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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ONYX ACCEPTANCE GRANTOR TRUST 1997-2
(ISSUER WITH RESPECT TO CERTIFICATES)
------------------------
ONYX ACCEPTANCE FINANCIAL CORPORATION
(ORIGINATOR OF THE TRUST DESCRIBED HEREIN)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 9999 33-0639768
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
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8001 IRVINE CENTER DRIVE, 6TH FLOOR
IRVINE, CA 92618
(714) 753-1191
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
REGAN E. KELLY, ESQ.
EXECUTIVE VICE PRESIDENT
8001 IRVINE CENTER DRIVE, 5TH FLOOR
IRVINE, CA 92618
(714) 450-5500
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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DAVID J. JOHNSON, JR., ESQ. SUSAN M. CURTIS, ESQ.
DANIEL F. PASSAGE, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
ANDREWS & KURTH L.L.P. 919 THIRD AVENUE
601 S. FIGUEROA, SUITE 4200 NEW YORK, NEW YORK 10022
LOS ANGELES, CALIFORNIA 90017
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to a dividend or interest reinvestment plan, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 134,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------
____% Auto Loan Pass-Through
Certificates, Series 1997-2........ $1,000,000 100% $1,000,000 $303.03
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(1) Estimated solely for the purpose of calculating the registration fee on the
basis of the proposed maximum offering price per unit.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1997
PROSPECTUS
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LOGO ONYX ACCEPTANCE GRANTOR TRUST 1997-2
% AUTO LOAN PASS-THROUGH CERTIFICATES, SERIES 1997-2
ONYX ACCEPTANCE FINANCIAL CORPORATION,
Seller
ONYX ACCEPTANCE CORPORATION,
Servicer
</TABLE>
------------------------
The % Auto Loan Pass-Through Certificates (the "Certificates") will
represent undivided fractional interests in the Onyx Acceptance Grantor Trust
1997-2 (the "Trust") to be formed by Onyx Acceptance Financial Corporation (the
"Seller"), a wholly-owned, limited purpose finance subsidiary of Onyx Acceptance
Corporation ("Onyx"). The Trust property will include a pool of fixed rate Rule
of 78's and Simple Interest Method motor vehicle retail installment sales
contracts (the "Contracts") secured by new and used automobiles and light-duty
trucks (the "Financed Vehicles"), certain monies due under certain Contracts on
or after June 1, 1997 (the "Cut-Off Date"), security interests in the Financed
Vehicles, the benefits of an irrevocable principal/interest surety bond (the
"Surety Bond") issued by Capital Markets Assurance Corporation (the "Insurer")
and certain other property, all as more fully described herein. The initial
Aggregate Scheduled Balance (as defined herein) of the Contracts as of the
Cut-Off Date was $ . Onyx will act as servicer of the Contracts (the
"Servicer").
Interest on the Certificates at the Pass-Through Rate of % per annum
(each, an "Interest Distribution"), will be distributed to the
Certificateholders on the 15th day of each month (or, if the 15th day is not a
Business Day, the following Business Day) (each, a "Distribution Date")
commencing July 15, 1997 and ending on December 15, 2003 (the "Final
Distribution Date"). Payments of principal, as well as the principal balance of
liquidated contracts and contracts repurchased by the Seller and purchased by
the Servicer (the "Principal Distribution"), will be distributed to
Certificateholders on each Distribution Date as described herein.
It is a condition of issuance that the Certificates be rated in the highest
category by two nationally recognized rating agencies based primarily on the
issuance of the Surety Bond by the Insurer. Under the Surety Bond, the Insurer
has unconditionally and irrevocably guaranteed payment of the Interest
Distribution and the Principal Distribution on each Distribution Date, including
the Final Distribution Date. See "The Certificates and the Agreement -- The
Surety Bond."
------------------------
SEE "RISK FACTORS" AT PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES OFFERED
HEREBY.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND ARE NOT INSURED OR
GUARANTEED BY THE SELLER, ONYX OR ANY OF THEIR RESPECTIVE AFFILIATES.
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.
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PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1) DISCOUNT SELLER(1)(2)
- ------------------------------------------------------------------------------------------------
Per Certificate............ % % %
- ------------------------------------------------------------------------------------------------
Total...................... $ $ $
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(1) Plus accrued interest, if any, calculated from , 1997.
(2) Before deducting expenses payable by the Seller estimated to be $ .
------------------------
The Certificates are offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
various prior conditions, including its right to reject orders in whole or in
part. It is expected that the Certificates will be delivered in book-entry form,
on or about , 1997, through the facilities of The Depository Trust
Company.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CERTIFICATES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
CERTIFICATES, AND THE IMPOSITION OF PENALTY BIDS, DURING AND AFTER THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed a Registration Statement
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates offered pursuant
to this Prospectus. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement and the exhibits thereto. For further information, reference is made
to the Registration Statement and amendments thereof and to the exhibits
thereto, which are available for inspection without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission at 7 World Trade Center, Suite 1300, New
York, New York 10048 and at the Northwestern Atrium Building, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies of which may be
obtained from the Commission at prescribed rates. The Commission also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Servicer, and the address is http://www.sec.gov. The Servicer, on
behalf of the Trust, will also file or cause to be filed with the Commission
such periodic reports as are required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the rules and regulations of the Commission
thereunder, and such reports can be obtained as described above. Such reports
will include Current Reports on Form 8-K filed after each Distribution Date, and
an Annual Report on Form 10-K. Such reports will contain certain financial
information regarding the Trust, including the Distribution Date Statement which
will be furnished monthly to Certificateholders as described under "Reports to
Certificateholders" below. Reports on Form 8-K and Form 10-K will not be filed
for any period which ends after December 31, 1997; however, the
Certificateholders will continue to receive the Distribution Date Statement
monthly, as described below.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued (which will occur under
the limited circumstances described herein), the unaudited monthly Distribution
Date Statements and unaudited annual reports concerning the Trust which are
described herein under "Additional Provisions of the Agreement -- Statements to
Certificateholders" and are prepared by the Servicer, will be sent by the
Trustee only to Cede & Co. as the nominee of DTC and the registered holder of
the Certificates. Such reports will not constitute financial statements prepared
in accordance with generally accepted accounting principles. These reports may
be obtained by Certificate Owners by a request in writing to the Trustee. See
"The Certificates and the Agreement -- Book-Entry Registration." The Seller does
not intend to send any of its financial reports to the Certificateholders.
2
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Certain capitalized
terms used in this Summary are defined elsewhere in this Prospectus. See the
Index of Principal Definitions for the location herein of the definitions of
certain capitalized terms. An investment in the Certificates involves various
risks, and potential purchasers should carefully consider the matters discussed
under "Risk Factors" herein in considering an investment in the Certificates.
Issuer..................... Onyx Acceptance Grantor Trust 1997-2 (the "Trust"),
to be formed by Onyx Acceptance Financial
Corporation (the "Seller") pursuant to the Pooling
and Servicing Agreement, to be dated as of June 1,
1997 (the "Agreement"), among the Seller, Onyx
Acceptance Corporation (the "Servicer") and Bankers
Trust Company (the "Trustee").
Securities Offered......... % Auto Loan Pass-Through Certificates (the
"Certificates") representing fractional undivided
interests in the Trust. The Certificates will be
offered for purchase in denominations of $1,000 and
integral multiples thereof. See "The Certificates
and the Agreement -- General."
Initial Certificate
Balance.................... $ . The initial principal balance of the
Certificates is equal to the aggregate principal
balance of the Contracts as of the Cut-Off Date
calculated in accordance with the Rule of 78's or
Simple Interest Method. The term "Cut-Off Date
Scheduled Balance" means the principal balance of a
Contract as of the Cut-Off Date. See "The
Contracts."
Seller..................... Onyx Acceptance Financial Corporation, a wholly
owned limited purpose subsidiary of Onyx Acceptance
Corporation ("Onyx"). The Seller's principal
executive offices are located at 8001 Irvine Center
Drive, 6th Floor, Irvine, California 92618 and its
telephone number is (714) 753-1191. See "The
Seller." All of the Contracts will have been
purchased by the Seller from Onyx. Substantially
all of the Contracts have been purchased by Onyx
from new and used car Dealers unaffiliated with
Onyx or the Seller, and a limited number of
Contracts have been originated by Onyx itself. See
"The Onyx Portfolio of Motor Vehicle Contracts."
Servicer................... Onyx. The Servicer's principal executive offices
are located at 8001 Irvine Center Drive, 5th Floor,
Irvine California 92618 and its telephone number is
(714) 450-5500. See "The Servicer."
Trustee.................... Bankers Trust Company.
Trust Property............. The Trust's assets (the "Trust Property") will
include: (i) a pool of fixed rate motor vehicle
retail installment sales contracts (the
"Contracts") of which approximately % of the
Aggregate Scheduled Balance as of the Cut-Off Date
are Rule of 78's Contracts and approximately %
of the Aggregate Scheduled Balance as of the
Cut-Off Date are Simple Interest Contracts, and all
of which were purchased from the Seller and secured
by new and used automobiles and light-duty trucks
(the "Financed Vehicles"), (ii) certain documents
relating to the Contracts, (iii) certain monies due
under such Contracts on or after the Cut-Off Date,
(iv) security interests in the Financed Vehicles
and the rights to receive proceeds from claims on
certain insurance policies covering the Financed
Vehicles or the individual obligors under each
related Contract and the right to certain proceeds
under the Blanket Insurance Policy, (v) all amounts
on deposit in the Collection Account, including all
Eligible Investments credited thereto (but
excluding any investment income from Eligible
Investments), (vi) the benefits of an irrevocable
principal/interest surety bond (the "Surety Bond")
issued by Capital Markets Assurance Corporation
(the "Insurer"), (vii) the right of the Seller to
cause Onyx to repurchase certain Contracts under
certain circumstances, (viii) all right, title and
interest of the Seller under the
3
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Yield Supplement Agreement, dated as of the Closing
Date between the Seller and Onyx (the "Yield
Supplement Agreement"), and (ix) all proceeds of
the foregoing. See "The Trust."
Pass-Through Rate.......... % per annum, payable monthly at one-twelfth
the annual rate and calculated on the basis of a
360-day year of twelve 30-day months.
Distribution Date.......... The 15th day of each month (or, if such day is not
a Business Day, the next succeeding Business Day)
commencing July 15, 1997 (each a "Distribution
Date"). A "Business Day" is a day other than a
Saturday, Sunday or other day on which commercial
banks located in California or New York are
authorized or obligated to be closed.
Final Distribution Date.... December 15, 2003.
Interest Distribution...... On each Distribution Date, monthly interest (the
"Interest Distribution") in an amount equal to the
product of one-twelfth of the Pass-Through Rate and
the Pool Balance as of the end of the Collection
Period preceding the related Collection Period will
be distributed to the Certificateholders of record
on a pro rata basis as of the related Record Date.
The "Pool Balance" as of any date is the Aggregate
Scheduled Balance of the Contracts as of such date,
excluding those Contracts which as of such date
have become Liquidated Contracts or have been
repurchased by the Seller or purchased by the
Servicer. Interest will be paid from collections
received on the Contracts on deposit in the
Collection Account or previously collected and
available for distribution and from payments under
the Yield Supplement Agreement. A "Collection
Period" with respect to a Distribution Date will be
the calendar month preceding the month in which
such Distribution Date occurs; provided, that with
respect to Liquidated Contracts (as defined below)
the Collection Period will be the period from but
excluding the sixth Business Day preceding the
immediately preceding Distribution Date to and
including the sixth Business Day preceding such
Distribution Date. With respect to the first
Distribution Date the "Collection Period" for
Liquidated Contracts will be the period from and
including the Cut-Off Date to and including the
sixth Business Day preceding such first
Distribution Date. See "The Certificates and the
Agreement -- Distributions of Principal and
Interest."
Principal Distribution..... On each Distribution Date, Principal Distributions
for the related Collection Period will be passed
through to the Certificateholders. The "Principal
Distribution" on any Distribution Date is the
Aggregate Scheduled Balance Decline (as defined
below) during the related Collection Period. The
Principal Distribution on the Final Distribution
Date will include the Aggregate Scheduled Balance
of all Contracts that are outstanding at the end of
the Collection Period immediately prior to the
Final Distribution Date. The "Aggregate Scheduled
Balance Decline" for any Distribution Date is the
amount by which the Aggregate Scheduled Balance of
the Contracts as of the beginning of the related
Collection Period exceeds the Aggregate Scheduled
Balance of such Contracts as of the end of the
related Collection Period. The "Aggregate Scheduled
Balance" of the Contracts is the sum of the
Scheduled Balance of each Contract. The "Scheduled
Balance" of a Rule of 78's Contract at any date is
equal to the Cut-Off Date Scheduled Balance of such
Contract reduced by the portion of each scheduled
payment of principal and interest due on such
Contract (the "Monthly P&I") on or prior to the
date of calculation that is allocated to principal
under the Recomputed Actuarial Method. The
Scheduled Balance of a Simple Interest Contract at
any date is equal to the Cut-Off Date Scheduled
Balance of such Contract reduced by the portion of
Monthly P&I on or prior to the date of calculation
that is allocated to principal under the Simple
Interest Method. The Scheduled
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Balance of any Contract that is a Liquidated
Contract or that has been purchased by the Servicer
or repurchased by the Seller will equal zero. A
"Liquidated Contract" is a Contract that (a) is the
subject of a Full Prepayment, (b) is a Defaulted
Contract and with respect to which Liquidation
Proceeds constituting, in the Servicer's reasonable
judgment, the final amounts recoverable have been
received, (c) is paid in full on or after its
Maturity Date or (d) has been a Defaulted Contract
for four or more Collection Periods and as to which
Liquidation Proceeds constituting the final amounts
recoverable have not been received; provided,
however, that in any event a Contract that is
delinquent in the amount of five monthly payments
at the end of a Collection Period is a Liquidated
Contract. A "Defaulted Contract" with respect to
any Collection Period is a Contract (a) which is,
at the end of such Collection Period, delinquent in
the amount of two monthly payments or (b) with
respect to which the related Financed Vehicle has
been repossessed or repossession efforts have been
commenced. See "The Contracts" and "The
Certificates and the Agreement -- Distributions of
Principal and Interest."
Yield Supplement
Agreement.................. Onyx will enter into the Yield Supplement Agreement
with the Seller, which will assign its interest
therein to the Trust. The Yield Supplement
Agreement will provide for payment by Onyx into the
Collection Account on or before five Business Days
prior to each Distribution Date (the "Servicer
Report Date") of the Yield Supplement Amount. The
"Yield Supplement Amount," with respect to any
Distribution Date for any Collection Period, is the
sum of the following as calculated for each
Contract: the amount (if positive), calculated by
the Servicer, equal to one-twelfth of (i) interest
on such Contract's Scheduled Balance as of the
first day of the related Collection Period at a
rate equal to % minus (ii) interest on such
Contract at its Recomputed Yield on such Contract's
Scheduled Balance as of the first day of the
related Collection Period.
The obligation of Onyx to pay the Yield Supplement
Amount will be secured by funds on deposit in a
segregated trust account to be maintained for the
benefit of the Certificateholders and the Insurer
(the "Yield Supplement Reserve Account"). The
amount required to be deposited in the Yield
Supplement Reserve Account will initially be equal
to the maximum Yield Supplement Amount that may
become owing under the Yield Supplement Agreement,
assuming that payments on the Contracts are made on
their scheduled Due Dates and that no prepayments
are made. See "The Certificates and the
Agreement -- Yield Supplement Agreement and Yield
Supplement Reserve Account."
Servicing Fee.............. The Servicer will be responsible for managing,
administering, servicing, and making collections on
the Contracts. Compensation to the Servicer will
consist of a monthly fee (the "Servicing Fee"),
payable from the Trust to the Servicer on each
Distribution Date, in an amount equal to the
product of one-twelfth of 1.00% per annum (the
"Servicing Fee Rate") multiplied by the Pool
Balance as of the end of the Collection Period
preceding the related Collection Period. As
additional compensation, the Servicer will be
entitled to any late fees and other administrative
fees and expenses or similar charges collected with
respect to the Contracts. The Servicer or its
designee will also receive as servicing
compensation investment earnings on Eligible
Investments and the amount, if any, by which the
outstanding principal balance of a Rule of 78's
Contract that is subject to a Full Prepayment
exceeds the Scheduled Balance of such Contract. See
"The Certificates and the Agreement -- Servicing
Fee."
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Surety Bond................ On the Closing Date, the Insurer will issue a
principal/interest surety bond (the "Surety Bond")
to the Trustee pursuant to an Insurance and
Reimbursement Agreement (the "Insurance
Agreement"), dated as of June , 1997, among the
Insurer, Onyx, the Seller and the Trustee. Pursuant
to the Surety Bond, the Insurer will
unconditionally and irrevocably guarantee payment
of the Interest Distribution and Principal
Distribution on each Distribution Date to the
Trustee for the benefit of the Certificateholders.
If on the Servicer Report Date with respect to any
Distribution Date the amount on deposit and
available in the Collection Account, after giving
effect to all amounts deposited or payable from the
Payahead Account, the Yield Supplement Reserve
Account and/or pursuant to the Yield Supplement
Agreement, is less than the sum of the Servicing
Fee, the Principal Distribution and Interest
Distribution for the related Distribution Date, the
Trustee, by delivering a notice to the Insurer,
shall demand payment under the Surety Bond in an
amount equal to such deficiency. The Insurer shall
pay or cause to be paid such amount to the Trustee
for credit to the Collection Account and the
Trustee shall withdraw from the Collection Account
and shall pay such amount to the Certificateholders
on the related Distribution Date. On the Final
Distribution Date, to the extent the amount on
deposit and available in the Collection Account is
less than all remaining unpaid interest and
principal on the Certificates, the Insurer shall
pay or cause to be paid an amount equal to such
shortfall. See "The Certificates and the
Agreement -- The Surety Bond."
Contracts.................. The Aggregate Scheduled Balance of the Contracts as
of the Cut-Off Date was $ . As of the
Cut-Off Date the Contracts had a weighted average
annual percentage rate of % and a weighted
average remaining term of months.
Approximately % of the Aggregate Scheduled
Balance of the Contracts as of the Cut-Off Date
allocate interest and principal in accordance with
the Rule of 78's (the "Rule of 78's Contracts"),
and approximately % in accordance with the
Simple Interest Method (the "Simple Interest
Contracts"). Approximately % of the Aggregate
Scheduled Balance of the Contracts as of the
Cut-Off Date were originated in California, %
in Arizona, % in Washington and the balance in
Florida, Nevada and Oregon.
Substantially all of the Contracts were originated
by automobile dealerships ("Dealers") and assigned
to Onyx, and a limited number of Contracts were
originated by Onyx itself. All the Contracts will
have been purchased by the Seller from Onyx and by
the Trust from the Seller. The Seller is required
to repurchase certain of the Contracts under
certain circumstances if certain representations
and warranties made by the Seller are incorrect in
a manner that materially and adversely affects the
Certificateholders or the Insurer. All of the
Contracts have been selected by Onyx from its
portfolio of motor vehicle installment sales
contracts based upon the criteria specified in the
Agreement.
All collections of Monthly P&I, all prepayments on
the Contracts collected by the Servicer and all
amounts paid under the Surety Bond will be
deposited in or credited to the Collection Account.
Partial prepayments of Monthly P&I ("Payaheads") on
Rule of 78's Contracts will be transferred on the
Servicer Report Date to the Payahead Account, to be
applied against future scheduled payments of
Monthly P&I. Partial and full prepayments on Simple
Interest Contracts will be passed through to
Certificateholders on the Distribution Date
immediately following the Collection Period in
which such prepayments are received. All payments
to the Certificateholders will be made from the
Collection Account and certain funds remaining in
the Collection
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Account following distributions to
Certificateholders and others will be paid to the
Insurer to be promptly distributed in accordance
with the terms of the Insurance Agreement. See "The
Contracts" and "The Certificates and the
Agreement -- Payahead Account."
Optional Termination....... The Servicer may purchase all of the Contracts on
any Distribution Date as of which the Pool Balance
(after giving effect to the Principal Distribution
on such Distribution Date) has declined to 10% or
less of the Cut-Off Date Scheduled Balance for all
of the Contracts (the "Original Pool Balance"),
subject to certain provisions in the Agreement. See
"The Certificates and the Agreement -- Repurchase
of Contracts."
Federal Income Tax
Status..................... In the opinion of counsel to the Seller, the Trust
will be treated for Federal income tax purposes as
a grantor trust and not as an association taxable
as a corporation. Certificateholders must report
their respective allocable shares of income earned
on Trust assets and, subject to certain limitations
applicable to individuals, estates and trusts, may
deduct their respective allocable shares of
reasonable servicing and other fees. See "Certain
Federal Income Tax Consequences."
ERISA Considerations....... The Certificates may be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") upon satisfaction of certain conditions
described herein. See "ERISA Considerations."
Rating..................... It is a condition of issuance of the Certificates
that they be rated in the highest rating category
by two nationally recognized rating agencies. This
rating will be based primarily on the issuance of
the Surety Bond by the Insurer. See "Risk
Factors -- Rating."
Registration of the
Certificates............... The Certificates will initially be represented by
certificates registered in the name of Cede & Co.
("Cede"), as the nominee of The Depository Trust
Company ("DTC"). No person acquiring an interest in
a Certificate through the facilities of DTC (a
"Certificate Owner") will be entitled to receive a
Definitive Certificate representing such person's
interest in the Trust, except in the event that
Definitive Certificates are issued in certain
limited circumstances. See "The Certificates and
the Agreement."
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RISK FACTORS
LIMITED LIQUIDITY
There is currently no secondary market for the Certificates, and there will
be no application to list the Certificates on an exchange. The Underwriter
currently intends, but is not obligated, to make a market in the Certificates.
However, there can be no assurance that the Underwriter will make such a market,
that a secondary market will develop or, if it does develop, that it will
provide Certificateholders with liquidity of investment or will continue for the
life of the Certificates.
LIMITED OPERATING HISTORY OF ONYX
All of the Contracts were originally purchased by Onyx from Dealers or
originated by Onyx itself in accordance with credit underwriting criteria
established by Onyx. In February 1994, Onyx commenced its operations as a
purchaser and servicer of motor vehicle retail installment sales contracts.
Thus, Onyx has historical performance data for only a relatively short period
with respect to the motor vehicle retail installment sales contracts it
purchases and originates. Delinquencies and loan losses may increase from
existing levels in the portfolio with the passage of time.
Onyx is still at an early stage of operations and is subject to all of the
risks inherent in the establishment of a new business enterprise and must, among
other things, continue to attract, retain and motivate qualified personnel,
support and grow its auto lending and contract servicing business, maintain its
existing relationships with automobile dealers and develop new relationships
with dealers in and beyond Onyx's present market region. Onyx experienced
operating losses from inception through December 31, 1995. Onyx's operating
losses for the years ended December 31, 1994 and December 31, 1995 were $3.5
million and $3.1 million, respectively. Onyx's net income for the year ended
December 31, 1996 was $7.7 million and for the first quarter ended March 31,
1997 was $612,444.
CERTAIN LEGAL ASPECTS -- THE CONTRACTS
The transfer of the Contracts to the Trust is subject to the perfection
requirements of the Uniform Commercial Code, as in effect in California ("UCC").
The Seller will take or cause to be taken such action as is required to perfect
the Trust's rights in the Contracts and will warrant that the Trust has good
title free and clear of liens and encumbrances to each Contract on the date the
Certificates are issued (the "Closing Date"). The Agreement permits the Servicer
with the consent of the Insurer (such consent not to be unreasonably withheld)
to hold the Contracts on behalf of the Trustee and the Insurer after the filing
of UCC-1 financing statements relating to the perfection of the Trust's security
interest in the Contracts. Accordingly, if Onyx or the Seller sell and deliver a
Contract to another purchaser, there is a risk that the purchaser could acquire
an interest in the Contract superior to the interest of the Trust and the
Certificateholders. Onyx will agree in the Agreement to take all necessary
action to preserve and protect the Trust's ownership interest in the Contracts.
The Seller will represent that each Contract is secured by a Financed Vehicle.
After a Contract is purchased or originated by Onyx and the appropriate
application is processed by the department of motor vehicles or similar state
agency responsible for vehicle records in the state in which the Contract was
originated, the certificate of title (or computerized title record in the case
of Contracts originated in California, for which there will be no paper
certificates) to the Financed Vehicle securing the Contract shows Onyx as the
secured party holding a lien in the Financed Vehicle. When Contracts are sold to
the Seller and then to the Trust, Onyx remains the secured party named on the
related certificates of title (or computerized title records in the case of
Contracts originated in California), and such certificates (or electronic
records) are not endorsed or otherwise marked to identify the Trustee as secured
party, due to the administrative burden and expense of applying to the
department of motor vehicles or similar state agency in each of the states of
Contract origination to identify the Trustee as secured party, and because
retaining Onyx's name as secured party enables Onyx to more efficiently service
the Contracts. Even though the Trust is not identified as secured party, because
the Trust has a security interest in the Contracts, it is the beneficial owner
of the security interest in the related Financed Vehicles. There exists a risk,
however, in not identifying the Trust as the new secured party on the
certificate of title (or computerized title record) that, through fraud or
negligence, the security interest of the Trust could be released. Moreover,
statutory liens for repairs or unpaid taxes may have
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priority even over perfected security interests in the Financed Vehicles.
Notwithstanding the failure of the Trust to have obtained a valid, first
priority security interest in a Financed Vehicle, the Insurer will remain
unconditionally and irrevocably obligated on its guarantee of the Interest
Distribution and the Principal Distribution on each Distribution Date. See
"Certain Legal Aspects of the Contracts."
CERTAIN LEGAL ASPECTS -- BANKRUPTCY CONSIDERATIONS
It is intended by Onyx and the Seller that the transfer of the Contracts by
Onyx to the Seller constitute a "true sale" of the Contracts to the Seller. If
the transfer constitutes such a "true sale," the Contracts and the proceeds
thereof would not be part of Onyx's bankruptcy estate should it become the
subject of a bankruptcy case subsequent to the transfer of the Contracts to the
Seller.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by Onyx under the United States Bankruptcy Code or similar state laws
("Insolvency Laws") will not result in consolidation of the assets and
liabilities of the Seller with those of Onyx. These steps include the creation
of the Seller as a separate, limited purpose subsidiary pursuant to a
certificate of incorporation containing certain limitations (including
restrictions on the nature of the Seller's business and a restriction on the
Seller's ability to commence a voluntary case or proceeding under any Insolvency
Law without the prior unanimous affirmative vote of all of its directors).
However, there can be no assurance that the activities of the Seller would not
result in a court concluding that the assets and liabilities of the Seller
should be consolidated with those of Onyx in a proceeding under any Insolvency
Law. If a court were to reach such a conclusion, then delays in distributions on
the Certificates could occur or reductions in the amounts of such distributions
could result. Notwithstanding the holding by a court that the assets and
liabilities of the Seller should be consolidated with those of Onyx in a
proceeding under any Insolvency Law, the Insurer will remain unconditionally and
irrevocably obligated on the Surety Bond to guarantee payment of the Interest
Distribution and Principal Distribution on each Distribution Date. See "The
Seller."
PREPAYMENT CONSIDERATIONS
The rate of distribution of principal on the Certificates will depend on
the rate of payment (including prepayments, liquidations and repurchases by the
Seller or purchases by Onyx under certain conditions) on the Contracts which is
not possible to predict. Any full prepayments and repurchases of the Contracts
can reduce the average life of the Contracts and the aggregate interest received
by the Certificateholders over the life of the Certificates. Prepayments on
Simple Interest Contracts will shorten the average life of such Contracts and,
therefore, of the Certificates, because they will be passed through to
Certificateholders on the Distribution Date immediately following the Collection
Period in which such prepayments are received. Partial prepayments on Rule of
78's Contracts will be treated as Payaheads and accordingly will not affect the
average life of the Contracts because such payments will be held in the name of
Bankers Trust Company, acting on behalf of the Obligors and the
Certificateholders, as their interests may appear, until passed through in
accordance with the original schedule of payments for such Contracts. See "The
Certificates and Agreement -- Payahead Account."
Onyx has limited historical experience with respect to prepayments, has not
as of the date hereof prepared data on prepayment rates, and is not aware of
publicly available industry statistics that set forth principal prepayment
experience for retail installment sales contracts similar to the Contracts. Onyx
can make no prediction as to the actual prepayment rates that will be
experienced on the Contracts in either stable or changing interest rate
environments. See "-- Limited Operating History of Onyx" and "Maturity and
Prepayment Assumptions." Certificateholders will bear all reinvestment risk
resulting from the rate of prepayment of the Contracts.
GEOGRAPHIC CONCENTRATION
Economic conditions in the states where the obligors under the Contracts
(each, an "Obligor") reside may affect the delinquency, loan loss and
repossession experience of the Trust with respect to the Contracts.
Approximately % of the Aggregate Scheduled Balance of the Contracts as of
the Cut-Off Date will have been originated in California, % in Arizona,
% in Washington and % in Nevada, Florida and
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<PAGE> 11
Oregon combined. Accordingly, adverse economic conditions or other factors
particularly affecting California, Arizona or Washington could adversely affect
the delinquency, loan loss or repossession experience of the Trust.
LIMITED ASSETS
The Trust does not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Contracts and the right to
receive payments under the Surety Bond. The Certificates represent interests
solely in the Trust and will not be insured or guaranteed by the Seller, the
Servicer, the Trustee or any other person or entity except the Insurer.
Consequently, holders of the Certificates will only be able to look to payments
on the Contracts and the Surety Bond for payment.
RATING
It is a condition of issuance of the Certificates that they be rated in the
highest rating category by two nationally recognized rating agencies. A security
rating is not a recommendation to buy, sell or hold securities and may be
revised or withdrawn at any time by the assigning rating agency. There can be no
assurance that a rating will not be lowered or withdrawn if, in the sole
judgment of a rating agency, circumstances in the future so warrant, including a
downgrading of the Insurer. The Seller cannot predict with certainty what effect
any revision or withdrawal of a rating may have on the liquidity or market value
of the Certificates. Such ratings of the Certificates address the likelihood of
the timely payment of each scheduled Interest Distribution and Principal
Distribution, which are guaranteed by the Insurer pursuant to the Surety Bond.
Therefore, the ratings are primarily dependent on the rating of the Insurer, and
a change in the Insurer's rating may affect the ratings of the Certificates. See
"Description of the Insurer" for a description of the Insurer's rating.
CONSUMER PROTECTION LAWS
The Contracts are subject to federal and state consumer protection laws
which impose requirements with respect to the making, transfer, acquisition,
enforcement and collection of consumer loans. Such laws, as well as any new laws
or rules which may be adopted, may adversely affect the Servicer's ability to
collect on the Contracts. Any failure by the originator thereof to have
complied, or the Servicer to comply, with such requirements could adversely
affect the enforceability of the Contracts. The Seller will make representations
and warranties relating to the validity and enforceability of the Contracts and
its compliance with applicable law in connection with its performance of the
transactions contemplated by the Agreement. Pursuant to the Agreement, if the
Trust's interest in a Contract is materially and adversely affected by the
failure of such Contract to comply with the applicable requirements of any
consumer protection law, such Contract will be repurchased by the Seller. The
sole remedy if any such representation or warranty is not complied with and such
noncompliance continues beyond the applicable cure period is that the Contracts
affected thereby will be required to be repurchased by the Seller. See "The
Certificates and the Agreement -- Repurchase of Contracts" and "Certain Legal
Aspects of the Contracts -- Repurchase Obligation."
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THE TRUST
Pursuant to the Agreement, the Seller will establish the Onyx Acceptance
Grantor Trust 1997-2 (the "Trust") by selling and assigning the following
property to Bankers Trust Company in its capacity as trustee of the Trust (the
"Trustee") in exchange for the Certificates executed and authenticated by the
Trustee: (i) the Contracts purchased from the Seller and secured by Financed
Vehicles, (ii) certain documents relating to the Contracts, (iii) certain monies
due under the Contracts on or after the Cut-Off Date (iv) security interests in
the Financed Vehicles and the rights to receive proceeds from claims on certain
insurance policies covering the Financed Vehicles or the Obligors and the right
to certain proceeds under the Blanket Insurance Policy, (v) all amounts on
deposit in the Collection Account, including all Eligible Investments credited
thereto (but excluding any income on Eligible Investments, which will be paid to
the Servicer), (vi) the right of the Seller under the Purchase Agreement to
cause Onyx to repurchase certain Contracts under certain circumstances, (vii)
all right, title and interest of the Seller under the Yield Supplement
Agreement, and (viii) all proceeds of the foregoing. The Trust Property will
also include the benefits of the Surety Bond of the Insurer, proceeds of which
will be available to the Trustee in the event collections from Obligors are
insufficient to pay the Interest Distributions and Principal Distributions to
Certificateholders and unpaid principal and interest on the Certificates on the
Final Distribution Date. Each Certificate will represent a fractional undivided
interest in the Trust.
The Trust will be formed for this transaction pursuant to the Agreement
and, prior to formation, will have had no assets or obligations. After
formation, the Trust will not engage in any activity other than acquiring and
holding the Contracts, issuing the Certificates, distributing payments thereon
and as otherwise described herein and as provided in the Agreement. The Trust
will not acquire any Motor Vehicle Contracts or assets other than the Trust
Property and will not have any need for additional capital resources.
THE ONYX PORTFOLIO OF MOTOR VEHICLE CONTRACTS
PURCHASE AND ORIGINATION OF MOTOR VEHICLE CONTRACTS
Onyx's portfolio of retail installment sales contracts and installment loan
agreements are secured by new and used automobile and light-duty trucks ("Motor
Vehicle Contracts"). The Contracts were originated by Dealers and purchased by
Onyx, except for a limited number of Contracts which were originated by Onyx
itself. All of the Contracts will have been sold to the Seller and then to the
Trust. Onyx currently has agreements with 1,717 Dealers, of which approximately
84% are franchised new car dealerships and approximately 16% are independent
used car dealerships. The Dealers are located in metropolitan areas in the
states in which the Contracts are or will be originated, which are California,
Arizona, Washington, Oregon, Florida and Nevada. Each Dealer from which Onyx
purchases Contracts has entered into an agreement with Onyx whereby the Dealer
represents that it will comply with federal and state laws regarding motor
vehicle financing, that the Dealer will obtain the requisite financial
information required of the Obligor in order to extend credit, and that the
Dealer will truthfully disclose to Onyx such financial information, the identity
of the Obligor and other information in connection with the loan transaction.
The Dealers with whom Onyx has agreements and Dealers with whom Onyx would like
to have agreements are regularly contacted by Onyx account managers by telephone
and in person in an effort to obtain a continued supply of Motor Vehicle
Contracts for Onyx to purchase. Before purchasing Contracts from independent
used car Dealers, Onyx completes a credit review of the Dealer's financial
condition (including a review of financial information provided by the Dealer
and a Dun & Bradstreet report on the Dealer) and a review of the underwriting
criteria used by the Dealer.
Approximately % of the Aggregate Scheduled Balance of the Contracts as
of the Cut-Off Date will have been originated in California, % in Arizona,
% in Washington and the balance in Oregon, Florida and Nevada. See "Risk
Factors -- Geographic Concentration." The payment obligations of the Obligor
under each Motor Vehicle Contract are secured by the vehicle purchased with the
loan proceeds provided under that Motor Vehicle Contract (the "Financed
Vehicle").
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Onyx services all of the Motor Vehicle Contracts and initially will serve
as the primary servicer after the Motor Vehicle Contracts are sold by the Seller
to the Trust. The servicing functions performed by Onyx include customer
service, document filekeeping, computerized account recordkeeping, vehicle title
processing and collections.
UNDERWRITING OF MOTOR VEHICLE CONTRACTS
Onyx underwrites the Motor Vehicle Contracts through its ten regional
contract purchasing offices ("Auto Finance Centers"), six of which are in
California and one in each of Arizona, Florida, Nevada and Washington. Contracts
purchased from Oregon are currently underwritten in the Washington Auto Finance
Centers. Each Motor Vehicle Contract is fully amortizing and provides for level
payments over its term with the portion of principal and interest of each level
payment determined either on the basis of the Rule of 78's or the Simple
Interest Method. See "The Contracts."
To evaluate the potential purchase of a Motor Vehicle Contract, Onyx
reviews the application package received from the Dealer originating the Motor
Vehicle Contract, or in the case of Contracts originated by Onyx the application
package received from the Obligor, that sets forth the Obligor's income,
liabilities, credit and employment history, and other personal information, as
well as a description of the Financed Vehicle that secures the Motor Vehicle
Contract. The credit applications do not consist of forms provided by Onyx.
However, at the time a Dealer underwrites a Motor Vehicle Contract, Onyx reviews
the related application for completeness and for compliance with Onyx's
underwriting guidelines and applicable federal and state consumer statutes and
regulations. To evaluate credit applications, Onyx reviews information in the
application and from credit bureau reports obtained by Onyx.
Each proposed Motor Vehicle Contract is evaluated using uniform
underwriting standards developed by Onyx. These underwriting standards are
intended to assess the Obligor's ability to repay all amounts due under the
Motor Vehicle Contract and the adequacy of the Financed Vehicle as collateral,
based upon a review of the information contained in the Motor Vehicle Contract
application. Among the criteria considered by an Onyx credit manager in
evaluating the individual applications are (i) stability of the Obligor with
specific regard to the Obligor's occupation, length of employment and length of
residency, (ii) the Obligor's payment history based on information known
directly by Onyx or as provided by various credit reporting agencies with
respect to present and past debt, (iii) a debt service-to-gross monthly income
ratio test, and (iv) the principal amount of the Motor Vehicle Contract taking
into account the age, type and market value of the Financed Vehicle. The general
policy of Onyx has been not to allow an Obligor's debt service-to-gross monthly
income ratio to exceed 45%.
After review of an application, an Onyx credit manager, via an electronic
system utilized by Onyx, communicates an appropriate decision to the Dealer, or
by telephone or otherwise to the Obligor in the case of Motor Vehicle Contracts
originated by Onyx, specifying approval (subject to the receipt of the required
documentation), denial or a counter-offer on the proposed Motor Vehicle
Contract. If the response to the Dealer or Obligor requires stipulations to the
approval, (including an additional downpayment, reduction in the term of the
financing, or the addition of a co-signer to the Motor Vehicle Contract), these
are communicated concurrently to the Dealer or Obligor, and become a condition
of the approval. Subsequent to approval, the Dealer will (if Onyx is the chosen
source of financing) forward the necessary documentation to Onyx, which consists
of the following: (i) a signed application; (ii) the only original and a copy of
the executed contract; (iii) an agreement by the Obligor to provide insurance;
(iv) a report of sale or guarantee of title; (v) an application for
registration; (vi) a co-signer notification (if applicable); (vii) a copy of any
supplemental warranty purchased with respect to the Financed Vehicle; (viii)
vehicle valuation documentation acceptable to Onyx; and (ix) any other required
documentation.
Once the appropriate documentation is in hand for funding, the file
relating to the Motor Vehicle Contract is ready to forward to an Onyx contract
processor for a pre-funding audit. The contract processor then audits such
documents for completeness and consistency with the application, providing final
approval for purchase of the Motor Vehicle Contract once these requirements have
been satisfied (subject to the receipt of the required documentation).
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The amount advanced by Onyx under any Motor Vehicle Contract does not
exceed (i) for a new Financed Vehicle, the manufacturer's suggested retail price
plus taxes, title and license fees, extended warranty (if any) and credit
insurance, or (ii) for a used Financed Vehicle, the value assigned by a
nationally recognized used car value guide, plus taxes, title and license fees
and extended warranty (if any). However, the actual amount advanced for a Motor
Vehicle Contract is often less than the maximum permissible amount depending on
a number of factors, including the length of the Motor Vehicle Contract term and
the model and year of the Financed Vehicle. These adjustments are made to assure
that the Financed Vehicle constitutes adequate collateral to secure the Motor
Vehicle Contract. Under no circumstances is the amount advanced for a Motor
Vehicle Contract greater than the amount payable by the Obligor with respect to
the purchase of the Financed Vehicle.
Periodically, Onyx makes a detailed analysis of its portfolio of Motor
Vehicle Contracts to evaluate the effectiveness of Onyx's credit guidelines. If
external economic factors, credit delinquencies or credit losses change, Onyx
adjusts its credit guidelines to maintain the asset quality deemed acceptable by
Onyx's management. Onyx reviews, on a daily basis, the quality of its Motor
Vehicle Contracts by conducting audits of certain randomly selected Motor
Vehicle Contracts to ensure compliance with established policies and procedures.
INSURANCE
Each related Motor Vehicle Contract requires the Obligor to obtain
comprehensive and collision insurance with respect to the related Financed
Vehicle with Onyx as a loss payee. Onyx does not presently track whether
Obligors maintain the required insurance. To protect against losses with respect
to Obligors who do not obtain or maintain any insurance, or who do not obtain or
maintain the right type or level of insurance, Onyx has purchased limited
comprehensive and collision insurance, referred to as the "Blanket Insurance
Policy" coverage. The Blanket Insurance Policy provides Onyx with protection on
each uninsured or underinsured Financed Vehicle against total loss, damage or
theft. Onyx has obtained its Blanket Insurance Policy from United Financial
Casualty Company, which is rated "A" by A.M. Best & Co. For the Blanket
Insurance Policy, Onyx is assessed a premium based on each Motor Vehicle
Contract acquired. The insurer under the Blanket Insurance Policy is required to
settle any claim complying with the policy conditions within 60 days from the
date reported. Onyx has paid the premium for the Blanket Insurance Policy
allocable to each Contract sold to the Trust prior to such Contract's sale to
the Trust. The proceeds under the Blanket Insurance Policy, to the extent they
relate to any Contract, will constitute part of the Trust Property.
COLLECTION PROCEDURES
Collection activities with respect to delinquent Motor Vehicle Contracts
are performed by Onyx at its Irvine collection center. Collection activities
include prompt investigation and evaluation of the causes of any delinquency. An
Obligor is considered delinquent when he or she has failed to make a scheduled
payment under the Motor Vehicle Contract within 30 days of the related due date
(each, a "Due Date").
To automate its collection procedures, Onyx uses features of the computer
system of its third party service bureau, Online Computer Systems, Inc. ("OCS")
to provide tracking and notification of delinquencies. The collection system
provides relevant Obligor information (for example, current addresses, phone
numbers and loan information) and records of all Motor Vehicle Contracts. The
system also records an Obligor's promise to pay and affords supervisors the
ability to review collection personnel activity and to modify collection
priorities with respect to Motor Vehicle Contracts. Onyx utilizes a predictive
dialing system centrally located within its Irvine headquarters to make phone
calls to Obligors whose payments are past due by more than eight days but less
than 30 days. The predictive dialer is a computer-controlled telephone dialing
system which dials phone numbers of Obligors from a file of records extracted
from Onyx's database. By eliminating time wasted on attempting to reach
Obligors, the system gives a single collector, on average, the ability to speak
with and work 300 to 350 accounts per day. Once a live voice responds to the
automated dialer's call, the system automatically transfers the call to a
collector and the relevant account information to the collector's computer
screen. The system also tracks and notifies collection management of phone
numbers
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that the system has been unable to reach within a specified number of days,
thereby promptly identifying for management all Obligors who cannot be reached
by telephone.
Once an Obligor is 20 days or more delinquent, those accounts are assigned
to specific collectors at the Irvine Collection Center who have primary
responsibility for such delinquent account until it is resolved. To expedite
collections from late paying Obligors, Onyx uses Western Union "Quick Collect,"
which allows an Obligor to pay at numerous locations any late payments and Onyx
to print at its Irvine headquarters a check evidencing the payment. Onyx also
uses an automatic payment system that allows an Obligor to authorize Onyx to
present a draft on the Obligor's bank account directly to the Obligor's bank for
payment to Onyx.
Generally, after a scheduled payment under a Motor Vehicle Contract
continues to be past due for between 45 and 60 days, Onyx will initiate
repossession of the Financed Vehicle. However, if a Motor Vehicle Contract is
deemed uncollectible, if the Financed Vehicle is deemed by collection personnel
to be in danger of being damaged, destroyed or made unavailable for
repossession, or if the Obligor voluntarily surrenders the Financed Vehicle,
Onyx may repossess it without regard to the length or existence of payment
delinquency. Repossessions are conducted by third parties who are engaged in the
business of repossessing vehicles for secured parties. Under the laws of
California, Arizona and Washington and the other states in which the Contracts
were or will be originated, after repossession the Obligor generally has an
additional period of up to 15 days to redeem the Financed Vehicle before the
Financed Vehicle may be resold by Onyx in an effort to recover the balance due
under the Motor Vehicle Contract.
Losses may occur in connection with delinquent Motor Vehicle Contracts and
can arise in several ways, including inability to locate the Financed Vehicle or
the Obligor, or because of a discharge of the Obligor in a bankruptcy
proceeding. The current policy of Onyx is to recognize losses at the time a
Motor Vehicle Contract is deemed uncollectible or during the month a scheduled
payment under a Motor Vehicle Contract becomes 120 days or more past due,
whichever occurs first.
Upon repossession and sale of the Financed Vehicle, any deficiency
remaining is pursued against the Obligor to the extent deemed practical by Onyx
and to the extent permitted by law. The loss recognition and collection policies
and practices of Onyx may change over time in accordance with Onyx's business
judgment. However, the Agreement requires that Onyx service the Contracts and
collect all amounts due using reasonable care and in at least the same manner as
it services and collects amounts due with respect to Motor Vehicle Contracts
serviced by it for its own account.
MODIFICATIONS AND EXTENSIONS
Onyx offers certain credit-related extensions to Obligors. Generally, these
extensions are offered only when (i) Onyx believes that the Obligor's financial
difficulty has been resolved or will no longer impair the Obligor's ability to
make future payments, (ii) the extension will result in the Obligor's payments
being brought current, (iii) the total number of credit-related extensions
granted on the Motor Vehicle Contract will not exceed three and the total
credit-related extensions granted on the Motor Vehicle Contract will not exceed
three months in the aggregate, (iv) there have been no more than two
credit-related extensions granted on the Motor Vehicle Contract in the
immediately preceding twelve months, and (v) Onyx (or its assignee) had held the
Motor Vehicle Contract for at least six months. Any deviation from this policy
requires the concurrence of Onyx's collection manager and an Auto Finance Center
manager.
DELINQUENCY AND LOAN LOSS INFORMATION
The following tables set forth information with respect to the experience
of Onyx relating to delinquencies, loan losses and recoveries for the portfolio
of Motor Vehicle Contracts owned and serviced by Onyx on an annual basis
commencing December 31, 1994. The tables include delinquency information
relating to those Motor Vehicle Contracts that were purchased, originated, sold
and serviced by Onyx. All of the Motor Vehicle Contracts were originally
purchased by Onyx from Dealers or originated by Onyx itself in accordance with
credit underwriting criteria established by Onyx. In February 1994, Onyx
commenced its operations as a purchaser and servicer of motor vehicle retail
installment sales contracts. Thus, Onyx has historical performance for only a
limited time period with respect to the Motor Vehicle Contracts it purchases and
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originates and thus delinquencies and loan losses may increase from existing
levels in the portfolio with the passage of time. Delinquency and loan loss
experience may be influenced by a variety of economic, social and other factors.
See "Risk Factors."
The delinquency and loss levels of the Motor Vehicle Contracts in Onyx's
portfolio at December 31, 1996 and March 31, 1997 were higher than in prior
periods due generally to the seasoning of such contracts. In addition, the
increase in delinquency and loss levels at December 31, 1996 and March 31, 1997
were influenced by disproportionately high delinquency and loss levels of the
Motor Vehicle Contracts originated prior to the third quarter of 1996 through
Onyx's North Hollywood Auto Finance Center. The North Hollywood Auto Finance
Center had a higher concentration of used car dealerships than Onyx's other Auto
Finance Centers, and this concentration of used car dealerships was principally
responsible for the deterioration in the performance of Onyx's portfolio during
the second and third quarters of 1996.
To address the performance issues of this center, following the end of the
second quarter of 1996 management re-evaluated all used car dealerships from
which Onyx purchases Motor Vehicle Contracts to ensure that such dealerships
meet Onyx's underwriting criteria, and Onyx terminated its relationships with a
majority of the used car dealerships serviced by the North Hollywood Auto
Finance Center. Originations in the North Hollywood office, as a result, have
declined.
During the third quarter of 1996 management further enhanced the credit
review process by promoting a senior credit manager to the position of Chief
Credit Officer and by increasing staffing in the credit review department. This
department continues to audit contracts within a few days after funding. The
results of the audits are communicated back to the originating office on a daily
basis.
In addition, during the fourth quarter of 1996 and first quarter of 1997
management further enhanced the collections process by completing the
centralization of collections at Onyx's Irvine headquarters and hiring a manager
with over 25 years of collections experience to head the department. Collections
were previously handled at each of Onyx's Auto Finance Centers, each of which
was responsible for collections in certain geographic areas. Centralized
collections is intended to reduce cost and enhance effectiveness by enabling
personnel to specialize in specific stages of the collections process, rather
than focusing on specific geographic areas. For example, a collections officer
previously working at a regional Auto Finance Center might have focused on a
particular geographic region and covered all stages of collections (e.g., from
delinquencies through bankruptcies). In the centralized collections operation,
this officer might cover all geographic areas, but focus on a particular stage
of collections (e.g., 60-day delinquencies). In addition, in the first quarter
of 1997, Onyx's review of its payment deferral policy resulted in more
consistent applications of the policy and reductions in loan payment deferrals
by approximately 55% over the same period in the prior year. This review and
change contributed significantly to the increase in delinquencies experienced
during the first quarter of 1997.
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DELINQUENCY EXPERIENCE OF ONYX MOTOR VEHICLE CONTRACT PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31, AT MARCH 31,
1994 1995 1996 1997
----------------- ------------------ ------------------ ------------------
AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT NO.
------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio... $74,581 6,893 $218,207 20,156 $400,665 38,275 $478,400 45,740
Delinquencies
30-59 days(1)(2).... $ 15 2 $ 1,608 153 $ 5,022 478 $ 9,867 904
60-89 days(1)(2).... 27 4 470 35 1,816 162 2,551 242
90+ days(1)(2)...... 12 1 547 42 1,279 111 2,542 214
Total delinquencies as
a percent of
servicing
portfolio........... .07% .10% 1.20% 1.14% 2.03% 1.96% 3.13% 2.97%
</TABLE>
- ---------------
(1) Delinquencies include principal amounts only, net of repossessed inventory.
Repossessed inventory as a percent of the servicing portfolio was .00%,
.24%, .56% and .97% at December 31, 1994, 1995, 1996 and at March 31, 1997,
respectively.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
LOAN LOSS EXPERIENCE FOR THE PERIODS ENDED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
--------------------------------- ENDED
DEC. ------------
31, DEC. 31, DEC. 31, MARCH 31,
1994 1995 1996 1997
------- -------- -------- ------------
<S> <C> <C> <C> <C>
Number of Motor Vehicle Contracts
outstanding................................. 6,893 20,156 38,275 45,740
Period end outstanding........................ $74,581 $218,207 $400,665 $478,400
Average outstanding........................... 29,301 141,029 311,340 433,147
Number of gross charge-offs................... 0 197 987 367
Gross charge-offs............................. $ 0 $ 548.2 $5,789.2 $2,309.2
Net charge-offs(1)............................ $ 0 $ 528.7 $5,066.1 $1,979.7
Net charge-offs as a percent of period end
outstanding................................. 0.0% .24% 1.26% 1.66%(2)
Net charge-offs as a percent of average
outstanding................................. 0.0% .37% 1.63% 1.83%(2)
</TABLE>
- ---------------
(1) Net charge-offs are gross charge-offs minus recoveries of Motor Vehicle
Contracts previously charged off.
(2) Annualized.
16
<PAGE> 18
THE CONTRACTS
All of the Contracts have been purchased by the Seller from Onyx.
Substantially all of the Contracts have been purchased by Onyx from new and used
car Dealers unaffiliated with Onyx or the Seller, and a limited number of
Contracts have been originated by Onyx itself. See "The Onyx Portfolio of Motor
Vehicle Contracts." Each of the Contracts in the Trust will be fixed rate
contracts where the allocation of each payment between interest and principal is
calculated using the Rule of 78's or the Simple Interest Method. Approximately
% of the Aggregate Scheduled Balance of the Contracts as of the Cut-Off
Date allocate interest and principal in accordance with the Rule of 78's (the
"Rule of 78's Contracts"), and approximately % in accordance with the
Simple Interest Method (the "Simple Interest Contracts"). Rule of 78's Contracts
provide for the payment by the Obligor of a specified total amount of payments,
payable in equal monthly installments, which total represents the principal
amount financed plus add-on interest in an amount calculated as if such Contract
were a self-amortizing, level-yield Contract bearing interest at a per annum
rate equal to the stated annual percentage rate as set forth in the Contract
("APR"). Under the Rule of 78's, the amount of each payment allocable to
interest on a Contract is determined by multiplying the total amount of add-on
interest payable over the term of the Contract by a fraction derived as
described below. The fraction used in the calculation of add-on interest earned
each month under a contract governed by the Rule of 78's has as its denominator
a number equal to the sum of a series of numbers representing the total number
of monthly payments due under the Contract. For example, with a Contract
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of a series of numbers from 1 to 12. The numerator of the fraction for a
given month is the number of payments remaining before giving effect to the
payment to which the fraction is being applied. Accordingly, in the example of a
twelve-payment Contract, the fraction for the first payment is 12/78, for the
second payment 11/78, for the third payment 10/78, and so on through the final
payment, for which the fraction is 1/78. The applicable fraction is then
multiplied by the total add-on interest payment over the entire term of the
Contract, and the resulting amount is the amount of add-on interest earned that
month. The difference between the amount of the monthly payment by the Obligor
and the amount of earned add-on interest calculated for the month is applied to
principal reduction.
For Simple Interest Contracts, interest due is calculated on the Due Date
based on the actual principal balance of the Contract on that date (the "Simple
Interest Method"). For such Contracts, interest accrued as of the Due Date is
paid first, and then the remaining payment is applied to the unpaid principal
balance. Accordingly, if an Obligor pays the fixed monthly installment in
advance of the Due Date, the portion of the payment allocable to interest for
the period since the preceding payment will be less than it would be if the
payment were made on the Due Date, and the portion of the payment allocable to
reduce the principal balance will be correspondingly greater. Conversely, if an
Obligor pays the fixed monthly installment after its Due Date, the portion of
the payment allocable to interest for the period since the preceding payment
will be greater than it would be if the payment were made on the Due Date, and
the portion of the payment allocable to reduce the principal balance will be
correspondingly smaller. When necessary, an adjustment is made at the maturity
of the Contract to the scheduled final payment to reflect the larger or smaller,
as the case may be, allocations of payments to the amount financed under the
Contract as a result of early or late payments, as the case may be.
The purchase price paid by the Trust for each Contract will reflect the
principal balance of such Contract as of the Cut-Off Date, calculated either
under the Rule of 78's or the Simple Interest Method. For each of the Contracts
the term "Cut-Off Date Scheduled Balance" means the principal balance of such
Contract as of the Cut-Off Date. For Rule of 78's Contracts a greater portion of
the early payments under a Contract is allocated to interest than would be the
case using the actuarial method. Therefore, the Cut-Off Date Scheduled Balance
of each Rule of 78's Contract exceeds the amount that would have been its
principal balance as of the Cut-Off Date if each Contract had been amortized
from origination under the actuarial method. The Trustee and the Servicer intend
to account for interest and principal on the Rule of 78's Contracts using the
actuarial method, but based on the Cut-Off Date Scheduled Balance. The remaining
payments due on a Rule of 78's Contract are not sufficient to amortize the
Cut-Off Date Scheduled Balance of such Contract at a yield equal to its APR.
Accordingly, in order to amortize the Cut-Off Date Scheduled Balance over the
remaining term of the Rule of 78's Contract using the actuarial method of
accounting, the
17
<PAGE> 19
Servicer will recompute the effective yield of such Contract based on the
remaining payments due and the Cut-Off Date Scheduled Balance (such yield,
stated as a per annum rate, the "Recomputed Yield") and will allocate each
payment of Monthly P&I between principal and interest on each Rule of 78's
Contract based on the Cut-Off Date Scheduled Balance and the Recomputed Yield
for such Contract (such method, the "Recomputed Actuarial Method").
The Contracts were selected from the Motor Vehicle Contracts in the
portfolio of Onyx using the following criteria (the "Eligibility Requirements").
No selection procedures used with respect to the Contracts were adverse to the
Certificateholders or the Insurer. Approximately % of the Aggregate
Scheduled Balance of the Contracts are secured by new Financed Vehicles and
approximately % of the Aggregate Scheduled Balance of the Contracts are
secured by used Financed Vehicles. The Seller may not substitute other Motor
Vehicle Contracts for the Contracts at any time during the term of the
Agreement.
The Seller has represented that all of the Contracts included in the Trust
satisfy the following Eligibility Requirements:
(a) Such Contracts are secured by a new or used automobile or
light-duty truck;
(b) Such Contracts have remaining maturity as of the Cut-Off Date of
not more than 72 months;
(c) Such Contracts have an original maturity of not more than 72
months;
(d) Such Contracts (i) are fully-amortizing fixed rate contracts which
provide for level scheduled monthly payments determined on the basis of the
Rule of 78's or the Simple Interest Method (except for the last payment,
which may be minimally different from the level payments) and (ii) have a
yield (using the Recomputed Yield for the Rule of 78's Contracts) that
equals or exceeds %, (only after including amounts due under the Yield
Supplement Agreement);
(e) Such Contracts are secured by Financed Vehicles that, as of the
Cut-Off Date, have not been repossessed without reinstatement;
(f) Such Contracts have no payment more than 30 days past due as of
the Cut-Off Date;
(g) Such Contracts have remaining principal balances as of the Cut-Off
Date of at least $500;
(h) Such Contracts were made to Obligors located in the State of
California, Arizona, Nevada, Washington or Oregon; and
(i) As of the Cut-Off Date, the Seller has not received notice that
any Obligor has filed for bankruptcy.
18
<PAGE> 20
Set forth below is data concerning Contracts originated prior to the
Cut-Off Date which, as of such date, had an Aggregate Scheduled Balance of
$ .
COMPOSITION OF THE CONTRACTS
<TABLE>
<S> <C>
Aggregate principal balance.......................................... $
Number of Contracts..................................................
Average principal balance outstanding................................ $
Average original amount financed..................................... $
Original amount financed (range)..................................... $
Weighted average APR................................................. %
APR (range).......................................................... %
Weighted average original term.......................................
Original term (range)................................................
Weighted average remaining term......................................
Remaining term (range)...............................................
</TABLE>
DISTRIBUTION BY APRS OF THE CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE
NUMBER OF % OF PRINCIPAL SCHEDULED
APR RANGE(1) CONTRACTS CONTRACTS BALANCE BALANCE
--------------------------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
7.001- 8.000.......................... % $ %
8.001- 9.000..........................
9.001-10.000..........................
10.001-11.000..........................
11.001-12.000..........................
12.001-13.000..........................
13.001-14.000..........................
14.001-15.000..........................
15.001-16.000..........................
16.001-17.000..........................
17.001-18.000..........................
18.001-19.000..........................
19.001-20.000..........................
20.001-21.000..........................
21.001 and over........................
----- ------ ----------- ------
Totals....................... % $ %
===== ====== =========== ======
</TABLE>
GEOGRAPHIC CONCENTRATION OF THE CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE
NUMBER OF % OF PRINCIPAL SCHEDULED
CONTRACTS CONTRACTS BALANCE BALANCE
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
California....................... % $ %
Arizona..........................
Washington.......................
Florida, Nevada and Oregon.......
-------
----
----- ------
Total.................. % $ %
===== =========== ======
</TABLE>
- ---------------
(1) Because the principal balance of each such Contract sold to the Trust is the
Cut-Off Date Scheduled Balance, which in the case of Rule of 78's Contracts
is higher than what the principal balance of the Rule of 78's Contracts
would have been had principal and interest been allocated from the date of
origination in accordance with the actuarial method, the Recomputed Yield
for each Rule of 78's Contract is less than the APR of such Contract
specified herein. On a weighted average basis, the yield for all the
Contracts, using the Recomputed Yield for the Rule of 78's Contracts, in the
aggregate, is %. See "The Contracts."
19
<PAGE> 21
MATURITY AND PREPAYMENT ASSUMPTIONS
The Contracts are prepayable in full by the Obligors at any time without
penalty. Prepayments on Simple Interest Contracts will be passed through to
Certificateholders on the Distribution Date following the Collection Period in
which they are received. Partial prepayments on Rule of 78's Contracts however
will be treated as Payaheads and will not be passed through until the Collection
Period in which such payments are due or until the amount of such partial
prepayment equals the amount the Obligor would be required to pay in order to
prepay the Contract in full. See "The Certificates and the Agreement -- Payahead
Account." To the extent that any Contract is prepaid in full ("Full Prepayment")
whether by the Obligor, or as the result of a purchase by the Servicer or a
repurchase by the Seller or otherwise, the actual weighted average life of the
Contracts will be shorter than a weighted average life calculation based on the
assumptions that payments will be made on schedule and that no prepayments will
be made. Weighted average life means the average amount of time in which each
dollar of principal on a Contract is repaid. Full Prepayments may also result
from liquidations due to default, receipt of proceeds from theft, physical
damage, credit life and credit disability insurance policies, repurchases by the
Seller as a result of the failure of a Contract to meet certain criteria set
forth in the Agreement, purchases by the Servicer as a result of a breach of
certain of its covenants with respect to the Contracts made by it in the
Agreement or as a result of an exercise by the Servicer of its option to
purchase the Trust Property. See "The Certificates and the
Agreement -- Repurchases of Contracts."
The rate of Full Prepayments by Obligors on the Contracts may be influenced
by a variety of economic, social and other factors, including the fact that an
Obligor may not sell or transfer the Financed Vehicle securing a Contract
without the consent of the Servicer. These factors may also include
unemployment, servicing decisions, seasoning of loans, destruction of vehicles
by accident, sales of vehicles and market interest rates.
California, Washington and Arizona law require that retail installment
sales contracts such as the Contracts permit full prepayment without penalty.
Any Full Prepayments reduce the average life of the Contracts. The Servicer will
permit the sale or other transfer of a Financed Vehicle without accelerating the
maturity of the related Contract if such Contract is assumed by a person
satisfying Onyx's then current underwriting standards. See "The Onyx Portfolio
of Motor Vehicle Contracts -- Underwriting of Motor Vehicle Contracts."
Onyx has limited historical experience with respect to prepayments, has not
as of the date hereof prepared data on prepayment rates, and is not aware of
publicly available industry statistics that set forth principal prepayment
experience for retail installment sales contracts similar to the Contracts. Onyx
can make no prediction as to the actual prepayment rates that will be
experienced on the Contracts in either stable or changing interest rate
environments. Certificate Owners will bear all reinvestment risk resulting from
the rate of prepayment of the Contracts.
YIELD CONSIDERATIONS
Interest due will be passed through on each Distribution Date in an amount
equal to the product of one-twelfth of the Pass-Through Rate and the Pool
Balance as of the end of the Collection Period preceding the related Collection
Period (or the Original Pool Balance, in the case of the first Distribution
Date). In the event of a principal prepayment on a Contract during a Collection
Period, Certificateholders will receive interest for the full month on the
related Distribution Date. See "The Certificates and the Agreement --
Distributions of Principal and Interest."
Although the Contracts have different APRs, the yield on each individual
Contract, using the Recomputed Yield for Rule of 78's Contracts, will equal or
exceed % (after including amounts due under the Yield Supplement
Agreement). Therefore, disproportionate rates of prepayments between Contracts
with higher and lower APRs will not affect the yield to Certificateholders.
20
<PAGE> 22
POOL FACTOR
The "Pool Factor" will be a six-digit decimal which the Servicer will
compute each month indicating the Pool Balance at the end of the month as a
fraction of the Original Pool Balance. The Pool Factor will be 1.000000 as of
the Closing Date; thereafter, the Pool Factor will decline to reflect reductions
in the Pool Balance. The amount of a Certificateholder's pro rata share of the
Pool Balance for a given month can be determined by multiplying the original
denomination of such holder's Certificate by the Pool Factor for that month.
Pursuant to the Agreement, Certificateholders will receive monthly reports
from the Trustee concerning payments received on the Contracts, the Pool
Balance, the Pool Factor, and various other items of information.
Certificateholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "The Certificates and the Agreement."
USE OF PROCEEDS
The net proceeds to be received by the Seller from the sale of Certificates
will be used to repay loans incurred pursuant to its short-term funding program
and to fund the Yield Supplement Reserve Account.
THE SELLER
The Seller is a wholly-owned, limited purpose finance subsidiary of Onyx
which was incorporated under the laws of the State of Delaware on July 28, 1994
and has a limited operating history. The principal office of the Seller is
located at 8001 Irvine Center Drive, 6th Floor, Irvine, CA 92618. The telephone
number of such office is (714) 753-1191.
The Seller was organized principally for the purpose of purchasing retail
installment sales contracts from Onyx in connection with its activities as a
finance subsidiary of Onyx. The Seller was organized for limited purposes, and
its certificate of incorporation limits its activities to purchasing Contracts
from Onyx and transferring such Contracts to third parties and any activities
incidental to and necessary or convenient for the accomplishment of such
purposes.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by Onyx under any Insolvency Law will not result in consolidation of
the assets and liabilities of the Seller with those of Onyx. These steps include
the creation of the Seller as a separate, limited purpose subsidiary pursuant to
a certificate of incorporation containing certain limitations (including
restrictions on the nature of the Seller's business and a restriction on the
Seller's ability to commence a voluntary case or proceeding under any Insolvency
Law without the unanimous affirmative vote of all of its directors). However,
there can be no assurance that the activities of the Seller would not result in
a court concluding that the assets and liabilities of the Seller should be
consolidated with those of Onyx in a proceeding under any Insolvency Law.
The Seller has received the advice of counsel to the effect that, subject
to certain facts, assumptions and qualifications, it would not be a proper
exercise by a court of its equitable discretion to disregard the separate
corporate existence of the Seller and to require the consolidation of the assets
and liabilities of the Seller with the assets and liabilities of Onyx in the
event of the application of any Insolvency Law to Onyx. However, there can be no
assurance that a court would not conclude that the assets and liabilities of the
Seller should be consolidated with those of Onyx. If a court were to reach such
a conclusion, or a filing were made under any Insolvency Law by or against the
Seller, or if an attempt were made to litigate any of the foregoing issues,
delays in distributions on the Certificates could occur or reductions in the
amounts of such distributions could result.
The Contracts have been sold by Onyx to the Seller from time to time
pursuant to a Sale and Servicing Agreement dated as of September 8, 1994 (the
"Purchase Agreement"). The Contracts will be sold by the Seller to the Trust
pursuant to the Agreement. Onyx and the Seller intend that the transfer of the
Contracts by Onyx to the Seller under the Purchase Agreement constitute a "true
sale" of the Contracts to the Seller. If the
21
<PAGE> 23
transfer constitutes such a "true sale," the Contracts and the proceeds thereof
would not be part of the bankruptcy estate of Onyx under Section 541 of the
Bankruptcy Code should Onyx become the subject of a bankruptcy case subsequent
to the transfer of the Contracts to the Seller.
The Seller has received the advice of counsel to the effect that, subject
to certain facts, assumptions and qualifications, in the event Onyx were to
become the subject of a voluntary or involuntary case under the Bankruptcy Code
subsequent to the transfer of the Contracts to the Seller, the transfer of the
Contracts by Onyx to the Seller pursuant to the Purchase Agreement would be
characterized as a "true sale" of the Contracts from Onyx to the Seller and the
Contracts and the proceeds thereof would not form part of Onyx's bankruptcy
estate pursuant to Section 541 of the Bankruptcy Code.
THE SERVICER
The Contracts initially will be serviced by Onyx Acceptance Corporation
("Onyx"). Onyx was incorporated in California in 1993 and reincorporated in
Delaware in 1996 in connection with its initial public offering of Common Stock
which was successfully completed in March 1996 and all stock offered in
connection with such public offering was sold. Onyx is engaged principally in
the business of providing indirect automobile financing to new car dealerships
and selected used car dealerships within California, and to an increasing degree
in other Western states and Florida. Onyx has been in existence for over three
years and is headed by a management team with extensive experience in the
origination and servicing of indirect and direct automobile loans (average
tenure of 16 years), and who, from 1985 to present, have actively participated
in a number of public securitizations of motor vehicle installment contracts.
Onyx is headquartered in Irvine, California and operates ten Auto Finance
Centers, six in California and one in each of Arizona, Florida, Nevada and
Washington. The California centers are located in: (i) Orange and Metropolitan
Los Angeles Counties, (ii) North Los Angeles and Ventura Counties, (iii) the San
Francisco Bay Area, (iv) Riverside and San Bernardino Counties, (v) San Diego
County, and (vi) Sacramento County. Through these offices, Onyx is able to
service the most populous California counties including Los Angeles, Riverside,
San Bernardino, Ventura, Orange, San Diego, San Francisco, Santa Clara, Alameda,
San Mateo, Santa Cruz, Marin, Contra Costa, and Sacramento counties. In
addition, Onyx services Oregon through its Washington center. The Arizona center
is located in Phoenix, and is able to service the Phoenix metropolitan and
suburban areas. The Washington center is located in Seattle and is able to
service the Seattle metropolitan and suburban areas. The Nevada center is
located in Las Vegas and is able to service the Las Vegas metropolitan and
suburban areas. The Florida center is located in Deerfield Beach and is able to
service southern Florida. Onyx currently has agreements with 1,717 Dealers.
Onyx acquires individual motor vehicle installment contracts from Dealers
after reviewing and approving the customer's credit application in accordance
with its underwriting policies and procedures. See "The Contracts." Onyx has
acquired motor vehicle installment contracts totaling approximately $730.6
million from commencement of operations through March 31, 1997. As of March 31,
1997, Onyx has amassed a servicing portfolio of approximately $478.4 million. As
of March 31, 1997, approximately 77.4% of Onyx's servicing portfolio consisted
of motor vehicle installment contracts secured by used motor vehicles, and 22.6%
secured by new motor vehicles. As of March 31, 1997, Onyx had total assets of
approximately $95.0 million and shareholders equity of $38.5 million.
Onyx finances its acquisition of motor vehicle installment contracts on a
short term basis through a commercial paper conduit program and has previously
financed its acquisition of motor vehicle installment contracts on a long term
basis through sales of Contracts to grantor trusts.
THE CERTIFICATES AND THE AGREEMENT
The Certificates will be issued pursuant to the Agreement, a form of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries of certain provisions of the
Agreement do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreement. Where
particular provisions of or terms used in the Agreement are referred
22
<PAGE> 24
to, the actual provisions (including definitions of terms) are incorporated by
reference as part of such summaries.
GENERAL
The Certificates will be offered for purchase in minimum denominations of
$1,000 and integral multiples thereof, except that one Certificate may be issued
in a denomination that includes any residual portion of the Original Pool
Balance. Each Certificate will rank pari passu with each other Certificate. The
Certificates will initially be represented by one or more Certificates
registered in the name of Cede & Co. ("Cede"), as nominee of DTC, except as set
forth below. The interests of holders of beneficial interests in the
Certificates (each a "Certificate Owner") will be available for purchase in
denominations of $1,000 and integral multiples thereof in book-entry form only.
The Seller has been informed by DTC that DTC's nominee will be Cede.
Accordingly, Cede is expected to be the holder of record of the Certificates.
Unless and until Definitive Certificates are issued under the limited
circumstances described herein, no Certificate Owner will be entitled to receive
a certificate representing such person's interest in the Certificates. All
references herein to actions by Certificateholders shall refer to actions taken
by DTC upon instructions from its participating organizations (the
"Participants") and all references herein to distributions, notices, reports and
statements to Certificateholders shall refer to distributions, notices, reports
and statements to DTC or Cede, as the registered holder of the Certificates, as
the case may be, for distribution to Certificate Owners in accordance with DTC
procedures. See "The Certificates and the Agreement -- Book-Entry Registration"
and "-- Definitive Certificates."
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
On each Distribution Date, monthly interest due on the Contracts (the
"Interest Distribution") at a rate equal to the product of one-twelfth of the
Pass-Through Rate and the Pool Balance as of the end of the Collection Period
preceding the related Collection Period will be distributed on a pro rata basis
to the Certificateholders of record as of the related Record Date. The "Pool
Balance" as of any date is the Aggregate Scheduled Balance of the Contracts as
of such date, excluding those Contracts which as of such date have become
Liquidated Contracts or have been repurchased by the Seller or purchased by the
Servicer. Interest will be paid from collections received on the Contracts on
deposit in the Collection Account or previously collected and available for
distribution and from payments from the Yield Supplement Reserve Account and/or
pursuant to the Yield Supplement Agreement. A "Collection Period" with respect
to a Distribution Date will be the calendar month preceding the month in which
such Distribution Date occurs; provided, that with respect to Liquidated
Contracts the Collection Period will be the period from but excluding the sixth
Business Day preceding the immediately preceding Distribution Date to and
including the sixth Business Day preceding such Distribution Date. With respect
to the first Distribution Date the "Collection Period" for Liquidated Contracts
will be the period from and including the Cut-Off Date to and including the
sixth Business Day preceding such first Distribution Date. Each Interest
Distribution will be calculated on the basis of a 360-day year consisting of
twelve 30-day months. Unless and until Definitive Certificates have been issued,
distributions on each Distribution Date will be made through the facilities of
DTC and the related "Record Date" will be the Business Day prior to such
Distribution Date. If Definitive Certificates are issued, the related "Record
Date" will be the last day of the calendar month preceding such Distribution
Date. The final distribution of principal of and interest on each Certificate
will be made only upon presentation and surrender of such Certificate on or
after the Final Distribution Date (or such earlier termination date as is
provided by the Agreement) at the office or agency of the Trustee maintained for
that purpose.
On each Distribution Date, Principal Distributions for the related
Collection Period will be passed through to the Certificateholders. The
"Principal Distribution" on any Distribution Date is the Aggregate Scheduled
Balance Decline during the related Collection Period. The Principal Distribution
on the Final Distribution Date will include the Aggregate Scheduled Balance of
all Contracts that are outstanding at the end of the Collection Period
immediately prior to the Final Distribution Date. The "Aggregate Scheduled
Balance Decline" for any Distribution Date is the amount by which the Aggregate
Scheduled Balance of the Contracts as of the beginning of the related Collection
Period exceeds the Aggregate Scheduled Balance of
23
<PAGE> 25
such Contracts as of the end of the related Collection Period. The "Aggregate
Scheduled Balance" of the Contracts is the sum of the Scheduled Balances of each
Contract. The "Scheduled Balance" of a Rule of 78's Contract at any date is
equal to the Cut-Off Date Scheduled Balance of such Contract reduced by the
portion of each scheduled payment of principal and interest due on such Contract
(the "Monthly P&I") on or prior to the date of calculation that is allocable to
principal under the Recomputed Actuarial Method. The Scheduled Balance of a
Simple Interest Contract at any date is equal to the Cut-Off Date Scheduled
Balance of such Contract reduced by the portion of Monthly P&I on or prior to
the date of calculation that is allocated to principal under the Simple Interest
Method. The Scheduled Balance of any Contract that is a Liquidated Contract or
that has been purchased by the Servicer or repurchased by the Seller will equal
zero. A "Liquidated Contract" is a Contract that (a) is the subject of a Full
Prepayment, (b) is a Defaulted Contract with respect to which Liquidation
Proceeds constituting, in the Servicer's reasonable judgment, the final amounts
recoverable have been received, (c) is paid in full on or after its Maturity
Date or (d) has been a Defaulted Contract for four or more Collection Periods
and as to which Liquidation Proceeds constituting the final amounts recoverable
have not been received; provided, however, that in any event a Contract that is
delinquent in the amount of five monthly payments at the end of a Collection
Period is a Liquidated Contract. A "Defaulted Contract" with respect to any
Collection Period is a Contract (a) which is, at the end of such Collection
Period, delinquent in the amount of two monthly payments or (b) with respect to
which the related Financed Vehicle has been repossessed or repossession efforts
have been commenced.
The Monthly P&I for a Contract due on each Due Date is substantially equal
for the term of the Contract. The Scheduled Balance of each Contract as of the
Cut-Off Date, which will be treated as being equal to the Cut-Off Date Scheduled
Balance, will be set forth in a schedule to the Agreement. The yield of each
Contract (using the Recomputed Yield for Rule of 78's Contracts) will at least
equal % (after including amounts due under the Yield Supplement Agreement).
At the issuance of the Certificates, the initial aggregate principal amount
of the Certificates will equal the Aggregate Scheduled Balance of all the
Contracts as of the Cut-Off Date.
YIELD SUPPLEMENT AGREEMENT AND YIELD SUPPLEMENT RESERVE ACCOUNT
Simultaneously with the sale and assignment of the Contracts by the Seller
to the Trust, Onyx and the Seller will enter into the Yield Supplement
Agreement, pursuant to which Onyx will be obligated to pay the Yield Supplement
Amount, if any, on each Servicer Report Date. The Seller will assign its rights
under the Yield Supplement Agreement to the Trust. Payments of the Yield
Supplement Amounts due under the Yield Supplement Agreement will be secured by
funds on deposit in a segregated trust deposit account (the "Yield Supplement
Reserve Account") established in the name of Bankers Trust Company, acting as
agent for the benefit of the Certificateholders and the Insurer (in such
capacity, the "Yield Supplement Agent"). The amount required to be deposited in
such Yield Supplement Reserve Account will be the maximum Yield Supplement
Amount that may become owing under the Yield Supplement Agreement, assuming that
each payment on the Contracts is made on its scheduled Due Date and that no
prepayments are made. The "Yield Supplement Amount," with respect to any
Distribution Date for any Collection Period, is the sum of the following as
calculated for each Contract: the amount (if positive), calculated by the
Servicer, equal to one-twelfth of (i) interest on such Contract's Scheduled
Balance as of the first day of the related Collection Period at a rate equal to
% minus (ii) interest on such Contract at its Recomputed Yield on such
Contract's Scheduled Balance as of the first day of the related Collection
Period.
The Yield Supplement Reserve Account will be an Eligible Account. Any funds
remaining on deposit in the Yield Supplement Reserve Account after payment of
the Yield Supplement Amount will be released to Onyx on the Final Distribution
Date.
THE SURETY BOND
If on any Servicer Report Date the amount on deposit in the Collection
Account after giving effect to all amounts deposited to or payable from the
Payahead Account, the Yield Supplement Reserve Account and/or pursuant to the
Yield Supplement Agreement, with respect to the related Distribution Date, is
less than the
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sum of the Servicing Fee, the Principal Distribution and Interest Distribution
for the related Distribution Date, the Trustee by delivering a notice to the
Insurer shall demand payment under the Surety Bond in an amount equal to such
deficiency. The Insurer shall pay or cause to be paid such amount to the Trustee
for credit to the Collection Account. The Trustee shall withdraw from the
Collection Account and shall pay such amount to the Certificateholders on the
related Distribution Date.
If on the Business Day preceding the Final Distribution Date, any principal
amount of Certificates is still outstanding, then the Trustee shall demand
payment on the Surety Bond in an amount equal to the amount by which the
outstanding principal amount of the Certificates, plus interest thereon at the
Pass-Through Rate, exceeds the amount on deposit in the Collection Account which
is available for distribution on the Final Distribution Date. The Insurer shall
pay or cause to be paid such amount to the Trustee pursuant to the Trustee's
instructions for credit to the Collection Account and on the Final Distribution
Date, the Trustee shall withdraw from the Collection Account and shall pay such
amount to the Certificateholders.
BOOK-ENTRY REGISTRATION
Certificateholders may hold their Certificates through DTC if they are
participants of such system, or indirectly through organizations which are
participants ("Participants") in such system.
Cede, as nominee for DTC, will hold one or more global Certificates.
Transfers between Participants will occur in the ordinary way in accordance with
DTC rules.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations (including the Underwriters).
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Certificates may do so only through Participants and Indirect Participants.
In addition, Certificateholders will receive all distributions of principal of
and interest on the Certificates from the Trustee, as paying agent, or its
successor in such capacity (the "Paying Agent"), through the Participants who in
turn will receive them from DTC. Under a book-entry format, Certificate Owners
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Paying Agent to Cede, as nominee for DTC. DTC will forward
such payments to its Participants which thereafter will forward them to Indirect
Participants or Certificate Owners. It is anticipated that the only
"Certificateholder" will be Cede, as nominee of DTC. Certificate Owners will not
be recognized by the Trustee as Certificateholders, as such term is used in the
Agreement, and Certificate Owners will only be permitted to exercise the rights
of Certificateholders indirectly through the Participants who in turn will
exercise the rights of Certificateholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess Certificates, Certificate Owners will receive payments and will
be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge Certificates to persons or entities that do not
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participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC has advised the Seller that it will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Additionally, DTC has advised the Seller that it will take such actions with
respect to the particular portion of the Certificates represented by the
undivided interests held by Participants which have directed DTC, on their
behalf, to take such action. DTC may take conflicting actions with respect to
other undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Certificates among participants of DTC, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
DEFINITIVE CERTIFICATES
The Certificates will be issued in fully registered, certificated form in
denominations of $1,000 and integral multiples thereof to Certificate Owners or
their nominees (the "Definitive Certificates"), rather than to DTC or its
nominee, only if (i) the Seller advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as depositary
with respect to the Certificates, and the Trustee or the Seller are unable to
locate a qualified successor, or (ii) after the occurrence of an Event of
Default, Certificate Owners representing in the aggregate more than 50% of the
Pool Balance advise the Trustee and DTC through Participants in writing that the
continuation of a book-entry system with respect to the Certificates through any
depositary is no longer in the best interest of the Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the Definitive Certificates representing the Certificates and instructions for
reregistration, the Trustee will issue the Certificates as Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as holders under the Agreement (collectively,
"Holders").
Distribution of principal of and interest on the Certificates will be made
by the Paying Agent directly to Holders of Definitive Certificates in accordance
with the procedures set forth herein and in the Agreement. Interest
Distributions and Principal Distributions on each Distribution Date and on the
Final Distribution Date will be made to Holders in whose names the Definitive
Certificates were registered at the close of business on the related Record
Date. Distributions will be made by check mailed to the address of such Holder
as it appears on the certificate register. The final payment of any Certificate
(whether Definitive Certificates or the Certificate registered in the name of
DTC's nominee), however, will be made only upon presentation and surrender of
such Certificate at the office or agency specified in the notice of final
distribution to Certificateholders. The Trustee will provide such notice to
registered Certificateholders not later than the fifteenth day of the month of
such final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be the
Trustee. No service charge will be imposed for any registration of transfer or
exchange, but the Transfer Agent and Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
SALE AND ASSIGNMENT OF THE CONTRACTS
At the time of issuance of the Certificates, the Seller will sell and
assign to the Trustee, without recourse, the Seller's entire interest in the
Contracts and the proceeds thereof, including its security interests in the
Financed Vehicles. Each Contract will be identified in a schedule appearing as
an exhibit to the Agreement. The Trustee will, concurrently with such sale and
assignment, execute, authenticate and deliver the definitive certificates
representing the Certificates to the Underwriter against payment to the Seller
of the net purchase price of the sale of the Certificates. Pursuant to the
Purchase Agreement, prior to sale of the Contracts to the
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Trustee and the issuance of the Certificates, Onyx sold and assigned to the
Seller Onyx's entire interest in the Contracts.
Pursuant to the Agreement, the Seller will represent to the Trustee and the
Trust for the benefit of holders of the Certificates and the Insurer that: (i)
each Contract contains customary and enforceable provisions such that the rights
and remedies of the holder thereof shall be adequate for realization against the
collateral of the benefits of the security; (ii) each Contract and the sale of
the related Financed Vehicle complied at the time it was made in all material
respects with all requirements of applicable federal, state, and local laws, and
regulations thereunder, including usury laws, the Federal Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal
Trade Commission Act, the Fair Debt Collection Practices Act, the Fair Credit
Billing Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's
Regulations B and Z, the Soldiers' and Sailors' Civil Relief Act of 1940, state
adaptations of the National Consumer Act and of the Uniform Consumer Credit
Code, and any other consumer credit, equal opportunity and disclosure laws
applicable to such Contract and sale; (iii) each Contract constitutes the legal,
valid, and binding payment obligation in writing of the Obligor, enforceable by
the holder thereof in all respects in accordance with its terms, subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization, liquidation
and other similar laws and equitable principles relating to or affecting the
enforcement of creditors' rights; (iv) as of the Closing Date, each Contract was
secured by a validly perfected first priority security interest in the Financed
Vehicle in favor of the Seller as secured party or all necessary action with
respect to such Contract has been taken to perfect a first priority security
interest in the related Financed Vehicle in favor of the Seller as secured
party, which security interest is assignable and has been so assigned by the
Seller to the Trust; (v) as of the Closing Date, the Seller had good and
marketable title to and was the sole owner of each Contract, free of liens,
claims, encumbrances and rights of others; (vi) as of the Closing Date, there
are no rights of rescission, offset, counterclaim, or defense, and the Seller
has no knowledge of the same being asserted or threatened, with respect to any
Contract; (vii) as of the Closing Date, the Seller had no knowledge of any liens
or claims that have been filed, including liens for work, labor, materials or
unpaid taxes relating to a Financed Vehicle, that would be liens prior to, or
equal or coordinate with, the lien granted by the Contract; (viii) except for
payment defaults continuing for a period of not more than 30 days as of the
applicable Cut-Off Date, the Seller has no knowledge that a default, breach,
violation, or event permitting acceleration under the terms of any Contract
exists, and the Seller has no knowledge that a continuing condition that with
notice or lapse of time would constitute a default, breach, violation or event
permitting acceleration under the terms of any Contract exists, and the Seller
has not waived any of the foregoing; (ix) each Contract requires that the
Obligor thereunder obtain comprehensive and collision insurance covering the
Financed Vehicle; (x) each Contract was acquired from a dealer with whom Onyx
ordinarily does business (except for Contracts originated by Onyx); (xi) no
adverse selection procedures were utilized in selecting the Contracts; (xii)
scheduled payments under each Contract have been applied in accordance with the
method for allocating principal and interest set forth in the Contract (either
the Rule of 78's or Simple Interest Method) and (xiii) there is only one
original of each Contract and such original is being held by the Trustee as
custodian on behalf of the Trust and Insurer. As of the last day of the
Collection Period following the Collection Period (or, if the Seller elects, the
last day of such Collection Period) during which the Seller becomes aware or
receives written notice from the Trustee or the Servicer that a Contract does
not meet any of the criteria in the Agreement and such failure materially and
adversely affects the interests of the Certificateholders or the Insurer in a
Contract, the Seller, unless it cures the failed criterion, will repurchase the
Contract from the Trustee at a price equal to the Scheduled Balance thereof plus
accrued interest (the "Repurchase Amount"). The repurchase obligation will
constitute the sole remedy available to the Certificateholders or the Trustee
for the failure of a Contract to meet any of the criteria set forth in the
Agreement.
THE COLLECTION ACCOUNT AND ELIGIBLE INVESTMENTS
The Servicer will cause all collections made on the Contracts during a
Collection Period to be deposited in or credited to an account (the "Collection
Account") established by the Servicer under the Agreement. Funds in the
Collection Account will be invested in Eligible Investments by the Trustee
acting at the direction of the Insurer. "Eligible Investments" are (a) direct
obligations issued or fully guaranteed by the United
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States or any agency or instrumentality of the United States whose obligations
are backed by the full faith and credit of the United States and, to the extent,
at the time of the investment, acceptable to the Insurer and each statistical
rating agency rating the Certificates for securities having a rating equivalent
to the rating of the Certificates at the Closing Date, the direct obligations
of, or obligations fully guaranteed by, the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association; (b) deposits in or
other obligations of any bank (including the Trustee) whose long-term unsecured
debt obligations are rated "AA-" or better by Standard & Poor's Ratings Services
("Standard & Poor's") and "Aa2" or better by Moody's Investors Service, Inc.
("Moody's") or any bank acceptable to the Insurer; (c) repurchase obligations
with respect to federal government or agency securities described in clause (a)
above entered into with any bank described in clause (b) above; (d)
interest-bearing or discount corporate securities rated "AA-" or better by
Standard & Poor's and "Aa2" or better by Moody's; (e) commercial paper having
the highest rating obtainable from Standard & Poor's and Moody's; (f)
investments in money market funds or money market mutual funds having a rating
from Standard & Poor's and Moody's in the highest investment category granted
thereby, including funds for which the Trustee or any of its affiliates is
investment manager or advisor; and (g) such other securities that are acceptable
to the Insurer. Eligible Investments made with respect to the Collection Account
will mature no later than the next following Distribution Date. Income from
amounts on deposit in the Collection Account which are invested in Eligible
Investments will be paid to the Servicer monthly unless earlier directed by the
Servicer.
PAYAHEAD ACCOUNT
For Simple Interest Contracts, payments made by an Obligor in excess of the
Monthly P&I due on the current Due Date and any other amount currently due on a
Contract (including Full Prepayments) will be passed through to the
Certificateholders on the Distribution Date immediately following the Collection
Period in which such payment was collected.
For Rule of 78's Contracts, however, payments made by an Obligor in excess
of the Monthly P&I due on the current Due Date and any other amount currently
due on a Contract (other than Full Prepayments) ("Payaheads") will be initially
deposited in the Collection Account and subsequently transferred from the
Collection Account, as of each Servicer Report Date, to an account established
in the name of Bankers Trust Company for the benefit of the Obligors and the
Certificateholders as their interests may appear (the "Payahead Account") and
shall be held in such account until passed through in accordance with the
original schedule of payments for the related Contract or until the amount of
such partial prepayment equals the amount the Obligor would be required to pay
in order to prepay the Contract in full. The Payahead Account will be an
Eligible Account. Amounts on deposit in the Payahead Account will be invested in
Eligible Investments with maturity dates such that on each Distribution Date
Monthly P&I for each Rule of 78's Contract with respect to which a partial
prepayment had been made will be available to be passed through to
Certificateholders. The Payahead Account will not be part of the Trust and the
Trustee will not have a security interest in the Payahead Account. Earnings on
Eligible Investments credited to the Payahead Account will be paid to the
Servicer. Full Prepayments during any Collection Period will be deposited
directly into the Collection Account for distribution to Certificateholders on
the Distribution Date next succeeding such Collection Period.
PAYMENTS ON CONTRACTS
All collections on the Contracts will be deposited in or credited to the
Collection Account within two Business Days of the receipt by the Servicer of
payments from Obligors. Such collections will include: Full Prepayments and
partial prepayments (pending transfer of Payaheads on Rule of 78's Contracts to
the Payahead Account), Net Liquidation Proceeds and Net Insurance Proceeds, any
amounts deposited by Onyx or the Seller in the Collection Account to purchase
Contracts because of certain material defects in documents related to the
Contracts or certain breaches in representations or warranties regarding the
Contracts made by Onyx or the Seller in the Agreement that materially and
adversely affect the interests of the Certificateholders or the Insurer, any
amounts deposited by the Servicer in the Collection Account to purchase
Contracts as to which the Servicer has breached certain servicing covenants; and
any amounts
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deposited by the Servicer in the Collection Account as a result of such entity
exercising its right under certain circumstances to purchase all or a portion of
the Contracts. "Net Liquidation Proceeds" are proceeds received by the Servicer
(net of Liquidation Expenses) upon liquidation of any Defaulted Contract.
"Liquidation Expenses" are the reasonable out-of-pocket expenses (exclusive of
overhead expenses) incurred by the Servicer in realizing upon a Defaulted
Contract which are not recoverable under any insurance policy. "Net Insurance
Proceeds" are proceeds paid by any insurer under a comprehensive and collision
or vendor's single interest insurance policy related to a Contract (other than
funds used for the repair of the related Financed Vehicle or otherwise released
to the related Obligor in accordance with normal servicing procedures) and
proceeds from the Blanket Insurance Policy, after reimbursement to the Servicer
of expenses recoverable under such policy. Partial prepayments of Rule of 78's
Contracts are initially deposited in the Collection Account and are transferred
to the Payahead Account on the Servicer Report Date.
DISTRIBUTIONS
Subject to the last sentence of this paragraph, distributions on the
Certificates will be made on each Distribution Date by the Trustee out of net
collections on the Contracts (exclusive of amounts representing payment due in
the Collection Period in which such Distribution Date occurs and any future
Collection Periods) for the Collection Period preceding such Distribution Date
plus amounts payable from the Payahead Account and any Yield Supplement Amount.
The amount of such net collections, amounts payable from the Payahead Account
and any Yield Supplement Amount, will be applied, first, to the Servicer in
payment of the Servicing Fee; second, to payment of the Interest Distribution
and the Principal Distribution to the Certificateholders on such Distribution
Date in accordance with the Agreement, third, to the Insurer, the premium for
the Surety Bond, and fourth, any balance shall be distributed to a separate
spread account trust to be applied in accordance with the spread account trust
agreement and the Insurance Agreement, which provide that to the extent funds
are not required to reimburse the Insurer for draws on the Surety Bond, to
satisfy obligations owing to the Insurer or to reserve against the possibility
of future draws, amounts remaining shall be released to the beneficiaries of the
spread account trust. Any amounts distributed pursuant to clause fourth above
will not be available to make distributions to the Certificateholders on the
current or any future Distribution Date. Under the Surety Bond, the Insurer is
obligated to provide for payment to the Trustee on each Distribution Date of the
amount, if any, by which the amount available for distribution from the net
collections on Contracts, amounts payable from the Payahead Account and any
Yield Supplement Amount, is less than the sum of the Servicing Fee, the Interest
Distribution and the Principal Distribution due to the Certificateholders for
such Distribution Date. See "-- Distributions of Principal and Interest."
INSURANCE ON FINANCED VEHICLES
Each Obligor on a Contract is required to maintain insurance covering
physical damage to the Financed Vehicle of such Obligor in an amount not less
than the lesser of its maximum insurable value or the unpaid principal balance
under such Contract. Onyx is required to be named as a loss payee under the
policy of insurance obtained by the Obligor. The Financed Vehicle is required to
be insured against loss and damage due to fire, theft, transportation, collision
and other risks covered by comprehensive coverage. Onyx also maintains a
vendor's single interest insurance policy, as to which the Seller has been named
as an additional insured, which provides coverage upon repossession of a
Financed Vehicle in an amount equal to the lesser of the actual cash value of
such Financed Vehicle, the cost of repair or replacement for such Financed
Vehicle and the unpaid balance of the related Contract. Since Obligors may
choose their own insurers to provide the required coverage, the specific terms
and conditions of their policies vary.
Onyx has obtained the Blanket Insurance Policy from United Financial
Casualty Company with a rating of "A" by A.M. Best, with respect to each
Contract. Subject to certain conditions, the Blanket Insurance Policy covers the
lesser of actual damage to a Financed Vehicle or the amount by which the
Obligor's unpaid remaining principal balance on the related Contract exceeds the
proceeds from disposition of the Financed Vehicle. Onyx's rights under the
Blanket Insurance Policy with respect to the Contracts under the Blanket
Insurance Policy have been assigned to the Trust pursuant to the Agreement.
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SERVICER REPORTS TO THE TRUSTEE AND THE INSURER
The Servicer will perform certain monitoring and reporting functions for
the Trustee and the Insurer, including the preparation and delivery on the
Servicer Report Date to the Trustee and the Insurer of the Distribution Date
Statement setting forth the amounts on deposit in the Collection Account, the
sources of such amounts and the amounts to be paid to Certificateholders (the
"Distribution Date Statement"). The Distribution Date Statement shall also
include information regarding Contracts purchased by the Servicer or repurchased
by the Seller.
REPURCHASE OF CONTRACTS
The Servicer will have the option to purchase the remaining Contracts, and
thereby cause early retirement of the Certificates, as of any Distribution Date
on which, after giving effect to the Principal Distribution on such Distribution
Date, the Aggregate Scheduled Balance of the Contracts is 10% or less of the
Original Pool Balance. Any such purchase must be effected at a price equal to
the Aggregate Scheduled Balance of the Contracts in the Trust on the date of
repurchase, plus accrued interest thereon and all amounts due to the Insurer
under the Insurance Agreement. In addition, Onyx or the Seller is required to
purchase or repurchase, respectively, Contracts under certain circumstances if
certain representations and warranties made by Onyx or the Seller respectively
are incorrect in any manner that materially and adversely affects the interest
of the Certificateholders or the Insurer. Additionally, the Servicer is required
to purchase Contracts as to which the Servicer has breached certain servicing
covenants.
SERVICING FEE
The Servicer will be entitled to compensation for the performance of its
obligations under the Agreement. The Servicer shall be entitled to receive an
amount equal to the product of one-twelfth of 1.00% per annum (the "Servicing
Fee Rate") and the Pool Balance as of the end of the Collection Period preceding
the related Collection Period. As additional compensation, the Servicer or its
designee shall be entitled to retain all late payment charges, extension fees
and similar items paid in respect of the Contracts. The Servicer or its designee
will also receive as servicing compensation reinvestment earnings on Eligible
Investments and the amount, if any, by which the outstanding principal balance
based on the Rule of 78's of a Contract that is subject to a Full Prepayment
exceeds the Scheduled Balance of such Contract. The Servicer shall pay all
expenses incurred by it in connection with its servicing activities under the
Agreement and shall not be entitled to reimbursement of such expenses except to
the extent they constitute Liquidation Expenses or expenses recoverable under an
applicable insurance policy.
REALIZATION UPON DEFAULTED CONTRACTS
The Servicer will liquidate any Contract that comes into and continues in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. Such liquidation may be through repossession or sale of
the Financed Vehicle securing such Contract or otherwise. In connection with
such repossession or other conversion, the Servicer will follow such procedures
as are normal and usual for holders of motor vehicle retail installment sales
contracts. In this regard, the Servicer may sell the Financed Vehicle at a
repossession or other sale.
DESCRIPTION OF THE INSURER
The following information with respect to the Insurer has been furnished by
the Insurer and none of Onyx, the Seller or the Underwriter have made any
independent investigation of such information.
The Insurer is a New York-domiciled monoline stock insurance company which
engages only in the business of financial guarantee and surety insurance. The
Insurer is licensed in 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. The Insurer insures
structured asset-backed, corporate, municipal and other financial obligations in
the U.S. and international capital markets. The Insurer also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
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The Insurer's claims-paying ability is rated "Aaa" by Moody's, "AAA" by
Standard & Poor's, "AAA" by Duff & Phelps Credit Rating Co. 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 Insurer 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 INSURER OR ANY DEBTS OF THE
INSURER OR TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS TO THE INSURER.
The Insurer is regulated by the Superintendent of Insurance of the State of
New York. In addition, the Insurer 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 Insurer may retain, capital transfers, dividends, investment of assets,
changes in control, transactions with affiliates and consolidations and
acquisitions. The Insurer is subject to periodic regulatory examinations by the
same regulatory authorities.
The Insurer's obligations under the Surety Bond may be reinsured. Such
reinsurance does not relieve the Insurer of any of its obligations under the
Surety Bond.
THE SURETY BOND IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As of December 31, 1996 and 1995, the Insurer had qualified statutory
capital (which consists of policyholders' surplus and contingency reserve) of
approximately $260 million and $240 million, respectively, and had not incurred
any debt obligations. Article 69 of the New York State Insurance Law requires
the Insurer to establish and maintain the contingency reserve, which is
available to cover claims under surety bonds issued by the Insurer.
The audited financial statements of the Insurer prepared in accordance with
generally accepted accounting principles as of December 31, 1996 and 1995 and
for each of the years in the three-year period ended December 31, 1996 are
included in this Prospectus beginning at F-1. The unaudited financial statements
of the Insurer for the three month period ended March 31, 1997 is made a part of
this Prospectus beginning at F-21. Copies of the Insurer's financial statements
prepared in accordance with statutory accounting standards, which differ from
generally accepted accounting principles, are filed with the Insurance
Department of the State of New York and are available upon request. The Insurer
is located at 885 Third Avenue, New York, New York 10022, and its telephone
number is (212) 755-1155.
ADDITIONAL PROVISIONS OF THE AGREEMENT
STATEMENTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will include with each distribution
to each Certificateholder a statement (the "Distribution Date Statement")
setting forth for such Distribution Date the following information:
(i) the amount of the distribution to Certificateholders allocable to
principal;
(ii) the amount of the distribution to Certificateholders allocable to
interest;
(iii) the certificate distribution amount for such Distribution Date;
(iv) the premiums payable to the Insurer and the amount to be deposited
in the spread account;
(v) the aggregate Servicing Fee paid to the Servicer with respect to
the Contracts for the related Collection Period;
(vi) the number of, and aggregate amount of monthly principal and
interest payments due on, the Contracts which are delinquent as of
the end of the related Collection Period presented on a 30-day,
60-day and 90-day basis;
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(vii) the amount available in the Collection Account for payment of the
Certificate distribution amount and the Servicing Fee and the
amount, if any, required from the Insurer pursuant to the Surety
Bond to pay any shortfall;
(viii) the aggregate amount of Liquidation Proceeds received for
Defaulted Contracts;
(ix) the net credit losses for the Collection Period;
(x) the number and net outstanding balance of Contracts for which the
Financed Vehicle has been repossessed;
(xi) the Pool Balance;
(xii) the amount in the Collection Account available for such
Distribution Date; and
(xiii) the amount of claims (if any) made on the Surety Bond.
Within a reasonable period of time after the end of each calendar year, but
not later than the latest date permitted by law, commencing with the year ended
December 31, 1997, the Trustee and the Paying Agent shall furnish to each person
who on any Record Date during such calendar year shall have been a registered
Certificateholder a statement containing the sum of the amounts described in
(i), (ii) and (viii) above and such other information in respect of the
Certificates as may be reasonably necessary for such Certificateholder's
preparation of federal income tax returns. See "Certain Federal Income Tax
Consequences."
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that a firm of independent public accountants
will furnish to the Trustee and the Insurer, on or before each March 15 after
the end of each fiscal year of the Servicer, beginning with the fiscal year
ended December 31, 1997, a statement as to compliance by the Servicer during the
preceding fiscal year with certain standards relating to the servicing of the
Contracts.
The Agreement will also provide for delivery to the Trustee and the
Insurer, on each March 15 after the end of each fiscal year of the Servicer,
commencing with the fiscal year ended December 31, 1997, of a certificate signed
by an authorized officer of the Servicer stating that the Servicer has fulfilled
its obligations under the Agreement throughout the preceding fiscal year or, if
there has been a default in the fulfillment of any such obligation, describing
each such default.
Copies of such statements and certificates may be obtained by
Certificateholders by a request in writing addressed to the Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder except upon determination that the
Servicer's performance of such duties is no longer permissible under applicable
law. No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's servicing obligations and duties under the
Agreement. See "-- The Trustee."
The Agreement will further provide that neither the Servicer nor any of its
directors, officers, employees, and agents shall be under any liability to the
Trust or the Certificateholders for taking any action or for refraining from
taking any action pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence (except errors in judgment) in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Agreement will provide that the Servicer is
under no obligation to appear in, prosecute or defend any legal action that is
not incidental to the Servicer's servicing responsibilities under the Agreement
and that, in its opinion, may cause it to incur any expense or liability. The
Servicer may, however, undertake any reasonable action that it may deem
necessary or desirable in respect of the Agreement and the rights and duties of
the parties thereto and the interests of the Certificateholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust, and
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the Servicer will be entitled to be reimbursed therefor out of the Collection
Account. Any such indemnification or reimbursement could reduce the amount
otherwise available for distribution to Certificateholders.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer is a party or any corporation succeeding to the business of the
Servicer, or, with respect to the Servicer's obligation as the Servicer, will be
the successor of the Servicer under the Agreement.
EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any failure by
the Servicer to deposit in or credit to the Collection Account or the Payahead
Account any amount required to be so deposited or credited or to make the
required distribution to Certificateholders, which failure continues unremedied
for three Business Days after written notice from the Trustee or the Insurer is
received by the Servicer or discovery by the Servicer; (ii) any failure by the
Servicer to deliver to the Insurer or the Trustee certain reports required by
the Agreement by the fifth Business Day prior to the related Distribution Date
or to perform certain other covenants under the Agreement; (iii) any failure by
the Servicer or the Seller duly to observe or perform in any material respect
any other covenants or agreements of the Servicer or the Seller in the
Agreement, which failure materially and adversely affects the rights of
Certificateholders, the Insurer or the Trustee and which continues unremedied
for 30 days after the giving of written notice of such failure (A) to the
Servicer or the Seller as the case may be, by the Trustee or the Insurer or (B)
to the Servicer or the Seller, as the case may be, and to the Trustee by Holders
of Certificates evidencing not less than 25% of the Pool Balance or by the
Insurer; (iv) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities, or similar proceedings and certain actions by the
Servicer or Seller indicating its insolvency, reorganization pursuant to
bankruptcy or similar proceedings or inability to pay its obligations; (v) any
breach of any of the representations and warranties of the Servicer or the
Seller (except for any breaches relating to Contracts repurchased by the Seller
or the Servicer) which breach has a material adverse effect on the Trust and
which continues for 30 days after the giving of notice of such breach to the
Seller or the Servicer, as the case may be, by the Trustee or the Holders of
Certificates evidencing not less than 25% of the Pool Balance or the Insurer;
(vi) any change in control of the Servicer in violation of the covenant set
forth in Section 7.2 of the Agreement; and (vii) any determination by the
Insurer that the quality of performance of the Servicer is not in compliance
with either the terms of the Agreement or that the Servicer's performance is not
adequate, as measured in accordance with industry standards, in respect of all
contracts serviced by the Servicer.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied, the
Trustee, the Insurer or Holders of Certificates evidencing not less than 25% of
the Pool Balance may terminate all the rights and obligations of the Servicer
under the Agreement, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements; provided, however, that
the Trustee will not be obligated to purchase Contracts if certain
representations and warranties of Onyx as Servicer prove incorrect or if certain
covenants of Onyx as Servicer are breached. In the event that the Trustee is
unwilling or unable so to act, it may appoint, with the consent of the Insurer,
or petition a court of competent jurisdiction for the appointment of a successor
with a net worth of at least $50,000,000 and whose regular business includes the
servicing of automobile retail installment sale contract receivables.
The Holders of Certificates evidencing not less than 51% of the Pool
Balance (not including any Certificates held by the Seller, the Servicer or any
affiliate) may, on behalf of all Certificateholders, with the consent of the
Insurer, waive any default by the Servicer or the Seller in the performance of
its obligations, other than failure to make any required deposits to or payments
from the Collection Account.
The Trustee is under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct, or defend any litigation thereunder or in
relation thereto at the request, order, or direction on any of the
Certificateholders, unless such
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Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby. No Certificateholder will have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless such Holder
previously has given to the Trustee written notice of default and unless the
Holders of Certificates evidencing not less than 25% of the Pool Balance with
the consent of the Insurer have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for 30 days has neglected or
refused to institute any such proceedings.
Notwithstanding any provision in the Agreement to the contrary, in the
event that the Insurer is in default under the Surety Bond or is subject to any
insolvency proceeding, the Insurer shall not have the right to terminate the
Servicer, or to control or direct the actions of the Seller, the Servicer or the
Trustee pursuant to the terms of the Agreement, nor shall the consent of the
Insurer be required with respect to any action (or waiver of a right to take
action) to be taken by the Seller, the Servicer or the Trustee; provided, that
the consent of the Insurer shall be required at all times with respect to any
amendment of the Agreement.
AMENDMENT
The Agreement may be amended by the Seller, the Servicer and the Trustee,
without the consent of the Certificateholders but with the consent of the
Insurer, to cure any ambiguity, correct or supplement any provision therein
which may be inconsistent with any other provision therein, or make any other
provisions with respect to matters or questions arising under such Agreement
which are not inconsistent with the provisions of the Agreement; provided that
such action will not, in the opinion of counsel satisfactory to the Trustee,
materially and adversely affect the interest of any Certificateholder. The
Agreement may also be amended by the Seller, the Servicer and the Trustee with
the consent of the Holders of Certificates evidencing not less than 51% of the
Pool Balance and the Insurer for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of Certificateholders; provided, however,
that no such amendment may (i) increase or reduce in any manner the amount of,
or accelerate or delay the timing of, collection of payments on Contracts or
distributions required to be made on any Certificate or (ii) reduce the
aforesaid percentage required to consent to any such amendment, without the
consent of all Certificateholders.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Servicer, the Trustee will provide to the
Servicer within 15 days after receipt of such request a list of the names and
addresses of all Certificateholders of record as of the most recent Record Date.
Upon written request by three or more Certificateholders or by Holders of
Certificates evidencing not less than 25% of the Pool Balance, the Trustee will
afford such Certificateholders access during business hours to the current list
of Certificateholders for purposes of communicating with other
Certificateholders with respect to their rights under the Agreement.
The Agreement will not provide for the holding of any annual or other
meetings of Certificateholders.
TERMINATION
The obligations of the Seller, the Servicer and the Trustee to the
Certificateholders pursuant to the Agreement will terminate upon the earlier of
(i) the maturity or other liquidation of the last Contract and the disposition
of any amounts received upon liquidation of any remaining Contracts that are
part of the Trust Property and (ii) (a) the payment to Certificateholders of all
amounts required to be paid to them pursuant to the Agreement and the
disposition of all property held as part of the Trust, (b) termination of the
Surety Bond in accordance with its terms and surrender of the Surety Bond to the
Insurer for cancellation, (c) the payment of all amounts owed to the Trustee
under the Agreement and (d) the payment of all amounts owed to the Insurer under
the Insurance Agreement and the spread account trust agreement. In order to
avoid excessive administrative expense, the Servicer is permitted at its option
to purchase the remaining Contracts from the Trust as of the Distribution Date
as of which the then outstanding Aggregate Scheduled Balance of the Contracts is
10% or less of the Original Pool Balance at a price equal to the Aggregate
Scheduled Balance of
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such Contracts plus accrued interest on the Contracts and all amounts due to the
Insurer under the Insurance Agreement. The Trustee will give written notice of
termination to each Certificateholder of record. The final distribution to any
Certificateholder will be made only upon surrender and cancellation of such
Certificateholder's Certificate at an office or agency of the Trustee specified
in the notice of termination. Any funds remaining in the Trust, after the
Trustee has taken certain measures to locate a Certificateholder and such
measures have failed, will be distributed to a charity designated by the
Servicer.
THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Certificates, or any Contracts or related documents, or the
investment of any monies by the Servicer before such monies are deposited in or
credited to the Collection Account. The Trustee has not examined the Contracts.
If no Event of Default has occurred, the Trustee is required to perform only
those duties specifically required of it under the Agreement. Generally, those
duties are limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Trustee under the Agreement, the
making of distributions to Certificateholders in the amounts specified in
certificates provided by the Servicer and drawing on the Surety Bond if required
to make distributions to the Certificateholders.
Bankers Trust Company is the Trustee under the Agreement. The Trustee, and
any of its affiliates, may hold Certificates in their own names. In addition,
for the purpose of meeting the legal requirements of certain local
jurisdictions, the Servicer and the Trustee acting jointly shall have the power
to appoint co-trustees or separate trustees of all or any part of the Trust. In
the event of such appointment, all rights, powers, duties and obligations
conferred or imposed upon the Trustee by the Agreement shall be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in
any jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee may resign at any time, in which event a successor trustee will
be appointed pursuant to the terms of the Agreement. The Trustee may be removed
if it ceases to be eligible to continue as such under the Agreement or if the
Trustee becomes insolvent. Any resignation or removal of the Trustee and
appointment of a successor does not become effective until acceptance of the
appointment by the successor trustee.
The Trustee shall be entitled to a fee payable on an annual basis by Onyx.
The Agreement will further provide that the Trustee will be entitled to
indemnification by the Servicer for, and will be held harmless against, any
loss, liability, or expense incurred by the Trustee not resulting from the
Trustee's own willful misfeasance, bad faith, or negligence (other than errors
in judgment) or by reason of breach of any of their respective representations
or warranties set forth in the Agreement, except to the extent that such loss,
liability, or expense relates to a specific Contract or Contracts or certain
taxes that could be asserted against the Trustee, the Trust or the Contracts, in
which case the Trustee would be entitled to be indemnified by the Trust.
Onyx and the Insurer may maintain other banking relationships with the
Trustee in the ordinary course of business.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
GENERAL
The Contracts are "chattel paper" as defined in the Uniform Commercial Code
as in effect in California ("UCC"). Pursuant to the UCC, an ownership interest
in chattel paper may be perfected by possession of the collateral or filing a
UCC-1 financing statement with the California Secretary of State.
Under the Agreement, the Trustee initially will have custody of the
Contracts following the sale of the Contracts to the Trust and will hold the
Contracts as bailee for the benefit of the Trust. Upon receiving the prior
consent of the Insurer, which cannot be unreasonably withheld, the Servicer may
be appointed by the Trustee to act as the custodian of the Contracts. Upon such
appointment physical possession of the Contracts
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would shift from the Trustee to the Servicer. While the Contracts will not be
physically marked to indicate the ownership interest thereof by the Trust, UCC-1
financing statements will be filed with the California Secretary of State to
perfect by filing and give notice of the Trust's ownership interest in the
Contracts. If, through inadvertence or otherwise, any of the Contracts were sold
to another party who purchased such Contracts in the ordinary course of its
business and took possession of such Contracts, the purchaser would acquire an
interest in the Contracts superior to the interests of the Trust if the
purchaser acquired the Contracts in good faith, for value and without actual
knowledge of the Trust's ownership interest in the Contracts.
SECURITY INTERESTS IN THE FINANCED VEHICLES
All Financed Vehicles were either registered in the State of California,
Arizona, Washington, or one of the other states listed above under "THE
CONTRACTS" at the time of origination of the related Contract. Perfection of
security interests in motor vehicles is generally governed by state certificate
of title statutes or by the motor vehicle registration laws of the state in
which each vehicle is located. Security interests in vehicles registered in the
State of California (the state in which approximately % of the Financed
Vehicles as of the Cut-Off Date will be located) may be perfected by depositing
with the California Department of Motor Vehicles a properly endorsed certificate
of title showing the secured party as legal owner or an application for an
original registration together with an application for registration of the
secured party as legal owner. Security interests in vehicles registered in the
State of Arizona (the state in which approximately % of the Financed
Vehicles as of the Cut-Off Date will be located) are perfected by delivering to
the assessor of the county in which the Obligor resides a properly completed
application for a certificate of title signed by the Obligor upon a form
supplied by the Motor Vehicle Division of the Arizona Department of
Transportation, noting the name of the lienholder, the amount and date of the
lien and the lienholder's mailing address. Security interests in vehicles
registered in the State of Washington (the state in which approximately %
of the Financed Vehicles as of the Cut-Off Date will be located) are perfected
upon the Washington Department of Licensing's receipt of the existing
certificate of ownership, if any, and an application for a certificate of
ownership containing the name and address of the secured party, and tender of
the required fee. Security interests in vehicles registered in Florida, Nevada
and Oregon, the other states in which Contracts were originated, are perfected,
generally, in the same manner. The Seller has warranted to the Trust in the
Agreement that Onyx has taken all steps necessary to obtain a perfected first
priority security interest with respect to all Financed Vehicles securing the
Contracts and that such security interest has been assigned to the Trust. If
Onyx fails, because of clerical errors or otherwise, to effect or maintain the
notation of its security interest on the certificate of title relating to a
Financed Vehicle, the Trust may not have a first priority security interest in
such Financed Vehicle.
The Seller will sell the Contracts and assign the security interest in each
Financed Vehicle to the Trust. However, because of the administrative burden and
expense, the Trust will not amend the certificates of title to identify the
Trust as the new secured party. Accordingly, Onyx, will continue to be named as
the secured party on the certificates of title relating to the Financed
Vehicles. Under the law of California, Arizona, Washington and most other states
including Florida, Nevada and Oregon, the assignment of the Contracts is an
effective conveyance of the security interests in the Financed Vehicles without
amendment of the lien noted on the related certificate of title and the new
secured party succeeds to the assignor's rights as the secured party. However,
there exists a risk in not identifying the Trust as the new secured party on the
certificate of title that, through fraud or negligence, the security interest of
the Trust could be released.
In the absence of fraud or forgery by the Financed Vehicle owner or
administrative error by state recording officials, notation of the lien of Onyx
will be sufficient to protect the Trust against the rights of subsequent
purchasers of a Financed Vehicle or subsequent lenders who take a security
interest in a Financed Vehicle. If there are any Financed Vehicles as to which
Onyx has failed to perfect the security interest assigned to the Trust, such
security interest would be subordinate to, among others, subsequent purchasers
of the Financed Vehicles and holders of perfected security interests.
In the event that the owner of a Financed Vehicle relocates to a state
other than the state in which the Financed Vehicle was registered at the
inception of the Contract, under the laws of most states the perfected
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security interest in the Financed Vehicle would continue for four months after
such relocation and thereafter, in most instances, until the owner re-registers
the Financed Vehicle in such state. A majority of states generally require
surrender of a certificate of title to re-register a vehicle. Therefore, the
Servicer will provide the department or motor vehicles or other appropriate
state or county agency of the state of relocation with the certificate of title
so that the owner can effect the re-registration. If the Financed Vehicle owner
moves to a state that provides for notation of lien on the certificate of title
to perfect the security interests in the Financed Vehicle, Onyx, absent clerical
errors or fraud, would receive notice of surrender of the certificate of title
if Onyx's lien is noted thereon. Accordingly, Onyx will have notice and the
opportunity to re-perfect the security interest in the Financed Vehicle in the
state of relocation. If the Financed Vehicle owner moves to a state which does
not require surrender of a certificate of title for registration of a motor
vehicle, reregistration could defeat perfection. In the ordinary course of
servicing its portfolio of motor vehicle installment sales contracts, Onyx takes
steps to effect such re-perfection upon receipt of notice of registration or
information from the Obligor as to relocation. Similarly, when an Obligor under
a Contract sells a Financed Vehicle, the Servicer must provide the owner with
the certificate of title, or the Servicer will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related Contract before release of the lien. Under the
Agreement, Onyx, at its cost, is obligated to maintain the continuous perfection
of its security interest in the Financed Vehicle.
Under the law of California and most other states, liens for unpaid taxes,
storage of and repairs performed on a motor vehicle take priority even over a
perfected security interest. Under the laws of Arizona and Washington, however,
certain liens for storage of and repairs performed on a motor vehicle do not
take priority over a perfected security interest. The Internal Revenue Code of
1986, as amended, also grants priority to certain federal tax liens over the
lien of a secured party. The Seller will represent in the Agreement that as of
the initial issuance of the Certificates no such state or federal liens exist
with respect to any Financed Vehicle securing payment on any Contract. However,
such liens could arise at any time during the term of a Contract. No notice will
be given to the Servicer in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN FINANCED VEHICLES
The Servicer, on behalf of the Trust, may take action itself to enforce its
security interest with respect to Defaulted Contracts by repossession and resale
of the Financed Vehicles securing such Defaulted Contracts. In addition to the
provisions of the UCC, under California law the Contracts originated in
California are subject to the provisions of the Rees-Levering Motor Vehicle
Sales and Finance Act (the "Rees-Levering Act"). In California the provisions of
the Rees-Levering Act control in the event of a conflict with the provisions of
the UCC. Contracts originated in Arizona are subject to the Motor Vehicle Time
Sales Disclosure Act of Arizona. Contracts originated in Washington are subject
to the Credit Disclosure Act of Washington. Contracts originated in states other
than California, Arizona and Washington may be subject to retail installment
sales laws and similar laws of those states. Under the UCC and laws applicable
in most states, a creditor can, without prior notice to the debtor, repossess a
motor vehicle securing a motor vehicle installment contract by voluntary
surrender, by "self-help" repossession without breach of peace, and by judicial
process. The Rees-Levering Act in California and similar laws in Arizona,
Washington and other states place restrictions on repossession sales, including
notice to the debtor of the intent to sell and of the debtor's right to redeem
the vehicle. In addition, the UCC requires commercial reasonableness in the
conduct of the sale.
In the event of such repossession and resale of a Financed Vehicle, the
Servicer for the benefit of the Trust would be entitled to be paid out of the
sale proceeds before such proceeds could be applied to the payment of the claims
of unsecured creditors or the holders of subsequently perfected security
interests or, thereafter, to the debtor.
Under the UCC and laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the motor vehicle securing such debtor's motor vehicle installment
contract. However, some states impose prohibitions or limitations on deficiency
judgments, including the State of Washington. Under California and Arizona law
the proceeds from the resale of the motor vehicle securing the debtor's motor
vehicle installment contract are applied first to the expenses of
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resale and repossession, and if the remaining proceeds are not sufficient to
repay the indebtedness, the creditor may seek a deficiency judgment for the
balance. The priority of application of proceeds from the sale of repossessed
vehicles under the Contracts originated in most other states, including Florida,
Nevada and Oregon, is similar.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws, may limit or delay the ability of the creditor to repossess
and resell collateral or enforce a deficiency judgment.
In the event that deficiency judgments are not satisfied, are satisfied at
a discount or are discharged in whole or in part, in bankruptcy proceedings,
including proceedings under Chapters 7 or 13 of the United States Bankruptcy
Code, the loss will be borne by the Trust.
OTHER MATTERS
The so-called "holder-in-due-course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the Obligor may also assert the rule to
set off remaining amounts due as a defense against a claim brought by the
Trustee against such Obligor.
The courts have imposed general equitable principles on repossession and
litigation involving deficiency balances. These equitable principles may have an
effect of relieving an Obligor from some or all of the legal consequences of a
default.
Numerous other federal and state consumer protection laws and related
regulations impose requirements applicable to the origination, sale and
servicing of the Contracts, including the Federal Truth-in-Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act, the Rees-Levering Act, the Magnuson-Moss Warranty Act, the
Federal Reserve Board's Regulations B and Z, the Soldiers' and Sailors' Civil
Relief Act of 1940, state adoptions of the National Consumers Act and of the
Uniform Commercial Code and other state motor vehicle retail sales acts and
similar laws. The Seller has represented to the Trust in the Agreement that each
of the Contracts, and the sale of the related Financed Vehicles sold thereunder,
complied with all material requirements of such laws and the regulations issued
pursuant thereto.
REPURCHASE OBLIGATION
Under the Agreement, the Seller will make representations and warranties
relating to validity, subsistence, perfection and priority of the security
interest in each Financed Vehicle as of the Closing Date. See "The Certificates
and the Agreement -- Sale and Assignment of the Contracts." Accordingly, if any
defect exists in the perfection of the security interest in any Financed Vehicle
as of the Closing Date and such defect adversely affects the Trust's interest in
the related Contract, such defect would constitute a breach of a warranty under
the Agreement and would create an obligation of the Seller to repurchase such
Contract unless the breach is cured. Additionally, in the Agreement the Servicer
will make certain representations, warranties and affirmative covenants
regarding, among other things, the maintenance of the security interest in each
Financed Vehicle, the breach of which would create an obligation of the Servicer
to purchase any affected Contract from the Trust unless the breach is cured.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated Federal income tax
consequences of the purchase, ownership, and disposition of Certificates. This
summary is based upon laws, regulations, rulings, and decisions currently in
effect, all of which are subject to change (which change may be retroactive).
The discussion does not deal with all Federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules. In
addition, this summary is generally limited to investors who will hold the
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Certificates as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). Consequences to individual investors of investment in the
Certificates will vary according to their individual circumstances. In addition,
this summary generally does not address foreign, state or local taxation issues.
Accordingly, investors should consult their own tax advisors to determine the
Federal, state, local, and other tax consequences of the purchase, ownership,
and disposition of the Certificates. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"IRS") with respect to any of the Federal income tax consequences discussed
below, and no assurance can be given that the IRS will not take contrary
positions.
BECAUSE MANY OF THE ISSUES DISCUSSED HEREIN ARE COMPLEX AND THEIR
RESOLUTION IS UNCERTAIN, INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS TO
DETERMINE THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES.
FEDERAL INCOME TAX STATUS OF THE TRUST
In the opinion of Andrews & Kurth L.L.P., special tax counsel to the
Seller, the Trust will be classified as a grantor trust and not as an
association taxable as a corporation for Federal income tax purposes.
Accordingly, subject to the discussion below, each Certificate Owner will be
subject to Federal income taxation as if it owned directly its interest in each
asset owned by the Trust and paid directly its share of reasonable expenses paid
by the Trust.
TREATMENT OF CERTIFICATE OWNERS' INTEREST IN TRUST ASSETS
Each Certificate Owner could be considered to own either (i) an undivided
interest in a single debt obligation held by the Trust and having a principal
amount equal to the total stated principal amount of the Contracts and an
interest rate equal to the Pass-Through Rate or (ii) an interest in each of the
Contracts, in the Yield Supplement Agreement and any other Trust Property. The
Agreement will express the intent of the Seller to sell, and the
Certificateholders to purchase, the Contracts (other than the Retained Strip (as
defined below)) and the Seller, the Certificateholders, and each Certificate
Owner, by accepting a beneficial interest in a Certificate, will agree to treat
the Certificates as ownership interests in the Contracts, the Yield Supplement
Agreement and any other Trust Property.
Treatment as Debt Obligation. If a Certificate Owner were considered to
own an undivided interest in a single debt obligation, rather than reporting its
share of the interest accrued on each Contract it would, in general, be required
to include in income interest accrued or received on the principal amount of the
Certificates at the Pass-Through Rate in accordance with its usual method of
accounting.
The Certificates would be subject to the original issue discount ("OID")
rules, generally in the manner discussed below with respect to Stripped
Contracts. However, in determining whether such OID is de minimis, the weighted
average life of the Certificates would be determined using a reasonable
assumption regarding anticipated prepayments (a "Prepayment Assumption"). OID
includible in income for any accrual period (generally, the period between
payment dates) would generally be calculated using a Prepayment Assumption and
an anticipated yield established as of the date of initial sale of the
Certificates, and would increase or decrease to reflect prepayments at a faster
or slower rate than anticipated. The Certificates would also be subject to the
market discount provisions of the Code to the extent that a Certificate Owner
purchased such Certificates at a discount from the initial issue price (as
adjusted to reflect prior accruals of original issue discount).
The remainder of the discussion herein assumes that a Certificate Owner
will be treated as owning an interest in each Contract (and the proceeds
thereof), in the Yield Supplement Agreement and any other Trust Property,
although the Servicer will report information on an aggregate basis.
SPECIFIC TAX ISSUES CONCERNING RULE OF 78'S CONTRACTS
For the Rule of 78's Contracts, the purchase price paid by the
Certificateholders for each Contract will reflect the principal balance of such
Contract as of the Cut-Off Date based on the Rule of 78's (the "Cut-Off
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Date Scheduled Balance"). Because the Rule of 78's allocates a greater portion
of the early payments under a Contract to interest than the actuarial method,
the Cut-Off Date Scheduled Balance of each Contract exceeds the amount that
would have been its principal balance as of the Cut-Off Date if each Contract
had been amortized from origination under an actuarial method (such amount, the
"Cut-Off Date Actuarial Balance").
The Trustee and the Servicer intend to account for interest and principal
on the Rule of 78's Contracts using the actuarial method, but based on the
Cut-Off Date Scheduled Balance rather than the Cut-Off Date Actuarial Balance.
As described above, the remaining payments due on a Rule of 78's Contract are
not sufficient to amortize the Cut-Off Date Scheduled Balance of such Contract
at a yield equal to its APR. Accordingly, in order to amortize the Cut-Off Date
Scheduled Balance over the remaining term of the Rule of 78's Contract using the
actuarial method of accounting, the Servicer will recompute the effective yield
of such Contract based on the remaining payments due and the Cut-Off Date
Scheduled Balance (such yield, stated as a per annum rate, the "Recomputed
Yield") and will allocate each payment of Monthly P&I between principal and
interest on each Contract beginning with the Cut-Off Date Scheduled Balance by
applying the Recomputed Yield instead of the APR.
The proper tax method for accounting for the Rule of 78's Contracts is
uncertain. As described above, the Servicer and the Trustee intend to report
income to the Certificateholders based on the Recomputed Actuarial Method (as
defined below) and assuming for purposes of calculating OID, that the income on
the Scheduled Balance of each Contract, at a rate equal to the Recomputed Yield
minus the Retained Strip, would be treated as "qualified stated interest." See
"-- Discount and Premium -- Original Issue Discount on Stripped Contracts."
However, prospective investors should consult their tax advisors as to whether
they may be required or permitted to use the Rule of 78's method to account for
interest on the Rule of 78's Contracts. A Certificateholder will be furnished
information for federal income tax purposes enabling him to report interest on
such Contracts under the Rule of 78's method of accounting only upon written
request to the Trustee, and payment of the actual costs of producing the same.
Alternatively, the IRS could take the position that a Certificate Owner that
amortizes a Rule of 78's Contract under the Recomputed Actuarial Method (rather
than under the Rule of 78's method) has actually acquired a Contract having an
actual principal balance equal to the Cut-Off Date Actuarial Balance at a
premium equal to the difference between the Cut-Off Date Actuarial Balance and
the Cut-Off Date Scheduled Balance, and that the actuarial method must be
applied from the time of a Contract's origination using its actual APR. In that
event (unless the Certificate Owner were to make a Total Accrual Election, as
described immediately below) it appears likely that the Certificate Owner would
be required to include income at a rate equal to the full APR of the Contract
(minus the Retained Strip) on a balance equal to the Cut-Off Date Actuarial
Balance amortized based on the APR and an actuarial method, and should be
entitled to amortize the difference between the Cut-Off Date Scheduled Balance
and the Cut-Off Date Actuarial Balance to the extent it had a valid election in
effect. See "-- Discount and Premium."
As an alternative to separately accruing stated interest, OID, de minimis
OID, market discount, de minimis market discount, unstated interest, premium,
and acquisition premium, a Certificate Owner may elect to include all income
that accrues on the Certificate using the constant yield method. If a
Certificate Owner makes this election (the "Total Accrual Election"), income on
a Certificate will be calculated as though (i) the issue price of the
Certificate were equal to the Certificate Owner's adjusted basis in the
Certificate immediately after its acquisition by the Certificate Owner; (ii) the
Certificate were issued on the Certificate Owner's acquisition date; and (iii)
none of the interest payments on the Certificate are "qualified stated interest"
payments. A Certificate Owner may make such an election for a Certificate that
has premium or market discount, respectively, only if the Certificate Owner
makes, or has previously made, an election to amortize bond premium or to
include market discount in income currently.
If a Rule of 78's Contract is prepaid in full, any amount collected from
the Obligor pursuant to the Contract in excess of the principal balance thereof
and accrued interest thereon, computed using the actuarial method and the
Recomputed Yield, as described above (such method, the "Recomputed Actuarial
Method" and such amount, the "Recomputed Principal Balance"), will be paid to
the owner of retained yield. Such amount may be treated as additional income in
the nature of a prepayment penalty to a Certificate Owner who had reported
income with respect to the Contracts on the Recomputed Actuarial Method, and
would be
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deductible only to the extent described below. Alternatively, such amount might
be treated as an interest in the Contract retained by the owner of retained
yield, in which event it would not be included in a Certificate Owner's income.
INCOME ON ALL CONTRACTS
For federal income tax purposes, the owner of retained yield will be
treated as having retained a portion (the "Retained Strip") of the interest due
on each Contract having a yield in excess of % calculated using the
actuarial method (each, a "Stripped Contract") equal to the difference between
(x) the Recomputed Yield of the Contract and (y) %. The Retained Strip will
be treated as "stripped coupons" within the meaning of Section 1286 of the Code,
and the Stripped Contracts will be treated as "stripped bonds." If, as described
above, the IRS were to take the position that the actuarial method must be
applied consistently from the time of origination of a Contract, the Retained
Strip would consist of a different portion of the interest that accrues at the
APR on the actuarial principal balance of a Contract for each monthly period
over which interest accrues on such Contract ("Contract Due Period").
Those Contracts that bear interest at, or have a Recomputed Yield of, a
rate which is less than or equal to % (the "Supplemented Contracts") will
not be treated as Stripped Contracts. Instead, Yield Supplement Amounts will be
payable to eliminate the difference between the Recomputed Yield on each
Supplemented Contract and %. Accordingly, each Certificate Owner will be
treated as owning its pro rata percentage interest in (i) payments received
under the Yield Supplement Agreement, and (ii) the principal of, and interest
payable on, each Contract (minus the Retained Strip on the Stripped Contracts).
See "-- Yield Supplement Amounts."
Each Certificate Owner will be required to report on its federal income tax
return its share of the gross income of the Trust, including interest and
certain other charges accrued on the Contracts and original issue discount and
market discount (to the extent described below), payments received under the
Yield Supplement Agreement (to the extent treated as income), investment
earnings on amounts held pending distribution, and any gain upon collection or
disposition of the Contracts. Such income (other than any original issue
discount or market discount, as described below) will be includible in income in
accordance with a Certificate Owner's usual method of accounting. Accordingly,
interest will be includible in a Certificate Owner's gross income at the time it
accrues on the Contracts, or, in the case of Certificate Owners who are cash
basis taxpayers, when received by the Servicer on behalf of Certificate Owners.
Because (i) interest accrues on the Contracts over differing monthly periods and
is paid in arrears and (ii) interest collected on a Contract is generally paid
to Certificate Owners in the following month, the amount of interest accruing to
a Certificate Owner during any month will not equal the interest distributed in
that month.
A Certificate Owner will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust as provided in Section 162 or 212 of the Code. If
a Certificate Owner is an individual, estate or trust, the deduction for such
holder's share of such fees will be allowed only to the extent that all of such
holder's miscellaneous itemized deductions, including such holder's share of
such fees, exceed 2% of such holder's adjusted gross income. In addition, in the
case of Certificate Owners who are individuals, certain otherwise allowable
itemized deductions will be reduced, but not by more than 80%, by an amount
equal to 3% of such holder's adjusted gross income in excess of a statutorily
defined threshold ($121,200 in the case of a married couple filing jointly for
the taxable year beginning in 1997 and will be adjusted for inflation each year
thereafter). The Servicer will not report to Certificate Owners the amount of
income or deductions attributable to interest earned on collections and certain
other amounts (which are includible in gross income, but the deductions of which
are subject to the foregoing limitations) and, accordingly, such a holder will
not have sufficient information from the report itself to accurately reflect the
holder's net taxable income.
For administrative convenience, the Servicer intends to report the total
amount of income with respect to the Certificates on an aggregate basis (as
though all of the Contracts and the Yield Supplement Agreement were a single
obligation), rather than on an asset-by-asset basis. The amount and, in some
instances, character, of the income reported to a Certificate Owner may differ
under this method for a particular period
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from that which would be reported if income were reported on a precise
asset-by-asset basis. Accordingly, the IRS could require that a Certificate
Owner calculate its income either (i) on an asset-by-asset basis, accounting
separately for each Contract and for payments made under the Yield Supplement
Agreement, or (ii) aggregating all Stripped Contracts under the aggregation rule
described below and accounting for the remaining Contracts and the Yield
Supplement Agreement on an asset-by-asset basis. If reporting on an aggregate
basis results in under-reporting of income, or if the IRS were to take a
position different from that adopted by the Trust with respect to any issue, a
Certificate Owner could be required to pay interest on underpayments of tax and
could be subject to penalties for under-reporting of income. See "-- Discount
and Premium -- Original Issue Discount on Stripped Contracts." In computing its
income on an asset-by-asset basis, a Certificate Owner would allocate its tax
basis among the Contracts and its interest in the Yield Supplement Agreement in
proportion to their fair market values. Because the Recomputed Yields of the
Contracts vary widely, the allocation of basis and computation of income on an
asset-by-asset basis could have a more significant effect on the income of a
Certificate Owner than it would if the Contracts had more uniform
characteristics.
The remainder of the disclosure generally describes the Code provisions
governing reporting of income on the Contracts and the Yield Supplement
Agreement on a separate asset basis.
DISCOUNT AND PREMIUM
In determining whether a Certificate Owner has purchased its interest in
the Contracts (or any Contract) at a discount and whether such Contracts (or any
Contract) have OID or market discount, a portion of the purchase price of a
Certificate should be allocated to the Certificate Owner's undivided interest in
accrued but unpaid interest, amounts collected at the time of purchase but not
distributed and rights to receive Yield Supplement Amounts. As a result, the
portion of the purchase price allocable to a Certificate Owner's undivided
interest in the Contracts (or any Contract) (the "Purchase Price") will be
decreased and the potential OID and/or market discount on the Contracts (or any
Contract) could be increased.
Original Issue Discount on Stripped Contracts. Because the Stripped
Contracts represent stripped bonds, they will be subject to the OID rules of the
Code. Under Treasury Regulations issued under Section 1286 of the Code (the
"Section 1286 Regulations"), it appears that, in general, the portion of the
interest on each Contract payable to the Certificate Owners may be treated as
"qualified stated interest." As a result, the amount of OID on a Contract (or
Contracts) will equal the amount, if any, by which the Purchase Price is less
than the portion of the remaining principal balance of the Contract (or
Contracts) allocable to the interest acquired. However, if the IRS were to take
the position that the actuarial method must be applied consistently from the
time of origination of a Contract at a rate equal to the Contract's APR (such
method, the "Origination Actuarial Method"), then a Certificate Owner would be
deemed to receive interest at a different rate for each Collection Period and
the remainder of the interest deemed to accrue at the Contract's APR on the
actuarial principal balance would be included in the Retained Strip. As a
result, it appears that none of the interest on the Stripped Contracts would be
"qualified stated interest." In that event, the entire yield deemed to accrue to
a Certificate Owner would be includible in income as OID, based on a yield which
should generally equal a rate equal to %.
The Trustee will calculate OID, if any, on all of the Contracts (including
Stripped Contracts) on an aggregate basis and without the use of a prepayment
assumption. Regulations issued under the OID provisions of the Code (the "OID
Regulations") suggest that all payments on the Stripped Contracts that are
allocable to the Certificates may be aggregated in determining whether the
Stripped Contracts will be treated as having OID, although the regulation does
not include the Contracts that are not "stripped bonds." Separate accounting for
the Stripped Contracts and the Contracts that are not stripped would reduce the
possibility that the Stripped Contracts would be treated as issued with OID;
however, as discussed below, any Contracts having a yield equal to % (using
a Recomputed Yield for Rule of 78's Contracts) may be treated as having imputed
interest, market discount, or both. In addition, it is not clear whether use of
a prepayment assumption is required in computing OID. If the IRS were to require
that OID be computed on a Contract-by-Contract basis, or that a prepayment
assumption be used, the character and timing of a Certificate Owner's income
could be adversely affected. Because under the stripped bond rules each sale of
a Certificate results in
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a recalculation of OID, a Certificate Owner technically will not be subject to
the market discount provisions of the Code with respect to Stripped Contracts.
The tax treatment of a Stripped Contract (or the Stripped Contracts in the
aggregate) will depend upon whether the amount of OID on the Contract or
Contracts is less than a statutorily defined de minimis amount. In general,
under the Section 1286 Regulations the amount of OID on a Stripped Contract will
be de minimis if it is less than 1/4 of one percent for each full year of
weighted average maturity remaining after the purchase date until the maturity
of the Contract (although it is not clear whether expected prepayments are taken
into account). If the amount of OID is de minimis under this rule, a Stripped
Contract would not be treated as having OID. The actual amount of discount on a
Stripped Contract would be includible in income as principal payments are
received on the Contract, in the proportion that each principal payment bears to
the total principal amount of the Contract. If the IRS were to require the use
of the Origination Actuarial Method, the OID on a Contract would not be de
minimis.
If the OID on a Contract (or Contracts) is not treated as being de minimis,
a Certificate Owner will be required to include in income any OID as it accrues
on a daily basis, regardless of when cash payments are received, using a method
reflecting a constant yield to maturity on the Contract (or Contracts). Accrued
OID would increase a Certificate Owner's tax basis in the Certificate (and the
applicable Contracts). Distributions of principal and other items attributable
to accrued OID (other than payments of interest on the Contracts at %)
would reduce a Certificate Owner's tax basis. Application of the OID rules,
particularly if a prepayment assumption is required and the Contracts are not
aggregated, would be complex and could significantly affect the timing of
inclusion of income on a Certificate.
The Trustee intends to account for OID, if any, reportable by holders of
Certificates by reference to the price paid for a Certificate by an initial
purchaser, although the amount of OID will differ for subsequent purchasers.
Such subsequent purchasers should consult their tax advisors regarding the
proper calculation of OID on the interest in Contracts represented by a
Certificate.
Market Discount. Contracts, other than the Stripped Contracts, will not be
treated as stripped bonds. However, to the extent that the portion of the
purchase price allocated to a Certificate Owner's undivided interest in a
Contract other than a Stripped Contract is less than the "stated redemption
price at maturity", such Contract could have market discount. The market
discount on such a Contract will be considered to be zero if it is less than a
statutorily defined de minimis amount. The allocation of a portion of the
purchase price of a Certificate to the rights to payments under the Yield
Supplement Agreement may cause or increase the amount of market discount.
In general, under the market discount provisions of the Code, principal
payments received by the Trust and all or a portion of the gain recognized upon
a sale or other disposition of a Contract or upon the sale or other disposition
of a Certificate in an amount in excess of accrued market discount will be
treated as capital gain, assuming such Certificate Owner held such Certificate
as a capital asset. In addition, a portion of the interest deductions of the
Certificate Owner attributable to any indebtedness treated as incurred or
continued to purchase or carry a Contract may have to be deferred, unless a
Certificate Owner makes an election to include market discount in income
currently as it accrues, which election would apply to all debt instruments
acquired by the taxpayer on or after the first day of the first taxable year to
which such election applies. Taxpayers may, in general, elect to accrue market
discount either under a constant yield-to-maturity method or in the proportion
that the stated redemption paid on the obligation for the current period bears
to the total remaining interest on the obligation.
Premium. In the event that a Contract is treated as purchased at a premium
(i.e., its Purchase Price exceeds the portion of the remaining principal balance
of such Contract allocable to the Certificate Owner), such premium will be
amortizable by the Certificate Owner as an offset to interest income (with a
corresponding reduction in the Certificate Owner's basis) under a constant
yield-to-maturity method over the term of the Contract if an election under
Section 171 of the Code is made with respect to the interests in the Contracts
represented by the Certificates or was previously in effect. Any such election
will also apply to all debt instruments held by the Certificate Owner during the
year in which the election is made and all debt instruments acquired thereafter.
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YIELD SUPPLEMENT AMOUNTS
The proper Federal income tax characterization of the Yield Supplement
Amounts is not clear. Moreover, the sum of the income and deductions properly
reportable by a Certificate Owner in any taxable year may not equal the amounts
that would be reportable if a Certificate Owner held instead of an interest in
the Contracts and in the Yield Supplement Agreement either (i) a debt instrument
bearing interest at the Pass-Through Rate or (ii) an interest in a trust holding
Contracts each of which bears interest at a rate at least equal to %. The
right to receive Yield Supplement Amounts may be treated as a separate asset
purchased by each Certificate Owner, in which case a portion of each Certificate
Owner's purchase price or other tax basis in the Certificate equal to the fair
market value of the right to receive Yield Supplement Amounts should be
allocated to the right to receive payments of Yield Supplement Amounts.
If the right to receive Yield Supplement Amounts is treated as a separate
asset, it may be treated as a loan made by the Certificate Owner to the Seller
in an amount equal to the present value, discounted at a rate equal to % of
the projected Yield Supplement Amounts. In that event, a portion of the Yield
Supplement Amounts generally representing a yield equal to % on such
discounted value should be included in income as accrued or received, and the
remainder should be treated as a return of the principal amount of the deemed
loan. Alternatively, it is possible that the entire amount of each Yield
Supplement Amount should be included in income as accrued or received, in which
event a Certificate Owner should also be entitled to amortize the portion of its
purchase price allocable to its right to receive Yield Supplement Amounts. The
method of calculating such amortization is unclear, and could result in the
inclusion of greater amounts of income than a Certificate Owner's actual yield
on a Contract.
Alternatively, it is possible that the Yield Supplement Amounts could be
treated as payments adjusting the purchase price of the Supplemented Contracts,
rather than as a separate asset. In that event, a Certificate Owner could be
treated as having purchased each Supplemented Contract at a discount (which may
consist of imputed interest, market discount, or both) that, combined with the
Contract's APR, produces a yield equal to %. See "-- Discount and Premium."
It is not clear whether, and to what extent, the amounts includible in
income or amortizable under any of these methods would be adjusted to take
account of prepayments on the Contracts. Moreover, it is possible that the IRS
might contend that none of the above methods is appropriate, and that income
with respect to the Yield Supplement Agreement should be reported by a
Certificate Owner in some other manner. In addition, to the extent that the
amounts payable pursuant to the Yield Supplement Agreement decline during any
period by reason of prepayments on the related Contracts, it is possible that a
portion of the amount amortizable by the Certificate Owner during such period
would be treated as a capital loss (which would not offset ordinary income),
rather than as an ordinary deduction. It is expected that the annual statement
furnished to Certificateholders will report the net income derived from the
Yield Supplement Agreement using a method that causes the total income
attributable to a Certificate to equal income at the Pass-Through Rate on the
Scheduled Balance. Certificate Owners are advised to consult their tax advisors
regarding the appropriate method of accounting for income attributable to the
Yield Supplement Agreement.
SALE OF A CERTIFICATE
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale and the Certificate Owner's
adjusted basis in the Contracts and any other assets held by the Trust. A
Certificate Owner's adjusted basis will equal the Certificate Owner's cost for
the Certificate, increased by any discount previously included in income, and
decreased by any deduction previously allowed for accrued premium and by the
amount of principal payments previously received on the Contracts. Any gain or
loss not attributable to accrued interest or accrued market discount will be
capital gain or loss if the Certificate was held as a capital asset.
FOREIGN CERTIFICATE OWNER
Interest attributable to Contracts which is payable to a foreign
Certificate Owner that is not engaged in a trade or business in the United
States will generally not be subject to the 30% withholding tax generally
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imposed with respect to such payments, provided that such Certificate Owner
fulfills certain certification requirements. Under such certification
requirements, the Certificate Owner must certify, under penalties of perjury,
that it is not a "United States person" and it is the beneficial owner of the
Certificates, and must provide its name and address. For this purpose, "United
States person" means a citizen or resident of the United States, a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust the
income of which is includible in gross income for United States Federal income
tax purposes, regardless of its source (except, with respect to the tax year of
any trust that begins after December 31, 1996, a United States person shall mean
a trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States fiduciaries who have the
authority to control all substantial decisions of the trust).
Proposed Treasury Regulations (the "Proposed Regulations") could affect the
procedures to be followed by a nonresident investor in complying with United
States Federal withholding, backup withholding and information reporting rules.
The Proposed Regulations are not currently effective, but if finalized in their
current form, could be effective for payments made after December 31, 1997.
Prospective investors are urged to consult their tax advisors regarding the
effect, if any, of the Proposed Regulations on the purchase, ownership and
disposition of the Certificates.
BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to a "backup" withholding tax of 31% unless, in
general, the Certificate Owner fails to comply with certain reporting procedures
and is not an exempt recipient under applicable provisions of the Code.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on (i) employee benefit plans subject to ERISA,
(ii) "plans" (as defined in Section 4975(e)(1) of the Code) and (iii) entities
whose underlying assets include plan assets by reason of a plan's investment in
such entities (each, a "Plan"), and certain restrictions on persons who have
certain specified relationships to such Plans ("Parties in Interest" under ERISA
and "Disqualified Persons" under the Code). ERISA also imposes certain duties on
persons who are fiduciaries of Plans subject to ERISA, and ERISA and the Code
prohibit certain transactions between a Plan and Parties in Interest or
Disqualified Persons with respect to such Plans. Under ERISA, any person who
exercises any authority or control respecting the management or disposition of
the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant.)
The Department of Labor ("DOL") has issued a final regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulation"). This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, grantor trusts and certain other entities in which a Plan (which
is subject to Title I of ERISA and/or Section 4975 of the Code) makes an
"equity" investment will be deemed to be assets of the investing Plan unless
certain exceptions apply. The Plan Asset Regulation contains certain exceptions
to this general rule. Accordingly if a Plan purchases the Certificates, the
Trust could be deemed to hold plan assets unless one of the exceptions under the
Plan Assets Regulation is applicable to the Trust.
Under the terms of the Plan Asset Regulation, if the Trust were deemed to
hold plan assets by reason of a Plan's investment in a Certificate, such plan
assets would include an undivided interest in the Trust and Contracts underlying
the Trust and any other assets held by the Trust. In such an event, the persons
providing services with respect to the assets of the Trust, including the
Contracts, may be subject to the fiduciary responsibility provisions of Title I
of ERISA. In addition, those persons and certain other persons, including
Obligors on the receivables held in the Trust, may be subject to the prohibited
transaction provisions of ERISA and Section 4975 of the Code with respect to
certain transactions involving such assets or the Certificates, unless a
statutory or administrative exemption from the prohibited transaction rules
applies.
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The DOL has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
an administrative exemption (Prohibited Transaction Exemption 90-29 (the
"Exemption")) from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates representing interests in asset backed pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The receivables covered by the
Exemption include motor vehicle installment loans such as the Contracts. The
Exemption will apply to the acquisition, holding and resale of the Certificates
purchased by a Plan from the Underwriter, provided that certain conditions
(certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's, Moody's, Duff & Phelps
Inc. or Fitch Investors Service, Inc.;
(4) The sum of all payments made to the Underwriter in connection with
the distribution of the Certificates represents not more than reasonable
compensation for underwriting the Certificates; the sum of all payments
made to and retained by the Seller pursuant to the sale of the Contracts to
the Trust represents not more than the fair market value of such Contracts;
the sum of all payments made to and retained by the Servicer represents not
more than reasonable compensation for the Servicer's services under the
Agreement and reimbursement of the Servicer's reasonable expenses in
connection therewith;
(5) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(6) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of the Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or his
affiliate) is an Obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Certificates, at least 50% of each class of Certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group and at least 50% of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group; (ii) such fiduciary (or
its affiliate) is an Obligor with respect to 5% or less of the fair market value
of the obligations contained in the trust; (iii) the Plan's investment in
Certificates does not exceed 25% of all of the Certificates outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than 25% of the assets of the Plan are invested in certificates representing an
interest in one or more trusts containing assets sold or serviced by the same
entity. The Exemption does not apply to Plans sponsored by the Seller, the
Underwriter, the Trustee, the Servicer, the Insurer, any Obligor with respect to
Contracts included in the Trust constituting more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or any affiliate of
such parties (the "Restricted Group").
As of the date hereof, no Obligor with respect to Contracts included in the
Trust constitutes more than 5% of the aggregate unamortized principal balance of
the assets of the Trust. Because the Certificates are the only class of
certificates to be issued by the Trust, the second general condition described
above is satisfied. It is a condition of the issuance of the Certificates that
they be rated in the highest rating category by at least two Rating Agencies. A
fiduciary of a Plan contemplating the purchase of a Certificate (other than
pursuant to the original issuance of the Certificates) must make its own
determination that at the time of such acquisition, the
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<PAGE> 48
Certificates continue to satisfy the third general condition described above.
The Seller and the Servicer expect that the fifth general condition set forth
above will be satisfied with respect to the Certificates. A fiduciary of a Plan
contemplating purchasing a Certificate must make its own determination that the
first, fourth and sixth general conditions set forth above will be satisfied
with respect to its purchase of Certificates.
Any Plan fiduciary considering the purchase of Certificates should consult
with its counsel with respect to the applicability of the Exemption and other
issues and determine on its own whether all conditions for exemptive relief have
been satisfied and whether the Certificates are otherwise an appropriate
investment for a Plan under ERISA and the Code.
47
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated June , 1997 (the "Underwriting Agreement") between the Seller and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), the
Seller has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase the entire principal amount of the Certificates.
The Seller has been advised by the Underwriter that it proposes initially
to offer the Certificates to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at such price less a
concession not in excess of % of the principal amount thereof. The
Underwriter may allow, and such dealers may reallow, a discount not in excess of
% of the principal amount of the Certificates on sales to certain other
dealers. After the initial public offering, the public offering price of the
Certificates and such concession and discount may be changed. The Underwriter is
obligated to purchase and pay for all of the Certificates if any Certificates
are purchased. The Underwriter currently intends, but is not obligated, to make
a market in the Certificates.
During and after the offering, the Underwriter may purchase and sell the
Certificates in the open market in transactions in the United States. These
transactions may include overallotment and stabilizing transactions and
purchases to cover short positions created in connection with the offering. The
Underwriter also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the Certificates sold in the offering for their
account may be reclaimed by the Underwriter if such Certificates are repurchased
by the Underwriter in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Certificates,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected in the over-the-counter market or
otherwise, and these activities, if commenced, may be discontinued at any time.
The Seller and Onyx have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under applicable securities laws, or
contribute to payments the Underwriter may be required to make in respect
thereof.
LEGAL MATTERS
Certain matters with respect to the legality of the Certificates and with
respect to the federal income tax matters discussed under "Certain Federal
Income Tax Consequences" will be passed upon for the Seller by Andrews & Kurth
L.L.P., Los Angeles, California. Certain legal matters with respect to the
Certificates will be passed upon for the Underwriter by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York. Certain legal matters relating to the
Surety Bond will be passed upon for the Insurer by Shaw, Pittman, Potts &
Trowbridge, New York, New York.
EXPERTS
The financial statements of Capital Markets Assurance Corporation as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 are included herein beginning on page F-1 and have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their 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
referred to above contains an explanatory paragraph with regard to Capital
Markets Assurance Corporation's adoption at December 31, 1993 of Financial
Accounting Standard Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
48
<PAGE> 50
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
Aggregate Scheduled Balance..................................................... 4, 24
Aggregate Scheduled Balance Decline............................................. 4, 23
Agreement....................................................................... 3
APR............................................................................. 17
Auto Finance Centers............................................................ 12
Blanket Insurance Policy........................................................ 13
Business Day.................................................................... 4
Cede............................................................................ 7, 23
Certificate Owner............................................................... 7, 23
Certificates.................................................................... 1, 3
Closing Date.................................................................... 8
Code............................................................................ 39
Collection Account.............................................................. 27
Collection Period............................................................... 4, 23
Commission...................................................................... 2
Contract Due Period............................................................. 41
Contracts....................................................................... 1, 3
Cut-Off Date.................................................................... 1, 3, 17
Cut-Off Date Actuarial Balance.................................................. 40
Cut-Off Date Scheduled Balance.................................................. 3, 17, 39
Dealers......................................................................... 6
Defaulted Contract.............................................................. 5, 24
Definitive Certificates......................................................... 26
Distribution Date............................................................... 1, 4
Distribution Date Statement..................................................... 31
Disqualified Persons............................................................ 45
DOL............................................................................. 45
Due Date........................................................................ 13
DTC............................................................................. 7
Eligibility Requirements........................................................ 18
Eligible Investments............................................................ 27
ERISA........................................................................... 7, 45
Events of Default............................................................... 33
Final Distribution Date......................................................... 1
Financed Vehicles............................................................... 1, 3, 11
Full Prepayment................................................................. 20
Holders......................................................................... 26
Holdings........................................................................ 31
Indirect Participants........................................................... 25
Insolvency Laws................................................................. 9
Insurance Agreement............................................................. 6
Insurer......................................................................... 1, 4
Interest Distribution........................................................... 1, 4, 23
IRS............................................................................. 39
Liquidated Contract............................................................. 5, 24
</TABLE>
49
<PAGE> 51
<TABLE>
<S> <C>
Liquidation Expenses............................................................ 29
Monthly P&I..................................................................... 5, 24
Moody's......................................................................... 28
Motor Vehicle Contracts......................................................... 11
Net Insurance Proceeds.......................................................... 29
Net Liquidation Proceeds........................................................ 29
Obligor......................................................................... 9
OCS............................................................................. 13
OID............................................................................. 39
OID Regulations................................................................. 42
Onyx............................................................................ 1, 3, 22
Origination Actuarial Method.................................................... 42
Original Pool Balance........................................................... 7
Participants.................................................................... 23, 25
Parties in Interest............................................................. 45
Pass-Through Rate............................................................... 4
Payaheads....................................................................... 7, 28
Payahead Account................................................................ 28
Paying Agent.................................................................... 25
Plan............................................................................ 45
Plan Asset Regulation........................................................... 45
Pool Balance.................................................................... 4, 23
Pool Factor..................................................................... 21
Prepayment Assumption........................................................... 39
Principal Distribution.......................................................... 1, 4, 23
Proposed Regulations............................................................ 45
Purchase Agreement.............................................................. 21
Purchase Price.................................................................. 42
Recomputed Actuarial Method..................................................... 18, 40
Recomputed Principal Balance.................................................... 40
Recomputed Yield................................................................ 18, 40
Record Date..................................................................... 23
Rees-Levering Act............................................................... 37
Repurchase Amount............................................................... 27
Retained Strip.................................................................. 41
Rule of 78's Contracts.......................................................... 6, 17
Scheduled Balance............................................................... 4, 24
Section 1286 Regulations........................................................ 42
Seller.......................................................................... 1, 3
Servicer........................................................................ 1, 3
Servicer Report Date............................................................ 5
Servicing Fee................................................................... 5
Servicing Fee Rate.............................................................. 5, 30
Simple Interest Contracts....................................................... 6, 17
Simple Interest Method.......................................................... 17
Standard & Poor's............................................................... 28
Stripped Contract............................................................... 41
Surety Bond..................................................................... 1, 4, 6
Total Accrual Election.......................................................... 40
</TABLE>
50
<PAGE> 52
<TABLE>
<S> <C>
Trust........................................................................... 1, 3, 11
Trust Property.................................................................. 3
Trustee......................................................................... 3, 11
UCC............................................................................. 8, 35
Underwriter..................................................................... 48
Underwriting Agreement.......................................................... 48
Yield Supplement Agent.......................................................... 24
Yield Supplement Agreement...................................................... 4
Yield Supplement Amount......................................................... 5, 24
Yield Supplement Reserve Account................................................ 5, 24
</TABLE>
51
<PAGE> 53
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-1
<PAGE> 54
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
-----------------------------
KPMG PEAT MARWICK LLP
January 29, 1997
F-2
<PAGE> 55
CAPITAL MARKETS ASSURANCE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $294,861 at December 31,
1996 and $210,651 at December 31, 1995) $297,893 215,706
Short-term investments (at amortized cost which approximates
fair value) 16,810 68,646
- ---------------------------------------------------------------------------------------
Total investments 314,703 284,352
- ---------------------------------------------------------------------------------------
Cash 371 344
Accrued investment income 3,807 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 6,424 3,428
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $394,315 343,133
=======================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 8,019 10,844
Current income taxes 679 136
Deferred income taxes 15,139 11,303
- --------------------------------------------------------------------------------------
Total liabilities 104,822 77,067
- --------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding at
December 31, 1996 and 1995 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 1,970 3,286
Retained earnings 64,048 41,972
- --------------------------------------------------------------------------------------
Total stockholder's equity 289,493 266,066
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $394,315 343,133
======================================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 56
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992) (11,069)
- ---------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242) (10,490)
- ---------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Net investment income 16,992 11,953 10,072
Net realized capital gains 236 1,301 92
Other income 146 2,273 120
- ---------------------------------------------------------------------------------------------
Total revenues 57,931 44,769 33,387
- ---------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 14,613 13,808 11,833
Policy acquisition costs 7,824 7,203 4,529
- ---------------------------------------------------------------------------------------------
Total expenses 27,252 24,152 17,791
- ---------------------------------------------------------------------------------------------
Income before income taxes 30,679 20,617 15,596
- ---------------------------------------------------------------------------------------------
INCOME TAXES:
Current income tax 5,235 2,113 865
Deferred income tax 3,368 3,102 2,843
- ---------------------------------------------------------------------------------------------
Total income taxes 8,603 5,215 3,708
- ---------------------------------------------------------------------------------------------
NET INCOME $ 22,076 15,402 11,888
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 57
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 205,808 146,808 146,808
Capital contribution 2,667 59,000 --
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 208,475 205,808 146,808
- ---------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS, NET OF TAX:
Balance at beginning of year 3,286 (5,499) 3,600
Unrealized appreciation (depreciation)
on investments (1,316) 8,785 (9,099)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 1,970 3,286 (5,499)
- ---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 41,972 26,570 14,682
Net income 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 64,048 41,972 26,570
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 289,493 266,066 182,879
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 58
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,076 15,402 11,888
- --------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment
expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (671) (390) (848)
Income taxes payable 3,911 3,621 2,611
Net realized capital gains (236) (1,301) (92)
Accounts payable and other accrued
expenses 1,020 472 3,726
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (3,396) 992 689
- --------------------------------------------------------------------------------------------------------
Total adjustments 10,424 6,530 6,292
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 32,500 21,932 18,180
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (199,989) (158,830) (77,980)
Proceeds from sales of investments 57,210 49,354 39,967
Proceeds from maturities of investments 110,306 28,803 19,665
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (32,473) (80,673) (18,348)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution -- 59,000 --
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES -- 59,000 --
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27 259 (168)
Cash balance at beginning of year 344 85 253
- --------------------------------------------------------------------------------------------------------
CASH BALANCE AT END OF YEAR $ 371 344 85
========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 4,525 1,450 1,063
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 59
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) BACKGROUND
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a
New York-domiciled monoline stock insurance company which engages only
in the business of financial guarantee and surety insurance. CapMAC is
a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC
is licensed in all 50 states in addition to the District of Columbia,
the commonwealth of Puerto Rico and the territory of Guam. CapMAC
insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets.
CapMAC also provides financial guarantee reinsurance for structured
asset-backed, corporate, municipal and other financial obligations
written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
and "AAA" by Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies,
are not recommendations to buy, sell or hold securities and are subject
to revision or withdrawal at any time by such rating agencies.
(2) SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
(A) BASIS OF PRESENTATION
The accompanying financial statements are prepared on the
basis of generally accepted accounting principles ("GAAP").
Such accounting principles differ from statutory reporting
practices used by insurance companies in reporting to state
regulatory authorities.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Management believes the most
significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and
disclosures of financial guarantees outstanding. Actual
results could differ from those estimates.
(B) INVESTMENTS
As of December 31, 1996 and 1995, all of the Company's
securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair
value is generally based upon quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholder's equity
until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. A decline in
the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security.
F-7
<PAGE> 60
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Short-term investments are those investments having a maturity
of less than one year at purchase date. Short-term investments
are carried at amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses are included
in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
(C) PREMIUM REVENUE RECOGNITION
Premiums which are payable monthly to CapMAC are reflected in
income when due, net of amounts payable to reinsurers.
Premiums which are payable quarterly, semi-annually or
annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding
policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the
principal amount and earning it straight-line over the term of
each bond maturity. For the years ended December 31, 1996 and
1995, 91% of net premiums earned were attributable to premiums
payable in installments and 9% were attributable to premiums
collected on an up-front basis.
(D) DEFERRED ACQUISITION COSTS
Certain costs incurred by CapMAC, which vary with and are
primarily related to the production of new business, are
deferred. These costs include direct and indirect expenses
related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized over
the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections
due to various factors such as renewal or early termination of
insurance contracts or different run-off patterns of exposure
resulting in a corresponding change in the amortization
pattern of the deferred acquisition costs.
(E) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists
of a supplemental loss reserve ("SLR") and a case basis loss
reserve. The SLR is established for expected levels of losses
resulting from credit failures on currently insured issues and
reflects the estimated portion of earned premiums required to
cover those losses.
A case basis loss reserve is established for insured
obligations when, in the judgment of management, a default in
the timely payment of debt service is imminent. For defaults
considered temporary, a case basis loss reserve is established
in an amount equal to the present value of the anticipated
defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the
present value of all remaining defaulted debt service payments
is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss
reserves when such amounts are reasonably estimable. Case
basis loss reserves may be allocated from any SLR outstanding
at the time the case basis reserves are established.
F-8
<PAGE> 61
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Management believes that the current level of reserves is
adequate to cover the ultimate net cost of claims and the
related expenses with respect to financial guarantees issued
by CapMAC. The establishment of the appropriate level of loss
reserves is an inherently uncertain process involving
estimates and subjective judgments by management, and
therefore there can be no assurance that ultimate losses in
CapMAC's insured portfolio will not exceed the current
estimate of loss reserves.
(F) DEPRECIATION
Leasehold improvements, furniture, fixtures and electronic
data processing equipment are being amortized or depreciated
over the lease term or useful life, whichever is shorter,
using the straight-line method.
(G) INCOME TAXES
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the
enactment date.
F-9
<PAGE> 62
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(3) INSURED PORTFOLIO
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding), was
$19.7 billion and $12.6 billion, respectively, with a weighted average
life of 6.4 years and 6.0 years, respectively. CapMAC's insured
portfolio was broadly diversified by geographic distribution and type
of insured obligations, with no single insured obligation in excess of
statutory single risk limits, after giving effect to any reinsurance
and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory
contingency reserve). At December 31, 1996 and 1995, the statutory
qualified capital was approximately $260 million and $240 million,
respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
----------------------------------------
December 31, 1996 December 31, 1995
------------------- -----------------
Type of Obligations Insured ($ in millions) Amount % Amount %
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $10,362 52.8 $ 6,959 55.1
Trade and other corporate obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
-----------------------------------------------------------------------------------------------
TOTAL $19,655 100.0 $12,628 100.0
===============================================================================================
</TABLE>
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and
interest outstanding) was $23.3 billion and $15.1 billion,
respectively. At December 31, 1996, approximately 93% of CapMAC's
insured portfolio was comprised of structured asset-backed
transactions. Under these structures, a pool of assets covering at
least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying
assets. CapMAC, therefore, evaluates all the factors affecting past and
future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction
is reviewed to ensure that an appropriate legal structure is used to
protect against the bankruptcy risk of the originator of the assets.
Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to
a third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is
typically several times the normal historical loss experience for the
underlying type of assets.
During 1995, the Company sold without recourse its interest in
potential cash flows from transactions included in its insured
portfolio and recognized $2,200,000 of income which has been included
in other income in the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
% of % of % of
Revenues Revenues Revenues
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Citicorp 14.5 15.2 16.3
=============================================================================================
</TABLE>
F-10
<PAGE> 63
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(4) INVESTMENTS
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value for available-for-sale securities by major
security type at December 31, 1996 and 1995 were as follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,059 10 -- 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 109,436 265 1,160 108,541
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate and asset-backed securities 20,365 23 153 20,235
-------------------------------------------------------------------------------------------------
TOTAL $311,671 4,900 1,868 314,703
=================================================================================================
December 31, 1995
-------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 -- 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed securities 8,506 45 6 8,545
-------------------------------------------------------------------------------------------------
TOTAL $279,297 5,222 167 284,352
=================================================================================================
</TABLE>
F-11
<PAGE> 64
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996 by contractual maturity are shown below
($ in thousands):
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
Amortized Estimated
Securities Available-for-sale Cost Fair Value
--------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 11,627 11,644
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 82,337 83,503
--------------------------------------------------------------------
Sub-total 202,235 206,162
Mortgage-backed securities 109,436 108,541
--------------------------------------------------------------------
TOTAL $311,671 314,703
====================================================================
</TABLE>
Actual maturities may differ from contractual maturities because
borrowers may call or prepay obligations with or without call or
prepayment penalties.
Proceeds from sales of investment securities were approximately $57.2
million, $49.3 million and $39.9 million in 1996, 1995 and 1994,
respectively. Gross realized capital gains of $772,000, $1,320,000 and
$714,000, and gross realized capital losses of $536,000, $19,000 and
$622,000 were realized on those sales for the years ended December 31,
1996, 1995 and 1994, respectively.
Investments include bonds having a fair value of approximately
$3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
1995, respectively, with state regulators as required by law.
Investment income is comprised of interest and dividends, net of
related expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 15,726 11,105 9,193
Short-term investments 1,534 1,245 484
Mutual funds -- (162) 579
Investment expenses (268) (235) (184)
--------------------------------------------------------------------------------
TOTAL $ 16,992 11,953 10,072
================================================================================
</TABLE>
F-12
<PAGE> 65
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The change in unrealized appreciation (depreciation) on
available-for-sale securities is included as a separate component of
stockholder's equity as shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
-------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 3,286 (5,499)
Change in unrealized (depreciation) appreciation (2,024) 13,386
Income tax effect 708 (4,601)
Net change (1,316) 8,785
-------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 1,970 3,286
===========================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 2% of stockholder's equity as of
December 31, 1996 and 1995, respectively.
(5) DEFERRED ACQUISITION COSTS
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy
acquisition costs) (7,824) (7,203) (4,529)
---------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 45,380 35,162 24,860
=======================================================================================
</TABLE>
(6) EMPLOYEE BENEFITS
CapMAC has a service agreement with CapMAC Financial Services, Inc.
("CFS"). Under the service agreement, CFS has agreed to provide various
services, including underwriting, reinsurance, marketing, data
processing and other services to CapMAC in connection with the
operation of CapMAC's insurance business. CapMAC pays CFS a fee for
providing such services, but not in excess of CFS's cost for such
services. CFS incurred, on behalf of CapMAC, total compensation
expenses, excluding bonuses, of $13,374,000, $13,484,000 and
$11,081,000 in 1996, 1995 and 1994, respectively.
The Company, through CFS, maintains an incentive compensation plan for
its employees. The plan is an annual discretionary bonus award. For the
years ended December 31, 1996, 1995 and 1994, the Company had provided
approximately $8,810,000, $7,804,000 and $5,253,000, respectively, for
the plan. CFS also provides health and welfare benefits to
substantially all of its employees. The Company incurred $551,943,
$598,530, and $562,508 of expense for the years ended December 31,
1996, 1995 and 1994, respectively, for such plan. The Company also has
a defined contribution retirement plan which allows participants to
make voluntary contributions by salary reduction pursuant to section
401 (k) of the Internal Revenue Code. The Company provides for the
administrative cost for the 401 (k) plan.
F-13
<PAGE> 66
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers
agreed to defer receipt of such cash amount in exchange for receiving
the same number of new shares of restricted stock of Holdings as the
number of RSU's such officers previously held. During 1995 and 1994,
the expense was $1.3 million and $0.1 million, respectively. During
1996, Holdings assumed the liability of $3.7 million less the related
deferred tax asset of $1.1 million as capital contribution. The cash
amount is held by Holdings and invested in accordance with certain
guidelines. Such amount, including the investment earnings thereon,
will be paid to each officer upon the occurrence of certain events but
no later than December 2000.
(7) EMPLOYEE STOCK OWNERSHIP PLAN
Holdings maintains an Employee Stock Ownership Plan ("ESOP") to provide
its employees the opportunity to obtain beneficial interests in the
stock of Holdings through a trust (the "ESOP Trust"). Compensation
expense related to the ESOP and allocated to CapMAC was approximately
$2,764,000, $2,087,000 and $2,086,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
F-14
<PAGE> 67
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(8) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the
aggregate amount of claims and related expenses not to exceed $2.7
million, although no assurance can be given that such claims and
related expenses will not exceed that amount. Such loss amount was
covered through a recovery under a quota share reinsurance agreement of
$0.2 million and a reduction in the SLR of $2.5 million. The portion of
such claims and expenses not covered under the quota share agreement is
being funded through payments to CapMAC from the Lureco Trust Account
(see note 12).
The following is a summary of the activity in the case basis loss
reserve account and the components of the reserve for losses and loss
adjustment expenses ($ in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASE BASIS LOSS RESERVE:
Net balance at January 1 $ 620 -- --
-------------------------------------------------------------------------------------------------------
INCURRED RELATED TO:
Current year -- 2,473 --
Prior years -- -- --
-------------------------------------------------------------------------------------------------------
Total incurred -- 2,473 --
-------------------------------------------------------------------------------------------------------
PAID RELATED TO:
Current year -- 1,853 --
Prior years 309 -- --
-------------------------------------------------------------------------------------------------------
Total paid 309 1,853 --
Net balance at December 31 311 620 --
Reinsurance recoverable -- 69 --
-------------------------------------------------------------------------------------------------------
GROSS BALANCE AT DECEMBER 31 311 689 --
-------------------------------------------------------------------------------------------------------
SUPPLEMENTAL LOSS RESERVE
Balance at January 1 5,859 5,191 3,762
-------------------------------------------------------------------------------------------------------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve -- (2,473) --
-------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 10,674 5,859 5,191
-------------------------------------------------------------------------------------------------------
TOTAL RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES $10,985 6,548 5,191
=======================================================================================================
</TABLE>
F-15
<PAGE> 68
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(9) INCOME TAXES
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return. The
Company's annual Federal income tax liability is determined by
computing its pro rata share of the consolidated group Federal income
tax liability.
Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
--------------------------------------------------------------------------------------------------------------
$ in thousands Amount % Amount % Amount %
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $10,738 35.0 $ 7,216 35.0 $ 5,303 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (9.5) (2,335) (11.3) (1,646) (10.6)
Other, net 781 2.5 334 1.6 51 0.4
--------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 8,603 28.0 $ 5,215 25.3 $ 3,708 23.8
==============================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1996 December 31, 1995
-----------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred compensation $ 200 1,901
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 96 98
----------------------------------------------------------------------------
Total gross deferred tax assets 2,689 3,853
----------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,061 1,769
Other, net 884 1,080
----------------------------------------------------------------------------
Total gross deferred tax liabilities 17,828 15,156
----------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $15,139 11,303
============================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the deferred tax assets will be fully realized
in the future.
F-16
<PAGE> 69
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(10) INSURANCE REGULATORY RESTRICTIONS
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that
may be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income
as defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1996, 1995 and 1994. No dividends could be
paid during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1996 and 1995 was approximately
$193,726,000 and $195,018,000, respectively. Statutory surplus differs
from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting
purposes and differences in accounting for investments, deferred
acquisition costs, SLR and deferred taxes provided under GAAP.
Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Statutory
net income differs from net income determined under GAAP principally
due to deferred acquisition costs, SLR and deferred income taxes.
(11) COMMITMENTS AND CONTINGENCIES
The Company's lease agreement for the space occupied in New York
expires on November 20, 2008. CapMAC has a lease agreement for its
London office, which expires on October 1, 2002. As of December 31,
1996, future minimum payments under the lease agreements are as
follows:
<TABLE>
<CAPTION>
$ in thousands Payment
-------------------------------------------------------------
<S> <C>
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
-------------------------------------------------------------
TOTAL $40,251
=============================================================
</TABLE>
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1996, 1995 and 1994 amounted to $1,618,000, $1,939,000 and
$2,243,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity
facility (the "Liquidity Facility") scheduled to terminate in September
1999. The Liquidity Facility is provided by a consortium of banks,
headed by Bank of Montreal, as agent, which is rated "A-1+" and "P-1"
by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
will be able, subject to satisfying certain conditions, to borrow funds
from time to time in order to enable it to fund any claim payments or
payments made in settlement or mitigation of claim payments under its
insurance contracts. There have been no draws under the Liquidity
Facility.
CapMAC has agreed to make an investment of 50 million French Francs
(approximately $10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. This
investment is anticipated to be made in 1997.
F-17
<PAGE> 70
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(12) REINSURANCE
In the ordinary course of business, CapMAC cedes exposure under various
treaty and facultative reinsurance contracts, both on a pro rata and
excess of loss basis, primarily designed to minimize losses from large
risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- ---------------------
$ in thousands Written Earned Written Earned Written Earned
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,069) (5,716)
--------------------------------------------------------------------------------------------
NET PREMIUMS $ 57,734 40,557 41,484 29,242 33,593 23,103
============================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists
with respect to the aforementioned reinsurance arrangements, which may
become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At
December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
$69,000, respectively, and had ceded unearned premiums of $18,489,000
and $13,171,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The
agreement reinsured and indemnified the Company for any loss incurred
by CapMAC during the agreement period up to the limits of the
agreement. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's
fee payable to Lureco, be deposited in a trust account (the "Lureco
Trust Account") to be applied by CapMAC, at its option, to offset
losses and loss expenses incurred by CapMAC in connection with incurred
claims. Amounts on deposit in the Lureco Trust Account which have not
been applied against claims are contractually due to CapMAC at the
termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement.
Premiums in excess of the deposit amounts have been recorded as ceded
premiums in the statements of income. For the 1996 policy year, the
agreement provides $7 million of loss coverage in excess of the premium
deposit amount of $5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200%
of the net premiums earned up to $4 million for any one agreement year.
In September 1995, a claim of approximately $2.5 million on an
insurance policy was applied against the Lureco Trust Account.
F-18
<PAGE> 71
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
In addition to its capital (including statutory contingency reserves),
CapMAC has other reinsurance available to pay claims under its
insurance contracts. Effective November 30, 1995, CapMAC entered into a
Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
required to pay any losses in excess of $100 million in the aggregate
incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
the insurance policies in effect on December 1, 1995 and written during
the one-year period thereafter, up to an aggregate limit payable under
the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
Agreement has a term of seven years and is subject to early termination
by CapMAC in certain circumstances. Effective January 1, 1997 the
stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses of $150 million increasing annually based on increases
in CapMAC's statutory qualified capital. The new stop-loss reinsurance
is provided by Mitsui, AXA Re Finance S.A. ("AXA Re") and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").
On November 30, 1995, CapMAC canceled the quota share reinsurance
agreement with Winterthur Swiss Insurance Company ("Winterthur")
pursuant to which Winterthur had the right to reinsure on a quota share
basis 10% of each policy written by CapMAC. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur
on January 1, 1996. In connection with the commutation, Winterthur
returned $2.0 million of unearned premiums, net of ceding commission
and Federal excise tax.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
1995. The fair value amounts were determined by the Company using
independent market information when available, and appropriate
valuation methodologies when market information was not available. Such
valuation methodologies require significant judgment and are not
necessarily indicative of the amount the Company could recognize in a
current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------- --------------------
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Available-for-sale securities $314,703 314,703 284,352 284,352
--------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET INSTRUMENTS:
Financial guarantees outstanding $ -- 219,989 -- 147,840
Less: ceding commission -- 65,997 -- 44,352
--------------------------------------------------------------------------------------------
Net financial guarantees outstanding $ -- 153,992 103,488
============================================================================================
</TABLE>
F-19
<PAGE> 72
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
AVAILABLE-FOR-SALE SECURITIES
The fair values of fixed maturities are based upon quoted market
prices. The fair value of short-term investments approximates amortized
cost.
FINANCIAL GUARANTEES OUTSTANDING
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2)
the fair value of installment revenue which is derived by calculating
the present value of the estimated future cash inflow to CapMAC of
policies in force having installment premiums, net of amounts payable
to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
The amount calculated is assumed to be equivalent to the consideration
that would be paid by CapMAC under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a
third party under reinsurance and other agreements. Ceding commission
represents the expected amount that would be paid to CapMAC to
compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management
makes assumptions regarding prepayments for amortizing asset-backed
securities which are consistent with relevant historical experience.
For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of
future installment revenue actually realized by the Company could be
reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations
or lower than anticipated utilization of insured structured programs,
such as commercial paper conduits. Although increases in future
installment revenue earnings due to renewals of existing insurance
contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there
can be no assurance that future circumstances might not cause a
material net reduction in the future installment revenue.
(14) CAPITALIZATION
In 1995, $59.0 million of the proceeds received by Holdings from the
sale of shares in connection with an initial public offering and
private placements were contributed to CapMAC.
F-20
<PAGE> 73
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
F-21
<PAGE> 74
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, 1997
(Unaudited) December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
INVESTMENTS:
<S> <C> <C>
Bonds at fair value (amortized cost $276,563 at March 31, 1997 and
$294,861 at December 31, 1996) $273,096 297,893
Short-term investments (at amortized cost which approximates fair value) 37,903 16,810
- --------------------------------------------------------------------------------------------------------------------
Total investments 310,999 314,703
- --------------------------------------------------------------------------------------------------------------------
Cash 9,399 371
Accrued investment income 3,070 3,807
Deferred acquisition costs 48,442 45,380
Premiums receivable 4,788 5,141
Prepaid reinsurance 18,703 18,489
Other assets 6,901 6,424
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $402,302 394,315
====================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums $ 68,838 68,262
Reserve for losses and loss adjustment expenses 12,528 10,985
Ceded reinsurance 2,163 1,738
Accounts payable and other accrued expenses 11,214 8,019
Current income taxes 1,301 679
Deferred income taxes 13,784 15,139
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 109,828 104,822
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock - $1.00 par value per share; 15,000,000 shares are authorized,
issued and outstanding at March 31, 1997 and December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized (depreciation) appreciation on investments, net of tax (2,253) 1,970
Retained earnings 71,252 64,048
- --------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 292,474 289,493
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $402,302 394,315
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 75
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Direct premiums written $ 16,454 14,155
Assumed premiums written 261 874
Ceded premiums written (4,349) (1,910)
- --------------------------------------------------------------------------------------------------------------
Net premiums written 12,366 13,119
Increase in unearned premiums (363) (4,291)
- --------------------------------------------------------------------------------------------------------------
Net premiums earned 12,003 8,828
Net investment income 4,702 3,877
Net realized capital gains 2,043 149
Other income 43 54
- --------------------------------------------------------------------------------------------------------------
Total revenues 18,791 12,908
- --------------------------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 1,543 1,075
Underwriting and operating expenses 4,671 3,978
Policy acquisition costs 2,581 2,064
- --------------------------------------------------------------------------------------------------------------
Total expenses 8,795 7,117
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 9,996 5,791
- --------------------------------------------------------------------------------------------------------------
INCOME TAXES:
Current income tax 1,873 664
Deferred income tax 919 823
- --------------------------------------------------------------------------------------------------------------
Total income taxes 2,792 1,487
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,204 4,304
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 76
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK:
Balance at beginning of period $ 15,000
- -------------------------------------------------------------------------------------------------
Balance at end of period 15,000
- -------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 208,475
- -------------------------------------------------------------------------------------------------
Balance at end of period 208,475
- -------------------------------------------------------------------------------------------------
UNREALIZED (DEPRECIATION) APPRECIATION ON INVESTMENTS, NET OF TAX:
Balance at beginning of period 1,970
Unrealized depreciation on investments (4,223)
- -------------------------------------------------------------------------------------------------
Balance at end of period (2,253)
- -------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 64,048
Net income 7,204
- -------------------------------------------------------------------------------------------------
Balance at end of period 71,252
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $292,474
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE> 77
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,204 4,304
- -------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment expenses 1,543 713
Unearned premiums, net 576 4,499
Deferred acquisition costs (3,062) (2,397)
Premiums receivable 353 77
Accrued investment income 737 (220)
Income taxes payable 1,541 947
Net realized capital gains (2,043) (149)
Accounts payable and other accrued expenses 3,195 287
Prepaid reinsurance (214) (208)
Other, net 78 89
- -------------------------------------------------------------------------------------------------------------
Total adjustments 2,704 3,638
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,908 7,942
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (74,308) (87,335)
Proceeds from sales of investments 58,658 6,158
Proceeds from maturities of investments 14,770 73,280
- -------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (880) (7,897)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash 9,028 45
Cash balance at beginning of period 371 344
- -------------------------------------------------------------------------------------------------------------
CASH BALANCE AT END OF PERIOD $ 9,399 389
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 1,250 525
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 78
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. BACKGROUND
Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled
monoline stock insurance company which engages only in the business of
financial guaranty and surety insurance. CapMAC is a wholly owned subsidiary
of CapMAC Holdings Inc. ("Holdings"). In early 1997, CapMAC made an
investment of 50 million French francs (approximately 10 million U.S.
dollars) in CapMAC Assurance, S.A., an insurance subsidiary to be
established in Paris, France. CapMAC Assurance, S.A., is licensed to write
financial guarantee insurance in the European Union member states.
CapMAC is licensed in all 50 states in addition to the District of Columbia,
the Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also
provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other major
insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
2. BASIS OF PRESENTATION
CapMAC's consolidated unaudited interim financial statements have been
prepared on the basis of generally accepted accounting principles and, in
the opinion of management, reflect all adjustments necessary for a fair
presentation of the CapMAC's financial condition, results of operations and
cash flows for the periods presented. The results of operations for the
three months ended March 31, 1997 may not be indicative of the results that
may be expected for the full year ending December 31, 1997. These
consolidated financial statements and notes should be read in conjunction
with the financial statements and notes included in the audited financial
statements of CapMAC as of December 31, 1996 and 1995, and for each of the
years in the three-year period ended December 31, 1996.
F-26
<PAGE> 79
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR THE
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF A TIME SUBSEQUENT TO THE DATE OF SUCH
INFORMATION. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................... 2
Reports to Certificateholders........... 2
Summary................................. 3
Risk Factors............................ 8
The Trust............................... 11
The Onyx Portfolio of Motor Vehicle
Contracts............................. 11
The Contracts........................... 17
Maturity and Prepayment Assumptions..... 20
Yield Considerations.................... 20
Pool Factor............................. 21
Use of Proceeds......................... 21
The Seller.............................. 21
The Servicer............................ 22
The Certificates and the Agreement...... 22
Description of the Insurer.............. 30
Additional Provisions of the
Agreement............................. 31
Certain Legal Aspects of the
Contracts............................. 35
Certain Federal Income Tax
Consequences.......................... 38
ERISA Considerations.................... 45
Underwriting............................ 48
Legal Matters........................... 48
Experts................................. 48
Financial Statements of Insurer......... F-1
------------------
UNTIL , 1997 (90 DAYS AFTER THE
DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
=============================================
</TABLE>
======================================================
ONYX ACCEPTANCE
GRANTOR TRUST 1997-2
% AUTO LOAN
PASS-THROUGH CERTIFICATES
LOGO
ONYX ACCEPTANCE FINANCIAL CORPORATION,
Seller
ONYX ACCEPTANCE CORPORATION,
Servicer
---------------------------
P R O S P E C T U S
---------------------------
MERRILL LYNCH & CO.
, 1997
======================================================
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fee........................................................... $303.03
Printing and Engraving..................................................... *
Trustee's Fee.............................................................. *
Legal Fees and Expenses.................................................... *
Blue Sky Fees and Expenses................................................. *
Accountant's Fees and Expenses............................................. *
Rating Agency Fees......................................................... *
Miscellaneous Fees and Expenses............................................ *
-------
Total Expenses........................................................ *
=======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law ("Delaware Law")
Onyx Acceptance Financial Corporation (the "Company") has broad powers to
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). The Company's Bylaws (the "Bylaws") (Exhibit 3.2 hereto)
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by law and requires the Company to advance litigation
expenses upon receipt by the Company of an undertaking by the director or
officer to repay such advances if it is ultimately determined that the director
is not entitled to indemnification. The Bylaws further provide that rights
conferred under such Bylaws shall not be deemed to be exclusive of any other
right such persons may have or acquire under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise.
The Certificate of Incorporation (the "Certificate of Incorporation")
(Exhibit 3.1 hereto) provides that, pursuant to Delaware Law, its directors
shall not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefits to the director, and for payment
of dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware Law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate of Incorporation further
provides that the Company shall indemnify its directors and officers to the
fullest extent permitted by law, and requires the Company to advance litigation
expenses in the case of stockholder derivative actions or other actions, against
an undertaking by the director to repay such advances if it is ultimately
determined that the director is not entitled to indemnification. The Certificate
of Incorporation also provides that rights conferred under such Certificate of
Incorporation shall not be deemed to be exclusive of any other right such
persons may have or acquire under any statute, the Certificate of Incorporation,
the Bylaws, agreement, vote of stockholders or disinterested directors, or
otherwise.
The Company has acquired a directors' and officers' liability insurance
policy that, subject to the terms and conditions of the policy, insures the
directors and officers of the Company against losses arising from any wrongful
act (as defined by the policy) in his or her capacity as a director or officer.
The policy reimburses the Company for amounts which the Company lawfully
indemnifies or for which it is required or permitted by law to indemnify its
directors and officers.
II-1
<PAGE> 81
In addition, the Company has entered into agreements to indemnify its
directors and certain of its officers in addition to indemnification provided
for in the Certificate of Incorporation and Bylaws. These agreements will, among
other things, indemnify the Company's directors and certain of its officers for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by such person in any action or proceeding, including any
action by or in the right of the Company, on account of services as a director
or officer of the Company or as a director or officer of any subsidiary of the
Company, or as a director or officer of any other company or enterprise that the
person provides services to at the request of the Company.
The Underwriting Agreement provides for indemnification by the Company of
the Underwriters, for certain liabilities rising under the Securities Act or
otherwise. It also provides, in certain limited instances, for indemnification
by the Underwriters of the Company with respect to information furnished by or
on behalf of the Underwriter that are contained in this prospectus or included
as part of this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Seller incorporated herein by reference
to the Registrant's Registration Statement on Form S-1 No. 333-4220
3.2 Bylaws of the Seller incorporated herein by reference to the Registrant's
Registration Statement on Form S-1 No. 333-4220
4.1 Form of Pooling and Servicing Agreement among the Seller, the Servicer and
the Trustee (includes Yield Supplement Agreement)*
5.1 Opinion of Andrews & Kurth LLP with respect to legality*
8.1 Opinion of Andrews & Kurth LLP, with respect to federal income tax matters*
23.1 Consent of Andrews & Kurth LLP, (contained in Exhibit 5.1)*
23.2 Consent of Andrews & Kurth LLP, (contained in Exhibit 8.1)*
23.3 Consent of KPMG Peat Marwick LLP with respect to financial statements of
Capital Markets Assurance Corporation*
24 Powers of Attorney**
</TABLE>
- ---------------
* To be filed by amendment
** Included on page II-4
(b) FINANCIAL STATEMENT SCHEDULES
Not applicable.
II-2
<PAGE> 82
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities
Act of 1933, each post effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on March 19, 1997.
Onyx Acceptance Financial Corporation
By: /s/ JOHN W. HALL
------------------------------------
John W. Hall
Director, President and Chief
Executive Officer
Each person whose signature appears below hereby constitutes and appoints
Regan E. Kelly and Don P. Duffy his true and lawful attorney-in-fact and agent,
with full powers of substitution, for him and in his name, place and stead, in
any and all capacities, to sign and to file any and all amendments including
post-effective amendments, to this Registration Statement with the Securities
and Exchange Commission granting to said attorney in fact power and authority to
perform any other act on behalf of the undersigned required to be done in
connection therewith.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- ----------------
<S> <C> <C>
/s/ JOHN W. HALL President and Chief May 23, 1997
- --------------------------------------------- Executive Officer, Director
John W. Hall (Principal Executive Officer)
/s/ DON P. DUFFY Executive Vice President May 23, 1997
- --------------------------------------------- and Chief Financial Officer,
Don P. Duffy Director (Principal Financial
and Accounting Officer)
/s/ REGAN E. KELLY Executive Vice President, May 23, 1997
- --------------------------------------------- Director
Regan E. Kelly
/s/ KURT C. BICKNELL Director May 23, 1997
- ---------------------------------------------
Kurt C. Bicknell
/s/ STEVE M. BOND Director May 27, 1997
- ---------------------------------------------
Steve M. Bond
</TABLE>
II-4
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*.........................................
3.1 Certificate of Incorporation of the Seller incorporated herein by
reference to the Registrant's Registration Statement on Form S-1 No.
333-4220................................................................
3.2 Bylaws of the Seller incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 No. 333-4220............
4.1 Form of Pooling and Servicing Agreement among the Seller, the Servicer
and the Trustee (includes Yield Supplement Agreement)*..................
5.1 Opinion of Andrews & Kurth LLP, with respect to legality*...............
8.1 Opinion of Andrews & Kurth LLP, with respect to federal income tax
matters*................................................................
23.1 Consent of Andrews & Kurth LLP, (contained in Exhibit 5.1)*.............
23.2 Consent of Andrews & Kurth LLP, (contained in Exhibit 8.1)*.............
23.3 Consent of KPMG Peat Marwick LLP with respect to financial statements of
Capital Markets Assurance Corporation*..................................
24 Powers of Attorney**....................................................
</TABLE>
- ---------------
* To be filed by amendment
** Included on page II-4
