Company, as registered holder of the Offered Certificates, monthly and
annual statements concerning the Trust and the Offered Certificates. Such
statements will not constitute financial statements prepared in accordance with
generally accepted accounting principles. A copy of the most recent monthly or
annual statement concerning the Trust and the Offered Certificates may be
obtained by contacting the Servicer at Union Acceptance Corporation, 250 North
Shadeland Avenue, Indianapolis, Indiana 46219 (telephone (317) 231-7965).
----------
S-2
<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 1996-D Auto Trust.
Depositor...............................UAC Securitization Corporation (the
"Depositor").
Servicer ...............................Union Acceptance Corporation (in its
capacity as servicer, the "Servicer,"
otherwise "UAC").
Trustee ...............................Harris Trust and Savings Bank.
The Certificates ..................... The Trust will be formed and will issue
the Certificates on or about November
21, 1996 (the "Closing Date") pursuant
to a pooling and servicing agreement
(the "Pooling and Servicing Agreement").
The "Certificates" will consist of: (i)
5.96% Class A-1 Automobile Receivable
Backed Certificates in the aggregate
principal amount of $171,000,000.00;
(ii) 6.17% Class A-2 Automobile
Receivable Backed Certificates in the
aggregate principal amount of
$91,085,000.00; (iii) 6.30% Class A-3
Automobile Receivable Backed
Certificates in the aggregate principal
amount of $21,000,347.28; (iv) the Class
I Interest Only Automobile Receivable
Backed Certificates; and (v) the Class
IC Automobile Receivable Backed
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.
Each of the Certificates will represent
a fractional undivided interest in the
Trust. The Trust assets will include the
Receivables, certain monies due
thereunder as of and after the Cutoff
Date, security interests in the related
Financed Vehicles, monies on deposit in
the Certificate Account and the proceeds
thereof, any proceeds from claims on
certain insurance policies relating to
the Financed Vehicles or the related
Obligors, any lender's single interest
insurance policy, the Spread Account for
the benefit of the Class A and Class I
Certificateholders and the Surety Bond
Issuer, the Surety Bond for the benefit
of the Class A and Class I
Certificateholders and certain rights
under the Pooling and Servicing
Agreement. Interest paid to the
Certificateholders on the first
Distribution Date will be based upon the
amount of interest accruing from the
Closing Date, and will therefore not
include a full month's interest.
The Class A Certificates ............Interest. Interest will be distributable
on each Distribution Date beginning
December 10, 1996, 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
S-3
<PAGE>
Certificateholders," which includes the
"Class A-1 Certificateholders," the
"Class A-2 Certificateholders" and the
"Class A-3 Certificateholders") in a
maximum amount equal to the product of
1/12th of the applicable pass-through
rate of 5.96% for the Class A-1
Certificates (the "Class A-1
Pass-Through Rate"), the applicable
pass-through rate of 6.17% for the
Class A-2 Certificates (the "Class A-2
Pass-Through Rate") and the applicable
pass-through rate of 6.30% for the Class
A-3 Certificates (the "Class A-3
Pass-Through Rate") and the aggregate
outstanding principal balance of the
Class A-1 Certificates, Class A-2
Certificates and Class A-3 Certificates,
respectively (the "Class A-1 Certificate
Balance," the "Class A-2 Certificate
Balance" and the "Class A-3 Certificate
Balance," and collectively, the
"Certificate Balance") as of the
preceding Distribution Date (after
giving effect to all distributions to
Certificateholders on such date) or, in
the case of the first Distribution Date,
as of the Closing Date. Interest on the
Class A Certificates will be calculated
on the basis of a 360-day year
consisting of twelve 30-day months or,
in the case of the first Distribution
Date, the number of days from the
Closing Date remaining in the month of
the closing (assuming a 30-day month).
See "The Offered Certificates --
Distributions on the Offered
Certificates." The effective yield on
the Class A Certificates will be below
that otherwise produced by the
applicable Pass-Through Rate because the
distribution of Monthly Principal (as
defined below) and Class A Monthly
Interest in respect of any given month
will not be made until the third
business day after the fifth calendar
day of the following month (the
"Distribution Date"). See "Yield and
Prepayment Considerations" herein.
Principal. On each Distribution Date,
the Trustee will distribute as principal
to the Class A Certificateholders in a
maximum aggregate amount equal to the
aggregate outstanding principal amount
of the Receivables (the "Pool Balance")
on the last day of the second preceding
calendar month (or, in the case of the
first Distribution Date, as of the
Cutoff Date) less the Pool Balance on
the last day of the immediately
preceding calendar month ("Monthly
Principal"). Monthly Principal will be
distributed sequentially to the Class A
Certificateholders as follows: (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; and (iii) to the Class A-3
Certificateholders until the Class A-3
Certificate Balance has been reduced to
zero. 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 such Receivable
became a Defaulted Receivable or a
Purchased Receivable.
S-4
<PAGE>
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, or (ii) to the
Class A-3 Certificateholders until the
Class A-2 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 3.0% per annum (the "Class I
Pass-Through Rate"). The Notional
Principal Amount represents a designated
principal component of the Receivables,
originally $231,119,724.27 (the
"Original Notional Principal Amount").
Interest with respect to the Class I
Certificates will accrue on the basis of
a 360-day year consisting of twelve
30-day months or, in the case of the
first Distribution Date, the number of
days from the Closing Date remaining in
the month of the closing (assuming a
30-day month). On each Distribution
Date, except the first Distribution
Date, the Trustee shall distribute pro
rata to holders of Class I Certificates
(the "Class I Certificateholders") of
record as of the preceding Record Date,
Class I Monthly Interest at the Class I
Pass-Through Rate on the Notional
Principal Amount outstanding on the
immediately preceding Distribution Date
(after giving effect to any reduction of
the Notional Principal Amount on such
Distribution Date) or, in the case of
the first Distribution Date, as of the
Closing Date. Holders of the Class I
Certificates will not be entitled to any
distributions after the Notional
Principal Amount thereof has been
reduced to zero.
Planned Amortization Feature;
Calculation of the Class I Notional
Principal Amount. The Class I
Certificates represent an interest-only
planned amortization class. The planned
amortization feature is intended to
reduce the uncertainty to investors in
the Class I Certificates with respect to
prepayments. Because the Class I
Certificates will receive interest based
on the Notional Principal Amount, this
is accomplished by basing the reduction
in the Notional Principal Amount on a
principal paydown schedule rather than
on the reduction in the actual principal
balances of the Receivables, as
described below. The amount which will
be paid to the Class I
Certificateholders will come 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
S-5
<PAGE>
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
$231,119,724.27. The Pooling and
Servicing Agreement establishes a
schedule (a "Planned Notional Principal
Amount Schedule") which is set forth
herein under "The Offered
Certificates-Class I
Certificates-Calculation of Notional
Principal Amount." On each Distribution
Date, the Monthly Principal will be
allocated first to the PAC Component in
an amount up to the amount necessary to
reduce the amount thereof to the Planned
Notional Principal Amount for such
Distribution Date, as set forth in the
Planned Notional Principal Amount
Schedule, second, to the Companion
Component until the outstanding amount
thereof is reduced to zero and third, to
the PAC Component, without regard to the
Planned Notional Principal Amount. As
described above, the Notional Principal
Amount of the Class I Certificates will
be equal to the outstanding amount of
the PAC Component and thus will be
reduced as the PAC Component is reduced.
The Planned Notional Principal Amount
Schedule has been prepared on the basis
of the assumption, among other things,
that the Receivables prepay at a
constant rate between 1.6% and 2.5% ABS
(as defined herein), an assumed
annualized constant rate of prepayments
and the prepayment model used in this
Prospectus. 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.
S-6
<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 Class I
Certificates," "Yield and Prepayment
Considerations -- The Class I
Certificates" and "The Offered
Certificates --Termination Upon
Insolvency Event of the Class IC
Certificateholder" herein.
Subordination; Spread Account...........The Depositor will establish an account
(the "Spread Account") on the Closing
Date. On each Distribution Date
thereafter, the Servicer will deposit
into the Spread Account any amounts
remaining in the Certificate Account
after the payment on such date of all
amounts owing pursuant to the Pooling
and Servicing Agreement to the
Certificateholders (other than the Class
IC Certificateholder), the Surety Bond
Issuer and the Servicer for the Monthly
Servicing Fee. 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 Class A and Class
I Monthly Interest to the Class A and
Class I Certificateholders, draws will
be made on the Spread Account to the
extent of the balance thereof and, if
necessary, the Surety Bond, in the
manner and to the extent described
herein. The Spread Account is solely for
the benefit of the Class A and Class I
Certificateholders and the Surety Bond
Issuer. 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 and Class
I Certificateholders, and there is a
default under the Surety Bond, 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 will also
result in a reduction of the Class I
Notional Principal Amount. See "The
Offered Certificates-- Distributions on
the Offered Certificates" and
"--Accounts" herein.
The Class A Certificates and Class I
Certificates will be senior in right and
interest to the Class IC Certificate.
The Class A Certificateholders and the
Class I Certificateholders will have
equal rights with respect to amounts
collected on or with respect to the
Receivables and other assets of the
Trust in the event of a shortfall. The
Trustee will first withdraw funds from
the Spread
S-7
<PAGE>
Account on each Distribution Date to the
extent of any shortfall in the Class A
and Class I Monthly Interest and the
Monthly Principal as described above.
Any amount on deposit in the Spread
Account on any Distribution Date in
excess of the Required Spread Amount
(defined below) after all other required
deposits thereto and withdrawals
therefrom have been made, and after
payment therefrom of all amounts due the
Surety Bond Issuer will be distributed
to the holder of the Class IC
Certificate (the "Class IC
Certificateholder"). Any amount so
distributed to the Class IC
Certificateholder will no longer be an
asset of the Trust.
While it is intended that the amount on
deposit in the Spread Account grow over
time, through the deposit thereto of the
excess collections, if any, on the
Receivables, to the Required Spread
Amount, there can be no assurance that
such growth will actually occur. The
"Required Spread Amount" with respect to
any Distribution Date will equal 1.25%
of the initial Pool Balance. If the
average aggregate yield of the
Receivables pool in excess of losses
falls below a prescribed level set forth
in the Insurance Agreement, the Required
Spread Amount will be increased to 5% 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 Surety Bond Amount, as
further described below. See "The
Offered Certificates -- Accounts" and --
"The Surety Bond" herein.
Surety Bond.............................The Depositor shall obtain an
irrevocable surety bond (the "Surety
Bond") issued by the Surety Bond Issuer
(as specified below), for the benefit of
the Trustee on behalf of the Class A and
Class I Certificateholders. The Trustee
shall draw on the Surety Bond in the
event that sufficient funds are not
available (after payment of the Monthly
Servicing Fee and after withdrawals from
the Spread Account to pay the Class A
and Class I Certificateholders on any
Distribution Date in accordance with the
Pooling and Servicing Agreement) to
distribute Class A and Class I Monthly
Interest and Monthly Principal, up to
the Surety Bond Amount. See "The Offered
Certificates--The Surety Bond."
Surety Bond Amount......................The term "Surety Bond Amount" means with
respect to any Distribution Date: (x)
the sum of (A) the lesser of (i) the
Certificate Balance (after giving effect
to any distribution of Available Funds
and any funds withdrawn from the Spread
Account to pay Monthly Principal on such
Distribution Date) and (ii) the Net
Principal Surety Bond Amount, plus (B)
Class A Monthly Interest, plus (C) Class
I Monthly Interest, plus (D) the Monthly
Servicing Fee; less (y) all amounts on
deposit in the Spread Account on such
Distribution Date. "Net Principal Surety
Bond Amount" means the Certificate
Balance as of
S-8
<PAGE>
the first Distribution Date minus all
amounts previously drawn on the Surety
Bond or from the Spread Account with
respect to Monthly Principal.
Surety Bond Issuer......................Capital Markets Assurance Corporation.
Optional Sale .........................The Class IC Certificateholder has the
right to cause the Trustee to sell all
of the Receivables (referred to herein
as an "Optional Sale") as of the last
day of any Collection Period, at a
purchase price equal to the fair market
value of the Receivables (but not less
than the sum of (i) their aggregate
outstanding principal balance plus
accrued and unpaid interest thereon and
(ii) any amounts due the Surety Bond
Issuer), if (i) the Certificate Balance
as of the following Distribution Date
will equal 10% or less of the initial
Certificate Balance and (ii) the Class I
Notional Principal Amount has been
reduced to zero.
Tax Status..............................In the opinion of special tax counsel to
the Depositor, the Trust will not be
treated as an association taxable as a
corporation or as a "publicly traded
partnership" taxable as a corporation.
The Trustee and the Certificateholders
will agree to treat the Trust as a
partnership for federal income tax
purposes, which will not be subject to
federal income tax at the Trust level.
See "Certain Federal Income Tax
Consequences" in the Prospectus.
Ratings ...............................As a condition to the issuance of the
Offered Certificates, the Class A and
Class I Certificates must be rated in
the highest category by at least one
nationally recognized rating agency. The
rating of the Class I Certificates does
not address the possibility that rapid
rates of principal prepayments,
including prepayments resulting from a
sale of the Receivables upon an
Insolvency Event with respect to the
Class IC Certificateholder, 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
"Certificate Rating."
ERISA Considerations ..................Subject to the considerations discussed
under "ERISA Considerations" herein and
in the Prospectus, the Class A
Certificates and the Class I
Certificates may be eligible for
purchase by employee benefit plans
subject to Title I of the Employee
Retirement Income Security Act of 1974,
as amended ("ERISA"). Any benefit plan
fiduciary considering the purchase of an
Offered Certificate should, among other
things, consult with experienced legal
counsel in determining whether all
required conditions for such purchase
have been satisfied. See "ERISA
Considerations" herein and in the
Prospectus.
S-9
<PAGE>
RISK FACTORS
Investors should carefully consider the information set forth below as
well as the other investment considerations described in this prospectus.
Limited Liquidity
There is currently no secondary market for the Offered Certificates.
The Underwriters currently intend to make a market in the Offered Certificates,
but are under no obligation to do so. There can be no assurance that a secondary
market will develop or, if one does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Offered Certificates.
Certificates Solely Obligations of the Trust
The Offered Certificates are interests in the Trust only and do not
represent the obligation of any other person. The Class A and 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 Class A and Class I Monthly Interest and
Monthly Principal (after payment of the Monthly Servicing Fee). The amount on
deposit in the Spread Account is intended to increase over time to an amount
equal to the Required Spread Amount. There is no assurance that such growth will
occur or that the balance in the Spread Account will always be sufficient to
assure payment in full of Monthly Principal and Monthly Interest. If the amount
on deposit in the Spread Account is reduced to zero after giving effect to all
amounts to be deposited to and withdrawn from the Spread Account pursuant to the
Pooling and Servicing Agreement, on any Distribution Date prior to termination
of the Trust, the Trustee will draw on the Surety Bond, in an amount equal to
the shortfall in respect of Class A and Class I Monthly Interest and Monthly
Principal, up to the Surety Bond Amount. If the Spread Account is reduced to
zero and there is a default under the Surety Bond, the Trust will depend solely
on current distributions on the Receivables to make distributions on the Offered
Certificates and distributions of interest and principal on the Offered
Certificates may be made pro rata based on the amounts to which
Certificateholders of each class are entitled as set forth under "The Offered
Certificates -- Distributions on the Offered Certificates." See "The Receivables
Pool --Delinquencies, Repossessions and Net Losses" and "The Offered
Certificates -- Accounts" and "-- Distribution on the Offered Certificates"
herein.
Prepayment Risks Associated with the Class I Certificates
If the Receivables prepay at a constant rate within the range assumed
in preparing the Planned Notional Principal Amount Schedule, the PAC Component
(and the Notional Principal Amount) will be reduced in accordance with the
Planned Notional Principal Amount Schedule. If the Receivables prepay at a
constant rate higher than 2.5% ABS, the Notional Principal Amount will be
reduced more quickly than provided in the Planned Notional Principal Amount
Schedule, thereby reducing the yield to holders of the Class I Certificates. In
general, a rapid rate of principal prepayments (including liquidations due to
losses, repurchases and other dispositions and prepayments resulting from any
sale of the Receivables upon an Insolvency Event with respect to the Class IC
Certificateholder) 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" herein.
Termination Upon Insolvency Event of the Class IC Certificateholder
The Depositor will be the initial Class IC Certificateholder. If an
Insolvency Event occurs with respect to the Class IC Certificateholder, the
Receivables will be sold and the Trust will be liquidated unless, within the
period specified herein, holders of more than 51% of the Certificate Balance and
holders of more than 51% of the Notional Principal Amount of the Class I
Certificates instruct the
S-10
<PAGE>
Trustee not to sell the Receivables and liquidate the Trust or unless such sale
and liquidation is otherwise prohibited by applicable law. The Surety Bond will
not be available to pay any shortfalls upon sale of the Receivables on
liquidation of the Trust. See "The Offered Certificates -- Termination Upon
Insolvency Event of the Class IC Certificateholder" herein. The Depositor is a
special purpose corporation the activities of which are circumscribed by its
charter with a view to reducing any risk of its bankruptcy; however no
representation is made concerning the financial condition of the Class IC
Certificateholder or the likelihood of an Insolvency Event with respect to such
holder. In the event of the sale of the Receivables and liquidation of the Trust
following an Insolvency Event, the proceeds may not be sufficient to pay all
accrued and unpaid amounts owing on the Certificates. The Surety Bond will not
be available to cover any such shortfall. Following such a sale, the Class I
Certificateholders may be entitled to receive a portion of the proceeds of sale
based upon the amount originally paid for the Class I Certificates (as reduced
by prior returns of such amount) as provided in the Pooling and Servicing
Agreement. Furthermore, any distributions of such proceeds will have an effect
similar to a prepayment of the Receivables and could affect the yield on the
Class A Certificates and may significantly affect the yield on the Class I
Certificates. See "Yield and Prepayment Considerations" 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
category by at least one nationally recognized rating agency. 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 rating of
the Class I Certificates does not address the possibility that rapid rates of
principal prepayments, including prepayments resulting from a sale of the
Receivables upon an Insolvency Event with respect to the Class IC
Certificateholder, could result in a failure of the holders of the Class I
Certificates to fully recover their investment. A security rating is not a
recommendation to buy, sell or hold securities.
FORMATION OF THE TRUST
The Depositor will establish the Trust by selling and assigning the
Trust property, as described below, to the Trustee in exchange for the Offered
Certificates. The Depositor will retain the Class IC Certificate. UAC will be
responsible for servicing the Receivables pursuant to the Pooling and Servicing
Agreement and will be compensated for acting as the Servicer. See "Description
of the Transfer and Servicing Agreements -- Servicing Compensation and Payment
of Expenses" in the Prospectus. To facilitate servicing and to minimize
administrative burden and expense, the Servicer will be appointed custodian of
the Receivables by the Trustee, but will not stamp the Receivables to reflect
the sale and assignment of the Receivables to the Trust or make any notation of
the Trust's lien on the certificates of title of the Financed Vehicles. In the
absence of such notation on the certificates of title, the Trustee may not have
perfected security interests in the Financed Vehicles securing the Receivables.
See "Certain Legal Aspects of the Receivables" in the Prospectus. Under the
terms of the Pooling and Servicing Agreement, UAC may delegate its duties as
Servicer and custodian; however, any such delegation will not relieve UAC of its
liability and responsibility with respect to such duties.
The Depositor will establish, for the benefit of the Class A and Class
I Certificateholders and the Surety Bond Issuer, the Spread Account and will
obtain the Surety Bond. Withdrawals from the Spread Account and, only after such
withdrawals, draws on the Surety Bond will be made in accordance with the
Pooling and Servicing Agreement in the event that sufficient funds are not
available (after payment of the Monthly Servicing Fee) to distribute, in the
case of Class I Monthly Interest, Class A Monthly Interest and Monthly
Principal, up to the Surety Bond Amount. If the Spread Account is exhausted and
there is a default under the Surety Bond, the Trust will look only to the
Obligors on the Receivables and the proceeds from the repossession and sale of
Financed Vehicles that secure Defaulted Receivables for distributions of
interest and principal on the Certificates. In such event, certain factors, such
as the Trustee's not having perfected security interests in some of the Financed
Vehicles, may affect the
S-11
<PAGE>
Trust's ability to realize on the collateral securing the Receivables, and thus
may reduce the proceeds to be distributed to Certificateholders. See "The
Offered Certificates -- Accounts" herein and "Certain Legal Aspects of the
Receivables" in the Prospectus.
THE RECEIVABLES POOL
The Receivables were selected from UAFC's prime portfolio for purchase
by the Depositor by several criteria, including that each Receivable: (i) has an
original number of payments of not more than 84 payments and not less than 12
payments, (ii) has a remaining maturity of not more than 84 months and not less
than three months, (iii) provides for level monthly payments that fully amortize
the amount financed over the original term, and (iv) has a Contract Rate
(exclusive of prepaid finance charges) of not less than 6.50%. The weighted
average remaining maturity of the Receivables will be approximately 68 months as
of the Cutoff Date.
Approximately 94.41% of the aggregate principal balance of the
Receivables as of the Cutoff Date are simple interest contracts which provide
for equal monthly payments. Approximately 5.59% of the aggregate principal
balance of the Receivables as of the Cutoff Date are Precomputed Receivables (as
defined in the Prospectus) originated in California. All of such Precomputed
Receivables are Rule of 78's Receivables (as defined in the Prospectus).
Approximately 22.27% of the aggregate principal balance of the Receivables as of
the Cutoff Date represent financing of new vehicles; the remainder of the
Receivables represent financing of used vehicles.
Receivables representing more than 10% of the aggregate principal
balance of the Receivables as of the Cutoff Date were originated in metropolitan
areas in the States of California and Texas. The performance of the Receivables
in the aggregate could be adversely affected in particular by the development of
adverse economic conditions in such metropolitan areas.
Composition of the Receivables as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate Original Weighted
Number of Principal Principal Average
Receivables Balance Balance Rate
------ --------------- --------------- ------
<S> <C> <C> <C> <C>
New Automobiles and Light-Duty Trucks............ 3,532 $ 55,929,577.00 $ 64,404,172.91 13.017%
Used Automobiles and Light-Duty Trucks........... 16,989 199,474,922.51 218,645,031.93 13.687%
New Vans (1)..................................... 331 7,125,344.01 7,853,862.60 12.926%
Used Vans (1).................................... 1,638 20,555,503.76 23,025,977.05 13.542%
------ --------------- --------------- ------
All Receivables.................................. 22,490 $283,085,347.28 $313,929,044.49 13.525%
====== =============== =============== ======
</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.......... 73.720mos. 77.705mos. 19.76%
Used Automobiles and Light-Duty Trucks......... 65.963 68.285 70.46
New Vans (1)................................... 76.463 79.537 2.52
Used Vans (1).................................. 65.811 68.545 7.26
------ ------ ------
All Receivables................................ 67.749mos. 70.448mos. 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.
S-12
<PAGE>
Geographic Distribution of the Receivables as of the Cutoff Date
Percent of Aggregate
State (1)(2) Principal Balance (3)
------------ ---------------------
Arizona............................................ 5.40%
California......................................... 11.15
Colorado........................................... 1.55
Florida............................................ 6.68
Georgia............................................ 1.52
Illinois........................................... 7.98
Indiana............................................ 3.92
Iowa............................................... 2.10
Kansas............................................. 0.71
Kentucky........................................... 0.02
Maryland........................................... 2.14
Michigan........................................... 1.54
Minnesota.......................................... 0.03
Missouri........................................... 2.53
Nebraska........................................... 0.32
New Mexico......................................... 1.05
North Carolina..................................... 9.50
Ohio............................................... 6.83
Oklahoma........................................... 6.06
Oregon............................................. 0.45
Pennsylvania....................................... 0.24
South Carolina..................................... 3.13
Tennessee.......................................... 1.55
Texas.............................................. 14.30
Virginia........................................... 6.74
Washington......................................... 1.07
Wisconsin.......................................... 1.48
------
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 to 100% due to rounding.
Distribution of the Receivables by Remaining Term as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage of
Remaining Aggregate Average Aggregate
Scheduled Number of Principal Principal Principal
Term Range Receivables Balance Balance Balance(1)
----------- --------------- ---------- --------------
<S> <C> <C> <C> <C>
0 to 6 months....................... 171 $ 167,085.67 $ 977.11 0.06%
7 to 12 months....................... 541 1,208,315.05 2,233.48 0.43
13 to 24 months....................... 2,173 8,912,231.40 4,101.35 3.15
25 to 36 months....................... 678 4,154,386.04 6,127.41 1.47
37 to 48 months....................... 1,558 13,324,751.68 8,552.47 4.71
49 to 60 months....................... 4,455 51,143,593.61 11,480.04 18.07
61 to 66 months....................... 1,637 20,965,938.09 12,807.54 7.41
67 to 84 months....................... 11,277 183,209,045.74 16,246.26 64.72
------ --------------- ---------- ------
Total....................... 22,490 $283,085,347.28 $12,587.17 100.00%
====== =============== ========== ======
</TABLE>
- ----------------
(1) Sum may not equal 100% due to rounding.
S-13
<PAGE>
Distribution of Receivables Vehicles by Model Year
<TABLE>
<CAPTION>
Principal
Model Number of Percentage Balance as of Percentage
Year Receivables of Total(1) Cut Off Date of Total(1)
----------- ---------- --------------- ------
<S> <C> <C> <C> <C>
1978..................................... 1 0.00% $ 2,360.94 0.00%
1980..................................... 1 0.00 6,489.41 0.00
1981..................................... 2 0.01 17,572.71 0.01
1982..................................... 1 0.00 1,948.79 0.00
1983..................................... 5 0.02 30,540.41 0.01
1984..................................... 13 0.06 83,866.88 0.03
1985..................................... 26 0.12 146,200.06 0.05
1986..................................... 72 0.32 380,336.14 0.13
1987..................................... 260 1.16 992,959.29 0.35
1988..................................... 780 3.47 3,859,261.43 1.36
1989..................................... 1,282 5.70 7,803,737.57 2.76
1990..................................... 1,751 7.79 13,810,290.16 4.88
1991..................................... 2,304 10.24 21,769,553.80 7.69
1992..................................... 3,377 15.02 34,274,485.26 12.11
1993..................................... 3,119 13.87 39,490,706.03 13.95
1994..................................... 3,097 13.77 46,465,617.01 16.41
1995..................................... 2,769 12.31 44,413,354.20 15.69
1996..................................... 2,919 12.98 55,248,814.61 19.52
1997..................................... 711 3.16 14,287,252.58 5.05
----------- ------ --------------- ------
Total.................................. 22,490 100.00% $283,085,347.28 100.00%
=========== ====== =============== ======
</TABLE>
(1) Sum may not equal 100% due to rounding.
Distribution of the Receivables by Note Rate as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage of
Aggregate Average Aggregate
Number of Principal Principal Principal
Note Rate Range Receivables Balance Balance Balance(1)
--------------- ----------- --------------- ---------- -------------
<S> <C> <C> <C> <C>
6.000 to 6.999%...................... 3 $ 33,537.86 $11,179.29 0.01%
7.000 to 7.999%...................... 23 138,025.63 6,001.11 0.05
8.000 to 8.999%...................... 213 1,746,434.83 8,199.23 0.62
9.000 to 9.999%...................... 537 4,266,728.44 7,945.49 1.51
10.000 to 10.999%...................... 1,355 13,568,221.50 10,013.45 4.79
11.000 to 11.999%...................... 2,785 34,831,265.63 12,506.74 12.30
12.000 to 12.999%...................... 4,956 65,026,539.33 13.120.77 22.97
13.000 to 13.999%...................... 5,900 79,818,435.82 13,528.55 28.20
14.000 to 14.999%...................... 3,697 47,727,138.42 12,909.69 16.86
15.000 to 15.999%...................... 1,414 17,630,920.21 12,468.83 6.23
16.000 to 16.999%...................... 677 8,108,759.07 11,977.49 2.86
17.000 to 17.999%...................... 419 5,023,881.82 11,990.17 1.77
18.000 to 18.999%...................... 304 3,494,923.23 11,496.46 1.23
19.000 to 19.999%...................... 68 646,765.55 9,511.26 0.23
20.000 to 20.999%...................... 93 787,085.67 8,463.29 0.28
21.000 to 21.999%...................... 39 195,848.22 5,021.75 0.07
22.000 to 22.999%...................... 3 19,698.00 6,566.00 0.01
23.000 to 23.999%...................... 1 6,064.24 6,064.24 0.00
24.000 to 24.999%...................... 1 5,582.08 5,582.08 0.00
25.000 to 25.999%...................... 1 4,292.11 4,292.11 0.00
26.000 to 26.999%...................... 1 5,199.62 5,199.62 0.00
------ --------------- ---------- ------
Total...................... 22,490 $283,085,347.28 $12,587.17 100.00%
====== =============== ========== ======
</TABLE>
- -------------
(1) Sum may not equal 100% due to rounding.
S-14
<PAGE>
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.
Delinquency Experience
<TABLE>
<CAPTION>
At June 30, At September 30,
--------------------------------------------------------------- ------------------------
1994 1995 1996 1996
------------------- --------------------- --------------------- ------------------------
(Dollars in thousands)
Number of Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount Receivables Amount
---------- -------- ---------- -------- ----------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio............. 91,837 $843,245 117,837 $1,159,349 147,722 $1,548,538 155,853 $1,648,523
------ -------- ------- ---------- ------- ---------- ------- ----------
Delinquencies
30-59 days................... 907 $ 8,389 1,169 $ 12,097 1,602 $ 17,030 1,498 $ 16,605
60-89 days................... 213 2,118 377 4,124 694 7,629 907 10,650
90 days or more.............. 137 1,324 0 0 333 3,811 499 6,047
------ -------- ------- ---------- ------- ---------- ------- ----------
Total delinquencies............. 1,257 $ 11,831 1,546 $ 16,221 2,629 $ 28,470 2,904 $ 33,302
====== ======== ======= ========== ======= ========== ======= ==========
Total delinquencies as a
percent of servicing
portfolio.................. 1.37% 1.40% 1.31% 1.40 % 1.78% 1.84% 1.86% 2.02%
</TABLE>
Credit Loss Experience (1)
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------------------------------------------------------- ------------------------
1994 1995 1996 1996
------------------- --------------------- ------------------------- ------------------------
(Dollars in thousands)
Number of Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount Receivables Amount
---------- -------- ---------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Avg. servicing portfolio(2)...... 83,673 $744,149 104,455 $982,875 132,363 $1,343,770 153,203 $1,616,606
------ -------- ------- -------- ------- ---------- ------- ----------
Gross charge-offs................ 1,404 $ 12,094 3,493 $ 28,628 3,663 $ 40,815 986 $ 10,751
Recoveries (4)................... 6,946 15,258 19,543 4,339
-------- -------- ---------- ----------
Net losses....................... $ 5,148 $ 13,370 $ 21,272 $ 6,412
======== ======== ========== =========
Gross charge-offs as
a % of avg. servicing
portfolio(3).................. 1.68% 1.63% 3.34% 2.91% 2.77% 3.04% 2.57% 2.66%
Recoveries as a % of gross
charge-offs................... 57.43% 53.30% 47.88% 40.36%
Net losses as a % of avg.
servicing portfolio(4)........ 0.69% 1.36% 1.58% 1.59%
</TABLE>
(1) There is generally no recourse to Dealers under any of the receivables in
the portfolio serviced by UAC or the Predecessor, except to the extent of
representations and warranties made by Dealers in connection with such
receivables.
(2) Equals the monthly arithmetic average, and includes receivables sold in
prior securitization transactions.
(3) Variation in the size of the portfolio serviced by UAC will affect the
percentages in "Gross charge-offs as a percentage of average servicing
portfolio" and "Net losses as a percentage of average servicing portfolio."
(4) In fiscal 1995, the method by which recoveries are stated was changed.
Currently, recoveries include recoveries on receivables previously charged
off, cash recoveries and unsold repossessed assets carried at fair market
value. Under the previous method, reported recoveries excluded unsold
repossessed assets carried at fair market value. Prior period credit loss
experience has been restated to conform to current period classifications.
(5) Annualized
As indicated in the above Delinquency Experience table, current
delinquency rates showed a slight increase at September 30, 1996 compared to
June 30, 1996; however, there was an improvement compared to September 30, 1995
delinquency statistics. Delinquency rates based upon outstanding loan balances
of accounts 30 days past due and over were 2.02% at September 30, 1996 compared
to 1.84% at June 30, 1996 and 3.06% at September 30, 1995 for the prime
servicing portfolio. UAC believes that the increase in delinquencies since June
30, 1996 is attributable primarily to the cyclical nature of delinquency trends
in the business of UAC since delinquencies tend to be higher in the September
and December quarters as compared to the March and June quarters. UAC believes
that this slight increase is not indicative of a material change in the
underlying credit quality of the portfolio.
S-15
<PAGE>
As indicated in the Credit Loss Experience table above, annualized net
charge-offs as a percentage of the average prime servicing portfolio were 1.59%
for the three months ended September 30, 1996, compared to 1.58% for the year
ended June 30, 1996, and 1.73% for the three months ended September 30, 1995.
UAC believes that the stability of losses results from the fact that loans
acquired during late 1994 and early 1995, which have experienced higher loss
rates, are nearing or have reached the end of the peak period for credit losses.
UAC believes such period to be nine to sixteen months from the date of closing.
Overall, UAC has made strategic changes with respect to pricing and
underwriting, including an increase in cut-off scores in several of its existing
markets during the third quarter of fiscal 1996 and the implementation of a
scoring matrix in October 1996. The scoring matrix combines UAC's custom score
with a credit bureau score in order to improve the average quality of the
contracts being purchased. UAC has been able to increase its acquisitions
despite tightening its credit standards. UAC continues to focus on controlled
growth, recognizing that the underlying credit quality of the portfolio is one
of the most important factors associated with long-term profitability. These
strategies appear to be providing UAC with the desired results; not only has
volume increased, but the implied losses on the more recent loan pools are
improved over the 1995 loan pools.
YIELD AND PREPAYMENT CONSIDERATIONS
General
Monthly Interest (as defined herein) on the Receivables will be
distributed to Certificateholders on each Distribution Date to the extent of the
Pass-Through Rate applied to the applicable Certificate Balance or Notional
Principal Amount, as applicable, as of the preceding Distribution Date or the
Closing Date, as applicable (after giving effect to distributions of principal
on such preceding Distribution Date). See "The Offered Certificates --
Distributions on the Offered Certificates" herein. In the event of a full or
partial prepayment on a Receivable, Certificateholders will receive interest for
the full month of such prepayment either through the distribution of interest
paid on other Receivables or withdrawal from the Spread Account.
Although the Receivables will have different Contract Rates, each
Receivable's Contract Rate generally will exceed the sum of (a) the weighted
average of the Class A-1 Pass-Through Rate, the Class A-2 Pass-Through Rate and
the Class A-3 Pass-Through Rate (b) the per annum rate used to calculate the
Surety Bond Fee (c) the Class I Pass-Through Rate and (d) the per annum rate
used to calculate the Servicing Fee. The Contract Rate on a small percentage of
the Receivables, however, will be less than the foregoing sum. Disproportionate
rates of prepayments between Receivables with higher and lower Contract Rates
could affect the ability of the Trust to distribute Monthly Interest to
Certificateholders.
The effective yield to Certificateholders will be below the yield
otherwise produced by the Pass-Through Rate because the distribution of Monthly
Principal and Monthly Interest in respect of any given month will not be made
until the related Distribution Date, which will not be earlier than the eighth
day of the following month.
S-16
<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, prepayments due to liquidations, repurchases and losses and
prepayments resulting from any sale of the Receivables upon an Insolvency Event
relating to the Class IC Certificateholder. 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", "-- Termination Upon Insolvency Event of the Class IC
Certificateholder" and "-- Class I Yield Considerations".
THE DEPOSITOR AND UAC
UAC currently acquires loans from nearly 2,600 manufacturer franchised
automobile dealerships in 45 major metropolitan areas in 25 states. UAC is an
Indiana corporation, formed in December 1993 by the Predecessor to succeed to
the indirect automobile finance business of the Predecessor, which the
Predecessor had operated since 1986. UAC began purchasing and originating
Receivables in April 1994. For the fiscal years ended June 30, 1993, 1994, 1995
and 1996 UAC and/or its Predecessor acquired prime loans aggregating $435
million, $615 million, $767 million, and $995 million, respectively,
representing annual increases of 41%, 25%, and 30%, respectively. Of the $1.5
billion of loans in the servicing portfolio of UAC and its Predecessor
(consisting of the principal balance of loans held for sale and securitized
loans) at June 30, 1996, approximately 73.29% represented loans on used cars and
approximately 26.71% represented loans on new cars.
Additional information regarding UAC and the Depositor is set forth under
"Union Acceptance Corporation and Affiliates" in the Prospectus.
THE SURETY BOND ISSUER
Capital Markets Assurance Corporation is the surety bond provider (the
"Surety Bond Issuer"). The Surety Bond Issuer is a New York-domiciled monoline
stock insurance company which engages only in the business of financial
guarantee and surety insurance. The Surety Bond Issuer is licensed in 50 states
in addition to the District of Columbia, the Commonwealth of Puerto Rico and the
territory of Guam. The Surety Bond Issuer insures structured asset-backed,
corporate, municipal and other financial obligations in the U.S. and
international capital markets. The Surety Bond Issuer also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
The Surety Bond Issuer's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Services
("Standard & Poor's"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff &
Phelps") and "AAA" by Nippon Investors Service Inc. Such ratings reflect only
the views of the respective rating agencies, are not recommendations to buy,
sell or hold securities and are subject to revision or withdrawal at any time by
such rating agencies.
The Surety Bond Issuer is a wholly-owned subsidiary of CapMAC Holdings
Inc. ("Holdings"). Neither Holdings nor any of its stockholders is obligated to
pay any claims under any surety bond issued by the Surety Bond Issuer or any
debts of the Surety Bond Issuer or to make additional capital contributions to
the Surety Bond Issuer.
S-17
<PAGE>
The Surety Bond Issuer is regulated by the Superintendent of Insurance of
the State of New York. In addition, the Surety Bond Issuer is subject to
regulation by the insurance laws and regulations of the other jurisdictions in
which it is licensed. Such insurance laws regulate, among other things, the
amount of net exposure per risk that the Surety Bond Issuer may retain, capital
transfers, dividends, investment of assets, changes in control, transactions
with affiliates and consolidations and acquisitions. The Surety Bond Issuer is
subject to periodic regulatory examinations by the same regulatory authorities.
The Surety Bond Issuer's obligations under the Surety Bond(s) may be
reinsured. Such reinsurance does not relieve the Surety Bond Issuer of any of
its obligations under the Surety Bond(s).
THE SURETY BOND IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As of December 31, 1995 and 1994, the Surety Bond Issuer had qualified
statutory capital (which consists of policyholders' surplus and contingency
reserve) of approximately $240 million and $170 million, respectively, and had
not incurred any debt obligations. Article 69 of the New York State Insurance
Law requires the Surety Bond Issuer to establish and maintain the contingency
reserve, which is available to cover claims under surety bonds issued by the
Surety Bond Issuer.
The audited financial statements of the Surety Bond Issuer prepared in
accordance with generally accepted accounting principles as of December 31, 1995
and 1994 and for each of the years in the three-year period ended December 31,
1995 and the unaudited financial statements of the Surety Bond Issuer for the
six-month periods ended June 30, 1995 and 1996 are made a part of this
Prospectus Supplement beginning on page F-1. Copies of the Surety Bond Issuer's
financial statements prepared in accordance with statutory accounting standards,
which differ from generally accepted accounting principles, and filed with the
Insurance Department of the State of New York are also available upon request.
The Surety Bond Issuer is located at 885 Third Avenue, New York, New York 10022,
and its telephone number is (212) 755-1155.
THE OFFERED CERTIFICATES
The Offered Certificates will be issued pursuant to the Pooling and
Servicing Agreement. Copies of the Pooling and Servicing Agreement (without
exhibits) may be obtained by Certificateholders upon request in writing to the
Servicer at the address set forth herein under "Reports to Certificateholders".
Citations to the relevant sections of the Pooling and Servicing Agreement appear
below in parentheses. The following summary does not purport to be complete and
is subject to and qualified in its entirety by reference to the Pooling and
Servicing Agreement.
Distributions
In general, it is intended that the Trustee distribute to the Class A
Certificateholders on each Distribution Date beginning December 10, 1996, 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 a full month's interest at the applicable Pass-Through Rates.
Principal to be distributed to the Class A Certificateholders will be allocated
on the basis of the Principal Distribution Sequence (as defined herein). It is
also intended that the Trustee distribute to the Class I Certificateholders, on
each Distribution Date beginning on December 10, 1996 and continuing until the
Distribution Date on which the Notional Principal Amount is reduced to zero, a
full month's interest at the Class I Pass-Through Rate on the Notional Principal
Amount. (Section 9.04.) See "-- Distributions on the Offered Certificates".
Interest to Certificateholders may be provided by a payment made by or on behalf
of the Obligor, by an Advance made by the Servicer to cover interest due on a
defaulted Receivable or by a withdrawal from the Spread Account. If such
interest represents Class A or Class I Monthly Interest it may be provided by a
draw on the Surety Bond if there are not sufficient funds (after payment of the
Monthly Servicing Fee and after giving effect to any withdrawals from the Spread
Account for the benefit of the Class A and Class I Certificateholders) to pay
Class I Monthly Interest, Class A Monthly Interest and Monthly Principal.
S-18
<PAGE>
Draws on the Surety Bond to pay Class A and Class I Monthly Interest and Monthly
Principal will be limited to the Surety Bond 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 $231,119,724.27. 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 $231,119,724.27. The sum of the PAC
Component and the Companion Component will at all times equal the then aggregate
unpaid Certificate Balance.
The Pooling and Servicing Agreement establishes a schedule (the "Planned
Notional Principal Amount Schedule") pursuant to which principal will be
allocated to the PAC Component and the Companion Component, as described below.
As the PAC Component is reduced, the Notional Principal Amount and payments to
the holders of the Class I Certificates will also be reduced.
On each Distribution Date, the Monthly Principal will be allocated first
to the PAC Component up to the amount necessary to reduce the PAC Component to
its Planned Notional Principal Amount for such Distribution Date, as set forth
in the Planned Notional Principal Amount Schedule, second, to the Companion
Component until the 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.
S-19
<PAGE>
Planned Notional Principal Amount Schedule
Planned Notional
Distribution Date in Principal Amount
-------------------- ----------------
Initial........................................ $ 231,119,724.27
December 1996.................................. 223,146,582.38
January 1997................................... 215,262,487.98
February 1997.................................. 207,469,102.72
March 1997..................................... 199,768,114.14
April 1997..................................... 192,161,235.98
May 1997....................................... 184,650,208.61
June 1997...................................... 177,236,799.35
July 1997...................................... 169,922,802.89
August 1997.................................... 162,710,041.68
September 1997................................. 155,600,366.31
October 1997................................... 148,595,655.92
November 1997.................................. 141,697,818.58
December 1997.................................. 134,908,791.74
January 1998................................... 128,230,542.64
February 1998.................................. 121,665,068.68
March 1998..................................... 115,214,397.95
April 1998..................................... 108,880,589.56
May 1998....................................... 102,665,734.12
June 1998...................................... 96,571,954.22
July 1998...................................... 90,601,404.82
August 1998.................................... 84,756,273.74
September 1998................................. 79,038,782.13
October 1998................................... 73,632,399.27
November 1998.................................. 68,311,492.66
December 1998.................................. 63,077,654.29
January 1999................................... 57,932,501.25
February 1999.................................. 52,877,676.09
March 1999..................................... 47,914,847.25
April 1999..................................... 43,045,709.43
May 1999....................................... 38,271,983.86
June 1999...................................... 33,595,418.81
July 1999...................................... 29,017,789.95
August 1999.................................... 24,540,900.71
September 1999................................. 20,166,582.71
October 1999................................... 15,896,696.17
November 1999.................................. 11,733,130.31
December 1999.................................. 7,677,803.76
January 2000................................... 3,737,528.33
February 2000.................................. 0.00
The Class I Certificates will not be entitled to any distributions after the
Notional Principal Amount has been reduced to zero.
S-20
<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, prepayments due to liquidations,
repurchases and losses and prepayments resulting from any sale of the
Receivables upon an Insolvency Event relating to the Class IC Certificateholder.
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 also "--Termination Upon
Insolvency Event of the Class IC Certificateholder" and "Risk Factors" herein.
The following table illustrates the significant effect that prepayments
on the Receivables have upon the yield to maturity of the Class I Certificates.
The 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. The following table also assumes that the
Receivables have been aggregated into five hypothetical pools having the
following characteristics and that the level scheduled monthly payment for each
of the five pools (which is based on its principal balance, weighted average
Contract Rate and 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.
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Cut Off 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 $ 14,442,018.16 12.351% 22 54
2 13,324,751.68 14.127 46 47
3 51,143,593.61 13.605 58 59
4 101,752,460.74 13.524 70 71
5 102,422,523.09 13.572 80 81
</TABLE>
For purposes of the table, it is also assumed that (i) the purchase price
of the Class I Certificates is as set forth below, (ii) the Receivables have the
characteristics set forth under "-- The Class I Certificates -- Calculation of
Notional Principal Amount" above, (iii) the Receivables prepay monthly at the
specified percentages of ABS as set forth in the table below, (iv) 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, (v) the
Closing Date for the Offered Certificates is November 21, 1996, (vi)
distributions on the Offered Certificates are made, in cash, on the ninth day of
each month, commencing on December 9, 1996, (vii) no defaults or delinquencies
in the payment of the Receivables are experienced, and (viii) no Receivable is
repurchased for breach of representation and warranty or otherwise.
Sensitivity of the Class I Certificates to Prepayments
1.0% 1.6% 1.8% 2.5% 3.0%
Price(1) ABS ABS ABS ABS ABS
-------- ------ ----- ----- ----- -----
3.955137% 26.755% 6.480% 6.480% 6.480% - 3.289%
(1) Expressed as a percentage of the original Notional Principal Amount.
Based on the assumptions described above and assuming a purchase price of
3.955137% at approximately 2.868% ABS, the pre-tax yield to maturity of the
Class I Certificates would be approximately 0%.
S-21
<PAGE>
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 model used in this Prospectus Supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the receivables are the same size and amortize at
the same rate and that each receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
Sale and Assignment of Receivables
Certain information with respect to the conveyance of the Receivables (i)
from Union Acceptance Funding Corporation ("UAFC") to the Depositor pursuant to
the Purchase Agreement dated as of November 1,1996, 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 "The Transfer and Servicing Agreements
- --Sale and Assignment of the Receivables" in the Prospectus.
Accounts
In addition to the Certificate Account, the property of the Trust will
include the Spread Account and the Payahead Account.
Spread Account. On the Closing Date, the Depositor will establish the
Spread Account. Thereafter, the amount held in the Spread Account will be
increased up to the Required Spread Amount by the deposit thereto of payments on
the Receivables not utilized to make payments to the Certificateholders (other
than the Class IC Certificateholder), the Surety Bond Issuer or the Servicer 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 and Class I Certificateholders and the Surety Bond
Issuer. On each Distribution Date, any amounts on deposit in the Spread Account
after the payment of any amounts owed to the Surety Bond Issuer in excess of the
Required Spread Amount will be withdrawn from the Spread Account and distributed
to the Class IC Certificateholder.
S-22
<PAGE>
Under the terms of the Pooling and Servicing Agreement, the Trustee will
withdraw funds from the Spread Account and transfer them to the Certificate
Account for any deficiency of Monthly Interest or Monthly Principal as further
described below under "-- Distributions on the Offered Certificates", to the
extent available, prior to making any draw on the Surety Bond.
In the event that the balance of the Spread Account is reduced to zero
and there is a default under the Surety Bond on any Distribution Date, the Trust
will depend solely on current distributions on the Receivables to make
distributions of principal and interest on the Certificates. Any reduction in
the principal balance of the Receivables due to losses on the Receivables will
also result in a reduction of the Notional Principal Amount of the Class I
Certificates. In addition, because the market value of motor vehicles generally
declines with age and because of difficulties that may be encountered in
enforcing motor vehicle contracts as described in the Prospectus under "Certain
Legal Aspects of the Receivables," the Servicer may not recover the entire
amount due on such Receivables in the event of a repossession and resale of a
Financed Vehicle securing a Receivable in default. In such event, the
Certificateholders may suffer a corresponding loss. Any such losses would be
borne pro rata by the Class A Certificateholders and Class I Certificateholders.
Payahead Account. The Servicer will establish an additional account (the
"Payahead Account"), in the name of the Trustee and for the benefit of Obligors
on the Receivables, into which, to the extent required by the Pooling and
Servicing Agreement, early payments by or on behalf of Obligors on Precomputed
Receivables will be deposited until such time as the payment becomes due. Until
such time as payments are transferred from the Payahead Account to the
Certificate Account, they will not constitute collected interest or collected
principal and will not be available for distribution to Certificateholders. The
Payahead Account will initially be maintained with the Trustee. Interest earned
on the balance in the Payahead Account will be remitted to the Servicer monthly.
Collections on a Precomputed Receivable made during a Collection Period shall be
applied first to any overdue scheduled payment on such Receivable, then to the
scheduled payment on such Receivable due in such Collection Period. If any
collections remaining after the scheduled payment is made are insufficient to
prepay the Precomputed Receivable in full, then generally such remaining
collections shall be transferred to and kept in the Payahead Account until such
later Collection Period as the collections may be retransferred to the
Certificate Account and applied either to a later scheduled payment or to prepay
such Receivable in full.
Advances
With respect to each Receivable delinquent more than 30 days at the end
of a Collection Period, the Servicer will make an Advance in an amount equal to
30 days of interest, but only to the extent that the Servicer in its sole
discretion, expects to recoup the Advance from subsequent collections on the
Receivable. The Servicer will deposit the Advance in the Certificate Account on
or before the fifth calendar day of the month following the Collection Period.
The Servicer will recoup its Advance from subsequent payments by or on behalf of
the respective Obligor, from insurance proceeds or, upon the Servicer's
determination that reimbursement from the preceding sources is unlikely, will
recoup its Advance from any collections made on other Receivables. (Section
9.05.)
Distributions on the Class IC Certificate
The Class IC Certificate will be initially issued to the Depositor and
will entitle it to receive monthly all funds held in the Spread Account in
excess of the Required Spread Amount after payment of all amounts owed to the
Surety Bond Issuer. Upon termination of the Trust the Class IC Certificateholder
is entitled to receive any amounts remaining in the Spread Account (only after
all required payments to the Surety Bond Issuer are made) after the payment of
expenses and distributions to Certificateholders. See "-- Accounts" above.
Distributions on the Offered Certificates
The Servicer will deposit in the Certificate Account the amount of
payments on all Receivables received with respect to the preceding Collection
Period. All such payments on the Simple Interest
S-23
<PAGE>
Receivables, the scheduled payments on Precomputed Receivables, plus the net
amount to be transferred from the Payahead 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") and will determine the amount of funds necessary to make distributions
of Monthly Principal and Monthly Interest to the Certificateholders and the
Monthly Servicing Fee to the Servicer. If there is a deficiency with respect to
Class A or Class I Monthly Interest or Monthly Principal on any Distribution
Date after giving effect to payments of the Monthly Servicing Fee on such
Distribution Date, the Servicer will withdraw amounts, to the extent available,
from the Spread Account in the amount of such deficiency and notify the Trustee
of any remaining deficiency, whereupon the Trustee will draw on the Surety Bond
to pay Class A and Class I Monthly Interest and Monthly Principal on any
Distribution Date, up to the Surety Bond Amount. Moreover, if the Available
Funds for a Distribution Date are insufficient to pay current and past due
Surety Bond Fees, and other amounts owed to the Surety Bond Issuer, pursuant to
the Insurance Agreement, plus accrued interest thereon, to the Surety Bond
Issuer, the Servicer will notify the Trustee of such deficiency, and the amount,
if any, then on deposit in the Spread Account (after giving effect to any
withdrawal to satisfy a deficiency described in the two preceding sentences)
will be available to cover such deficiency.
If acceptable to each Rating Agency without a reduction in the rating of
any class of Offered Certificates, the Servicing Fee due to the Servicer in
respect of each Collection Period will be distributed to the Servicer during
such Collection Period from Collections during such Collection Period.
On each such Distribution Date, the Trustee will apply or cause to be
applied the Available Funds (plus, to the extent required for payment of Monthly
Interest or Monthly Principal any amounts withdrawn from the Spread Account or
drawn on the Surety Bond, as applicable) to make the following payments in the
following priority:
(a) the aggregate amount of outstanding Advances on all Receivables
(x) that became Defaulted Receivables during the prior Collection
Period and (y) that the Servicer determines to be unrecoverable, to
the Servicer;
(b) the Servicing Fee, including any overdue Servicing Fee, to the
Servicer, to the extent not previously distributed to the Servicer;
(c) pro rata, (y) Monthly Principal, in accordance with the Principal
Distribution Sequence (described below), and Class A Monthly Interest,
including any overdue Monthly Principal and Class A Monthly Interest,
to the Class A Certificateholders and (z) Class I Monthly Interest,
including any overdue Class I Monthly Interest, to the Class I
Certificateholders;
(d) the Surety Bond Fee to the Surety Bond Issuer;
(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 amount of Liquidation Proceeds on Purchased Receivables
purchased by the Servicer, to the Servicer;
(g) the amount of Liquidation Proceeds on Purchased Receivables
repurchased by the Depositor, to the Depositor;
(h) the aggregate amount of any unreimbursed draws on the Surety Bond
payable to the Surety Bond Issuer, under the Insurance Agreement, for
Class A Monthly Interest, Class I Monthly Interest and Monthly
Principal, plus accrued interest thereon and any other amounts owing
to the Surety Bond Issuer under the Insurance Agreement; and
(i) the balance into the Spread Account.
S-24
<PAGE>
After all distributions pursuant to clauses (a) through (i) above have
been made for each Distribution Date, the amount of funds remaining in the
Spread Account on such date, if any, in excess of the Required Spread Amount,
will be distributed by the Trustee to the Class IC Certificateholder. Any
amounts so distributed to the Class IC Certificateholder will no longer be
property of the Trust and Certificateholders will have no rights with respect
thereto.
If on any Distribution Date there are not sufficient Available Funds
(together with amounts withdrawn from the Spread Account and/or the Surety Bond)
to pay the distribution required by (c) above, the Available Funds distributable
thereunder shall be distributed proportionately on the basis of the ratio of the
required distribution due each of the Class A and Class I Certificateholders,
respectively, to the sum of the distributions required by (c) to the Class A
Certificateholders and the Class I Certificateholders. The amount so distributed
to the Class A Certificateholders hereunder shall be allocated first to Class A
Monthly Interest, and second to Monthly Principal pro rata among the Class A
Certificateholders.
"Monthly Interest" for any Distribution Date will equal the sum of the
Class A Monthly Interest and the Class I Monthly Interest.
"Class A Monthly Interest" for any Distribution Date will equal the sum
of Class A-1 Monthly Interest, Class A-2 Monthly Interest and Class A-3 Monthly
Interest.
"Class A-1 Monthly Interest" for any Distribution Date will equal (i) for
the first Distribution Date, the product of the following: (one-twelfth of the
Class A-1 Pass-Through Rate) multiplied by (the number of days remaining in the
month of the Closing Date (assuming a 30 day month) from the Closing Date
divided by 30) multiplied by (the Class A-1 Certificate Balance at the Closing
Date) and (ii) with respect to each subsequent Distribution Date, the product of
one-twelfth of the Class A-1 Pass-Through Rate and the Class A-1 Certificate
Balance on the preceding Distribution Date (after giving effect to any
distribution of Monthly Principal required to be made on such preceding
Distribution Date).
"Class A-2 Monthly Interest" for any Distribution Date will equal (i) for
the first Distribution Date, the product of the following: (one-twelfth of the
Class A-2 Pass-Through Rate) multiplied by (the number of days remaining in the
month of the Closing Date (assuming a 30 day month) from the Closing Date
divided by 30) multiplied by (the Class A-2 Certificate Balance at the Closing
Date) and (ii) with respect to each subsequent Distribution Date, the product of
one-twelfth of the Class A-2 Pass-Through Rate and the Class A-2 Certificate
Balance on the preceding Distribution Date (after giving effect to any
distribution of Monthly Principal required to be made on such preceding
Distribution Date).
"Class A-3 Monthly Interest" for any Distribution Date will equal (i) for
the first Distribution Date, the product of the following: (one-twelfth of the
Class A-3 Pass-Through Rate) multiplied by (the number of days remaining in the
month of the Closing Date (assuming a 30 day month) from the Closing Date
divided by 30) multiplied by (the Class A-3 Certificate Balance at the Closing
Date) and (ii) with respect to each subsequent Distribution Date, the product of
one-twelfth of the Class A-3 Pass-Through Rate and the Class A-3 Certificate
Balance on the preceding Distribution Date (after giving effect to any
distribution of Monthly Principal required to be made on such preceding
Distribution Date).
"Monthly Principal" for any Distribution Date will equal the amount
necessary to reduce the Certificate Balance to the aggregate unpaid principal
balance of the Receivables on the last day of the preceding Collection Period;
provided, however, that Monthly Principal on the final scheduled Distribution
Date for each class of Class A Certificates will be increased by the amount, if
any, which is necessary to reduce the Certificate Balance of such class to zero
on such date. For the purpose of determining Monthly Principal, the unpaid
principal balance of a Defaulted Receivable or a Purchased Receivable is deemed
to be zero on and after the last day of the Collection Period in which such
Receivable became a Defaulted Receivable or a Purchased Receivable.
"Principal Distribution Sequence" means that 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; and (iii) to the Class A-3
Certificateholders until the Class A-3 Certificate Balance has been reduced to
zero.
S-25
<PAGE>
"Class I Monthly Interest" for any Distribution Date will equal (i) for
the first Distribution Date, the product of the following: (one-twelfth of the
Class I Pass-Through Rate) multiplied by (the number of days remaining in the
month of the Closing Date (assuming a 30 day month) from the Closing Date
divided by 30) multiplied by (the Class I Notional Principal Amount at the
Closing Date) and (ii) with respect to each subsequent Distribution Date, the
product of one-twelfth of the Class I Pass-Through Rate and the Notional
Principal Amount on the preceding Distribution Date (after giving effect to any
application of Monthly Principal on such preceding Distribution Date).
"Surety Bond Fee" for any Distribution Date will equal one-twelfth of the
product of the Surety Bond per annum fee rate set forth in the Insurance
Agreement and the Certificate Balance calculated as of the first day of the
Collection Period to which such Distribution Date relates and payable monthly in
arrears.
"Defaulted Receivable" will mean, for any Collection Period, a Receivable
as to which any of the following has occurred: (i) the Receivable 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.
As an administrative convenience, the Servicer will be permitted to make
the deposit of Collections and aggregate Advances and Purchase Amounts for or
with respect to the Collection Period, net of distributions to be made to the
Servicer or Depositor with respect to the Collection Period. The Servicer,
however, will account to the Trustee and to the Certificateholders as if all
deposits and distributions were made individually. (Section 9.06.)
The following chart sets forth an example of the application of the
foregoing provisions to a monthly distribution:
November 1-30 .........................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
Servicing Fee from such deposits.
November 30 ...........................Record Date. Distributions on the
Distribution Date are made to
Certificateholders of record at the
close of business on this date.
December 5 ............................On the fifth calendar day after the end
of the Collection Period (the
"Determination Date") the Servicer
notifies the Trustee of the amounts to
be distributed on the Distribution Date
and of any deficiencies.
December 10 ...........................On the third business day after the
Determination Date (the "Distribution
Date") the Trustee withdraws funds from
the Spread Account and/or draws on the
Surety Bond, if necessary, to pay
Monthly Principal and Monthly Interest
to Certificateholders as described
herein. The Trustee distributes to
Certificateholders amounts payable in
respect of the Offered Certificates, and
pays the Servicing Fee to the extent not
previously paid, the Surety Bond Fee and
any amounts owing to the Surety Bond
Issuer.
The Surety Bond
On or before the Closing Date, the Depositor and UAC, in its individual
capacity and as Servicer, and the Surety Bond Issuer will enter into an
Insurance and Reimbursement Agreement (the "Insurance Agreement") pursuant to
which the Surety Bond Issuer will issue the Surety Bond. Under the terms of the
Pooling and Servicing Agreement, after withdrawal of any amounts in the Spread
Account with respect to a Distribution Date to pay a deficiency Monthly Interest
or Monthly Principal, the Trustee will
S-26
<PAGE>
be authorized to draw on the Surety Bond for the benefit of the Class A and
Class I Certificateholders and credit the Certificate Account for such draws as
described above under "--Distributions on the Offered Certificates." The maximum
amount that may be drawn under the Surety Bond on any Distribution Date is
limited to the Surety Bond Amount for such Distribution Date. The Surety Bond
Amount, with respect to any Distribution Date, shall equal (x) the sum of (A)
the lesser of (i) the Certificate Balance (after giving effect to any
distribution of Available Funds and any funds withdrawn from the Spread Account
to pay Monthly Principal on such Distribution Date) and (ii) the Net Principal
Surety Bond Amount, plus (B) Class A Monthly Interest, plus (C) Class I Monthly
Interest, plus (D) the Monthly Servicing Fee; less (y) all amounts on deposit in
the Spread Account on such Distribution Date. "Net Principal Surety Bond Amount"
means the Certificate Balance as of the first Distribution Date minus all
amounts previously drawn on the Surety Bond or from the Spread Account with
respect to Monthly Principal.
The Surety Bond Issuer will be entitled to receive the Surety Bond Fee
and certain other amounts on each Distribution Date as described under
"--Distributions on Certificates" and to receive amounts on deposit in the
Spread Account as described above under "--The Spread Account." The Surety Bond
Issuer will not be entitled to reimbursement of any amounts from the
Certificateholders. The Surety Bond Issuer's obligation under the Surety Bond is
irrevocable. The Surety Bond Issuer will have no obligation other than its
obligations under the Surety Bond to the Certificateholders or the Trustee.
In the event that the balance in the Spread Account is reduced to zero
and there has been a default under the Surety Bond, the Trust may depend solely
on current distributions 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."
Unlimited Liability of the Class IC Certificateholder
The Class IC Certificateholder has agreed to assume unlimited personal
liability to any creditor of the Trust (other than the Trustee and the
Certificateholders in certain circumstances). Third party creditors may rely on
such agreement as third-party beneficiaries. (Section 7.08.)
Termination Upon Insolvency Event of the Class IC Certificateholder
If an Insolvency Event (as defined below) occurs with respect to the
Class IC Certificateholder, the Class IC Certificateholder will promptly give
notice to the Trustee of such event. Under the terms of the Pooling and
Servicing Agreement, within 15 days of such notice, the Trustee shall (i)
publish a notice of such Insolvency Event stating that the Trustee intends to
sell, dispose of, or otherwise liquidate the Receivables in a commercially
reasonable manner and (ii) send written notice to the Certificateholders
requesting instructions from such holders. Unless instructed otherwise within a
specified period by holders of more than 51% of the Certificate Balance and
holders of more than 51% of the Notional Principal Amount of the Class I
Certificates or unless otherwise prohibited by applicable law, the Trustee will
sell, dispose of or otherwise liquidate the Receivables in a commercially
reasonable manner and on commercially reasonable terms. The proceeds from the
sale, disposition or liquidation of the Receivables will be distributed pro rata
to Class A and Class I Certificateholders each in respect of their remaining
capital investment, and the Trustee will then distribute amounts owing the
Surety Bond Issuer and the Class IC Certificateholder and proceed to wind up and
terminate the Trust. If such proceeds are not sufficient to pay any accrued and
unpaid Class A Monthly Interest, Monthly Principal, the remaining Pool Balance
and any accrued but unpaid Class I Monthly Interest and the Surety Bond Issuer
in full, the Spread Account may not be available to cover such deficiency, and
the holders of the Offered Certificates
S-27
<PAGE>
could incur a loss. The Surety Bond is not available to pay such shortfall.
Furthermore, any distributions of such proceeds will have the same effect as a
prepayment of the Receivables and would affect the yield on the Class A
Certificates and could significantly affect the yield on the Class I
Certificates. (Section 16.03.)
An "Insolvency Event" means, with respect to the Class IC
Certificateholder, (i) the entry of a decree or order by a court or agency or
supervisory authority having jurisdiction in the premises for the appointment of
a trustee in bankruptcy for the Class IC Certificateholder in any insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings, or for the winding up or liquidation of the Class IC
Certificateholder's affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or (ii) the consent
by the Class IC Certificateholder to the appointment of a trustee in bankruptcy
in any insolvency, readjustment of debt, marshalling of assets and liabilities,
or similar proceedings of or relating to the Class IC Certificateholder or of or
relating to substantially all of its property; or (iii) the Class IC
Certificateholder admits in writing its inability to pay its debts generally as
they become due, files a petition to take advantage of any applicable insolvency
or reorganization statute, makes an assignment for the benefit of its creditors,
or voluntarily suspends payment of its obligations. The Depositor, the initial
Class IC Certificateholder, is a special purpose corporation the activities of
which are circumscribed by its charter with a view to reducing any risk of its
bankruptcy.
In the event of a liquidation of the Trust due to an Insolvency Event
with respect to the Class IC Certificateholder, the Surety Bonds will not be
available to pay a deficiency if the liquidation proceeds are less than the
Certificate Balance of the Receivables at the time of such liquidation.
Rights of the Surety Bond Issuer upon Events of Default, Amendment or Waiver
Upon the occurrence of an Event of Default, the Surety Bond Issuer, or
the Trustee upon the consent of the Surety Bond Issuer, will be entitled to
appoint a successor Servicer. In addition to the events constituting an Event of
Default as described in the Prospectus, the Pooling and Servicing Agreement will
also permit the Surety Bond Issuer to appoint a successor Servicer and to
redirect payments made under the Receivables to the Trustee upon the occurrence
of certain additional events involving a failure of performance by the Servicer
or a material misrepresentation made by the Servicer under the Insurance
Agreement.
The Pooling and Servicing Agreement cannot be amended or any provisions
thereof waived without the consent of the Surety Bond Issuer if such amendment
or waiver would have a materially adverse effect upon the rights of the Surety
Bond Issuer.
ERISA CONSIDERATIONS
Subject to the considerations set forth under "ERISA Considerations" in the
Prospectus, the Class A Certificates and the Class I Certificates may be
eligible for purchase by an employee benefit plan or an individual retirement
account (a "Plan") subject to Title I of ERISA or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan must
determine that the purchase of a Class A Certificate or of a Class I
Certificates is consistent with its fiduciary duties under ERISA and does not
result in a nonexempt prohibited transaction as defined in Section 406 of ERISA
or Section 4975 of the Code. For additional information regarding treatment of
the Class A Certificates and the Class I Certificates under ERISA, see "ERISA
Considerations" in the Prospectus.
S-28
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in the
underwriting agreement for the sale of the Offered Certificates, dated November
___, 1996, 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 opposite its name below:
<TABLE>
<CAPTION>
Notional
Principal Principal Principal Principal
Amount Amount Amount Amount of
of Class A-1 of Class A-2 of Class A-3 Class I
Underwriters Certificates Certificates Certificates Certificates
- ----------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Salomon Brothers Inc.................. $ 57,000,000.00 $30,365,000.00 $ 7,000,347.28 $231,119,724.27
Goldman, Sachs & Co................... 57,000,000.00 30,360,000.00 7,000,000.00 0.00
NationsBanc Capital Markets, Inc...... 57,000,000.00 30,360,000.00 7,000,000.00 0.00
--------------- -------------- -------------- ---------------
Total.............................. $171,000,000.00 $91,085,000.00 $21,000,347.28 $231,119,724.27
=============== ============== ============== ===============
</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 0.100%
of the denominations of the Class A-1 Certificates, 0.200% of the denominations
of the Class A-2 Certificates, 0.225% of the denominations of the Class A-3
Certificates or 0.200% of the gross proceeds of the Class I Certificates. The
Underwriters may allow and such dealers may reallow a concession not in excess
of 0.075% of the denominations of the Class A-1 Certificates, 0.150% of the
denominations of the Class A-2 Certificates, 0.150% of the denominations of the
Class A-3 Certificates or 0.150% of the gross proceeds of the Class I
Certificates to certain other dealers.
The Depositor and UAC have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
The Depositor has been advised by the Underwriters that the Underwriters
presently intend to make a market in the Offered Certificates, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however, to
make a market in the Offered Certificates and any such market-making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Offered Certificates.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor by Barnes & Thornburg, Indianapolis, Indiana, and for the
Underwriters by Cadwalader, Wickersham & Taft. Certain federal income tax
consequences with respect to the Offered Certificates will be passed upon for
the Depositor by Cadwalader, Wickersham & Taft.
EXPERTS
The financial statements of the Surety Bond Issuer, Capital Markets
Assurance Corporation, as of December 31, 1995 and 1994 and for each of the
years in the three-year period ended December 31, 1995 are included herein
beginning on page F-1 and have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as set forth in their audit report
thereon and are included in reliance upon the authority of such firm as experts
in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements noted
above refers to Capital Markets Assurance Corporation's adoption at December 31,
1993 of Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
S-29
<PAGE>
INDEX OF PRINCIPAL TERMS
TERM PAGE
ABS .................................................. S-22
Available Funds ...................................... S-24
Certificates ....................................... S-3
Certificate Balance.................................... S-4
Class A Certificates .............................. S-3
Class A Monthly Interest ............................. S-25
Class A Certificateholders ......................... S-1, S-3
Class A-1 Certificate Balance.......................... S-3
Class A-1 Certificateholders........................... S-4
Class A-1 Final Scheduled Distribution Date............ S-1
Class A-1 Monthly Interest ........................... S-25
Class A-1 Pass-Through Rate............................ S-4
Class A-2 Certificate Balance.......................... S-4
Class A-2 Certificateholders........................... S-4
Class A-2 Final Scheduled Distribution Date............ S-1
Class A-2 Monthly Interest ........................... S-25
Class A-2 Pass-Through Rate............................ S-4
Class A-3 Certificate Balance.......................... S-4
Class A-3 Certificateholders........................... S-4
Class A-3 Final Scheduled Distribution Date............ S-1
Class A-3 Monthly Interest ........................... S-25
Class A-3 Pass-Through Rate............................ S-4
Class I Certificateholders ........................ S-5
Class I Certificates ............................... S-5
Class I Monthly Interest ............................. S-26
Class I Pass-Through Rate .......................... S-5
Class IC Certificate ............................... S-1
Class IC Certificateholder ......................... S-8
Closing Date ....................................... S-3
Code ................................................ S-28
Companion Component.................................... S-5, S-19
Cutoff Date ........................................ S-1
Defaulted Receivable .................................. S-26
Depositor .......................................... S-1, S-3
Determination Date..................................... S-26
Distribution Date ................................... S-1, S-4, S-26
Duff & Phelps.......................................... S-17
ERISA .............................................. S-9
Holdings............................................... S-17
Insolvency Event ..................................... S-28
Insurance Agreement ................................... S-26
Moody's................................................ S-17
Monthly Interest ..................................... S-25
Monthly Principal .................................... S-4, S-25
Monthly Servicing Fee.................................. S-6
Net Principal Surety Bond Amount....................... S-8, S-27
Notional Principal Amount.............................. S-6
Offered Certificates ................................ S-1
Optional Sale ..................................... S-9
Original Notional Principal Amount..................... S-5
S-30
<PAGE>
PAC Component.......................................... S-5, S-19
Payahead Account ...................................... S-23
Plan ................................................. S-28
Planned Notional Principal Amount Schedule ........... S-6, S-19
Pool Balance ...................................... S-4
Pooling and Servicing Agreement ................... S-3
Principal Distribution Sequence........................ S-25
Receivables ........................................ S-1
Record Date ........................................ S-3
Required Spread Amount ............................. S-8
Servicer ........................................... S-3
Spread Account......................................... S-7
Standard & Poor's...................................... S-17
Surety Bond............................................ S-1, S-8
Surety Bond Amount..................................... S-8
Surety Bond Fee ....................................... S-25
Surety Bond Issuer .................................... S-9, S-17, S-26
Trust .............................................. S-1
Trustee ............................................ S-3
UAC ................................................ S-3
UAFC ................................................ S-22
Underwriters ......................................... S-29
S-31
<PAGE>
----------
THIS PAGE INTENTIONALLY
LEFT BLANK
----------
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Report
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," at December 31, 1993.
/S/ KPMG Peat Marwick LLP
New York, New York
January 25, 1996
F-2
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in Thousands)
ASSETS
December 31 December 31
1995 1994
- --------------------------------------------------------------------------------
Investments:
Bonds at fair value (amortized cost $210,651
at December 31, 1995 and $178,882
at December 31, 1994) $215,706 172,016
Short-term investments (at amortized cost
which approximates fair value) 68,646 2,083
Mutual funds at fair value (cost $16,434
at December 31, 1994) - 14,969
- --------------------------------------------------------------------------------
Total investments 284,352 189,068
- --------------------------------------------------------------------------------
Cash 344 85
Accrued investment income 3,136 2,746
Deferred acquisition costs 35,162 24,860
Premiums receivable 3,540 3,379
Prepaid reinsurance 13,171 5,551
Other assets 3,428 3,754
- --------------------------------------------------------------------------------
Total assets $343,133 229,443
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $45,767 25,905
Reserve for losses and loss adjustment expenses 6,548 5,191
Ceded reinsurance 2,469 1,497
Accounts payable and other accrued expenses 10,844 10,372
Current income taxes 136 -
Deferred income taxes 11,303 3,599
- --------------------------------------------------------------------------------
Total liabilities 77,067 46,564
- --------------------------------------------------------------------------------
Stockholder's Equity:
Common stock 15,000 15,000
Additional paid-in capital 205,808 146,808
Unrealized appreciation (depreciation) on investments,
net of tax 3,286 (5,499)
Retained earnings 41,972 26,570
- --------------------------------------------------------------------------------
Total stockholder's equity 266,066 182,879
- --------------------------------------------------------------------------------
Total liabilities and stockholder's equity $343,133 229,443
================================================================================
See accompanying notes to financial statements.
F-3
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Revenues:
Direct premiums written $56,541 43,598 24,491
Assumed premiums written 935 1,064 403
Ceded premiums written (15,992) (11,069) (3,586)
- --------------------------------------------------------------------------------
Net premiums written 41,484 33,593 21,308
Increase in unearned premiums (12,242) (10,490) (3,825)
- --------------------------------------------------------------------------------
Net premiums earned 29,242 23,103 17,483
Net investment income 11,953 10,072 10,010
Net realized capital gains 1,301 92 1,544
Other income 2,273 120 354
- --------------------------------------------------------------------------------
Total revenues 44,769 33,387 29,391
- --------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 3,141 1,429 902
Underwriting and operating expenses 13,808 11,833 11,470
Policy acquisition costs 7,203 4,529 2,663
- --------------------------------------------------------------------------------
Total expenses 24,152 17,791 15,035
- --------------------------------------------------------------------------------
Income before income taxes 20,617 15,596 14,356
- --------------------------------------------------------------------------------
Income Taxes:
Current income tax 2,113 865 1,002
Deferred income tax 3,102 2,843 2,724
- --------------------------------------------------------------------------------
Total income taxes 5,215 3,708 3,726
- --------------------------------------------------------------------------------
NET INCOME $15,402 11,888 10,630
================================================================================
See accompanying notes to financial statements.
F-4
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Common stock:
Balance at beginning of period $15,000 15,000 15,000
- --------------------------------------------------------------------------------
Balance at end of period 15,000 15,000 15,000
- --------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 146,808 146,808 146,808
Paid-in capital 59,000 - -
- --------------------------------------------------------------------------------
Balance at end of period 205,808 146,808 146,808
- --------------------------------------------------------------------------------
Unrealized (depreciation) appreciation
on investments, net of tax:
Balance at beginning of period (5,499) 3,600 -
Unrealized appreciation
(depreciation) on investments 8,785 (9,099) 3,600
- --------------------------------------------------------------------------------
Balance at end of period 3,286 (5,499) 3,600
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 26,570 14,682 4,052
Net income 15,402 11,888 10,630
- --------------------------------------------------------------------------------
Balance at end of period 41,972 26,570 14,682
- --------------------------------------------------------------------------------
Total stockholder's equity $266,066 182,879 180,090
================================================================================
See accompanying notes to financial statements.
F-5
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollar in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 15,402 11,888 10,630
---------
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Reserve for losses
and loss adjustment expenses 1,357 1,429 902
Unearned premiums 19,862 15,843 4,024
Deferred acquisition costs (10,302) (9,611) (9,815)
Premiums receivable (161) (2,103) (432)
Accrued investment income (390) (848) (110)
Income taxes payable 3,621 2,611 2,872
Net realized capital gains (1,301) (92) (1,544)
Accounts payable and other accrued
expenses 472 3,726 1,079
Prepaid reinsurance (7,620) (5,352) (199)
Other, net 992 689 1,201
-------- ------- --------
Total adjustments 6,530 6,292 (2,022)
-------- ------- --------
Net cash provided by
operating activities 21,932 18,180 8,608
-------- ------- --------
Cash flows from investing activities:
Purchases of investments (158,830) (77,980) (139,061)
Proceeds from sales of investments 49,354 39,967 24,395
Proceeds from maturities
of investments 28,803 19,665 106,042
-------- ------- --------
Net cash used in
investing activities (80,673) (18,348) (8,624)
-------- ------- --------
Cash flows from financing activities:
Capital contribution 59,000 -- --
-------- ------- --------
Net cash provided by
financing activities 59,000 -- --
-------- ------- --------
Net increase (decrease) in cash 259 (168) (16)
Cash balance at beginning of period 85 253 269
-------- ------- --------
Cash balance at end of period $ 344 85 253
======== ======= ========
Supplemental disclosure of cash flow
information:
Income taxes paid $ 1,450 1,063 833
======== ======= ========
See accompanying notes to financial statements.
F-6
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
1) Background
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a New
York-domiciled monoline stock insurance company which engages only in the
business of financial guaranty and surety insurance. CapMAC is a
wholly-owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is
licensed in 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also
provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other major
insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by S&P Ratings Group ("S&P"), "AAA" by Duff &
Phelps Credit Rating Co. ("Duff & Phelps"), and "AAA" by Nippon Investors
Service, Inc., a Japanese rating agency. Such ratings reflect only the
views of the respective rating agencies, are not recommendations to buy,
sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the accompanying
financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles ("GAAP"). Such accounting
principles differ from statutory reporting practices used by insurance
companies in reporting to state regulatory authorities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management believes
the most significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and disclosures of
financial guarantees outstanding. Actual results could differ from
those estimates.
b) Investments
At December 31, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No.
115, the Company can classify its debt and marketable equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability
and intent to hold the securities until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. As of December 31, 1995 and 1994, all of the
Company's securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair value
is based upon quoted market prices. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate
F-7
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
component of stockholder's equity until realized. Transfers of
securities between categories are recorded at fair value at the date
of transfer.
A decline in the fair value of any available-for-sale security below
cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Short-term investments are those investments having a maturity of less
than one year at purchase date. Short-term investments are carried at
amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses are included in earnings and are
derived using the FIFO (first-in, first-out) method for determining
the cost of securities sold.
c) Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in income
when due, net of amounts payable to reinsurers. Premiums which are
payable quarterly, semi-annually or annually are reflected in income,
net of amounts payable to reinsurers, on an equal monthly basis over
the corresponding policy term. Premiums that are collected as a single
premium at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by allocating
premium to each bond maturity based on the principal amount and
earning it straight-line over the term of each bond maturity. For the
year ended December 31, 1995, 91% of net premiums earned were
attributable to premiums payable in installments and 9% were
attributable to premiums collected on an upfront basis.
d) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are primarily
related to the production of new business, are deferred. These costs
include direct and indirect expenses related to underwriting,
marketing and policy issuance, rating agency fees and premium taxes.
The deferred acquisition costs are amortized over the period in
proportion to the related premium earnings. The actual amount of
premium earnings may differ from projections due to various factors
such as renewal or early termination of insurance contracts or
different run-off patterns of exposure resulting in a corresponding
change in the amortization pattern of the deferred acquisition costs.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a
Supplemental Loss Reserve ("SLR") and a case basis loss reserve. The
SLR is established based on expected levels of defaults resulting from
credit failures on currently insured issues. This SLR is based on
estimates of the portion of earned premiums required to cover those
claims.
A case basis loss reserve is established for insured obligations when,
in the judgement of management, a default in the timely payment of
debt service is imminent. For defaults considered temporary, a case
F-8
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
basis loss reserve is established in an amount equal to the present
value of the anticipated defaulted debt service payments over the
expected period of default. If the default is judged not to be
temporary, the present value of all remaining defaulted debt service
payments is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss reserves
when such amounts are reasonably estimable.
Management believes that the current level of reserves is adequate to
cover the estimated liability for claims and the related adjustment
expenses with respect to financial guaranties issued by CapMAC. The
establishment of the appropriate level of loss reserves is an
inherently uncertain process involving numerous estimates and
subjective judgments by management, and therefore there can be no
assurance that losses in CapMAC's insured portfolio will not exceed
the loss reserves.
f) Depreciation
Leasehold improvements, furniture and fixtures are being depreciated
over the lease term or useful life, whichever is shorter, using the
straight-line method.
g) Income Taxes
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
h) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
F-9
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) Insured Portfolio
At December 31, 1995 and 1994, the principal amount of financial
obligations insured by CapMAC was $16.9 billion and $11.6 billion,
respectively, and net of reinsurance (net principal outstanding), was $12.6
billion and $9.4 billion, respectively, with a weighted average life of 6.0
years and 5.0 years, respectively. CapMAC's insured portfolio was broadly
diversified by geographic distribution and type of insured obligations,
with no single insured obligation in excess of statutory single risk
limits, after giving effect to any reinsurance and collateral, which are a
function of CapMAC's statutory qualified capital (the sum of statutory
capital and surplus and mandatory contingency reserve). At December 31,
1995 and 1994, the statutory qualified capital was approximately $240
million and $170 million, respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
-----------------------------------------------------------
December 31, 1995 December 31, 1994
---------------------------- ---------------------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $6,959 55.1 $4,740 50.4
Trade and other corporate
obligations 4,912 38.9 4,039 43.0
Municipal/government
obligations 757 6.0 618 6.6
- ------------------------------------------------------------------------------------------------------
Total $12,628 100.0 $9,397 100.0
======================================================================================================
</TABLE>
At December 31, 1995, approximately 85% of CapMAC's insured portfolio was
comprised of structured asset-backed transactions. Under these structures,
a pool of assets covering at least 100% of the principal amount guaranteed
under its insurance contract is sold or pledged to a special purpose
bankruptcy remote entity. CapMAC's primary risk from such insurance
contracts is the impairment of cash flows due to delinquency or loss on the
underlying assets. CapMAC, therefore, evaluates all the factors affecting
past and future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction is
reviewed to ensure that an appropriate legal structure is used to protect
against the bankruptcy risk of the originator of the assets. Along with the
legal structure, an additional level of first loss protection is also
created to protect against losses due to credit or dilution. This first
level of loss protection is usually available from reserve funds, excess
cash flows, overcollateralization, or recourse to a third party. The level
of first loss protection depends upon the historical losses and dilution of
the underlying assets, but is typically several times the normal historical
loss experience for the underlying type of assets.
During 1995, the Company sold without recourse its interest in potential
cash flows from transactions included in its insured portfolio and
recognized $2,200,000 of income which has been included in other income in
the accompanying financial statements.
The following entities each accounted for, through referrals and otherwise,
10% or more of total revenues for each of the periods presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
- -------------------------------------- ------------------------------------- ---------------------------------------------
% of % of % of
Name Revenues Name Revenues Name Revenues
- -------------------------------------- ------------------------------------- ---------------------------------------------
<S> <C> <C> <C>
Citicorp 15.2 Citicorp 16.3 Citicorp 13.7
Merrill Lynch & Co. 14.1
</TABLE>
F-10
<PAGE>
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
4) Investments
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995
and 1994 were as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1995
- -------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
- -------------------------------------------------------------------------------------------------
Total $279,297 5,222 167 284,352
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- -------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,295 - 153 4,142
Mortgage-backed securities of U.S.
government instrumentalities and
agencies 40,973 - 2,986 37,987
Obligations of states, municipalities
and political subdivisions 128,856 364 3,994 125,226
Corporate and asset-backed
securities 6,841 15 112 6,744
Mutual funds 16,434 - 1,465 14,969
- -----------------------------------------------------------------------------------------------
Total $197,399 379 8,710 189,068
===============================================================================================
</TABLE>
The Company's investment in mutual funds in 1994 represents an investment
in an open-end management investment company which invests primarily in
investment-grade fixed-income securities denominated in foreign and United
States currencies.
F-11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 by contractual maturity are shown below ($
in thousands):
December 31, 1995
- --------------------------------------------------------------------------------
Amortized Estimated
Securities Available-for-Sale Cost Fair Value
- --------------------------------------------------------------------------------
Less than one year to maturity $ 5,569 5,572
One to five years to maturity 37,630 38,553
Five to ten years to maturity 99,567 102,264
Greater than ten years to maturity 35,903 37,101
- --------------------------------------------------------------------------------
Sub-total 178,669 183,490
Mortgage-backed securities 100,628 100,862
- --------------------------------------------------------------------------------
Total $ 279,297 284,352
================================================================================
Actual maturities may differ from contractual maturities because borrowers
may call or prepay obligations with or without call or prepayment
penalties.
Proceeds from sales of investment securities were approximately $49
million, $40 million and $24 million in 1995, 1994 and 1993, respectively.
Gross realized capital gains of $1,320,000, $714,000 and $1,621,000, and
gross realized capital losses of $19,000, $622,000 and $77,000 were
realized on those sales for the years ended December 31, 1995, 1994 and
1993, respectively.
Investments include bonds having a fair value of approximately $3,985,000
and $3,873,000 (amortized cost of $3,970,000 and $4,011,000) which are on
deposit at December 31, 1995 and 1994, respectively, with state regulators
as required by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
Year Ended Year Ended Year Ended
$ in thousands December 31, December 31, December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Bonds $ 11,105 9,193 7,803
Short-term investments 1,245 484 572
Mutual funds (162) 579 1,801
Investment expenses (235) (184) (166)
- --------------------------------------------------------------------------------
Total $ 11,953 10,072 10,010
================================================================================
F-12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on
available-for-sale securities is included in a separate component of
stockholder's equity as shown below:
Year Ended Year Ended
$ in thousands December 31, December 31,
1995 1994
- --------------------------------------------------------------------------------
Balance at beginning of period $(5,499) 3,600
Change in unrealized appreciation (depreciation) 13,386 (13,786)
Income tax effect (4,601) 4,687
- --------------------------------------------------------------------------------
Net change 8,785 (9,099)
- --------------------------------------------------------------------------------
Balance at end of period $3,286 (5,499)
- --------------------------------------------------------------------------------
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 10% of stockholder's equity as of
December 31, 1995.
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
$ in thousands 1995 1994 1993
- --------------------------------------------------------------------------------
Balance at beginning of period $24,860 15,249 5,434
Additions 17,505 14,140 12,478
Amortization (policy
acquisition costs) (7,203) (4,529) (2,663)
- --------------------------------------------------------------------------------
Balance at end of period $35,162 24,860 15,249
================================================================================
6) Employee Benefits
On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. ("CFS"), which was then a newly formed
wholly-owned subsidiary of Holdings. Under the Service Agreement, CFS has
agreed to provide various services, including underwriting, reinsurance,
data processing and other services to CapMAC in connection with the
operation of CapMAC's insurance business. CapMAC pays CFS an arm's length
fee for providing such services, but not in excess of CFS's cost for such
services. CFS incurred, on behalf of CapMAC, total compensation expenses,
excluding bonuses, of $13,484,000, $11,081,000 and $9,789,000 in 1995, 1994
and 1993, respectively.
CFS maintains an incentive compensation plan for its employees. The plan is
an annual discretionary bonus award based upon Holdings' and an
individual's performance. CFS also has a health and welfare plan and a
401(k) plan to cover substantially all of its employees. CapMAC reimburses
CFS for all out-of-pocket expenses incurred by CFS in providing services to
CapMAC, including awards given under the incentive compensation plan and
benefits provided under the health and welfare plan. For the years ended
December 31, 1995, 1994 and 1993, the Company had provided approximately
$7,804,000, $5,253,000 and $3,528,000, respectively, for the annual
discretionary bonus plan.
F-13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers agreed
to defer receipt of such cash amount in exchange for receiving the same
number of new shares of restricted stock of Holdings as the number of RSU's
such officers previously held. The cash amount will be held by Holdings and
invested in accordance with certain guidelines. Such amount, including the
investment earnings thereon, will be paid to each officer upon the
occurrence of certain events but no later than December, 2000.
7) Employee Stock Ownership Plan
On June 25, 1992, Holdings adopted an Employee Stock Ownership Plan
("ESOP") to provide its employees the opportunity to obtain beneficial
interests in the stock of Holdings through a trust (the "ESOP Trust"). The
ESOP Trust purchased 750,000 shares at $13.33 per share of Holdings' stock.
The ESOP Trust financed its purchase of common stock with a loan from
Holdings in the amount of $10 million. The ESOP loan is evidenced by a
promissory note delivered to Holdings. An amount representing unearned
employee compensation, equivalent in value to the unpaid balance of the
ESOP loan, is recorded as a deduction from stockholder's equity
(unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to Holdings. The ESOP expense is calculated
using the shares allocated method. Shares are released for allocation to
the participants and held in trust for the employees based upon the ratio
of the current year's principal and interest payment to the sum of
principal and interest payments estimated over the life of the loan. As of
December 31, 1995 approximately 262,800 shares were allocated to the
participants. Compensation expense related to the ESOP was approximately
$2,087,000, $2,086,000 and $1,652,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995 CapMAC incurred its first claim on a financial guaranty policy.
Based on its current estimate, the Company expects the aggregate amount of
claims and related expenses not to exceed $2.7 million, although no
assurance can be given that such claims and related expenses will not
exceed that amount. Such loss amount was covered through a recovery under a
quota share reinsurance agreement of $0.2 million and a reduction in the
SLR of $2.5 million. The portion of such claims and expenses not covered
under the quota share agreement is being funded through payments to CapMAC
from the Lureco Trust Account (see note 12).
F-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
Case Basis Loss Reserve:
Net balance at January 1, 1995 $ -
- --------------------------------------------------------------------------------
Incurred related to:
Current year 2,473
Prior years -
- --------------------------------------------------------------------------------
Total incurred 2,473
- --------------------------------------------------------------------------------
Paid incurred to:
Current year 1,853
Prior years -
- --------------------------------------------------------------------------------
Total paid 1,853
- --------------------------------------------------------------------------------
Balance at December 31, 1995 620
- --------------------------------------------------------------------------------
Reinsurance recoverable 69
- --------------------------------------------------------------------------------
Supplemental loss reserve 5,859
- --------------------------------------------------------------------------------
Total $ 6,548
================================================================================
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is included
in Holdings' consolidated U.S. Federal income tax return. The Company's
annual Federal income tax liability is determined by computing its pro rata
share of the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- -----------------
$ in thousands Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense
computed at the statutory rate $ 7,216 35.0 $ 5,303 34.0 $ 4,881 34.0
Increase (decrease) in tax resulting from:
Tax-exempt interest (2,335) (11.3) (1,646) (10.6) (1,140) (7.9)
Other, net 334 1.6 51 0.4 (15) (0.1)
- -----------------------------------------------------------------------------------------------------
Total income tax
expense $ 5,215 25.3 $ 3,708 23.8 $ 3,726 26.0
=====================================================================================================
</TABLE>
F-15
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant portions
of the deferred Federal income tax liability are as follows:
$in thousands December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Unrealized capital
losses on investments $ - (2,833)
Deferred compensation (1,901) (1,233)
Losses and loss adjustment expenses (1,002) (936)
Unearned premiums (852) (762)
Other, net (98) (228)
- --------------------------------------------------------------------------------
Total gross deferred tax assets (3,853) (5,992)
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 12,307 8,453
Unrealized capital gains on investments 1,769 -
Deferred capital gains on investments 654 726
Other, net 426 412
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 15,156 9,591
- --------------------------------------------------------------------------------
Net deferred tax liability $11,303 3,599
- --------------------------------------------------------------------------------
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
that the deferred tax assets will be fully realized in the future
10) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of New
York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that may be
paid without obtaining approval for such dividends from the Superintendent
of Insurance to the lower of (i) net investment income as defined or (ii)
10% of statutory surplus as of December 31 of the preceding year. No
dividends were paid by CapMAC to Holdings during the years ended December
31, 1995, 1994 and 1993. No dividends could be paid during these periods
because CapMAC had negative earned surplus. Statutory surplus at December
31, 1995 and 1994 was approximately $195,018,000 and $139,739,000,
respectively. Statutory surplus differs from stockholder's equity
determined under GAAP principally due to the mandatory contingency reserve
required for statutory accounting purposes and differences in accounting
for investments, deferred acquisition costs, SLR and deferred taxes
provided under GAAP. Statutory net income was $9,000,000, $4,543,000 and
$4,528,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. Statutory net income differs from net income determined under
GAAP principally due to deferred acquisition costs, SLR and deferred income
taxes.
F-16
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
11) Commitments and Contingencies
On January 1, 1988, the Company assumed from Citibank, N.A. the obligations
of a sublease agreement for space occupied in New York. On November 21,
1993, the sublease was terminated and a new lease was negotiated which
expires on November 20, 2008. CapMAC has a lease agreement for its London
office beginning October 1, 1992 and expiring October 1, 2002. As of
December 31, 1995, future minimum payments under the lease agreements are
as follows:
$ in thousands Payment
- --------------------------------------------------------------------------------
1996 $ 2,255
1997 2,948
1998 3,027
1999 3,476
2000 and thereafter 36,172
- --------------------------------------------------------------------------------
Total $ 47,878
================================================================================
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
CapMAC has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") provided by a consortium of banks, headed by
Bank of Montreal, as agent, which is rated "A-1+" and "P-1" by S&P and
Moody's, respectively. Under the Liquidity Facility, CapMAC will be able,
subject to satisfying certain conditions, to borrow funds from time to time
in order to enable it to fund any claim payments or payments made in
settlement or mitigation of claim payments under its insurance contracts.
For the years ended December 31, 1995, 1994 and 1993, no draws had been
made under the Liquidity Facility.
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily
designed to minimize losses from large risks and protect the capital and
surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------
1995 1994 1993
------------------------ ---------------------- ----------------------
$ in thousands Written Earned Written Earned Written Earned
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 56,541 36,853 43,598 28,561 24,491 20,510
Assumed 935 761 1,064 258 403 364
Ceded (15,992) (8,372) (11,069) (5,716) (3,586) (3,391)
- --------------------------------------------------------------------------------------------------
Net Premiums $ 41,484 29,242 33,593 23,103 21,308 17,483
==================================================================================================
</TABLE>
F-17
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Although the reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders, it is the industry practice of
insurers for financial statement purposes to treat reinsured risks as
though they were risks for which the ceding insurer was only contingently
liable. A contingent liability exists with respect to the aforementioned
reinsurance arrangements which may become a liability of CapMAC in the
event the reinsurers are unable to meet obligations assumed by them under
the reinsurance contracts. At December 31, 1995 and 1994, CapMAC had ceded
loss reserves of $69,000 and $0, respectively and had ceded unearned
premiums of $13,171,000 and $5,551,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco Treaty")
with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The agreement
reinsured and indemnified the Company for any loss incurred by CapMAC
during the agreement period up to the limits of the agreement. The Lureco
Treaty provides that the annual reinsurance premium payable by CapMAC to
Lureco, after deduction of the reinsurer's fee payable to Lureco, be
deposited in a trust account (the "Lureco Trust Account") to be applied by
CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the Lureco
Trust Account which have not been applied against claims are contractually
due to CapMAC at the termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been reflected
as assets by CapMAC during the term of the agreement. Premiums in excess of
the deposit amounts have been recorded as ceded premiums in the statements
of income. In the 1994 policy year, the agreement provided $5 million of
loss coverage in excess of the premium deposit amounts of $2 million
retained in the Lureco Trust Account. No losses were applied against the
Lureco Trust Account or ceded to the Lureco Treaty in 1994. The agreement
was renewed for the 1995 policy year and provides $5 million of loss
coverage in excess of the premium deposit amount of $4.5 million retained
in the Lureco Trust Account. Additional coverage is provided for losses
incurred in excess of 200% of the net premiums earned up to $4 million for
any one agreement year. In September 1995, a claim of approximately $2.5
million on an insurance policy was applied against the Lureco Trust
Account.
In addition to its capital (including statutory contingency reserves) and
other reinsurance available to pay claims under its insurance contracts, on
June 25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement (the
"Stop-loss Agreement") with Winterthur Swiss Insurance Company
("Winterthur") which is rated "AAA" by S&P and "Aaa" by Moody's. At the
same time, CapMAC and Winterthur also entered into a Quota Share
Reinsurance Agreement (the "Winterthur Quota Share Agreement") pursuant to
which Winterthur had the right to reinsure on a quota share basis 10% of
each policy written by CapMAC.
The Winterthur Stop-loss Agreement had an original term of seven years and
was renewable for successive one-year periods. In April 1995, Winterthur
notified CapMAC that it was canceling the Winterthur Stop-loss Agreement
and the Winterthur Quota Share Agreement effective June 30, 1996.
CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss
Reinsurance Agreement with Mitsui Marine (the "Mitsui Stop-loss
Agreement"). Under the Mitsui Stop-loss Agreement, Mitsui Marine would be
F-18
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
required to pay any losses in excess of $100 million in the aggregate
incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on the
insurance policies in effect on December 1, 1995 and written during the
one-year period thereafter, up to an aggregate limit payable under the
Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss Agreement
has a term of seven years and is subject to early termination by CapMAC in
certain circumstances.
The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC will reassume the liability, principally unearned
premium, for all policies reinsured by Winterthur. As a result, CapMAC will
reassume approximately $1.4 billion of principal insured by Winterthur as
of December 31, 1995. In connection with the commutation, Winterthur will
return the unearned premiums as of December 31, 1995, net of ceding
commission and federal excise tax. Such amount is expected to total
approximately $2.0 million.
13) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995 and 1994. SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Investments $284,352 284,352 189,068 189,068
Off-Balance-Sheet Instruments:
Financial Guarantees Outstanding $ - 147,840 - 93,494
Ceding Commission $ - 44,352 - 28,048
- -----------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments summarized above:
Investments
The fair values of fixed maturities and mutual funds are based upon quoted
market prices. The fair value of short-term investments approximates
amortized cost.
F-19
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2) the
fair value of installment revenue which is derived by calculating the
present value of the estimated future cash inflow to CapMAC of policies in
force having installment premiums, net of amounts payable to reinsurers, at
a discount rate of 7% at December 31, 1995 and 1994. The amount calculated
is equivalent to the consideration that would be paid under market
conditions prevailing at the reporting dates to transfer CapMAC's financial
guarantee business to a third party under reinsurance and other agreements.
Ceding commission represents the expected amount that would be paid to
CapMAC to compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management makes
assumptions regarding prepayments for amortizing asset-backed securities
which are consistent with relevant historical experience. For revolving
programs, assumptions are made regarding program utilization based on
discussions with program users. The amount of installment premium actually
realized by the Company could be reduced in the future due to factors such
as early termination of insurance contracts, accelerated prepayments of
underlying obligations or lower than anticipated utilization of insured
structured programs, such as commercial paper conduits. Although increases
in future installment revenue due to renewals of existing insurance
contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there can
be no assurance that future circumstances might not cause a net reduction
in installment revenue, resulting in lower revenues.
14) Capitalization
The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized,
issued and outstanding shares at December 31, 1995 and 1994 were 15,000,000
at $1.00 per share.
In 1995, $59.0 million of the proceeds received by Holdings from the sale
of shares in connection with an Initial Public Offering and private
placements were contributed to CapMAC.
F-20
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
F-21
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
- -------------------------------------------------------------------------------------------------------
Investments:
Bonds at fair value (amortized cost $282,241 at June 30,
<C> <C> <C>
1996 and $210,651 at December 31, 1995) $ 280,706 215,706
Short-term investments (at amortized cost which
approximates fair value) 15,664 68,646
- -------------------------------------------------------------------------------------------------------
Total investments 296,370 284,352
- -------------------------------------------------------------------------------------------------------
Cash 459 344
Accrued investment income 3,715 3,136
Deferred acquisition costs 39,904 35,162
Premiums receivable 3,232 3,540
Prepaid reinsurance 16,175 13,171
Other assets 3,537 3,428
- -------------------------------------------------------------------------------------------------------
Total assets $ 363,392 343,133
=======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 56,743 45,767
Reserve for losses and loss adjustment expenses 8,369 6,548
Ceded reinsurance 2,395 2,469
Accounts payable and other accrued expenses 9,582 10,844
Current income taxes 278 136
Deferred income taxes 12,145 11,303
- -------------------------------------------------------------------------------------------------------
Total liabilities 89,512 77,067
- -------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized (depreciation) appreciation on investments,
net of tax (998) 3,286
Retained earnings 51,403 41,972
- -------------------------------------------------------------------------------------------------------
Total stockholder's equity 273,880 266,066
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 363,392 343,133
=======================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- ----------------------
1996 1995 1996 1995
----------- ----------- ------- -------
Revenues:
<S> <C> <C> <C> <C>
Direct premiums written $ 18,622 16,000 32,777 32,838
Assumed premiums written 150 669 1,024 823
Ceded premiums written (5,103) (2,553) (7,013) (5,646)
- -------------------------------------------------------------------------------------------------------------------
Net premiums written 13,669 14,116 26,788 28,015
Increase in unearned premiums (3,681) (6,813) (7,972) (13,611)
- -------------------------------------------------------------------------------------------------------------------
Net premiums earned 9,988 7,303 18,816 14,404
Net investment income 4,112 2,956 7,989 5,593
Net realized capital gains 19 20 168 85
Other income 25 12 79 24
- -------------------------------------------------------------------------------------------------------------------
Total revenues 14,144 10,291 27,052 20,106
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,109 762 2,184 1,458
Underwriting and operating expenses 3,385 3,638 7,362 7,376
Policy acquisition costs 2,059 1,734 4,123 3,459
- -------------------------------------------------------------------------------------------------------------------
Total expenses 6,553 6,134 13,669 12,293
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,591 4,157 13,383 7,813
- -------------------------------------------------------------------------------------------------------------------
Income Taxes:
Current federal income tax 1,316 344 1,981 664
Deferred federal income tax 1,148 457 1,971 976
- -------------------------------------------------------------------------------------------------------------------
Total income taxes 2,464 801 3,952 1,640
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,127 3,356 9,431 6,173
===================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
Capital Markets Assurance Corporation
Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30, 1996
----------------
Common stock:
Balance at beginning of period $ 15,000
- ---------------------------------------------------------------------------
Balance at end of period 15,000
- ---------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 205,808
Capital contribution 2,667
- ---------------------------------------------------------------------------
Balance at end of period 208,475
Unrealized (depreciation) appreciation
on investments, net of tax:
Balance at beginning of period 3,286
Unrealized depreciation on investments (4,284)
- ---------------------------------------------------------------------------
Balance at end of period (998)
- ---------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 41,972
Net income 9,431
- ---------------------------------------------------------------------------
Balance at end of period 51,403
- ---------------------------------------------------------------------------
Total stockholder's equity $ 273,880
===========================================================================
See accompanying notes to financial statements.
F-24
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 9,431 6,173
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 1,821 1,458
Unearned premiums 10,977 15,463
Deferred acquisition costs (4,742) (5,428)
Premiums receivable 308 (3,603)
Accrued investment income (579) (290)
Income taxes payable 2,113 1,123
Net realized capital gains (168) (85)
Accounts payable and other accrued expenses 2,581 6,408
Prepaid reinsurance (3,004) (1,852)
Other, net (183) 692
- -------------------------------------------------------------------------------------------------------------
Total adjustments 9,124 13,886
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,555 20,059
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (121,115) (53,597)
Proceeds from sale of investments 19,875 7,829
Proceeds from maturities of investments 82,800 25,874
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,440) (19,894)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash 115 165
Cash balance at beginning of period 344 85
- -------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 459 250
=============================================================================================================
Supplemental disclosures of cash flow
information:
Income taxes paid $ 1,725 150
Tax and loss bonds purchased $ 112 18
=============================================================================================================
See accompanying notes to financial statements.
</TABLE>
F-25
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Capital Markets Assurance Corporation
Notes to Unaudited Financial Statements
June 30, 1996
1. Background
Capital Markets Assurance Corporation ("CapMAC") is a New
York-domiciled monoline stock insurance company which engages only in
the business of financial guaranty and surety insurance. CapMAC is a
wholly-owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is
licensed in all 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also
provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other
major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating
agency. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating
agencies.
2. Basis of Presentation
CapMAC's unaudited interim financial statements have been prepared on
the basis of generally accepted accounting principles and, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of the CapMAC's financial condition, results of operations
and cash flows for the periods presented. The results of operations for
the six months ended June 30, 1996 may not be indicative of the results
that may be expected for the full year ending December 31, 1996. These
financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited financial
statements of CapMAC as of December 31, 1995 and 1994, and for each of
the years in the three-year period ended December 31, 1995.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
F-26
<PAGE>
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
[BACK COVER, RIGHT COLUMN]
Page
Prospectus Supplement
Reports to Certificateholders.......................................... S-2
Summary of Terms....................................................... S-3
Risk Factors .......................................................... S-10
Formation of the Trust ............................................... S-11
The Receivables Pool................................................... S-12
Yield and Prepayment Considerations.................................... S-16
The Depositor and UAC ................................................ S-17
The Surety Bond Issuer................................................. S-17
The Offered Certificates ............................................. S-18
ERISA Considerations................................................... S-28
Underwriting........................................................... S-29
Legal Opinions......................................................... S-29
Experts................................................................ S-29
Index of Principal Terms .............................................. S-30
Financial Statements of the
Surety Bond Issuer.................................................. F-1
Prospectus
Available Information ............................................... 2
Incorporation of Certain Documents
by Reference......................................................... 2
Summary of Terms........................................................ 3
Risk Factors............................................................ 10
The Trusts.............................................................. 13
The Receivables Pools................................................... 14
Weighted Average Life of the Certificates............................... 16
Pool Factors and Other
Certificate Information.............................................. 17
Use of Proceeds......................................................... 17
Union Acceptance Corporation and Affiliates............................. 17
Description of the Certificates......................................... 18
Description of the Transfer
and Servicing Agreements............................................. 21
Certain Legal Aspects of the Receivables................................ 29
Certain Federal Income Tax Consequences................................. 33
ERISA Considerations.................................................... 41
Plan of Distribution.................................................... 43
Legal Matters........................................................... 44
Index of Principal Terms................................................ 44
<PAGE>
[BACK COVER RIGHT COLUMN]
$283,085,347.28
UACSC 1996-D Auto Trust
$171,000,000.00
5.96% Class A-1 Automobile
Receivable Backed Certificates
$91,085,000.00
6.17% Class A-2 Automobile
Receivable Backed Certificates
$21,000,347.28
6.30% Class A-3 Automobile
Receivable Backed Certificates
Class I Interest Only Automobile
Receivable Backed Certificates
UAC Securitization Corporation
Depositor
Union Acceptance Corporation
Servicer
[UACSC LOGO]
Underwriters of the Class A Certificates
Salomon Brothers Inc
Goldman, Sachs & Co.
NationsBanc Capital Markets, Inc.
Underwriter of the Class I Certificates
Salomon Brothers Inc
Prospectus Supplement
Dated November 13, 1996
