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 SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Prospectus Supplement
(To Prospectus Dated June 5, 1997)
$295,758,115.97
UACSC 1997-B Auto Trust
$171,750,000.00 6.37% Class A-1 Automobile Receivable Backed Certificates
$105,500,000.00 6.70% Class A-2 Automobile Receivable Backed Certificates
$ 18,508,115.97 6.79% Class A-3 Automobile Receivable Backed Certificates
Class I Interest Only Automobile Receivable Backed Certificates
UAC Securitization Corporation
Depositor
Union Acceptance Corporation
Servicer
Interest at the applicable Pass-Through Rate shown above, will be distributed to
Class A-1 Certificateholders, Class A-2 Certificateholders, and Class A-3
Certificateholders (collectively, the "Class A Certificateholders") on the third
business day after the 5th day of each month (the "Distribution Date"),
beginning July 9, 1997. Principal will be distributed to Class A
Certificateholders on each Distribution Date in the sequence described herein.
The final scheduled Distribution Date of the Class A-1 Certificates will be
April 10, 2001 (the "Class A-1 Final Scheduled Distribution Date"). The final
scheduled Distribution Date of the Class A-2 Certificates will be June 10, 2003
(the "Class A-2 Final Scheduled Distribution Date"). The final scheduled
Distribution Date of the Class A-3 Certificates will be October 8, 2004 (the
"Class A-3 Final Scheduled Distribution Date"). The Class I Certificates will
not receive principal payments, but interest at the Class I Pass-Through Rate of
1.85% per annum on the Notional Principal Amount (as defined herein) of the
Class I Certificates will be distributed to Class I Certificateholders on each
Distribution Date until the Notional Principal Amount has been reduced to zero.
The Original Notional Principal Amount will be $237,910,864.98 and will decrease
on each Distribution Date. Each Certificate offered hereby will represent an
undivided interest in the UACSC 1997-B Auto Trust (the "Trust") to be formed by
UAC Securitization Corporation, a Delaware corporation, having its principal
office and place of business in Indianapolis, Indiana (the "Depositor"). The
Trust property will include a pool of simple and precomputed interest
installment sale and installment loan contracts originated in various states in
the United States of America, secured by new and used automobiles, light trucks
and vans (the "Receivables"), certain monies due thereunder as of and after May
31, 1997 (the "Cutoff Date"), security interests in the vehicles financed
thereby and certain other property. The Trust Property will also include an
irrevocable surety bond guaranteeing payments of interest and principal on the
Class A Certificates and Class I Monthly Interest (the "Surety Bond") issued by
Capital Markets Assurance Corporation and a Spread Account for the benefit of
the Class A Certificateholders and the Class I Certificateholders, as well as
the Surety Bond Issuer.
Concurrently with the issuance of the Class A Certificates and the Class I
Certificates, the Trust will issue a Class IC Automobile Receivable Backed
Certificate (the "Class IC Certificate"). The Class IC Certificate will be
issued to UAC Securitization Corporation, the Depositor, and will not be offered
hereby. The Class A Certificates and the Class I Certificates are together
referred to herein as the "Offered Certificates."
Prior to their issuance there has been no market for the Offered Certificates
nor can there be any assurance that one will develop, or if it does develop,
that it will provide the holders of the Offered Certificates with liquidity or
will continue for the life of the Offered Certificates. The Underwriters intend,
but are not obligated, to make a market in the Offered Certificates.
<PAGE>
The yield to maturity of the Class I Certificates will be sensitive to the rate
and timing of principal payments (including prepayments) on the Receivables.
Investors in the Class I Certificates should fully consider the associated
risks, including the risk that a rapid rate of principal payments could result
in the failure of such investors to recoup their initial investments. See "Risk
Factors -- Prepayment Risks Associated with the Class I Certificates" and
"--Termination Upon Insolvency Event of the Class IC Certificateholder", "Yield
and Prepayment Considerations" and "The Offered Certificates -- The Class I
Certificates -- Calculation of Notional Principal Amount" herein.
Prospective investors should consider, among other things, the information set
forth under "Risk Factors" on page S-11 hereof and page 10 of the Prospectus.
THE OFFERED CERTIFICATES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF UAC
SECURITIZATION CORPORATION OR ANY AFFILIATE THEREOF. NEITHER THESE SECURITIES
NOR THE UNDERLYING RECEIVABLES WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
Price to Underwriting Proceeds to
Public Discounts (1) Depositor (2)
<S> <C> <C> <C>
Per Class A-1 Certificate....... 99.996950% 0.150% 99.846950%
Per Class A-2 Certificate....... 99.988290% 0.320% 99.668290%
Per Class A-3 Certificate....... 99.986610% 0.355% 99.631610%
Per Class I Certificate......... 2.435517% 0.375% 2.426384%
Total........................... $301,532,404.87 $682,657.66 $300,849,747.21
===================================================================================================
</TABLE>
(1) With respect to the Class I Certificates, the Price to Public and Proceeds
to Depositor are expressed as a percentage of the Notional Principal Amount
(initially $237,910,864.98), and the Underwriting Discounts are expressed
as a percentage of the related Price to Public.
(2) Before deducting expenses, estimated to be $557,477.51.
The Offered Certificates are offered, subject to prior sale, when, as and if
accepted by the Underwriters, and subject to approval of certain legal matters
by Cadwalader, Wickersham & Taft, counsel for the Underwriters. It is expected
that delivery of the Offered Certificates in book-entry form will be made on or
about June 12, 1997 through the facilities of The Depository Trust Company,
against payment therefor in immediately available funds.
Underwriters of the Class A Certificates
Salomon Brothers Inc Bear, Stearns & Co. Inc.
Underwriter of the Class I Certificates
Salomon Brothers Inc
The date of this Prospectus Supplement is June 5, 1997
<PAGE>
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN
THE PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT
BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT CONTAINS INFORMATION THAT IS
SPECIFIC TO THE TRUST AND THE OFFERED CERTIFICATES AND, TO THAT EXTENT,
SUPPLEMENTS AND REPLACES THE MORE GENERAL INFORMATION PROVIDED IN THE
PROSPECTUS.
----------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver this Prospectus Supplement and
the Prospectus. This is in addition to the obligation of dealers to deliver this
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
----------
REPORTS TO CERTIFICATEHOLDERS
Unless and until definitive certificates are issued (which will occur
only under the limited circumstances described herein), Harris Trust and Savings
Bank, as Trustee, will provide to Cede & Co., the nominee of The Depository
Trust Company, as registered holder of the Offered Certificates, monthly and
annual statements concerning the Trust and the Offered Certificates. Such
statements will not constitute financial statements prepared in accordance with
generally accepted accounting principles. A copy of the most recent monthly or
annual statement concerning the Trust and the Offered Certificates may be
obtained by contacting the Servicer at Union Acceptance Corporation, 250 North
Shadeland Avenue, Indianapolis, Indiana 46219 (telephone (317) 231-7965).
s-2
<PAGE>
SUMMARY OF TERMS
This Summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Certain capitalized terms used in this Summary are defined elsewhere
in this Prospectus Supplement on the pages indicated in the "Index of Principal
Terms" or, to the extent not defined herein, have the meanings assigned to such
terms in the Prospectus.
Issuer ......................UACSC 1997-B Auto Trust.
Depositor.....................UAC Securitization Corporation (the "Depositor").
Servicer .....................Union Acceptance Corporation (in its capacity as
servicer, the "Servicer," otherwise "UAC").
Trustee .....................Harris Trust and Savings Bank.
The Certificates ............The Trust will be formed and will issue the
Certificates on or about June 12, 1997 (the
"Closing Date") pursuant to a pooling and
servicing agreement (the "Pooling and Servicing
Agreement"). The "Certificates" will consist of:
(i) 6.37% Class A-1 Automobile Receivable Backed
Certificates in the aggregate principal amount of
$171,750,000; (ii) 6.70% Class A-2 Automobile
Receivable Backed Certificates in the aggregate
principal amount of $105,500,000; (iii) 6.79%
Class A-3 Automobile Receivable Backed
Certificates in the aggregate principal amount of
$18,508,115.97; (iv) the Class I Interest Only
Automobile Receivable Backed Certificates; and (v)
the Class IC Automobile Receivable Backed
Certificate. The Class I Certificates are interest
only certificates and will not receive
distributions of principal. The Class IC
Certificate will be issued to the Depositor on the
Closing Date and is not being offered hereby.
Each of the Certificates will represent a
fractional undivided interest in the Trust. The
Trust assets will include the Receivables, certain
monies due thereunder as of and after the Cutoff
Date, security interests in the related Financed
Vehicles, monies on deposit in the Certificate
Account and the proceeds thereof, any proceeds
from claims on certain insurance policies relating
to the Financed Vehicles or the related Obligors,
any lender's single interest insurance policy, the
Spread Account for the benefit of the Class A
Certificateholders, the Class I Certificateholders
and the Surety Bond Issuer, the Surety Bond for
the benefit of the Class A Certificateholders and
Class I Certificateholders and certain rights
under the Pooling and Servicing Agreement.
Interest paid to the Certificateholders on the
first Distribution Date will be based upon the
amount of interest accruing from the Closing Date,
and will therefore not include a full month's
interest.
The Class A Certificates ....Interest. Interest will be distributable on each
Distribution Date beginning July 9, 1997, to
holders of record as of the last day of the
S-3
<PAGE>
calendar month immediately preceding the calendar
month in which such Distribution Date occurs (the
"Record Date") of the Class A Certificates (the
"Class A Certificateholders," which includes the
"Class A-1 Certificateholders," the "Class A-2
Certificateholders" and the "Class A-3
Certificateholders") in a maximum amount equal to
the product of 1/12th of the applicable
pass-through rate of 6.37% for the Class A-1
Certificates (the "Class A-1 Pass-Through Rate"),
the applicable pass-through rate of 6.70% for the
Class A-2 Certificates (the "Class A-2
Pass-Through Rate") and the applicable
pass-through rate of 6.79% for the Class A-3
Certificates (the "Class A-3 Pass-Through Rate")
and the aggregate outstanding principal balance of
the Class A-1 Certificates, Class A-2 Certificates
and Class A-3 Certificates, respectively (the
"Class A-1 Certificate Balance," the "Class A-2
Certificate Balance" and the "Class A-3
Certificate Balance," and collectively, the
"Certificate Balance") as of the preceding
Distribution Date (after giving effect to all
distributions to Certificateholders on such date)
or, in the case of the first Distribution Date, as
of the Closing Date. Interest on the Class A
Certificates will be calculated on the basis of a
360-day year consisting of twelve 30-day months
or, in the case of the first Distribution Date,
the number of days from the Closing Date remaining
in the month of the closing (assuming a 30-day
month). See "The Offered Certificates"
Distributions on the Offered Certificates." The
effective yield on the Class A Certificates will
be below that otherwise produced by the applicable
Pass-Through Rate because the distribution of
Monthly Principal (as defined below) and Class A
Monthly Interest in respect of any given month
will not be made until the third business day
after the fifth calendar day of the following
month (the "Distribution Date"). See "Yield and
Prepayment Considerations" herein.
Principal. On each Distribution Date, the Trustee
will distribute as principal to the Class A
Certificateholders in a maximum aggregate amount
equal to the aggregate outstanding principal
amount of the Receivables (the "Pool Balance") on
the last day of the second preceding calendar
month (or, in the case of the first Distribution
Date, as of the Cutoff Date) less the Pool Balance
on the last day of the immediately preceding
calendar month ("Monthly Principal"). Monthly
Principal will be distributed sequentially to the
Class A Certificateholders as follows: (i) to the
Class A-1 Certificateholders until the Class A-1
Certificate Balance has been reduced to zero; (ii)
to the Class A-2 Certificateholders until the
Class A-2 Certificate Balance has been reduced to
zero; and (iii) to the Class A-3
Certificateholders until the Class A-3 Certificate
Balance has been reduced to zero. For purposes of
determining Monthly Principal, the unpaid
principal balance of a Defaulted Receivable or a
Purchased Receivable will be deemed to be zero on
and after the date such Receivable became a
Defaulted Receivable or a Purchased Receivable.
No Monthly Principal will be distributed (i) to
the Class A-2 Certificateholders until the Class
A-1 Certificate Balance has been reduced to zero,
or (ii) to the Class A-3 Certificateholders until
the Class A-2 Certificate Balance has been reduced
to zero. Since the rate of payment of principal of
each class of Class A Certificates depends upon
the rate of payment of principal (including
prepayments) of the Receivables, the final
distribution in respect of each class of Class A
Certificates could occur significantly earlier
than the respective Final Scheduled Distribution
Dates. See "The Offered Certificates -
Distributions on the Offered Certificates" herein.
The Class I Certificates......Interest. The Class I Certificates are interest
only certificates which will not be entitled to
any principal distributions. Interest will accrue
on the Notional Principal Amount (defined below)
of the Class I Certificates at the rate of 1.85%
per annum (the "Class I Pass-Through Rate"). The
Notional Principal Amount represents a designated
principal component of the Receivables, originally
$237,910,864.98 (the "Original Notional Principal
Amount").
Interest with respect to the Class I Certificates
will accrue on the basis of a 360-day year
consisting of twelve 30-day months or, in the case
of the first Distribution Date, the number of days
from the Closing Date remaining in the month of
the closing (assuming a 30-day month). On each
Distribution Date, the Trustee shall distribute
pro rata to holders of Class I Certificates (the
"Class I Certificateholders") of record as of the
preceding Record Date, Class I Monthly Interest at
the Class I Pass-Through Rate on the Notional
Principal Amount outstanding on the immediately
preceding Distribution Date (after giving effect
to any reduction of the Notional Principal Amount
on such Distribution Date) or, in the case of the
first Distribution Date, as of the Closing Date.
Holders of the Class I Certificates will not be
entitled to any distributions after the Notional
Principal Amount thereof has been reduced to zero.
Planned Amortization Feature; Calculation of the
Class I Notional Principal Amount. The Class I
Certificates represent an interest-only planned
amortization class. The planned amortization
feature is intended to reduce the uncertainty to
investors in the Class I Certificates with respect
to prepayments. Because the Class I Certificates
will receive interest based on the Notional
Principal Amount, this is accomplished by basing
the reduction in the Notional Principal Amount on
a principal paydown schedule rather than on the
reduction in the actual principal balances of the
Receivables, as described below. The amount which
will be paid to the Class I Certificateholders is
expected to be derived from the excess of interest
earned on the Receivables over the Class A Monthly
Interest and the monthly Servicing Fee payable to
the Servicer (the "Monthly Servicing Fee"). Solely
for the purpose of calculating the amount payable
with respect to the Class I Certificates, the
Certificate Balance will be divided into two
principal components, the "PAC Component" and the
"Companion Component." The sum of the PAC
Component and the Companion Component will at all
times equal the then aggregate unpaid Certificate
Balance. The "Notional Principal Amount" of the
Class I Certificates at any time will be equal to
the principal balance of the PAC Component as
calculated based on the allocations of principal
payments described below, originally
$237,910,864.98.
The Pooling and Servicing Agreement establishes a
schedule (a "Planned Notional Principal Amount
Schedule") which is set forth herein under "The
Offered Certificates-The Class I
Certificates-Calculation of Notional Principal
Amount." On each Distribution Date, the Monthly
Principal will be allocated first to the PAC
Component in an amount up to the amount necessary
to reduce the amount thereof to the Planned
Notional Principal Amount for such Distribution
Date, as set forth in the Planned Notional
Principal Amount Schedule, second, to the
Companion Component until the outstanding amount
thereof is reduced to zero and third, to the PAC
Component, without regard to the Planned Notional
Principal Amount. As described above, the Notional
Principal Amount of the Class I Certificates will
be equal to the outstanding amount of the PAC
Component and thus will be reduced as the PAC
Component is reduced.
The Planned Notional Principal Amount Schedule has
been prepared on the basis of the assumption,
among other things, that the Receivables prepay at
a constant rate between 1.6% and 2.5% ABS (as
defined herein), an assumed annualized constant
rate of prepayments and the prepayment model used
in this Prospectus Supplement. The yield to
maturity of the Class I Certificates will be
sensitive to the rate and timing of principal
payments (including prepayments) on the
Receivables and may fluctuate significantly from
time to time. If the Receivables prepay at a
constant rate within the range assumed in
preparing the Planned Notional Principal Amount
Schedule, the PAC Component (and the Notional
Principal Amount of the Class I Certificates) will
be reduced in accordance with the Planned Notional
Principal Amount Schedule. If the Receivables
prepay at a constant rate higher than 2.5% ABS,
the amount of the Companion Component will be
reduced to zero more quickly, and the amount of
the PAC Component (and the Notional Principal
Amount of the Class I Certificates) will be
reduced more quickly than provided in the Planned
Notional Principal Amount Schedule, thereby
reducing the yield to holders of the Class I
Certificates. In general, a rapid rate of
principal prepayments (including liquidations due
to losses, repurchases and other dispositions)
will have a material negative effect on the yield
to maturity of the Class I Certificates.
The Planned Notional Principal Amount Schedule is
set forth herein under "The Offered Certificates -
The Class I Certificates - Calculation of Notional
Principal Amount." The Planned Notional Principal
Amount Schedule has been prepared on the basis of
certain assumptions, which are described herein
under "The Offered Certificates - Class I Yield
Considerations." Prospective investors in the
Class I Certificates should fully consider the
associated risks, including the risk that a rapid
rate of prepayments could result in the failure of
investors in the Class I Certificates to recoup
their initial investment. See "Risk Factors -
Prepayment Risks Associated with the Class I
Certificates," "Yield and Prepayment
Considerations - The Class I Certificates" and
"The Offered Certificates - Termination Upon
Insolvency Event of the Class IC
Certificateholder" herein.
Subordination;
Spread Account...........The Depositor will establish an account (the
"Spread Account") on the Closing Date. On each
Distribution Date thereafter, the Servicer will
deposit into the Spread Account any amounts
remaining in the Certificate Account after the
payment on such date of all amounts owing pursuant
to the Pooling and Servicing Agreement to the
Certificateholders (other than the Class IC
Certificateholder), the Surety Bond Issuer, the
Servicer for the Monthly Servicing Fee and any
permitted reimbursement of outstanding Advances.
In the event that Available Funds are insufficient
on any Distribution Date prior to the termination
of the Trust (after payment of the Monthly
Servicing Fee) to pay Monthly Principal and
Monthly Interest to the Class A Certificateholders
and the Class I Certificateholders, draws will be
made on the Spread Account to the extent of the
balance thereof and, if necessary, the Surety
Bond, in the manner and to the extent described
herein. The Spread Account is solely for the
benefit of the Class A Certificateholders, the
Class I Certificateholders and the Surety Bond
Issuer. In the event the amount on deposit in the
Spread Account is zero after giving effect to any
draws thereon for the benefit of the Class A
Certificateholders and the Class I
Certificateholders, and there is a default under
the Surety Bond, any losses on the Receivables
will be borne directly pro rata by all classes of
Class A Certificateholders (to the extent of the
classes or class of Class A Certificates which are
outstanding at such time) and Class I
Certificateholders, as described herein. Any such
reduction of the principal balance of the
Receivables due to losses on the Receivables may
also result in a reduction of the Class I Notional
Principal Amount. See "The Offered Certificates -
Distributions on the Offered Certificates" and "-
Accounts" herein.
The Class A Certificates and Class I Certificates
will be senior in right and interest to the Class
IC Certificate. The Class A Certificateholders and
the Class I Certificateholders will have equal
rights with respect to amounts collected on or
with respect to the Receivables and other assets
of the Trust in the event of a shortfall. The
Trustee will first withdraw funds from the Spread
Account on each Distribution Date to the extent of
any shortfall in the Monthly Servicing Fee,
permitted reimbursements of outstanding Advances,
Monthly Interest and Monthly Principal as
described above. Any amount on deposit in the
Spread Account on any Distribution Date in excess
of the Required Spread Amount (defined below)
after all other required deposits thereto and
withdrawals therefrom have been made, and after
payment therefrom of all amounts due the Surety
Bond Issuer will be distributed to the holder of
the Class IC Certificate (the "Class IC
Certificateholder"). Any amount so distributed to
the Class IC Certificateholder will no longer be
an asset of the Trust.
While it is intended that the amount on deposit in
the Spread Account grow over time, through the
deposit thereto of the excess collections, if any,
on the Receivables, to the Required Spread Amount,
there can be no assurance that such growth will
actually occur. The "Required Spread Amount" with
respect to any Distribution Date will equal 1.25%
of the initial Pool Balance. If the average
aggregate yield of the Receivables pool in excess
of losses falls below a prescribed level set forth
in the Insurance Agreement, the Required Spread
Amount will be increased to 5.0% of the Pool
Balance. Upon and during the continuance of an
Event of Default or upon the occurrence of certain
other events described in the Insurance Agreement
generally involving a failure of performance by
the Servicer or a material misrepresentation made
by the Servicer under the Pooling and Servicing
Agreement or the Insurance Agreement, the Required
Spread Amount shall be equal to the Surety Bond
Amount, as further described below. See "The
Offered Certificates - Accounts" and - "The Surety
Bond" herein.
Surety Bond.................. The Depositor shall obtain an irrevocable surety
bond (the "Surety Bond") issued by the Surety Bond
Issuer (as specified below), for the benefit of
the Trustee on behalf of the Class A
Certificateholders and the Class I
Certificateholders. The Trustee shall draw on the
Surety Bond in the event that sufficient funds are
not available (after payment of the Monthly
Servicing Fee and after withdrawals from the
Spread Account to pay the Class A
Certificateholders and the Class I
Certificateholders on any Distribution Date in
accordance with the Pooling and Servicing
Agreement) to distribute Monthly Interest and
Monthly Principal, up to the Surety Bond Amount.
See "The Offered Certificates-The Surety Bond."
Surety Bond Amount........... The term "Surety Bond Amount" means with respect
to any Distribution Date: (x) the sum of (A) the
lesser of (i) the Certificate Balance (after
giving effect to any distribution of Available
Funds and any funds withdrawn from the Spread
Account to pay Monthly Principal on such
Distribution Date) and (ii) the Net Principal
Surety Bond Amount, plus (B) Class A Monthly
Interest, plus (C) Class I Monthly Interest, plus
(D) the Monthly Servicing Fee; less (y) all
amounts on deposit in the Spread Account on such
Distribution Date. "Net Principal Surety Bond
Amount" means the Certificate Balance as of the
first Distribution Date minus all amounts
previously drawn on the Surety Bond or from the
Spread Account with respect to Monthly Principal.
Surety Bond Issuer............Capital Markets Assurance Corporation.
Optional Sale................ The Class IC Certificateholder has the right to
cause the Trustee to sell all of the Receivables
(referred to herein as an "Optional Sale") as of
the last day of any Collection Period, at a
purchase price equal to the fair market value of
the Receivables (but not less than the sum of (i)
their aggregate outstanding principal balance plus
accrued and unpaid interest thereon and (ii) any
amounts due the Surety Bond Issuer), if (i) the
Certificate Balance as of the following
Distribution Date will equal 10% or less of the
initial Certificate Balance and (ii) the Notional
Principal Amount of the Class I Certificates has
been reduced to zero.
Tax Status .................In the opinion of special tax counsel to the
Depositor, the Trust will not be treated as an
association taxable as a corporation or as a
"publicly traded partnership" taxable as a
corporation. The Trustee and the
Certificateholders will agree to treat the Trust
as a partnership for federal income tax purposes,
which will not be subject to federal income tax at
the Trust level. See "Certain Federal Income Tax
Consequences" in the Prospectus.
Ratings .................... As a condition to the issuance of the Offered
Certificates, the Class A Certificates and the
Class I Certificates must be rated in the highest
category by Moody's Investors Service, Inc. and
Standard & Poor's Ratings Services, a Division of
The McGraw-Hill Companies (each a "Rating Agency"
and collectively, the "Rating Agencies"). The
ratings of the Class I Certificates do not address
the possibility that rapid rates of principal
prepayments, including prepayments resulting from
a sale of the Receivables upon an Insolvency Event
with respect to the Class IC Certificateholder,
could result in a failure of the holders of the
Class I Certificates to fully recover their
investment. A security rating is not a
recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any
time by the assigning rating agency. See "Risk
Factors - Certificate Rating" herein.
ERISA Considerations .........Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Class A Certificates and the Class
I Certificates may be eligible for purchase by
employee benefit plans subject to Title I of the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). Any benefit plan fiduciary
considering the purchase of an Offered Certificate
should, among other things, consult with
experienced legal counsel in determining whether
all required conditions for such purchase have
been satisfied. See "ERISA Considerations" herein
and in the Prospectus. S-10
<PAGE>
RISK FACTORS
Investors should carefully consider the information set forth below as
well as the other investment considerations described in this prospectus.
Limited Liquidity
There is currently no secondary market for the Offered Certificates.
The Underwriters currently intend to make a market in the Offered Certificates,
but are under no obligation to do so. There can be no assurance that a secondary
market will develop or, if one does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Offered Certificates.
Certificates Solely Obligations of the Trust
The Offered Certificates are interests in the Trust only and do not
represent the obligation of any other person. The Class A Certificateholders and
the Class I Certificateholders are senior in right and interest to the Class IC
Certificateholder (as described under "The Offered Certificates -- Distributions
on the Offered Certificates"). The Trustee will withdraw funds from the Spread
Account, up to the full balance of the funds on deposit in such account, only in
the event that Available Funds are insufficient in accordance with the Pooling
and Servicing Agreement to distribute Monthly Interest and Monthly Principal
(after payment of the Monthly Servicing Fee). The amount on deposit in the
Spread Account is intended to increase over time to an amount equal to the
Required Spread Amount. There is no assurance that such growth will occur or
that the balance in the Spread Account will always be sufficient to assure
payment in full of Monthly Principal and Monthly Interest. If the amount on
deposit in the Spread Account is reduced to zero after giving effect to all
amounts to be deposited to and withdrawn from the Spread Account pursuant to the
Pooling and Servicing Agreement, on any Distribution Date prior to termination
of the Trust, the Trustee will draw on the Surety Bond, in an amount equal to
the shortfall in respect of Monthly Interest and Monthly Principal, up to the
Surety Bond Amount. If the Spread Account is reduced to zero and there is a
default under the Surety Bond, the Trust will depend solely on current
distributions on the Receivables to make distributions on the Offered
Certificates and distributions of interest and principal on the Offered
Certificates may be made pro rata based on the amounts to which
Certificateholders of each class are entitled as set forth under "The Offered
Certificates -- Distributions on the Offered Certificates." See "The Receivables
Pool -- Delinquencies, Repossessions and Net Losses" and "The Offered
Certificates -- Accounts" and "-- Distributions on the Offered Certificates"
herein. Prepayment Risks Associated with the Class I Certificates
If the Receivables prepay at a constant rate within the range assumed
in preparing the Planned Notional Principal Amount Schedule, the PAC Component
(and the Notional Principal Amount) will be reduced in accordance with the
Planned Notional Principal Amount Schedule. If the Receivables prepay at a
constant rate higher than 2.5% ABS, the Notional Principal Amount will be
reduced more quickly than provided in the Planned Notional Principal Amount
Schedule, thereby reducing the yield to holders of the Class I Certificates. In
general, a rapid rate of principal prepayments (including liquidations due to
losses, repurchases and other dispositions and prepayments resulting from any
sale of the Receivables upon an Insolvency Event with respect to the Class IC
Certificateholder) will have a material negative effect on the yield to maturity
of the Class I Certificates. Prospective investors should fully consider the
associated risks, including the risk that a rapid rate of prepayments could
result in the failure of investors in the Class I Certificates to recoup their
initial investment. See "Yield and Prepayment Considerations -- The Class I
Certificates" herein.
Termination Upon Insolvency Event of the Class IC Certificateholder
The Depositor will be the initial Class IC Certificateholder. If an
Insolvency Event occurs with respect to the Class IC Certificateholder, the
Receivables will be sold and the Trust will be liquidated unless, within the
period specified herein, holders of more than 51% of the Certificate Balance and
holders of more than 51% of the Notional Principal Amount of the Class I
Certificates instruct the Trustee not to sell the Receivables and liquidate the
S-11
<PAGE>
Trust or unless such sale and liquidation is otherwise prohibited by applicable
law. The Surety Bond will not be available to pay any shortfalls upon sale of
the Receivables on liquidation of the Trust. See "The Offered Certificates --
Termination Upon Insolvency Event of the Class IC Certificateholder" herein. The
Depositor is a special purpose corporation the activities of which are
circumscribed by its charter with a view to reducing any risk of its bankruptcy;
however no representation is made concerning the financial condition of the
Class IC Certificateholder or the likelihood of an Insolvency Event with respect
to such holder. In the event of the sale of the Receivables and liquidation of
the Trust following an Insolvency Event, the proceeds may not be sufficient to
pay all accrued and unpaid amounts owing on the Certificates. The Surety Bond
will not be available to cover any such shortfall. Following such a sale, the
Class I Certificateholders may be entitled to receive a portion of the proceeds
of sale based upon the amount originally paid for the Class I Certificates (as
reduced by prior returns of such amount) as provided in the Pooling and
Servicing Agreement. Furthermore, any distributions of such proceeds will have
an effect similar to a prepayment of the Receivables and could affect the yield
on the Class A Certificates and may significantly affect the yield on the Class
I Certificates. See "Yield and Prepayment Considerations" herein.
Certificate Rating
It is a condition of issuance of the Offered Certificates that the
Class A Certificates and the Class I Certificates be rated in the highest
category by the Rating Agencies. Such ratings will reflect only the views of the
relevant rating agency. There is no assurance that any such rating will continue
for any period of time or that it will not be revised or withdrawn entirely by
such rating agency if, in its judgment, circumstances so warrant. A revision or
withdrawal of such rating may have an adverse effect on the market price of the
Offered Certificates. The ratings of the Class I Certificates do not address the
possibility that rapid rates of principal prepayments, including prepayments
resulting from a sale of the Receivables upon an Insolvency Event with respect
to the Class IC Certificateholder, could result in a failure of the holders of
the Class I Certificates to fully recover their investment. A security rating is
not a recommendation to buy, sell or hold securities.
FORMATION OF THE TRUST
The Depositor will establish the Trust by selling and assigning the
Trust property, as described below, to the Trustee in exchange for the Offered
Certificates. The Depositor will retain the Class IC Certificate. UAC will be
responsible for servicing the Receivables pursuant to the Pooling and Servicing
Agreement and will be compensated for acting as the Servicer. See "Description
of the Transfer and Servicing Agreements -- Servicing Compensation and Payment
of Expenses" in the Prospectus. To facilitate servicing and to minimize
administrative burden and expense, the Servicer will be appointed custodian of
the Receivables by the Trustee, but will not stamp the Receivables to reflect
the sale and assignment of the Receivables to the Trust or make any notation of
the Trust's lien on the certificates of title of the Financed Vehicles. In the
absence of such notation on the certificates of title, the Trustee may not have
perfected security interests in the Financed Vehicles securing the Receivables.
See "Certain Legal Aspects of the Receivables" in the Prospectus. Under the
terms of the Pooling and Servicing Agreement, UAC may delegate its duties as
Servicer and custodian; however, any such delegation will not relieve UAC of its
liability and responsibility with respect to such duties.
The Depositor will establish, for the benefit of the Class A
Certificateholders and the Class I Certificateholders and the Surety Bond
Issuer, the Spread Account and will obtain the Surety Bond. Withdrawals from the
Spread Account and, only after such withdrawals, draws on the Surety Bond will
be made in accordance with the Pooling and Servicing Agreement in the event that
sufficient funds are not available (after payment of the Monthly Servicing Fee)
to distribute, in the case of Class I Monthly Interest, Class A Monthly Interest
and Monthly Principal, up to the Surety Bond Amount. If the Spread Account is
exhausted and there is a default under the Surety Bond, the Trust will look only
to the Obligors on the Receivables and the proceeds from the repossession and
sale of Financed Vehicles that secure Defaulted Receivables for distributions of
interest and principal on the Certificates. In such event, certain factors, such
S-12
<PAGE>
as the Trustee's not having perfected security interests in some of the Financed
Vehicles, may affect the Trust's ability to realize on the collateral securing
the Receivables, and thus may reduce the proceeds to be distributed to
Certificateholders. See "The Offered Certificates -- Accounts" herein and
"Certain Legal Aspects of the Receivables" in the Prospectus.
THE RECEIVABLES POOL
The Receivables were selected from UAFC's prime portfolio for purchase
by the Depositor by several criteria, including that each Receivable: (i) has an
original number of payments of not more than 84 payments and not less than 12
payments, (ii) has a remaining maturity of not more than 84 months and not less
than three months, (iii) provides for level monthly payments that fully amortize
the amount financed over the original term, and (iv) has a Contract Rate
(exclusive of prepaid finance charges) of not less than 6.9%. The weighted
average remaining maturity of the Receivables will be approximately 69 months as
of the Cutoff Date.
Approximately 96.15% of the aggregate principal balance of the
Receivables as of the Cutoff Date are simple interest contracts which provide
for equal monthly payments. Approximately 3.85% of the aggregate principal
balance of the Receivables as of the Cutoff Date are Precomputed Receivables (as
defined in the Prospectus) originated in the State of California. All of such
Precomputed Receivables are Rule of 78's Receivables (as defined in the
Prospectus). Approximately 20.72% of the aggregate principal balance of the
Receivables as of the Cutoff Date represent financing of new vehicles; the
remainder of the Receivables represent financing of used vehicles.
Receivables representing more than 10% of the aggregate principal
balance of the Receivables as of the Cutoff Date were originated in metropolitan
areas in the State of Texas. The performance of the Receivables in the aggregate
could be adversely affected in particular by the development of adverse economic
conditions in such metropolitan areas.
Composition of the Receivables as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate Original Weighted
Number of Principal Principal Average
Receivables Balance Balance Rate
----------- --------------- --------------- ------
<S> <C> <C> <C> <C>
New Automobiles and Light-Duty Trucks............ 3,345 $ 53,322,450.13 $ 61,996,840.64 12.414%
Used Automobiles and Light-Duty Trucks........... 17,455 209,681,663.63 225,880,898.38 13.441%
New Vans (1)..................................... 397 7,966,078.03 9,050,371.92 12.263%
Used Vans (1).................................... 1,935 24,787,924.18 27,182,336.46 13.285%
------ --------------- --------------- ------
All Receivables.................................. 23,132 $295,758,115.97 $324,110,447.40 13.211%
====== =============== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted Percent of
Average Average Aggregate
Remaining Original Principal
Term(2) Term(2) Balance(3)
---------- ----------- ------------
<S> <C> <C> <C>
New Automobiles and Light-Duty Trucks.......... 74.225mos. 79.077mos. 18.03%
Used Automobiles and Light-Duty Trucks......... 67.734 70.656 70.90
New Vans (1)................................... 76.439 80.580 2.69
Used Vans (1).................................. 68.398 71.585 8.38
------ ------ ------
All Receivables................................ 69.194mos. 72.520mos. 100.00%
====== ====== ======
</TABLE>
- -----------
(1) References to vans include minivans and van conversions.
(2) Based on scheduled maturity and assuming no prepayments of the Receivables.
(3) Sum may not equal 100% due to rounding.
S-13
<PAGE>
Geographic Distribution of the Receivables as of the Cutoff Date
Percent of Aggregate
State (1)(2) Principal Balance (3)
------------ ---------------------
Arizona............................................ 3.64%
California......................................... 9.78
Colorado........................................... 2.05
Florida............................................ 7.80
Georgia............................................ 3.43
Illinois........................................... 6.56
Indiana............................................ 3.84
Iowa............................................... 2.37
Kansas............................................. 0.99
Kentucky........................................... 0.74
Maryland........................................... 2.73
Michigan........................................... 2.59
Minnesota.......................................... 0.27
Missouri........................................... 2.44
Nebraska........................................... 0.23
Nevada............................................. 0.42
New Mexico......................................... 0.65
North Carolina..................................... 9.18
Ohio............................................... 8.14
Oklahoma........................................... 4.04
Oregon............................................. 0.36
Pennsylvania....................................... 0.79
South Carolina..................................... 3.32
Tennessee.......................................... 2.24
Texas.............................................. 13.12
Virginia........................................... 6.30
Washington......................................... 0.67
Wisconsin.......................................... 1.32
------
Total ........................................ 100.00%
======
- -------------
(1) Based on address of the Dealer selling the related Financed Vehicle.
(2) Receivables originated in Ohio were solicited by Dealers for direct
financing by UAC or the Predecessor. All other Receivables were
originated by Dealers and purchased from such Dealers by UAC or the
Predecessor.
(3) Sum may not equal to 100% due to rounding.
Distribution of the Receivables by Remaining Term as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage of
Remaining Aggregate Average Aggregate
Scheduled Number of Principal Principal Principal
Term Range Receivables Balance Balance Balance(1)
---------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
0 to 6 months....................... 137 $ 124,941.65 $ 911.98 0.04%
7 to 12 months....................... 699 1,537,656.06 2,199.79 0.52
13 to 24 months....................... 1,998 7,908,904.63 3,958.41 2.67
25 to 36 months....................... 640 4,150,906.75 6,485.79 1.40
37 to 48 months....................... 1,324 10,920,352.31 8,248.00 3.69
49 to 60 months....................... 3,870 43,517,017.62 11,244.71 14.71
61 to 66 months....................... 1,552 19,485,050.71 12,554.80 6.59
67 to 72 months....................... 5,032 71,924,038.25 14,293.33 24.32
73 to 84 months....................... 7,880 136,189,247.99 17,282.90 46.05
------ --------------- ---------- ------
Total....................... 23,132 $295,758,115.97 $12,785.67 100.00%
====== =============== ========== ======
</TABLE>
- ----------
(1) Sum may not equal 100% due to rounding.
S-14
<PAGE>
Distribution of Receivables by Financed Vehicle
Model Year as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage Percentage
of Total Aggregate of Aggregate
Model Number of Number of Principal Principal
Year Receivables Receivables(1) Balance Balance(1)
------------- ----------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
1980 or earlier...................... 3 0.01% $ 24,906.90 0.01%
1981................................. 1 0.00 10,695.62 0.00
1983................................. 3 0.01 12,433.41 0.00
1984................................. 3 0.01 22,192.06 0.01
1985................................. 10 0.04 46,034.45 0.02
1986................................. 37 0.16 196,348.00 0.07
1987................................. 141 0.61 530,847.90 0.18
1988................................. 439 1.90 1,791,923.85 0.61
1989................................. 961 4.15 5,275,309.02 1.78
1990................................. 1,329 5.75 9,154,091.71 3.10
1991................................. 1,923 8.31 16,092,201.92 5.44
1992................................. 2,748 11.88 26,319,289.94 8.90
1993................................. 3,591 15.52 39,487,837.40 13.35
1994................................. 3,462 14.97 49,295,757.91 16.67
1995................................. 3,224 13.94 50,486,347.42 17.07
1996................................. 2,673 11.56 45,986,990.57 15.55
1997................................. 2,562 11.08 50,520,474.23 17.08
1998................................. 22 0.10 504,433.66 0.17
------ ------ --------------- ------
Total.............................. 23,132 100.00% $295,758,115.97 100.00%
====== ====== =============== ======
</TABLE>
- ------------
(1) Sum may not equal 100% due to rounding.
Distribution of the Receivables by Note Rate as of the Cutoff Date
<TABLE>
<CAPTION>
Percentage of
Aggregate Average Aggregate
Number of Principal Principal Principal
Note Rate Range Receivables Balance Balance Balance(1)
--------------- ----------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
6.000 to 6.999%...................... 5 $ 46,351.46 $ 9,270.29 0.02%
7.000 to 7.999%...................... 49 469,690.40 9,585.52 0.16
8.000 to 8.999%...................... 255 1,758,489.14 6,896.04 0.60
9.000 to 9.999%...................... 708 6,032,400.70 8,520.34 2.04
10.000 to 10.999%...................... 1,613 19,017,012.33 11,789.84 6.43
11.000 to 11.999%...................... 3,014 41,135,153.66 13,648.03 13.91
12.000 to 12.999%...................... 5,202 71,488,534.00 13,742.51 24.17
13.000 to 13.999%...................... 5,587 74,233,851.79 13,286.89 25.10
14.000 to 14.999%...................... 3,713 46,800,011.92 12,604.37 15.82
15.000 to 15.999%...................... 1,530 18,308,834.94 11,966.56 6.19
16.000 to 16.999%...................... 641 7,742,394.21 12,078.62 2.62
17.000 to 17.999%...................... 415 4,838,538.66 11,659.13 1.64
18.000 to 18.999%...................... 251 2,638,276.62 10,511.06 0.89
19.000 to 19.999%...................... 42 421,906.63 10,045.40 0.14
20.000 to 20.999%...................... 81 685,381.54 8,461.50 0.23
21.000 to 21.999%...................... 23 129,917.64 5,648.59 0.04
24.000 to 24.999%...................... 2 6,927.09 3,463.55 0.00
25.000 to 25.999%...................... 1 4,443.24 4,443.24 0.00
------ --------------- ---------- ------
Total...................... 23,132 $295,758,115.97 $12,785.67 100.00%
====== =============== ========== ======
</TABLE>
- -------------
(1) Sum may not equal 100% due to rounding.
S-15
<PAGE>
Delinquencies, Repossessions and Net Losses
Set forth below is certain information concerning the experience of UAC
and the Predecessor pertaining to delinquencies, repossessions, and net losses
on its prime fixed rate retail automobile, light truck and van receivables
serviced by UAC and the Predecessor. There can be no assurance that the
delinquency, repossession, and net loss experience on the Receivables will be
comparable to that set forth below.
<TABLE>
<CAPTION>
Delinquency Experience
At June 30, At March 31,
1994 1995 1996 1997
-------------------- --------------------- ----------------------- ------------------------
(Dollars in thousands)
Number of Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio......... 91,837 $843,245 117,837 $1,159,349 147,722 $1,548,538 171,234 $1,836,305
Delinquencies
30-59 days............... 907 $ 8,389 1,169 $ 12,097 1,602 $ 17,030 2,484 $ 27,527
60-89 days............... 213 2,118 377 4,124 694 7,629 1,561 18,894
90 days or more.......... 137 1,324 0 0 333 3,811 705 8,414
----- -------- ----- ---------- ----- ---------- ----- ----------
Total delinquencies......... 1,257 $ 11,831 1,546 $ 16,221 2,629 $ 28,470 4,750 $ 54,835
===== ======== ===== ========== ===== ========== ===== ==========
Total delinquencies as a
percent of servicing
portfolio.............. 1.37% 1.40% 1.31% 1.40% 1.78% 1.84% 2.77% 2.99%
</TABLE>
Credit Loss Experience (1)
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
1994 1995 1996 Nine Months Ended
---------------------- ------------------------ ----------------------- March 31, 1997
(Dollars in thousands) ----------------------
Number of Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Avg. servicing portfolio(2)... 83,673 $744,149 104,455 $982,875 132,363 $1,343,770 162,120 $1,727,725
Gross charge-offs............. 1,404 $ 12,094 3,493 $ 28,628 3,663 $ 40,815 4,393 $ 48,923
Recoveries (4)................ 6,946 15,258 19,543 19,089
-------- -------- ---------- ----------
Net losses.................... $ 5,148 $ 13,370 $ 21,272 $ 29,834
======== ======== ========== ==========
Gross charge-offs as a % of
avg. servicing portfolio(3).. 1.68% 1.63% 3.34% 2.91% 2.77% 3.04% 3.61% 3.78%
Recoveries as a % of gross
charge-offs.................. 57.43% 53.30% 47.88% 39.02%
Net losses as a % of avg.
servicing portfolio(4)....... 0.69% 1.36% 1.58% 2.30%
</TABLE>
- --------------
(1) There is generally no recourse to Dealers under any of the receivables
in the portfolio serviced by UAC or the Predecessor, except to the
extent of representations and warranties made by Dealers in connection
with such receivables.
(2) Equals the monthly arithmetic average, and includes receivables sold in
prior securitization transactions.
(3) Variation in the size of the portfolio serviced by UAC will affect the
percentages in "Gross charge-offs as a percentage of average servicing
portfolio" and "Net losses as a percentage of average servicing
portfolio."
(4) In fiscal 1995, the method by which recoveries are stated was changed.
Currently, recoveries include recoveries on receivables previously
charged off, cash recoveries and unsold repossessed assets carried at
fair market value. Under the previous method, reported recoveries
excluded unsold repossessed assets carried at fair market value. Prior
period credit loss experience has been restated to conform to current
period classifications.
(5) Annualized
As indicated by the above table, delinquency rates at March 31, 1997,
were higher as compared to the same quarter of last year. Delinquency rates
based upon outstanding loan balances of accounts 30 days past due and over were
2.99% at March 31, 1997, compared to 2.34% at March 31, 1996, for UAC's prime
servicing portfolio. UAC believes the increased delinquency is primarily due to
a tightening of the criteria for the deferment of accounts which became
effective in February 1997. Bankrupt accounts which are included in delinquency
statistics pending resolution constitute a significant portion of the overall
delinquency amount. Bankrupt accounts represented 42 basis points of delinquency
at March 31, 1997, compared to 38 basis points at June 30, 1996.
Annualized net charge-offs as a percentage of the average servicing
portfolio were 2.30% for the nine months ended March 31, 1997, compared to 1.58%
for the year ended June 30, 1996, and 1.39% for the nine months ended March 31,
S-16
<PAGE>
1996. Tightening of UAC's deferral policy, as discussed above, accelerated
losses during the quarter ending March 31, 1997, causing quarterly statistics to
be unusually high. UAC believes that the short-term effect of this change will
be to increase delinquency and accelerate net charge-offs; however, UAC does not
expect overall credit losses in the long-term to increase materially as a result
of the change.
The increase in net charge-offs for the nine months ended March
31,1997, compared to the nine months ended March 31, 1996, is a result of both
the increase in gross charge-offs as discussed above, as well as a decline in
recovery rates. Recovery rates with respect to UAC's prime servicing portfolio
have declined from 53.30% for fiscal 1995 to 47.88% for fiscal 1996 and are at
39.02% for fiscal 1997 through March 31, 1997. UAC attributes the decline to a
softening in current used car prices. UAC is working to improve the recovery
percentage by refocusing on its recovery efforts.
Portfolio performance continues to be within the parameters of UAC's
expectations despite the recent increases in delinquency and net charge-offs.
The level of credit loss risk is gauged against the potential for profit in the
underwriting process. UAC has implemented various collections and underwriting
changes throughout the year in order to improve portfolio performance and
continues to monitor closely the performance of the portfolio and its response
to policy changes.
Overall, UAC has made strategic changes with respect to pricing and
underwriting, including an increase in cut-off scores in several of its markets
during the third quarter of fiscal 1996, and the implementation of a new risk
scorecard in March 1997. The new scorecard is a composite credit bureau score.
These changes were made with the intent of improving the overall quality of the
contracts being acquired. UAC continues to focus on controlled growth with an
emphasis on credit quality.
UAC's expectations with respect to delinquency and credit loss trends
constitute forward-looking statements and are subject to important factors that
could cause actual results to differ materially from those projected by UAC.
Such factors include, but are not limited to, general economic factors affecting
obligors' ability to make timely payments on their indebtedness such as
employment status, rates of consumer bankruptcy, consumer debt levels generally
and the interest rates applicable thereto. In addition, credit losses are
affected by UAC's ability to realize on recoveries of repossessed vehicles,
including, but not limited to, the market for used cars at any given time.
YIELD AND PREPAYMENT CONSIDERATIONS
General
Monthly Interest (as defined herein) on the Receivables will be
distributed to Certificateholders on each Distribution Date to the extent of the
Pass-Through Rate applied to the applicable Certificate Balance or Notional
Principal Amount, as applicable, as of the preceding Distribution Date or the
Closing Date, as applicable (after giving effect to distributions of principal
on such preceding Distribution Date). See "The Offered Certificates --
Distributions on the Offered Certificates" herein. In the event of a full or
partial prepayment on a Receivable, Certificateholders will receive interest for
the full month of such prepayment either through the distribution of interest
paid on other Receivables or from a withdrawal from the Spread Account.
Although the Receivables will have different Contract Rates, each
Receivable's Contract Rate generally will exceed the sum of (a) the weighted
average of the Class A-1 Pass-Through Rate, the Class A-2 Pass-Through Rate and
the Class A-3 Pass-Through Rate, (b) the per annum rate used to calculate the
Surety Bond Fee, (c) the Class I Pass-Through Rate and (d) the per annum rate
used to calculate the Servicing Fee. The Contract Rate on a small percentage of
the Receivables, however, will be less than the foregoing sum. Disproportionate
rates of prepayments between Receivables with higher and lower Contract Rates
could affect the ability of the Trust to distribute Monthly Interest to
Certificateholders.
The effective yield to Certificateholders will be below the yield
otherwise produced by the Pass-Through Rate because the distribution of Monthly
Principal and Monthly Interest in respect of any given month will not be made
until the related Distribution Date, which will not be earlier than the eighth
day of the following month.
S-17
<PAGE>
The Class I Certificates
The Class I Certificates are interest only certificates. Although the
planned amortization feature of the Class I Certificates is intended to reduce
the uncertainty of prepayments with respect to the Class I Certificates, if the
Receivables prepay sufficiently quickly, the Notional Principal Amount of the
Class I Certificates may be reduced more quickly than provided in the Planned
Notional Principal Amount Schedule, thereby reducing the yield to the holders of
the Class I Certificates. The yield to maturity on the Class I Certificates will
therefore be very sensitive to the rate of prepayments, including voluntary
prepayments, prepayments due to liquidations, repurchases and losses and
prepayments resulting from any sale of the Receivables upon an Insolvency Event
relating to the Class IC Certificateholder. Prospective investors should fully
consider the associated risks, including the risk that a rapid rate of
prepayments could result in the failure of investors in the Class I Certificates
to recoup their initial investment. See "Risk Factors" and "The Offered
Certificates -- The Class I Certificates -- Calculation of Notional Principal
Amount", "-- Termination Upon Insolvency Event of the Class IC
Certificateholder" and "-- Class I Yield Considerations".
THE DEPOSITOR AND UAC
UAC currently acquires loans from over 3,000 manufacturer franchised
automobile dealerships in 27 states. UAC is an Indiana corporation, formed in
December 1993 by the Predecessor to succeed to the indirect automobile finance
business of the Predecessor, which the Predecessor had operated since 1986. UAC
began purchasing and originating Receivables in April 1994. For the fiscal years
ended June 30, 1993, 1994, 1995 and 1996 UAC and/or its Predecessor acquired
prime loans aggregating $435 million, $615 million, $767 million, and $995
million, respectively, representing annual increases of 41%, 25%, and 30%,
respectively. Of the $1.5 billion of loans in the servicing portfolio of UAC and
its Predecessor (consisting of the principal balance of loans held for sale and
securitized loans) at June 30, 1996, approximately 73.29% represented loans on
used cars and approximately 26.71% represented loans on new cars.
Additional information regarding UAC and the Depositor is set forth
under "Union Acceptance Corporation and Affiliates" in the Prospectus.
THE SURETY BOND ISSUER
Capital Markets Assurance Corporation is the surety bond provider (the
"Surety Bond Issuer"). The Surety Bond Issuer is a New York-domiciled monoline
stock insurance company which engages only in the business of financial
guarantee and surety insurance. The Surety Bond Issuer is licensed in 50 states
in addition to the District of Columbia, the Commonwealth of Puerto Rico and the
territory of Guam. The Surety Bond Issuer insures structured asset-backed,
corporate, municipal and other financial obligations in the U.S. and
international capital markets. The Surety Bond Issuer also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
The Surety Bond Issuer's claims-paying ability is rated "Aaa" by
Moody's Investors Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings
Services ("Standard & Poor's"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff
& Phelps") and "AAA" by Nippon Investors Service Inc. Such ratings reflect only
the views of the respective rating agencies, are not recommendations to buy,
sell or hold securities and are subject to revision or withdrawal at any time by
such rating agencies.
The Surety Bond Issuer is a wholly-owned subsidiary of CapMAC Holdings
Inc. ("Holdings"). Neither Holdings nor any of its stockholders is obligated to
pay any claims under any surety bond issued by the Surety Bond Issuer or any
debts of the Surety Bond Issuer or to make additional capital contributions to
the Surety Bond Issuer.
The Surety Bond Issuer is regulated by the Superintendent of Insurance
of the State of New York. In addition, the Surety Bond Issuer is subject to
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<PAGE>
regulation by the insurance laws and regulations of the other jurisdictions in
which it is licensed. Such insurance laws regulate, among other things, the
amount of net exposure per risk that the Surety Bond Issuer may retain, capital
transfers, dividends, investment of assets, changes in control, transactions
with affiliates and consolidations and acquisitions. The Surety Bond Issuer is
subject to periodic regulatory examinations by the same regulatory authorities.
The Surety Bond Issuer's obligations under the Surety Bond may be
reinsured. Such reinsurance does not relieve the Surety Bond Issuer of any of
its obligations under the Surety Bond.
THE SURETY BOND IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As of December 31, 1996 and 1995, the Surety Bond Issuer had qualified
statutory capital (which consists of policyholders' surplus and contingency
reserve) of approximately $260 million and $240 million, respectively, and had
not incurred any debt obligations. Article 69 of the New York State Insurance
Law requires the Surety Bond Issuer to establish and maintain the contingency
reserve, which is available to cover claims under surety bonds issued by the
Surety Bond Issuer.
The audited financial statements of the Surety Bond Issuer prepared in
accordance with generally accepted accounting principles as of December 31, 1996
and 1995 and for each of the years in the three-year period ended December 31,
1996 and the unaudited financial statements of the Surety Bond Issuer for the
three-month periods ended March 31, 1997 and 1996 are made a part of this
Prospectus Supplement beginning on page F-1. Copies of the Surety Bond Issuer's
financial statements prepared in accordance with statutory accounting standards,
which differ from generally accepted accounting principles, and filed with the
Insurance Department of the State of New York are also available upon request.
The Surety Bond Issuer is located at 885 Third Avenue, New York, New York 10022,
and its telephone number is (212) 755-1155.
THE OFFERED CERTIFICATES
The Offered Certificates will be issued pursuant to the Pooling and
Servicing Agreement. Copies of the Pooling and Servicing Agreement (without
exhibits) may be obtained by Certificateholders upon request in writing to the
Servicer at the address set forth herein under "Reports to Certificateholders".
Citations to the relevant sections of the Pooling and Servicing Agreement appear
below in parentheses. The following summary does not purport to be complete and
is subject to and qualified in its entirety by reference to the Pooling and
Servicing Agreement.
Distributions
In general, it is intended that the Trustee distribute to the Class A
Certificateholders on each Distribution Date beginning July 9, 1997, the
aggregate principal payments, including full and partial prepayments (except
certain prepayments in respect of Precomputed Receivables as described below
under "-- Accounts") received on the Receivables during the related Collection
Period, plus the Class A Monthly Interest. Principal to be distributed to the
Class A Certificateholders will be allocated on the basis of the Principal
Distribution Sequence (as defined herein). It is also intended that the Trustee
distribute to the Class I Certificateholders, on each Distribution Date
beginning on July 9, 1997 and continuing until the Distribution Date on which
the Notional Principal Amount is reduced to zero, the Class I Monthly Interest.
(Section 9.04.) See "-- Distributions on the Offered Certificates". Interest to
Certificateholders may be provided by a payment made by or on behalf of the
Obligor, by an Advance made by the Servicer to cover interest due on a defaulted
Receivable or by a withdrawal from the Spread Account. If such interest
represents Monthly Interest it may be provided by a draw on the Surety Bond if
there are not sufficient funds (after payment of the Monthly Servicing Fee,
permitted reimbursements of outstanding Advances and after giving effect to any
withdrawals from the Spread Account for the benefit of the Class A
Certificateholders and the Class I Certificateholders) to pay Monthly Interest
and Monthly Principal. Draws on the Surety Bond to pay Monthly Interest and
Monthly Principal will be limited to the Surety Bond Amount. See "-- Sale and
Assignment of Receivables" and "-- Accounts" herein.
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<PAGE>
The Class I Certificates -- Calculation of Notional Principal Amount
The Class I Certificates are interest only planned amortization
securities. The Class I Certificates are entitled to receive interest at the
Class I Pass-Through Rate on the Notional Principal Amount of the Class I
Certificates, initially $237,910,864.98. The planned amortization feature is
intended to reduce the uncertainty to investors in the Class I Certificates with
respect to prepayments because the Class I Certificates will receive interest
based on their Notional Principal Amount on a principal paydown schedule rather
than on the reduction in the actual Certificate Balance as a result of principal
payments and prepayments, as described below. Solely for the purpose of
calculating the amount payable with respect to the Class I Certificates, the
Certificate Balance will be divided into two principal components, the "PAC
Component" and the "Companion Component". The Notional Principal Amount will be
equal to the PAC Component, originally $237,910,864.98. The sum of the PAC
Component and the Companion Component will at all times equal the then aggregate
unpaid Certificate Balance.
The Pooling and Servicing Agreement establishes a schedule (the
"Planned Notional Principal Amount Schedule") pursuant to which principal will
be allocated to the PAC Component and the Companion Component, as described
below. As the PAC Component is reduced, the Notional Principal Amount and
payments to the holders of the Class I Certificates will also be reduced.
On each Distribution Date, the Monthly Principal will be allocated
first to the PAC Component up to the amount necessary to reduce the PAC
Component to the amount specified in the Planned Notional Principal Amount
Schedule (the "Planned Notional Principal Amount") for such Distribution Date,
second, to the Companion Component until the balance thereof is reduced to zero
and third, to the PAC Component, without regard to the Planned Notional
Principal Amount for such Distribution Date. The foregoing allocations will be
made solely for purposes of calculating the Notional Principal Amount and
correspondingly, the amount of interest payable with respect to the Class I
Certificates. The Class I Certificates are not entitled to receive any principal
payments. The foregoing calculations will not affect distributions of principal
with respect to the Class A Certificates.
S-20
<PAGE>
Planned Notional Principal Amount Schedule
Planned Notional
Distribution Date in Principal Amount
- -------------------- ----------------
Initial............................................... $ 237,910,864.98
July 1997............................................. 229,536,763.96
August 1997........................................... 221,260,057.27
September 1997........................................ 213,082,506.03
October 1997.......................................... 205,005,898.03
November 1997......................................... 197,032,048.15
December 1997......................................... 189,162,798.70
January 1998.......................................... 181,400,019.85
February 1998......................................... 173,745,609.93
March 1998............................................ 166,201,495.95
April 1998............................................ 158,769,633.85
May 1998.............................................. 151,452,009.04
June 1998............................................. 144,250,636.72
July 1998............................................. 137,167,562.32
August 1998........................................... 130,204,861.89
September 1998........................................ 123,364,642.63
October 1998.......................................... 116,649,043.13
November 1998......................................... 110,060,234.05
December 1998......................................... 103,600,418.31
January 1999.......................................... 97,271,831.72
February 1999......................................... 91,076,743.33
March 1999............................................ 85,017,456.00
April 1999............................................ 79,242,021.10
May 1999.............................................. 73,555,314.51
June 1999............................................. 67,958,948.78
July 1999............................................. 62,454,561.36
August 1999........................................... 57,043,814.90
September 1999........................................ 51,728,397.65
October 1999.......................................... 46,510,023.78
November 1999......................................... 41,390,433.80
December 1999......................................... 36,371,394.85
January 2000.......................................... 31,454,701.18
February 2000......................................... 26,642,174.44
March 2000............................................ 21,935,664.17
April 2000............................................ 17,337,048.06
May 2000.............................................. 12,848,232.46
June 2000............................................. 8,471,152.79
July 2000............................................. 4,207,773.84
August 2000........................................... 60,090.29
September 2000........................................ 0.00
The Class I Certificates will not be entitled to any distributions after the
Notional Principal Amount has been reduced to zero.
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<PAGE>
Class I Yield Considerations
Although the planned amortization feature of the Class I Certificates
is intended to reduce the uncertainty relating to prepayments of the Receivables
with respect to the Class I Certificates, the yield to maturity of the Class I
Certificates will remain extremely sensitive to the prepayment experience of the
Receivables, including voluntary prepayments, prepayments due to liquidations,
repurchases and losses and prepayments resulting from any sale of the
Receivables upon an Insolvency Event relating to the Class IC Certificateholder.
Prospective investors should fully consider the associated risks, including the
risk that such investors may not fully recover their initial investment. In
particular, investors in the Class I Certificates should note that they will not
be entitled to any distributions after the Notional Principal Amount of the
Class I Certificates has been reduced to zero, and that Receivables may be
repurchased due to breaches of representations. See also "--Termination Upon
Insolvency Event of the Class IC Certificateholder" and "Risk Factors" herein.
The following tables illustrate the significant effect that prepayments
on the Receivables have upon the yield to maturity of the Class I Certificates.
The first table assumes that the Receivables have been aggregated into five
hypothetical pools having the characteristics described therein and that the
level scheduled monthly payment for each of the five pools (which is based on
its principal balance, weighted average Contract Rate, weighted average
remaining term as of the Cutoff Date and its weighted average original term)
will be such that such pool will be fully amortized by the end of its weighted
average remaining term. Based on such hypothetical pools, the second table shows
the approximate hypothetical pre-tax yields to maturity of the Class I
Certificates, stated on a corporate bond equivalent basis, under five different
prepayment assumptions based on the assumed purchase price and the ABS
prepayment model described below.
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Cutoff Date Weighted Average Remaining Term to Original Term to
Pool Principal Balance Note Rate Maturity (in Months) Maturity (in Months)
- ---- ----------------- ---------------- -------------------- --------------------
<S> <C> <C> <C> <C>
1 $ 13,722,409.09 12.135% 21 56
2 10,920,352.31 14.094 46 47
3 43,517,017.62 13.487 58 60
4 109,241,691.36 13.291 70 72
5 118,356,645.59 13.079 80 82
</TABLE>
For purposes of the table, it is also assumed that (i) the purchase
price of the Class I Certificates is as set forth below, (ii) the Receivables
have the characteristics set forth under "The Receivables Pool" herein, (iii)
the Receivables prepay monthly at the specified percentages of ABS as set forth
in the table below, (iv) prepayments representing prepayments in full of
individual Receivables are received on the last day of the month and include a
full month's interest thereon, (v) the Closing Date for the Offered Certificates
is June 13, 1997, (vi) distributions on the Offered Certificates are made, in
cash, on the ninth day of each month, commencing on July 9, 1997, (vii) no
defaults or delinquencies in the payment of the Receivables are experienced, and
(viii) no Receivable is repurchased for breach of representation and warranty or
otherwise.
Sensitivity of the Yield on the Class I Certificates to Prepayments
1.0% 1.6% 1.8% 2.5% 3.0%
Price(1) ABS ABS ABS ABS ABS
-------- ------ ----- ----- ----- -----
2.423333% 27.815% 6.800% 6.800% 6.800% - 2.807%
(1) Expressed as a percentage of the original Notional Principal Amount.
Based on the assumptions described above and assuming a purchase price
of 2.423333% at approximately 2.889% ABS, the pre-tax yield to maturity of the
Class I Certificates would be approximately 0%.
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<PAGE>
It is highly unlikely that the Receivables will prepay at a constant
rate until maturity or that all of the Receivables will prepay at the same rate.
The foregoing table assumes that each Receivable bears interest at its specified
Contract Rate, has the same remaining amortization term, and prepays at the same
rate. In fact, receivables will prepay at different rates and have different
terms.
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the Class I Certificates, would cause the discounted
present value of such assumed cash flows to equal the assumed purchase price of
such Class I Certificates and by converting such monthly rates to corporate bond
equivalent rates. Such calculations do not take into account variations that may
occur in the interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class I Certificates and consequently
do not purport to reflect the return on any investment in the Class I
Certificates when such reinvestment rates are considered.
The Receivables will not necessarily have the characteristics assumed
above, and there can be no assurance that (i) the Receivables will prepay at any
of the rates shown in the table or at any other particular rate or will prepay
proportionately, (ii) the pre-tax yield on the Class I Certificates will
correspond to any of the pre-tax yields shown above or (iii) the aggregate
purchase price of the Class I Certificates will be equal to the purchase price
assumed. Because the Receivables will include Receivables that have remaining
terms to stated maturity shorter or longer than those assumed and Contract Rates
higher or lower than those assumed, the pre-tax yield on the Class I
Certificates may differ from those set forth above, even if all of the
Receivables prepay at the indicated constant prepayment rates.
Prepayments on automotive receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the receivables are the same size and amortize at
the same rate and that each receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
Sale and Assignment of Receivables
Certain information with respect to the conveyance of the Receivables
(i) from Union Acceptance Funding Corporation ("UAFC") to the Depositor pursuant
to the Purchase Agreement dated as of June 1, 1997, among UAFC, UAC and the
Depositor and (ii) from the Depositor to the Trust pursuant to the Pooling and
Servicing Agreement is set forth under "Description of the Transfer and
Servicing Agreements -- Sale and Assignment of the Receivables" in the
Prospectus.
Accounts
In addition to the Certificate Account, the property of the Trust will
include the Spread Account and the Payahead Account.
Spread Account. On the Closing Date, the Depositor will establish the
Spread Account. Thereafter, the amount held in the Spread Account will be
increased up to the Required Spread Amount by the deposit thereto of payments on
the Receivables not utilized to make payments to the Certificateholders (other
than the Class IC Certificateholder), the Surety Bond Issuer and the Servicer
for the Monthly Servicing Fee and any permitted reimbursements of outstanding
Advances on any Distribution Date. While it is intended that the Spread Account
will grow over time to equal the Required Spread Amount through monthly deposits
of excess collections on the Receivables, if any, there can be no assurance that
such growth will actually occur. The Spread Account will be established for the
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<PAGE>
benefit of the Class A Certificateholders, the Class I Certificateholders and
the Surety Bond Issuer. On each Distribution Date, any amounts on deposit in the
Spread Account after the payment of any amounts owed to the Surety Bond Issuer
in excess of the Required Spread Amount will be withdrawn from the Spread
Account and distributed to the Class IC Certificateholder.
Under the terms of the Pooling and Servicing Agreement, the Trustee
will withdraw funds from the Spread Account and transfer them to the Certificate
Account for any deficiency of Monthly Interest or Monthly Principal as further
described below under "-- Distributions on the Offered Certificates", to the
extent available, prior to making any draw on the Surety Bond.
In the event that the balance of the Spread Account is reduced to zero
and there is a default under the Surety Bond on any Distribution Date, the Trust
will depend solely on current distributions on the Receivables to make
distributions of principal and interest on the Certificates. Any reduction in
the principal balance of the Receivables due to losses on the Receivables will
also result in a reduction of the Notional Principal Amount of the Class I
Certificates. In addition, because the market value of motor vehicles generally
declines with age and because of difficulties that may be encountered in
enforcing motor vehicle contracts as described in the Prospectus under "Certain
Legal Aspects of the Receivables," the Servicer may not recover the entire
amount due on such Receivables in the event of a repossession and resale of a
Financed Vehicle securing a Receivable in default. In such event, the
Certificateholders may suffer a corresponding loss. Any such losses would be
borne pro rata by the Class A Certificateholders and Class I Certificateholders.
Payahead Account. The Servicer will establish an additional account
(the "Payahead Account"), in the name of the Trustee and for the benefit of
Obligors on the Receivables, into which, to the extent required by the Pooling
and Servicing Agreement, early payments by or on behalf of Obligors on
Precomputed Receivables will be deposited until such time as the payment becomes
due. Until such time as payments are transferred from the Payahead Account to
the Certificate Account, they will not constitute collected interest or
collected principal and will not be available for distribution to
Certificateholders. The Payahead Account will initially be maintained with the
Trustee. Interest earned on the balance in the Payahead Account will be remitted
to the Servicer monthly. Collections on a Precomputed Receivable made during a
Collection Period shall be applied first to any overdue scheduled payment on
such Receivable, then to the scheduled payment on such Receivable due in such
Collection Period. If any collections remaining after the scheduled payment is
made are insufficient to prepay the Precomputed Receivable in full, then
generally such remaining collections shall be transferred to and kept in the
Payahead Account until such later Collection Period as the collections may be
retransferred to the Certificate Account and applied either to a later scheduled
payment or to prepay such Receivable in full.
Advances
With respect to each Receivable delinquent more than 30 days at the end
of a Collection Period, the Servicer will make an Advance in an amount equal to
30 days of interest, but only to the extent that the Servicer in its sole
discretion, expects to recoup the Advance from subsequent collections on the
Receivable. The Servicer will deposit the Advance in the Certificate Account on
or before the fifth calendar day of the month following the Collection Period.
The Servicer will recoup its Advance from subsequent payments by or on behalf of
the respective Obligor, from insurance proceeds or, upon the Servicer's
determination that reimbursement from the preceding sources is unlikely, will
recoup its Advance from any collections made on other Receivables. (Section
9.05.)
Distributions on the Class IC Certificate
The Class IC Certificate will be initially issued to the Depositor and
will entitle it to receive monthly all funds held in the Spread Account in
excess of the Required Spread Amount after payment of all amounts owed to the
Surety Bond Issuer. Upon termination of the Trust the Class IC Certificateholder
is entitled to receive any amounts remaining in the Spread Account (only after
all required payments to the Surety Bond Issuer are made) after the payment of
expenses and distributions to Certificateholders. See "-- Accounts" above.
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<PAGE>
Distributions on the Offered Certificates
The Servicer will deposit in the Certificate Account the amount of
payments on all Receivables received with respect to the preceding Collection
Period. All such payments on the Simple Interest Receivables, the scheduled
payments on Precomputed Receivables, plus the net amount to be transferred from
the Payahead Account to the Certificate Account for the related Distribution
Date, all Advances for such Collection Period and the Purchase Amount for all
Receivables that became Purchased Receivables during the preceding Collection
Period, will be available for distribution pursuant to the terms of the Pooling
and Servicing Agreement on the next succeeding Distribution Date ("Available
Funds"). The Servicer will determine the amount of funds necessary to make
distributions of Monthly Principal and Monthly Interest to the
Certificateholders and to pay the Monthly Servicing Fee to the Servicer. If
there is a deficiency with respect to Monthly Interest or Monthly Principal on
any Distribution Date, after giving effect to payments of the Monthly Servicing
Fee and permitted reimbursements of outstanding Advances to the Servicer on such
Distribution Date, the Servicer will withdraw amounts, to the extent available,
from the Spread Account, in the amount of such deficiency and notify the Trustee
of any remaining deficiency, whereupon the Trustee will draw on the Surety Bond,
up to the Surety Bond Amount, to pay Monthly Interest and Monthly Principal.
Moreover, if the Available Funds for a Distribution Date are insufficient to pay
current and past due Surety Bond Fees, and other amounts owed to the Surety Bond
Issuer, pursuant to the Insurance Agreement, plus accrued interest thereon, to
the Surety Bond Issuer, the Servicer will notify the Trustee of such deficiency,
and the amount, if any, then on deposit in the Spread Account (after giving
effect to any withdrawal to satisfy a deficiency described in this and the
preceding sentences) will be available to cover such deficiency.
If acceptable to each Rating Agency without a reduction in the rating
of any class of Offered Certificates, the Monthly Servicing Fee due to the
Servicer in respect of each Collection Period will be distributed to the
Servicer during such Collection Period from Collections during such Collection
Period.
On each Distribution Date, the Trustee will apply or cause to be
applied the Available Funds (plus, to the extent required for payment of Monthly
Interest or Monthly Principal any amounts withdrawn from the Spread Account or
drawn on the Surety Bond, as applicable) to make the following payments in the
following priority:
(a) without duplication, an amount equal to the sum of the amount
of outstanding Advances in respect of Receivables (x) that
became Defaulted Receivables during the prior Collection
Period plus (y) that the Servicer determines to be
unrecoverable, to the Servicer;
(b) the Monthly Servicing Fee, including any overdue Monthly
Servicing Fee, to the Servicer, to the extent not previously
distributed to the Servicer;
(c) pro rata, (y) Monthly Principal, in accordance with the
Principal Distribution Sequence (described below), and Class A
Monthly Interest, including any overdue Monthly Principal and
Class A Monthly Interest, to the Class A Certificateholders
and (z) Class I Monthly Interest, including any overdue Class
I Monthly Interest, to the Class I Certificateholders;
(d) the Surety Bond Fee to the Surety Bond Issuer;
(e) the amount of recoveries of Advances (to the extent such
recoveries have not previously been reimbursed to the Servicer
pursuant to clause (a) above), to the Servicer;
(f) the aggregate amount of any unreimbursed draws on the Surety
Bond payable to the Surety Bond Issuer, under the Insurance
Agreement, for Class A Monthly Interest, Class I Monthly
Interest and Monthly Principal, plus accrued interest thereon
and any other amounts owing to the Surety Bond Issuer under
the Insurance Agreement; and
(g) the balance into the Spread Account.
After all distributions pursuant to clauses (a) through (g) above have
been made for each Distribution Date, the amount of funds remaining in the
Spread Account on such date, if any, in excess of the Required Spread Amount,
will be distributed by the Trustee to the Class IC Certificateholder. Any
amounts so distributed to the Class IC Certificateholder will no longer be
property of the Trust and Certificateholders will have no rights with respect
thereto.
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<PAGE>
If on any Distribution Date there are not sufficient Available Funds
(together with amounts withdrawn from the Spread Account and/or the Surety Bond)
to pay the distribution required by (c) above, the Available Funds distributable
thereunder shall be distributed proportionately on the basis of the ratio of the
required distribution due each of the Class A Certificateholders and the Class I
Certificateholders, respectively, to the sum of the distributions required by
(c) to the Class A Certificateholders and the Class I Certificateholders. The
amount so distributed to the Class A Certificateholders hereunder shall be
allocated first to Class A Monthly Interest, and second to Monthly Principal pro
rata among the Class A Certificateholders.
"Monthly Interest" for any Distribution Date will equal the sum of the
Class A Monthly Interest and the Class I Monthly Interest.
"Class A Monthly Interest" for any Distribution Date will equal the sum
of Class A-1 Monthly Interest, Class A-2 Monthly Interest and Class A-3 Monthly
Interest.
"Class A-1 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class A-1 Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Class A-1 Certificate Balance at the Closing Date) and (ii) with respect
to each subsequent Distribution Date, the product of one-twelfth of the Class
A-1 Pass-Through Rate and the Class A-1 Certificate Balance on the preceding
Distribution Date (after giving effect to any distribution of Monthly Principal
required to be made on such preceding Distribution Date).
"Class A-2 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class A-2 Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Class A-2 Certificate Balance at the Closing Date) and (ii) with respect
to each subsequent Distribution Date, the product of one-twelfth of the Class
A-2 Pass-Through Rate and the Class A-2 Certificate Balance on the preceding
Distribution Date (after giving effect to any distribution of Monthly Principal
required to be made on such preceding Distribution Date).
"Class A-3 Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class A-3 Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Class A-3 Certificate Balance at the Closing Date) and (ii) with respect
to each subsequent Distribution Date, the product of one-twelfth of the Class
A-3 Pass-Through Rate and the Class A-3 Certificate Balance on the preceding
Distribution Date (after giving effect to any distribution of Monthly Principal
required to be made on such preceding Distribution Date).
"Monthly Principal" for any Distribution Date will equal the amount
necessary to reduce the Certificate Balance to the aggregate unpaid principal
balance of the Receivables on the last day of the preceding Collection Period;
provided, however, that Monthly Principal on the final scheduled Distribution
Date for each class of Class A Certificates will be increased by the amount, if
any, which is necessary to reduce the Certificate Balance of such class to zero
on such date. For the purpose of determining Monthly Principal, the unpaid
principal balance of a Defaulted Receivable or a Purchased Receivable is deemed
to be zero on and after the last day of the Collection Period in which such
Receivable became a Defaulted Receivable or a Purchased Receivable.
"Principal Distribution Sequence" means that Monthly Principal shall be
distributed among the Class A Certificateholders in the following sequence: (i)
to the Class A-1 Certificateholders until the Class A-1 Certificate Balance has
been reduced to zero; (ii) to the Class A-2 Certificateholders until the Class
A-2 Certificate Balance has been reduced to zero; and (iii) to the Class A-3
Certificateholders until the Class A-3 Certificate Balance has been reduced to
zero.
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<PAGE>
"Class I Monthly Interest" will equal (i) for the first Distribution
Date, the product of the following: (one-twelfth of the Class I Pass-Through
Rate) multiplied by (the number of days remaining in the month of the Closing
Date (assuming a 30 day month) from the Closing Date divided by 30) multiplied
by (the Notional Principal Amount at the Closing Date) and (ii) with respect to
each subsequent Distribution Date, the product of one-twelfth of the Class I
Pass-Through Rate and the Notional Principal Amount on the preceding
Distribution Date (after giving effect to any application of Monthly Principal
on such preceding Distribution Date).
"Surety Bond Fee" for any Distribution Date will equal one-twelfth of
the product of the Surety Bond per annum fee rate set forth in the Insurance
Agreement and the Certificate Balance calculated as of the first day of the
Collection Period to which such Distribution Date relates and payable monthly in
arrears.
"Defaulted Receivable" will mean, for any Collection Period, a
Receivable as to which any of the following has occurred: (i) any payment is 120
days or more delinquent as of the last day of such Collection Period; (ii) the
Financed Vehicle that secures the Receivable has been repossessed; or (iii) the
Receivable has been determined to be uncollectable in accordance with the
Servicer's customary practices on or prior to the last day of such Collection
Period; provided, however, that any Receivable which the Depositor or the
Servicer is obligated to repurchase or purchase pursuant to the Pooling and
Servicing Agreement shall be deemed not to be a Defaulted Receivable.
As an administrative convenience, the Servicer will be permitted to
make the deposit of Collections and aggregate Advances and Purchase Amounts for
or with respect to the Collection Period, net of distributions to be made to the
Servicer or Depositor with respect to the Collection Period. The Servicer,
however, will account to the Trustee and to the Certificateholders as if all
deposits and distributions were made individually. (Section 9.06.)
The following chart sets forth an example of the application of the
foregoing provisions to a monthly distribution:
June 1-30 ...................Collection Period. The Servicer receives monthly
payments, prepayments, and other proceeds in
respect of the Receivables and deposits them in
the Certificate Account. The Servicer may deduct
the Monthly Servicing Fee from such deposits.
June 30 .....................Record Date. Distributions on the Distribution
Date are made to Certificateholders of record at
the close of business on this date.
July 5 ......................On the fifth calendar day after the end of the
Collection Period (the "Determination Date") the
Servicer notifies the Trustee of the amounts to be
distributed on the Distribution Date and of any
deficiencies.
July 9........................On the third business day after the Determination
Date (the "Distribution Date") the Trustee
withdraws funds from the Spread Account and/or
draws on the Surety Bond, if necessary, to pay
Monthly Principal and Monthly Interest to
Certificateholders as described herein. The
Trustee distributes to Certificateholders amounts
payable in respect of the Offered Certificates,
and pays the Monthly Servicing Fee to the extent
not previously paid, the Surety Bond Fee and any
amounts owing to the Surety Bond Issuer.
The Surety Bond
On or before the Closing Date, the Depositor and UAC, in its individual
capacity and as Servicer, and the Surety Bond Issuer will enter into an
Insurance and Reimbursement Agreement (the "Insurance Agreement") pursuant to
which the Surety Bond Issuer will issue the Surety Bond. Under the terms of the
S-27
<PAGE>
Pooling and Servicing Agreement, after withdrawal of any amounts in the Spread
Account with respect to a Distribution Date to pay a deficiency in Monthly
Interest or Monthly Principal, the Trustee will be authorized to draw on the
Surety Bond for the benefit of the Class A Certificateholders and the Class I
Certificateholders and credit the Certificate Account for such draws as
described above under "--Distributions on the Offered Certificates." The maximum
amount that may be drawn under the Surety Bond on any Distribution Date is
limited to the Surety Bond Amount for such Distribution Date. The Surety Bond
Amount, with respect to any Distribution Date, shall equal (x) the sum of (A)
the lesser of (i) the Certificate Balance (after giving effect to any
distribution of Available Funds and any funds withdrawn from the Spread Account
to pay Monthly Principal on such Distribution Date) and (ii) the Net Principal
Surety Bond Amount, plus (B) Class A Monthly Interest, plus (C) Class I Monthly
Interest, plus (D) the Monthly Servicing Fee; less (y) all amounts on deposit in
the Spread Account on such Distribution Date. "Net Principal Surety Bond Amount"
means the Certificate Balance as of the first Distribution Date minus all
amounts previously drawn on the Surety Bond or from the Spread Account with
respect to Monthly Principal.
The Surety Bond Issuer will be entitled to receive the Surety Bond Fee
and certain other amounts on each Distribution Date as described under
"--Distributions on the Offered Certificates" and to receive amounts on deposit
in the Spread Account as described above under "--Accounts." The Surety Bond
Issuer will not be entitled to reimbursement of any amounts from the
Certificateholders. The Surety Bond Issuer's obligation under the Surety Bond is
irrevocable. The Surety Bond Issuer will have no obligation other than its
obligations under the Surety Bond to the Certificateholders or the Trustee.
In the event that the balance in the Spread Account is reduced to zero
and there has been a default under the Surety Bond, the Trust may depend solely
on current collections on the Receivables to make distributions of principal and
interest on the Offered Certificates. Any reduction in the principal balance of
the Receivables due to losses on the Receivables may also result in a reduction
of the Notional Principal Amount of the Class I Certificates. In addition,
because the market value of motor vehicles generally declines with age and
because of difficulties that may be encountered in enforcing motor vehicle
contracts as described in the Prospectus under "Certain Legal Aspects of the
Receivables," the Servicer may not recover the entire amount due on such
Receivables in the event of a repossession and resale of a Financed Vehicle
securing a Receivable in default. In such event, the Certificateholders may
suffer a corresponding loss. Any such losses would be borne pro rata by the
Class A Certificateholders and Class I Certificateholders. See " --
Distributions on the Offered Certificates."
Unlimited Liability of the Class IC Certificateholder
The Class IC Certificateholder has agreed to assume unlimited personal
liability to any creditor of the Trust (other than the Trustee and the
Certificateholders in certain circumstances). Third party creditors may rely on
such agreement as third-party beneficiaries. (Section 7.08.)
Termination Upon Insolvency Event of the Class IC Certificateholder
If an Insolvency Event (as defined below) occurs with respect to the
Class IC Certificateholder, the Class IC Certificateholder will promptly give
notice to the Trustee of such event. Under the terms of the Pooling and
Servicing Agreement, within 15 days of such notice, the Trustee shall (i)
publish a notice of such Insolvency Event stating that the Trustee intends to
sell, dispose of, or otherwise liquidate the Receivables in a commercially
reasonable manner and (ii) send written notice to the Certificateholders
requesting instructions from such holders. Unless instructed otherwise within a
specified period by holders of more than 51% of the Certificate Balance and
holders of more than 51% of the Notional Principal Amount of the Class I
Certificates or unless otherwise prohibited by applicable law, the Trustee will
sell, dispose of or otherwise liquidate the Receivables in a commercially
reasonable manner and on commercially reasonable terms. The proceeds from the
sale, disposition or liquidation of the Receivables will be distributed pro rata
to the Class A Certificateholders and the Class I Certificateholders, each in
respect of their remaining capital investment, and the Trustee will then
S-28
<PAGE>
distribute amounts owing the Surety Bond Issuer and the Class IC
Certificateholder and proceed to wind up and terminate the Trust. If such
proceeds are not sufficient to pay any accrued and unpaid Class A Monthly
Interest, Monthly Principal, the remaining Pool Balance and any accrued but
unpaid Class I Monthly Interest and the Surety Bond Issuer in full, the Spread
Account may not be available to cover such deficiency, and the holders of the
Offered Certificates could incur a loss. The Surety Bond is not available to pay
such shortfall. Furthermore, any distributions of such proceeds will have the
same effect as a prepayment of the Receivables and would affect the yield on the
Class A Certificates and could significantly affect the yield on the Class I
Certificates. (Section 16.03.)
An "Insolvency Event" means, with respect to the Class IC
Certificateholder, (i) the entry of a decree or order by a court or agency or
supervisory authority having jurisdiction in the premises for the appointment of
a trustee in bankruptcy for the Class IC Certificateholder in any insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings, or for the winding up or liquidation of the Class IC
Certificateholder's affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or (ii) the consent
by the Class IC Certificateholder to the appointment of a trustee in bankruptcy
in any insolvency, readjustment of debt, marshalling of assets and liabilities,
or similar proceedings of or relating to the Class IC Certificateholder or of or
relating to substantially all of its property; or (iii) the Class IC
Certificateholder admits in writing its inability to pay its debts generally as
they become due, files a petition to take advantage of any applicable insolvency
or reorganization statute, makes an assignment for the benefit of its creditors,
or voluntarily suspends payment of its obligations. The Depositor, the initial
Class IC Certificateholder, is a special purpose corporation the activities of
which are circumscribed by its charter with a view to reducing any risk of its
bankruptcy.
In the event of a liquidation of the Trust due to an Insolvency Event
with respect to the Class IC Certificateholder, the Surety Bond will not be
available to pay a deficiency if the liquidation proceeds are less than the
Certificate Balance of the Receivables at the time of such liquidation.
Rights of the Surety Bond Issuer upon Events of Default, Amendment or Waiver
Upon the occurrence of an Event of Default, the Surety Bond Issuer, or
the Trustee upon the consent of the Surety Bond Issuer, will be entitled to
appoint a successor Servicer. In addition to the events constituting an Event of
Default as described in the Prospectus, the Pooling and Servicing Agreement will
also permit the Surety Bond Issuer to appoint a successor Servicer and to
redirect payments made under the Receivables to the Trustee upon the occurrence
of certain additional events involving a failure of performance by the Servicer
or a material misrepresentation made by the Servicer under the Insurance
Agreement.
The Pooling and Servicing Agreement cannot be amended or any provisions
thereof waived without the consent of the Surety Bond Issuer if such amendment
or waiver would have a materially adverse effect upon the rights of the Surety
Bond Issuer.
ERISA CONSIDERATIONS
Subject to the considerations set forth under "ERISA Considerations" in
the Prospectus, the Class A Certificates and the Class I Certificates may be
eligible for purchase by an employee benefit plan or an individual retirement
account (a "Plan") subject to Title I of ERISA or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan must
determine that the purchase of a Class A Certificate or of a Class I
Certificates is consistent with its fiduciary duties under ERISA and does not
result in a nonexempt prohibited transaction as defined in Section 406 of ERISA
or Section 4975 of the Code. For additional information regarding treatment of
the Class A Certificates and the Class I Certificates under ERISA, see "ERISA
Considerations" in the Prospectus.
S-29
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in the
underwriting agreement for the sale of the Offered Certificates, dated June 5,
1997, the Depositor has agreed to sell and each of the underwriters named below
(the "Underwriters") severally agreed to purchase the principal amount of the
Offered Certificates set forth opposite its name below:
<TABLE>
<CAPTION>
Notional
Principal Principal Principal Principal
Amount Amount Amount Amount of
of Class A-1 of Class A-2 of Class A-3 Class I
Underwriters Certificates Certificates Certificates Certificates
- ----------------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Salomon Brothers Inc.................. $ 85,875,000.00 $ 52,750,000.00 $ 9,254,057.99 $237,910,864.98
Bear, Stearns & Co. Inc............... 85,875,000.00 52,750,000.00 9,254,057.98 0.00
--------------- --------------- -------------- ---------------
Total................................. $171,750,000.00 $105,500,000.00 $18,508,115.97 $237,910,864.98
=============== =============== ============== ===============
</TABLE>
In the underwriting agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Offered
Certificates offered hereby if any of the Offered Certificates are purchased.
The Underwriters propose to offer part of the Offered Certificates
directly to the public at the prices set forth on the cover page hereof, and
part to certain dealers at a price that represents a concession not in excess of
0.100% of the denominations of the Class A-1 Certificates, 0.200% of the
denominations of the Class A-2 Certificates, 0.225% of the denominations of the
Class A-3 Certificates or 0.200% of the gross proceeds of the Class I
Certificates. The Underwriters may allow and such dealers may reallow a
concession not in excess of 0.075% of the denominations of the Class A-1
Certificates, 0.150% of the denominations of the Class A-2 Certificates, 0.150%
of the denominations of the Class A-3 Certificates or 0.150% of the gross
proceeds of the Class I Certificates to certain other dealers.
The Depositor and UAC have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
The Depositor has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Offered Certificates, as
permitted by applicable laws and regulations. The Underwriters are not
obligated, however, to make a market in the Offered Certificates and any such
market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Offered Certificates.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Depositor by Barnes & Thornburg, Indianapolis, Indiana, and
for the Underwriters by Cadwalader, Wickersham & Taft. Certain federal income
tax consequences with respect to the Offered Certificates will be passed upon
for the Depositor by Cadwalader, Wickersham & Taft.
EXPERTS
The financial statements of the Surety Bond Issuer, Capital Markets
Assurance Corporation, as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 are included herein
beginning on page F-1 and have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as set forth in their audit report
thereon and are included in reliance upon the authority of such firm as experts
in accounting and auditing.
S-30
<PAGE>
INDEX OF PRINCIPAL TERMS
TERM PAGE
ABS .................................................... S-23
Available Funds ........................................ S-25
Certificates ......................................... S-3
Certificate Balance...................................... S-4
Class A Certificates ................................ S-3
Class A Monthly Interest ............................... S-26
Class A Certificateholders ........................... S-1, S-4
Class A-1 Certificate Balance............................ S-4
Class A-1 Certificateholders............................. S-4
Class A-1 Final Scheduled Distribution Date.............. S-1
Class A-1 Monthly Interest ............................. S-26
Class A-1 Pass-Through Rate.............................. S-4
Class A-2 Certificate Balance............................ S-4
Class A-2 Certificateholders............................. S-4
Class A-2 Final Scheduled Distribution Date.............. S-1
Class A-2 Monthly Interest ............................. S-26
Class A-2 Pass-Through Rate.............................. S-4
Class A-3 Certificate Balance............................ S-4
Class A-3 Certificateholders............................. S-4
Class A-3 Final Scheduled Distribution Date.............. S-1
Class A-3 Monthly Interest ............................. S-26
Class A-3 Pass-Through Rate.............................. S-4
Class I Certificateholders .......................... S-5
Class I Certificates ................................. S-5
Class I Monthly Interest ............................... S-27
Class I Pass-Through Rate ............................ S-5
Class IC Certificate ................................. S-1
Class IC Certificateholder ........................... S-8
Closing Date ......................................... S-3
Code .................................................. S-29
Companion Component...................................... S-6, S-20
Cutoff Date .......................................... S-1
Defaulted Receivable .................................... S-27
Depositor ............................................ S-1, S-3
Determination Date....................................... S-27
Distribution Date .....................................S-1, S-4, S-27
Duff & Phelps............................................ S-18
ERISA ................................................ S-10
Holdings................................................. S-18
Insolvency Event ....................................... S-29
Insurance Agreement ..................................... S-27
Moody's.................................................. S-18
Monthly Interest ....................................... S-26
Monthly Principal ...................................... S-4, S-26
Monthly Servicing Fee.................................... S-5
Net Principal Surety Bond Amount......................... S-9, S-28
Notional Principal Amount................................ S-6
Offered Certificates .................................. S-1
Optional Sale ....................................... S-9
Original Notional Principal Amount....................... S-5
S-31
<PAGE>
PAC Component............................................ S-6, S-20
Payahead Account ........................................ S-24
Plan ................................................... S-29
Planned Notional Principal Amount........................ S-20
Planned Notional Principal Amount Schedule ............. S-6, S-20
Pool Balance ........................................ S-4
Pooling and Servicing Agreement ..................... S-3
Principal Distribution Sequence.......................... S-26
Rating Agency............................................ S-9
Receivables .......................................... S-1
Record Date .......................................... S-4
Required Spread Amount ............................... S-8
Servicer ............................................. S-3
Spread Account........................................... S-7
Standard & Poor's........................................ S-18
Surety Bond.............................................. S-1, S-8
Surety Bond Amount....................................... S-9
Surety Bond Fee ......................................... S-27
Surety Bond Issuer ...................................... S-9, S-18
Trust ................................................ S-1
Trustee .............................................. S-3
UAC .................................................. S-3
UAFC .................................................. S-23
Underwriters ........................................... S-30
S-32
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 29, 1997
F-2
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $294,861 at December 31,
1996 and $210,651 at December 31, 1995) $ 297,893 215,706
Short-term investments (at amortized cost which approximates
fair value) 16,810 68,646
- ------------------------------------------------------------------------------------------------------
Total investments 314,703 284,352
- ------------------------------------------------------------------------------------------------------
Cash 371 344
Accrued investment income 3,807 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 6,424 3,428
- ------------------------------------------------------------------------------------------------------
Total assets $ 394,315 343,133
======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 8,019 10,844
Current income taxes 679 136
Deferred income taxes 15,139 11,303
- ------------------------------------------------------------------------------------------------------
Total liabilities 104,822 77,067
- ------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding
at December 31, 1996 and 1995 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 1,970 3,286
Retained earnings 64,048 41,972
- ------------------------------------------------------------------------------------------------------
Total stockholder's equity 289,493 266,066
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 394,315 343,133
======================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31,1995 December 31, 1994
Revenues:
<S> <C> <C> <C>
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992) (11,069)
- -----------------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242) (10,490)
- -----------------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Net investment income 16,992 11,953 10,072
Net realized capital gains 236 1,301 92
Other income 146 2,273 120
- -----------------------------------------------------------------------------------------------------
Total revenues 57,931 44,769 33,387
- -----------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 14,613 13,808 11,833
Policy acquisition costs 7,824 7,203 4,529
- -----------------------------------------------------------------------------------------------------
Total expenses 27,252 24,152 17,791
- -----------------------------------------------------------------------------------------------------
Income before income taxes 30,679 20,617 15,596
- -----------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 5,235 2,113 865
Deferred income tax 3,368 3,102 2,843
- -----------------------------------------------------------------------------------------------------
Total income taxes 8,603 5,215 3,708
- -----------------------------------------------------------------------------------------------------
Net Income $ 22,076 15,402 11,888
=====================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31,1996 December 31, 1995 December 31, 1994
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 205,808 146,808 146,808
Capital contribution 2,667 59,000 -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 208,475 205,808 146,808
Unrealized appreciation (depreciation)
on investments, net of tax:
Balance at beginning of year 3,286 (5,499) 3,600
Unrealized appreciation (depreciation)
on investments (1,316) 8,785 (9,099)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 1,970 3,286 (5,499)
- ---------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 41,972 26,570 14,682
Net income 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 64,048 41,972 26,570
- ---------------------------------------------------------------------------------------------------------
Total stockholder's equity $ 289,493 266,066 182,879
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollar in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,076 15,402 11,888
- ----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment
expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (671) (390) (848)
Income taxes payable 3,911 3,621 2,611
Net realized capital gains (236) (1,301) (92)
Accounts payable and other accrued
expenses 1,020 472 3,726
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (3,396) 992 689
- ----------------------------------------------------------------------------------------------------------
Total adjustments 10,424 6,530 6,292
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,500 21,932 18,180
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (199,989) (158,830) (77,980)
Proceeds from sales of investments 57,210 49,354 39,967
Proceeds from maturities of investments 110,306 28,803 19,665
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (32,473) (80,673) (18,348)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution - 59,000 -
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities - 59,000 -
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27 259 (168)
Cash balance at beginning of year 344 85 253
- ----------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 371 344 85
==========================================================================================================
Supplemental disclosure of cash flow
information:
Income taxes paid $ 4,525 1,450 1,063
==========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1996 and 1995
1) Background
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a
New York- domiciled monoline stock insurance company which engages only
in the business of financial guarantee and surety insurance. CapMAC is
a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC
is licensed in all 50 states in addition to the District of Columbia,
the Commonwealth of Puerto Rico and the territory of Guam. CapMAC
insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets.
CapMAC also provides financial guarantee reinsurance for structured
asset- backed, corporate, municipal and other financial obligations
written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
and "AAA" by Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies,
are not recommendations to buy, sell or hold securities and are subject
to revision or withdrawal at any time by such rating agencies.
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the
basis of generally accepted accounting principles ("GAAP").
Such accounting principles differ from statutory reporting
practices used by insurance companies in reporting to state
regulatory authorities.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Management believes the most
significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and
disclosures of financial guarantees outstanding. Actual
results could differ from those estimates.
b) Investments
As of December 31, 1996 and 1995, all of the Company's
securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair
value is generally based upon quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholder's equity
until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. A decline in
the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security.
F-7
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Short-term investments are those investments having a maturity
of less than one year at purchase date. Short-term investments
are carried at amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses are included
in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
c) Premium Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in
income when due, net of amounts payable to reinsurers.
Premiums which are payable quarterly, semi-annually or
annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding
policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the
principal amount and earning it straight-line over the term of
each bond maturity. For the years ended December 31, 1996 and
1995, 91% of net premiums earned were attributable to premiums
payable in installments and 9% were attributable to premiums
collected on an up-front basis.
d) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are
primarily related to the production of new business, are
deferred. These costs include direct and indirect expenses
related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized over
the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections
due to various factors such as renewal or early termination of
insurance contracts or different run-off patterns of exposure
resulting in a corresponding change in the amortization
pattern of the deferred acquisition costs.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists
of a supplemental loss reserve ("SLR") and a case basis loss
reserve. The SLR is established for expected levels of losses
resulting from credit failures on currently insured issues and
reflects the estimated portion of earned premiums required to
cover those losses.
A case basis loss reserve is established for insured
obligations when, in the judgment of management, a default in
the timely payment of debt service is imminent. For defaults
considered temporary, a case basis loss reserve is established
in an amount equal to the present value of the anticipated
defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the
present value of all remaining defaulted debt service payments
is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss
reserves when such amounts are reasonably estimable. Case
basis loss reserves may be allocated from any SLR outstanding
at the time the case basis reserves are established.
F-8
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Management believes that the current level of reserves is
adequate to cover the ultimate net cost of claims and the
related expenses with respect to financial guarantees issued
by CapMAC. The establishment of the appropriate level of loss
reserves is an inherently uncertain process involving
estimates and subjective judgments by management, and
therefore there can be no assurance that ultimate losses in
CapMAC's insured portfolio will not exceed the current
estimate of loss reserves.
f) Depreciation
Leasehold improvements, furniture, fixtures and electronic
data processing equipment are being amortized or depreciated
over the lease term or useful life, whichever is shorter,
using the straight-line method.
g) Income Taxes
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the
enactment date.
F-9
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) Insured Portfolio
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding), was
$19.7 billion and $12.6 billion, respectively, with a weighted average
life of 6.4 years and 6.0 years, respectively. CapMAC's insured
portfolio was broadly diversified by geographic distribution and type
of insured obligations, with no single insured obligation in excess of
statutory single risk limits, after giving effect to any reinsurance
and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory
contingency reserve). At December 31, 1996 and 1995, the statutory
qualified capital was approximately $260 million and $240 million,
respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1996 December 31, 1995
------------------------------ -----------------------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ----------------------------------------- -------------- --------------- ---- -------------- -------------
<S> <C> <C> <C> <C>
Consumer receivables $ 10,362 52.8 $ 6,959 55.1
Trade and other corporate
obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
- ----------------------------------------- -------------- --------------- ---- -------------- -------------
Total $ 19,655 100.0 $ 12,628 100.0
========================================= ============== =============== ==== ============== =============
</TABLE>
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and
interest outstanding) was $23.3 billion and $15.1 billion,
respectively. At December 31, 1996, approximately 93% of CapMAC's
insured portfolio was comprised of structured asset-backed
transactions. Under these structures, a pool of assets covering at
least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying
assets. CapMAC, therefore, evaluates all the factors affecting past and
future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction
is reviewed to ensure that an appropriate legal structure is used to
protect against the bankruptcy risk of the originator of the assets.
Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to
a third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is
typically several times the normal historical loss experience for the
underlying type of assets.
During 1995, the Company sold without recourse its interest in
potential cash flows from transactions included in its insured
portfolio and recognized $2,200,000 of income which has been included
in other income in the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
--------------------------- ---------------------------- ----------------------------
% of % of % of
Revenues Revenues Revenues
----------- -- ----------- ------------ -- ----------- ----------- ----------------
<S> <C> <C> <C>
Citicorp 14.5 15.2 16.3
</TABLE>
F-10
<PAGE>
4) Investments
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value for available-for-sale securities by major
security type at December 31, 1996 and 1995 were as follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,059 10 - 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 109,436 265 1,160 108,541
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate and asset-backed
securities 20,365 23 153 20,235
-----------------------------------------------------
Total $ 311,671 4,900 1,868 314,703
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
-----------------------------------------------------
Total $ 279,297 5,222 167 284,352
=====================================================================================================
</TABLE>
F-11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996 by contractual maturity are shown below
($ in thousands):
December 31, 1996
Amortized Estimated
Securities Available-for-sale Cost Fair Value
- ------------------------------------------------------------- -----------------
Due in one year or less $ 11,627 11,644
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 82,337 83,503
- ------------------------------------------------------------- -----------------
Sub-total 202,235 206,162
Mortgage-backed securities 109,436 108,541
- ------------------------------------------------------------- -----------------
Total $ 311,671 314,703
============================================================= =================
Actual maturities may differ from contractual maturities because
borrowers may call or prepay obligations with or without call or
prepayment penalties.
Proceeds from sales of investment securities were approximately $57.2
million, $49.3 million and $39.9 million in 1996, 1995 and 1994,
respectively. Gross realized capital gains of $772,000, $1,320,000 and
$714,000, and gross realized capital losses of $536,000, $19,000 and
$622,000 were realized on those sales for the years ended December 31,
1996, 1995 and 1994, respectively.
Investments include bonds having a fair value of approximately
$3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
1995, respectively, with state regulators as required by law.
Investment income is comprised of interest and dividends, net of
related expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 15,726 11,105 9,193
Short-term investments 1,534 1,245 484
Mutual funds - (162) 579
Investment expenses (268) (235) (184)
- -----------------------------------------------------------------------------------------------------
Total $ 16,992 11,953 10,072
=====================================================================================================
</TABLE>
F-12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on
available-for-sale securities is included as a separate component of
stockholder's equity as shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 3,286 (5,499)
Change in unrealized (depreciation) appreciation (2,024) 13,386
Income tax effect 708 (4,601)
Net change (1,316) 8,785
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,970 3,286
======================================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 2% of stockholder's equity as of
December 31, 1996 and 1995, respectively.
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy
acquisition costs) (7,824) (7,203) (4,529)
- -----------------------------------------------------------------------------------------------------
Balance at end of year $ 45,380 35,162 24,860
=====================================================================================================
</TABLE>
6) Employee Benefits
CapMAC has a service agreement with CapMAC Financial Services, Inc.
("CFS"). Under the service agreement, CFS has agreed to provide various
services, including underwriting, reinsurance, marketing, data
processing and other services to CapMAC in connection with the
operation of CapMAC's insurance business. CapMAC pays CFS a fee for
providing such services, but not in excess of CFS's cost for such
services. CFS incurred, on behalf of CapMAC, total compensation
expenses, excluding bonuses, of $13,374,000, $13,484,000 and
$11,081,000 in 1996, 1995 and 1994, respectively.
The Company, through CFS, maintains an incentive compensation plan for
its employees. The plan is an annual discretionary bonus award. For the
years ended December 31, 1996, 1995 and 1994, the Company had provided
approximately $8,810,000, $7,804,000 and $5,253,000, respectively, for
the plan. CFS also provides health and welfare benefits to
substantially all of its employees. The Company incurred $551,943,
$598,530, and $562,508 of expense for the years ended December 31,
1996, 1995 and 1994, respectively, for such plan. The Company also has
a defined contribution retirement plan which allows participants to
make voluntary contributions by salary reduction pursuant to section
401 (k) of the Internal Revenue Code. The Company provides for the
administrative cost for the 401 (k) plan.
S-13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers
agreed to defer receipt of such cash amount in exchange for receiving
the same number of new shares of restricted stock of Holdings as the
number of RSU's such officers previously held. During 1995 and 1994,
the expense was $1.3 million and $0.1 million, respectively. During
1996, Holdings assumed the liability of $3.7 million less the related
deferred tax asset of $1.1 million as capital contribution. The cash
amount is held by Holdings and invested in accordance with certain
guidelines. Such amount, including the investment earnings thereon,
will be paid to each officer upon the occurrence of certain events but
no later than December 2000.
7) Employee Stock Ownership Plan
Holdings maintains an Employee Stock Ownership Plan ("ESOP") to provide
its employees the opportunity to obtain beneficial interests in the
stock of Holdings through a trust (the "ESOP Trust"). Compensation
expense related to the ESOP and allocated to CapMAC was approximately
$2,764,000, $2,087,000 and $2,086,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
S-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the
aggregate amount of claims and related expenses not to exceed $2.7
million, although no assurance can be given that such claims and
related expenses will not exceed that amount. Such loss amount was
covered through a recovery under a quota share reinsurance agreement of
$0.2 million and a reduction in the SLR of $2.5 million. The portion of
such claims and expenses not covered under the quota share agreement is
being funded through payments to CapMAC from the Lureco Trust Account
(see note 12).
The following is a summary of the activity in the case basis loss
reserve account and the components of the reserve for losses and loss
adjustment expenses ($ in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Case basis loss reserve:
Net balance at January 1 $ 620 - -
- ------------------------------------------------------------------------ --------------- ----------
Incurred related to:
Current year - 2,473 -
Prior years - - -
- ------------------------------------------------------------------------ --------------- ----------
Total incurred - 2,473 -
- ------------------------------------------------------------------------ --------------- ----------
Paid related to:
Current year - 1,853 -
Prior years 309 - -
- ------------------------------------------------------------------------ --------------- ----------
Total paid 309 1,853 -
- ------------------------------------------------------------------------ --------------- ----------
Net balance at December 31 311 620 -
Reinsurance recoverable - 69 -
- ------------------------------------------------------------------------ --------------- ----------
Gross balance at December 31 311 689 -
- ------------------------------------------------------------------------ --------------- ----------
Supplemental loss reserve
Balance at January 1 5,859 5,191 3,762
- ------------------------------------------------------------------------ --------------- ----------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve - (2,473) -
- ------------------------------------------------------------------------ --------------- ----------
Balance at December 31 10,674 5,859 5,191
- ------------------------------------------------------------------------ --------------- ----------
Total reserve for losses and loss adjustment
expenses $10,985 6,548 5,191
======================================================================== =============== ==========
</TABLE>
S-15
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return. The
Company's annual Federal income tax liability is determined by
computing its pro rata share of the consolidated group Federal income
tax liability.
Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
$ in thousands Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 10,738 35.0 $7,216 35.0 $5,303 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (9.5) (2,335) (11.3) (1,646) (10.6)
Other, net 781 2.5 334 1.6 51 0.4
- -----------------------------------------------------------------------------------------------------
Total income tax expense $ 8,603 28.0 $5,215 25.3 $3,708 23.8
=====================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1996 December 31, 1995
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 200 1,901
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 96 98
Total gross deferred tax assets 2,689 3,853
- -----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,061 1,769
Other, net 884 1,080
Total gross deferred tax liabilities 17,828 15,156
Net deferred tax liability $ 15,139 11,303
=====================================================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the deferred tax assets will be fully realized
in the future.
S-16
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
10) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that
may be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income
as defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1996, 1995 and 1994. No dividends could be
paid during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1996 and 1995 was approximately
$193,726,000 and $195,018,000, respectively. Statutory surplus differs
from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting
purposes and differences in accounting for investments, deferred
acquisition costs, SLR and deferred taxes provided under GAAP.
Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Statutory
net income differs from net income determined under GAAP principally
due to deferred acquisition costs, SLR and deferred income taxes.
11) Commitments and Contingencies
The Company's lease agreement for the space occupied in New York
expires on November 20, 2008. CapMAC has a lease agreement for its
London office, which expires on October 1, 2002. As of December 31,
1996, future minimum payments under the lease agreements are as
follows:
$ in thousands Payment
- -----------------------------------------------------------------------------
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
Total $ 40,251
=============================================================================
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1996, 1995 and 1994 amounted to $1,618,000, $1,939,000 and
$2,243,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity
facility (the "Liquidity Facility") scheduled to terminate in September
1999. The Liquidity Facility is provided by a consortium of banks,
headed by Bank of Montreal, as agent, which is rated "A-1+" and "P- 1"
by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
will be able, subject to satisfying certain conditions, to borrow funds
from time to time in order to enable it to fund any claim payments or
payments made in settlement or mitigation of claim payments under its
insurance contracts. There have been no draws under the Liquidity
Facility.
CapMAC has agreed to make an investment of 50 million French Francs
(approximately $10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. This
investment is anticipated to be made in 1997.
S-17
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty and facultative reinsurance contracts, both on a pro rata and
excess of loss basis, primarily designed to minimize losses from large
risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
------------------------ ---------------------- -----------------------
$ in thousands Written Earned Written Earned Written Earned
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,069) (5,716)
- -----------------------------------------------------------------------------------------------------
Net premiums $ 57,734 40,557 41,484 29,242 33,593 23,103
=====================================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists
with respect to the aforementioned reinsurance arrangements, which may
become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At
December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
$69,000, respectively, and had ceded unearned premiums of $18,489,000
and $13,171,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The
agreement reinsured and indemnified the Company for any loss incurred
by CapMAC during the agreement period up to the limits of the
agreement. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's
fee payable to Lureco, be deposited in a trust account (the "Lureco
Trust Account") to be applied by CapMAC, at its option, to offset
losses and loss expenses incurred by CapMAC in connection with incurred
claims. Amounts on deposit in the Lureco Trust Account which have not
been applied against claims are contractually due to CapMAC at the
termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement.
Premiums in excess of the deposit amounts have been recorded as ceded
premiums in the statements of income. For the 1996 policy year, the
agreement provides $7 million of loss coverage in excess of the premium
deposit amount of $5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200%
of the net premiums earned up to $4 million for any one agreement year.
In September 1995, a claim of approximately $2.5 million on an
insurance policy was applied against the Lureco Trust Account.
S-18
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
In addition to its capital (including statutory contingency reserves),
CapMAC has other reinsurance available to pay claims under its
insurance contracts. Effective November 30, 1995, CapMAC entered into a
Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
required to pay any losses in excess of $100 million in the aggregate
incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
the insurance policies in effect on December 1, 1995 and written during
the one-year period thereafter, up to an aggregate limit payable under
the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
Agreement has a term of seven years and is subject to early termination
by CapMAC in certain circumstances. Effective January 1, 1997 the
stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses of $150 million increasing annually based on increases
in CapMAC's statutory qualified capital. The new stop-loss reinsurance
is provided by Mitsui, AXA Re Finance S.A. ("AXA Re") and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").
On November 30, 1995, CapMAC canceled the quota share reinsurance
agreement with Winterthur Swiss Insurance Company ("Winterthur")
pursuant to which Winterthur had the right to reinsure on a quota share
basis 10% of each policy written by CapMAC. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur
on January 1, 1996. In connection with the commutation, Winterthur
returned $2.0 million of unearned premiums, net of ceding commission
and Federal excise tax.
13) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
1995. The fair value amounts were determined by the Company using
independent market information when available, and appropriate
valuation methodologies when market information was not available. Such
valuation methodologies require significant judgment and are not
necessarily indicative of the amount the Company could recognize in a
current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- --------------------------------------------------------------- --------------------------------------
Financial Assets:
<S> <C> <C> <C> <C>
Available-for-sale securities $ 314,703 314,703 284,352 284,352
- --------------------------------------------------------------- --------------------------------------
Off-Balance-Sheet Instruments:
Financial guarantees outstanding $ - 219,989 - 147,840
Less: ceding commission - 65,997 - 44,352
- --------------------------------------------------------------- --------------------------------------
Net financial guarantees outstanding $ - 153,992 103,488
=============================================================== ======================================
</TABLE>
S-19
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
Available-for-sale Securities
The fair values of fixed maturities are based upon quoted market
prices. The fair value of short-term investments approximates amortized
cost.
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2)
the fair value of installment revenue which is derived by calculating
the present value of the estimated future cash inflow to CapMAC of
policies in force having installment premiums, net of amounts payable
to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
The amount calculated is assumed to be equivalent to the consideration
that would be paid by CapMAC under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a
third party under reinsurance and other agreements. Ceding commission
represents the expected amount that would be paid to CapMAC to
compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management
makes assumptions regarding prepayments for amortizing asset-backed
securities which are consistent with relevant historical experience.
For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of
future installment revenue actually realized by the Company could be
reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations
or lower than anticipated utilization of insured structured programs,
such as commercial paper conduits. Although increases in future
installment revenue earnings due to renewals of existing insurance
contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there
can be no assurance that future circumstances might not cause a
material net reduction in the future installment revenue.
14) Capitalization
In 1995, $59.0 million of the proceeds received by Holdings from the
sale of shares in connection with an initial public offering and
private placements were contributed to CapMAC.
S-20
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
S-21
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31,
(Unaudited) 1997 December 31,1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
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>
F-22
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
Revenues:
<S> <C> <C>
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>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31, 1997
Common stock:
Balance at beginning of period $ 15,000
- ---------------------------------------------------------------------------
Balance at end of period 15,000
- ---------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 208,475
- ---------------------------------------------------------------------------
Balance at end of period 208,475
Unrealized (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
===========================================================================
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
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>
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>
[BACK COVER, LEFT COLUMN]
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the Prospectus in connection with the offer contained
herein, and, if given or made, such information or representations must not be
relied upon as having been authorized by the Depositor, the Servicer or the
Underwriters. This Prospectus Supplement and the Prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. The delivery of this Prospectus
Supplement and the Prospectus at any time does not imply that the information
herein or therein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Prospectus Supplement
Reports to Certificateholders............................................ S-2
Summary of Terms......................................................... S-3
Risk Factors ............................................................ S-11
Formation of the Trust ................................................. S-12
The Receivables Pool..................................................... S-13
Yield and Prepayment Considerations...................................... S-17
The Depositor and UAC .................................................. S-18
The Surety Bond Issuer................................................... S-18
The Offered Certificates ............................................... S-19
ERISA Considerations..................................................... S-29
Underwriting............................................................. S-30
Legal Opinions........................................................... S-30
Experts.................................................................. S-30
Index of Principal Terms ................................................ S-31
Financial Statements of the
Surety Bond Issuer.................................................... F-1
Prospectus
Available Information ................................................ 2
Incorporation of Certain Documents
by Reference.......................................................... 2
Summary of Terms......................................................... 3
Risk Factors............................................................. 10
The Trusts............................................................... 13
The Receivables Pools.................................................... 14
Weighted Average Life of the Certificates................................ 16
Pool Factors and Other
Certificate Information............................................... 17
Use of Proceeds.......................................................... 17
Union Acceptance Corporation and Affiliates............ .... .... ... . 18
Description of the Certificates.......................................... 18
Description of the Transfer
and Servicing Agreements.............................................. 22
Certain Legal Aspects of the Receivables................................. 29
Certain Federal Income Tax Consequences.................................. 33
ERISA Considerations..................................................... 42
Plan of Distribution..................................................... 44
Legal Matters............................................................ 44
Index of Principal Terms................................................. 45
<PAGE>
[BACK COVER, RIGHT COLUMN]
$295,758,115.97
UACSC 1997-B Auto Trust
$171,750,000.00
6.37% Class A-1 Automobile
Receivable Backed Certificates
$105,500,000.00
6.70% Class A-2 Automobile
Receivable Backed Certificates
$18,508,115.97
6.79% Class A-3 Automobile
Receivable Backed Certificates
Class I Interest Only Automobile
Receivable Backed Certificates
Union Acceptance Corporation
Servicer
UAC Securitization Corporation
Depositor
[UACSC LOGO]
Underwriters of the Class A Certificates
Salomon Brothers Inc
Bear, Stearns & Co. Inc.
Underwriter of the Class I Certificates
Salomon Brothers Inc
Prospectus Supplement
Dated June 5, 1997
