<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1996
REGISTRATION NO. 333-16601
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ONYX ACCEPTANCE GRANTOR TRUST 1996-4
(ISSUER WITH RESPECT TO CERTIFICATES)
------------------------
ONYX ACCEPTANCE FINANCIAL CORPORATION
(ORIGINATOR OF THE TRUST DESCRIBED HEREIN)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 9999 33-063978
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
------------------------
8001 IRVINE CENTER DRIVE
IRVINE, CA 92718
(714) 753-1191
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
REGAN E. KELLY, ESQ.
EXECUTIVE VICE PRESIDENT
8001 IRVINE CENTER DRIVE, 5TH FLOOR
IRVINE, CA 92718
(714) 753-1191
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROGER M. COHEN, ESQ. SUSAN M. CURTIS, ESQ.
BROBECK, PHLEGER & HARRISON LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM
4675 MACARTHUR COURT, SUITE 1000 919 THIRD AVENUE
NEWPORT BEACH, CA 92660-1846 NEW YORK, NEW YORK 10022
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
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% Auto Loan Pass-Through
Certificates, Series 1996-4..... $100,000,000 100% $100,000,000 $30,303.03(1)
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</TABLE>
(1) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION,
PRELIMINARY PROSPECTUS DATED DECEMBER 13, 1996
PROSPECTUS
$100,000,000
[LOGO] ONYX ACCEPTANCE GRANTOR TRUST 1996-4
% AUTO LOAN PASS-THROUGH CERTIFICATES, SERIES 1996-4
ONYX ACCEPTANCE FINANCIAL CORPORATION,
Seller
ONYX ACCEPTANCE CORPORATION,
Servicer
------------------------
The % Auto Loan Pass-Through Certificates (the "Certificates") will
represent undivided fractional interests in the Onyx Acceptance Grantor Trust
1996-4 (the "Trust") to be formed by Onyx Acceptance Financial Corporation (the
"Seller"), a wholly-owned, limited purpose finance subsidiary of Onyx Acceptance
Corporation ("Onyx"). The Trust property will include a pool of fixed rate Rule
of 78's and Simple Interest Method motor vehicle retail installment sales
contracts (the "Initial Contracts") secured by new and used automobiles and
light-duty trucks (the "Initial Financed Vehicles"), certain monies due under
the Initial Contracts on or after December 1, 1996 (the "Cut-Off Date"),
security interests in the Initial Financed Vehicles, the benefits of an
irrevocable principal/interest surety bond (the "Surety Bond") issued by Capital
Markets Assurance Corporation (the "Insurer"), monies on deposit in a trust
account (the "Pre-Funding Account") to be established with the trustee of the
Trust (the "Trustee") and certain other property, all as more fully described
herein. The initial aggregate principal balance of the Certificates will be
$100,000,000 (the "Original Certificate Balance"). The Original Certificate
Balance will consist of the Aggregate Scheduled Balance (as defined herein) of
the Initial Contracts as of the Cut-Off Date, which will be $75,932,971, and the
amount on deposit in the Pre-Funding Account, which will be $24,067,029 (the
"Pre-Funded Amount"). From time to time on or before March , 1997, the
Pre-Funded Amount will be used for purchase by the Trust of additional Rule of
78's and Simple Interest Method contracts (the "Subsequent Contracts" and
together with the Initial Contracts, the "Contracts") secured by new and used
automobiles and light duty trucks (the "Subsequent Financed Vehicles" and,
together with the Initial Financed Vehicles, the "Financed Vehicles"). Onyx will
act as servicer of the Contracts (the "Servicer").
Interest on the Certificates at the Pass-Through Rate of % per annum
(each, an "Interest Distribution"), will be distributed to the
Certificateholders on the 15th day of each month (or, if the 15th day is not a
Business Day, the following Business Day) (each, a "Distribution Date")
commencing January 15, 1997 and ending on June 15, 2003 (the "Final Distribution
Date"). Payments of principal, as well as the principal balance of liquidated
contracts and contracts repurchased by the Seller and purchased by the Servicer
(the "Principal Distribution"), will be distributed to Certificateholders on
each Distribution Date as described herein. In addition, the Principal
Distribution on the Distribution Date immediately following the end of the
Funding Period, which shall occur on or before March , 1997, will include all
amounts remaining on deposit in the Pre-Funding Account.
It is a condition of issuance that the Certificates be rated in the highest
category by two nationally recognized rating agencies based primarily on the
issuance of the Surety Bond by the Insurer. Under the Surety Bond, the Insurer
has unconditionally and irrevocably guaranteed payment of the Interest
Distribution and the Principal Distribution on each Distribution Date, including
the Final Distribution Date. See "The Certificates and the Agreement -- The
Surety Bond."
The Certificates will initially be represented by certificates registered in
the name of Cede & Co. as the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of DTC and participating members thereof. Definitive
Certificates will be available only under the limited circumstances described
herein.
There is currently no secondary market for the Certificates, and there will
not be any application to list the Certificates on an exchange. The Underwriter
expects, but is not obligated, to make a market in the Certificates. There is no
assurance that any such market will develop or if it does develop, that it will
provide Certificateholders with liquidity of investment or will continue for the
life of the Certificates.
------------------------
SEE "RISK FACTORS" AT PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES OFFERED
HEREBY.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND ARE NOT INSURED OR
GUARANTEED BY THE SELLER, ONYX OR ANY OF THEIR RESPECTIVE AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1) DISCOUNT SELLER(1)(2)
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Per Certificate...................... % % %
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Total................................ $ $ $
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</TABLE>
(1) Plus accrued interest, if any, calculated from December , 1996.
(2) Before deducting expenses payable by the Seller estimated to be $325,000.
------------------------
The Certificates are offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and
subject to various prior conditions, including its right to reject orders in
whole or in part. It is expected that the Certificates will be delivered in
book-entry form, on or about December , 1996, through the facilities of DTC.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is December , 1996.
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed a Registration Statement
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates offered pursuant
to this Prospectus. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement and the exhibits thereto. For further information, reference is made
to the Registration Statement and amendments thereof and to the exhibits
thereto, which are available for inspection without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission at 7 World Trade Center, New York, New York
10048 and at the Northwestern Atrium Building, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511, and copies of which may be obtained from the
Commission at prescribed rates. The Commission also maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Servicer, and the address is http://www.sec.gov. The Servicer, on behalf of
the Trust, will also file or cause to be filed with the Commission such periodic
reports as are required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations of the Commission thereunder,
and such reports can be obtained as described above. Such reports will include
Current Reports on Form 8-K filed after each Distribution Date, and an Annual
Report on Form 10-K. Such reports will contain certain financial information
regarding the Trust, including the Distribution Date Statement which will be
furnished monthly to Certificateholders as described under "Reports to
Certificateholders" below. Reports on Form 8-K and Form 10-K will not be filed
for any period which ends after December 31, 1996, however, the
Certificateholders will continue to receive the Distribution Date Statement
monthly, as described below.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued (which will occur under
the limited circumstances described herein), the unaudited monthly Distribution
Date Statements and unaudited annual reports concerning the Trust which are
described herein under "Additional Provisions of the Agreement -- Statements to
Certificateholders" and are prepared by the Servicer, will be sent by the
Trustee only to Cede & Co. as the nominee of DTC and the registered holder of
the Certificates. Such reports will not constitute financial statements prepared
in accordance with generally accepted accounting principles. These reports may
be obtained by Certificate Owners by a request in writing to the Trustee. See
"The Certificates and the Agreement -- Book-Entry Registration." The Seller does
not intend to send any of its financial reports to the Certificateholders.
2
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Certain capitalized
terms used in this Summary are defined elsewhere in this Prospectus. See the
Index of Principal Definitions for the location herein of the definitions of
certain capitalized terms. An investment in the Certificates involves various
risks, and potential purchasers should carefully consider the matters discussed
under "Risk Factors" herein in considering an investment in the Certificates.
Issuer..................... Onyx Acceptance Grantor Trust 1996-4 (the "Trust"),
to be formed by Onyx Acceptance Financial
Corporation (the "Seller") pursuant to the Pooling
and Servicing Agreement, to be dated as of December
1, 1996 (the "Agreement"), among the Seller, Onyx
Acceptance Corporation (the "Servicer") and Bankers
Trust Company (the "Trustee").
Securities Offered......... % Auto Loan Pass-Through Certificates (the
"Certificates") representing fractional undivided
interests in the Trust. The Certificates will be
offered for purchase in denominations of $1,000 and
integral multiples thereof. See "The Certificates
and the Agreement -- General."
Initial Certificate
Balance.................... $100,000,000. The initial principal balance of the
Certificates is equal to the aggregate Cut-Off Date
Scheduled Balance of the Initial Contracts and the
Pre-Funded Amount. The "Cut-Off Date Scheduled
Balance" means, with respect to any Initial
Contract, the principal balance of such Initial
Contract calculated in accordance with the Rule of
78's or Simple Interest Method as of the Cut-Off
Date and with respect to any Subsequent Contract,
the principal balance of such Subsequent Contract
calculated in accordance with the Rule of 78's or
Simple Interest Method on the related Subsequent
Transfer Date. See "The Contracts."
Seller..................... Onyx Acceptance Financial Corporation, a wholly
owned subsidiary of Onyx Acceptance Corporation
("Onyx"). The Seller's principal executive offices
are located at 8001 Irvine Center Drive, 5th Floor,
Irvine, California 92718 and its telephone number
is (714) 753-1191. See "The Seller." All of the
Contracts will have been purchased by the Seller
from Onyx. Substantially all of the Contracts will
have been purchased by Onyx from new and used car
Dealers unaffiliated with Onyx or the Seller, and a
limited number of Contracts will have been
originated by Onyx itself. See "The Onyx Portfolio
of Motor Vehicle Contracts."
Servicer................... Onyx. The Servicer's principal executive offices
are located at 8001 Irvine Center Drive, 5th Floor,
Irvine California 92718 and its telephone number is
(714) 450-5500. See "The Servicer."
Trustee.................... Bankers Trust Company.
Trust Property............. The Trust's assets (the "Trust Property") will
include: (i) a pool of fixed rate motor vehicle
retail installment sales contracts (the "Initial
Contracts") of which 71.7% of the Aggregate
Scheduled Balance as of the Cut-Off Date are Rule
of 78's Contracts and 28.3% of the Aggregate
Scheduled Balance as of the Cut-Off Date are Simple
Interest Contracts, and all of which were purchased
from the Seller and secured by new and used
automobiles and light-duty trucks (the "Initial
Financed Vehicles"), (ii) certain documents
relating to the Initial Contracts, (iii) certain
monies due under the Initial Contracts on or after
December 1, 1996 (the "Cut-Off Date"), (iv)
security interests in the Initial
3
<PAGE> 5
Financed Vehicles and the rights to receive
proceeds from claims on certain insurance policies
covering the Initial Financed Vehicles or the
individual obligors under each related Initial
Contract and the right to certain proceeds under
the Blanket Insurance Policy, (v) all amounts on
deposit in the Collection Account, including all
Eligible Investments credited thereto (but
excluding any investment income from Eligible
Investments), (vi) the benefits of an irrevocable
principal/interest surety bond (the "Surety Bond")
issued by Capital Markets Assurance Corporation
(the "Insurer"), (vii) the right of the Seller to
cause Onyx to repurchase certain Contracts under
certain circumstances, (viii) all right, title and
interest of the Seller under the Yield Supplement
Agreement, dated as of December 1, 1996 between the
Seller and Onyx (the "Yield Supplement Agreement"),
(ix) funds on deposit in a trust account
established for the benefit of the
Certificateholders (the "Pre-Funding Account") and
(x) all proceeds of the foregoing. From time to
time during the Funding Period, and as frequently
as each Business Day (each such day a "Subsequent
Transfer Date"), the Trust will purchase from the
Seller with monies on deposit in the Pre-Funding
Account, additional Rule of 78's and Simple
Interest Method contracts (the "Subsequent
Contracts" and, together with the Initial
Contracts, the "Contracts") secured by new and used
automobile and light-duty trucks (the "Subsequent
Financed Vehicles" and, together with the Initial
Financed Vehicles, the "Financed Vehicles"). As of
each such Subsequent Transfer Date, the Trust
Property will include the Subsequent Contracts
delivered to the Trustee on such Subsequent
Transfer Date, certain documents relating to the
Subsequent Contracts, certain monies due under the
Subsequent Contracts after the related Subsequent
Transfer Dates, security interests in the
Subsequent Financed Vehicles and the right to
receive proceeds from claims under certain
insurance policies in respect of individual
Subsequent Financed Vehicles or the related
obligors, and all proceeds of the foregoing. See
"The Trust."
Pass-Through Rate.......... % per annum, payable monthly at one-twelfth
the annual rate and calculated on the basis of a
360-day year of twelve 30-day months.
Distribution Date.......... The 15th day of each month (or, if such day is not
a Business Day, the next succeeding Business Day)
commencing January 15, 1997 (each a "Distribution
Date"). A "Business Day" is a day other than a
Saturday, Sunday or other day on which commercial
banks located in California or New York are
authorized or obligated to be closed.
Final Distribution Date.... June 15, 2003.
Interest Distribution...... On each Distribution Date, monthly interest (the
"Interest Distribution") in an amount equal to the
product of one-twelfth of the Pass-Through Rate and
the Certificate Balance as of the end of the
immediately preceding Collection Period will be
distributed to the Certificateholders of record on
a pro rata basis as of the Business Day immediately
preceding such Distribution Date. The "Certificate
Balance" will initially equal $100,000,000 (the
"Original Certificate Balance") and as of any
Distribution Date will equal the Original
Certificate Balance, reduced by all previous
Principal Distributions, including any amounts from
the Pre-Funding Account which are distributed to
Certificateholders on the Distribution Date
immediately following the end of the Funding
Period. Interest will be paid (i) to the extent of
the portion of the Certificate
4
<PAGE> 6
Balance represented by Contracts, from collections
received on the Contracts on deposit in the
Collection Account or previously collected and
available for distribution, (ii) to the extent of
the portion of the Certificate Balance represented
by the Pre-Funded Amount from investment earnings
thereon, and from payments under the Yield
Supplement Agreement. A "Collection Period" with
respect to a Distribution Date will be the calendar
month preceding the month in which such
Distribution Date occurs; provided, that with
respect to Liquidated Contracts (as defined below)
the Collection Period will be the period from but
excluding the sixth Business Day preceding the
immediately preceding Distribution Date to and
including the sixth Business Day preceding such
Distribution Date. With respect to the first
Distribution Date the "Collection Period" for
Liquidated Contracts will be the period from and
including the Cut-Off Date to and including the
sixth Business Day preceding such first
Distribution Date. See "The Certificates and the
Agreement -- Distribution of Principal and
Interest."
Principal Distribution..... On each Distribution Date, Principal Distributions
for the related Collection Period will be passed
through to the Certificateholders. The "Principal
Distribution" on any Distribution Date is the
Aggregate Scheduled Balance Decline (as defined
below) during the related Collection Period and,
with respect to the Distribution Date immediately
following the end of the Funding Period, any
portion of the Pre-Funded Amount remaining on
deposit in the Pre-Funding Account. The Principal
Distribution on the Final Distribution Date will
include the Aggregate Scheduled Balance of all
Contracts that are outstanding at the end of the
Collection Period immediately prior to the Final
Distribution Date. The "Aggregate Scheduled Balance
Decline" for any Distribution Date is the sum of
(x) the amount by which the Aggregate Scheduled
Balance of the Contracts as of the beginning of the
related Collection Period exceeds the Aggregate
Scheduled Balance of such Contracts as of the end
of the related Collection Period (excluding any
Subsequent Contracts added during the related
Collection Period) and (y) the amount by which the
Aggregate Scheduled Balance of the Subsequent
Contracts (determined as of each related Subsequent
Transfer Date) transferred to the Trust during the
related Collection Period exceeds the Aggregate
Scheduled Balance of such Contracts as of the end
of the related Collection Period. The "Aggregate
Scheduled Balance" of the Contracts is the sum of
the Scheduled Balance of each Contract. The
"Scheduled Balance" of a Rule of 78's Contract at
any date is equal to the Cut-Off Date Scheduled
Balance of such Contract reduced by the portion of
each scheduled payment of principal and interest
due on such Contract (the "Monthly P&I") on or
prior to the date of calculation that is allocated
to principal under the Recomputed Actuarial Method.
The Scheduled Balance of a Simple Interest Contract
at any date is equal to the Cut-Off Date Scheduled
Balance of such Contract reduced by the portion of
Monthly P&I on or prior to the date of calculation
that is allocated to principal under the Simple
Interest Method. The Scheduled Balance of any
Contract that is a Liquidated Contract or that has
been purchased by the Servicer or repurchased by
the Seller will equal zero. A "Liquidated Contract"
is a Contract that (a) is the subject of a Full
Prepayment, (b) is a Defaulted Contract and with
respect to which Liquidation Proceeds constituting,
in the Servicer's reasonable judgment, the final
5
<PAGE> 7
amounts recoverable have been received, (c) is paid
in full on or after its Maturity Date or (d) has
been a Defaulted Contract for four or more
Collection Periods and as to which Liquidation
Proceeds constituting the final amounts recoverable
have not been received; provided, however, that in
any event a Contract that is delinquent in the
amount of five monthly payments at the end of a
Collection Period is a Liquidated Contract. A
"Defaulted Contract" with respect to any Collection
Period is a Contract (a) which is, at the end of
such Collection Period, delinquent in the amount of
two monthly payments or (b) with respect to which
the related Financed Vehicle has been repossessed
or repossession efforts have been commenced. See
"The Contracts" and "The Certificates and the
Agreement -- Distributions of Principal and
Interest."
The Pre-Funding Account.... The Pre-Funding Account will be maintained in the
name of the Trustee for the benefit of the
Certificateholders and is designed solely to hold
funds to be applied by the Trustee during the
Funding Period (as defined herein) to pay to the
Seller the purchase price for Subsequent Contracts.
Monies on deposit in the Pre-Funding Account will
not be available to cover losses on or otherwise
make any payments with respect to the portion of
the Certificate Balance represented by Contracts.
Interest on the portion of the Certificate Balance
represented by the Pre-Funded Amount will be
payable from earnings received by the Trustee
during the related Collection Period from
investment of the Pre-Funded Amount on deposit in
the Pre-Funding Account and from payments made
under the Yield Supplement Agreement, and will not
be payable from collections on the Contracts.
The Pre-Funding Account will be created with an
initial deposit by the Seller of $24,067,029 (the
"Pre-Funded Amount"). The "Funding Period" will be
the period from the date the Certificates are
issued (the "Closing Date") until the earliest to
occur of (i) the date on which the remaining
Pre-Funded Amount is less than $20,000, (ii) the
date on which an Event of Default occurs or (iii)
the close of business on March , 1997. During the
Funding Period, on one or more Subsequent Transfer
Dates (as defined herein), the Pre-Funded Amount
will be applied to purchase Subsequent Contracts
from the Seller. The Seller expects that the
Pre-Funded Amount will be reduced to less than
$20,000 by the scheduled end of the Funding Period,
although no assurances can be given in this regard.
Any portion of the Pre-Funded Amount remaining on
deposit in the Pre-Funding Account at the end of
the Funding Period will be payable as principal to
Certificateholders on the immediately following
Distribution Date. See "The Certificates and the
Agreement -- General" and "The Certificates and the
Agreement -- The Pre-Funding Account; Mandatory
Partial Prepayment of the Certificates."
Mandatory Partial
Prepayment................. The Certificates will be prepaid in part on the
Distribution Date immediately succeeding the date
on which the Funding Period ends in the event that
any portion of the Pre-Funded Amount remains on
deposit in the Pre-Funding Account after giving
effect to the sale to the Trust of all Subsequent
Contracts sold to the Trust during the Funding
Period, including any such acquisition and
conveyance on the date on which the Funding Period
ends (a "Mandatory Partial Prepayment"). The amount
6
<PAGE> 8
to be distributed to Certificateholders in
connection with any Mandatory Partial Prepayment
will equal the remaining Pre-Funded Amount. See
"The Certificates and the Agreement -- The
Pre-Funding Account; Mandatory Partial Prepayment
of the Certificates."
Yield Supplement........... Onyx will enter into the Yield Supplement Agreement
with the Seller, and the Seller will assign its
interest therein to the Trust. The purpose of the
Yield Supplement Agreement is to cover the
shortfall between interest distributable on the
portion of the Certificate Balance represented by
the Pre-Funded Amount and interest which will be
earned by the Trust on the Pre-Funded Amount prior
to the time it is used to purchase Subsequent
Contracts. The Yield Supplement Agreement will be
in effect from the Closing Date until April 15,
1997, which is the Distribution Date following the
end of the Funding Period. The Yield Supplement
Agreement will provide for payment of the Yield
Supplement Amount on or before five business days
prior to each Distribution Date, ending with the
Distribution Date on April 15, 1997. The "Yield
Supplement Amount," with respect to any Collection
Period is an amount equal to the difference between
(a) one month's interest on the Pre-Funded Amount
on deposit in the Pre-Funding Account as of the
first day of such Collection Period at the Pass-
Through Rate and (b) the earnings received by the
Trustee during the related Collection Period from
investment of the Pre-Funded Amount on deposit in
the Pre-Funding Account.
The obligation of Onyx to pay the Yield Supplement
Amount will be secured by funds on deposit in a
segregated trust account to be maintained for the
benefit of the Certificateholders and the Insurer
(the "Yield Supplement Reserve Account"). The
amount required to be deposited in the Yield
Supplement Reserve Account will initially be equal
to the maximum Yield Supplement Amount that may
become owing under the Yield Supplement Agreement
assuming that with respect to the Pre-Funded Amount
during the Funding Period, a certain rate of
interest (set forth in the Agreement) is earned and
no Subsequent Contracts are purchased. On each
Subsequent Closing Date, certain amounts shall be
released to Onyx from the Yield Supplement Reserve
Account with respect to Subsequent Contracts
acquired by the Trust on each Subsequent Transfer
Date since the preceding Subsequent Closing Date,
or the Closing Date, as the case may be. See "The
Certificates and the Agreement -- Yield Supplement
Agreement and Yield Supplement Reserve Account."
Servicing Fee.............. The Servicer will be responsible for managing,
administering, servicing, and making collections on
the Contracts. Compensation to the Servicer will
consist of a monthly fee (the "Servicing Fee"),
payable from the Trust to the Servicer on each
Distribution Date, in an amount equal to the
product of one-twelfth of 1.00% per annum (the
"Servicing Fee Rate") multiplied by the Pool
Balance as of the close of the preceding Collection
Period. The "Pool Balance" as of any date is the
Aggregate Scheduled Balance of the Contracts as of
such date, excluding those Contracts which, as of
such date, have become Liquidated Contracts or have
been repurchased by the Seller or purchased by the
Servicer. As additional compensation, the Servicer
will be entitled to any late fees and other
administrative fees and expenses or similar charges
collected with respect to the Contracts. The
Servicer or its designee will also receive as
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servicing compensation investment earnings on
Eligible Investments and the amount, if any, by
which the outstanding principal balance of a Rule
of 78's Contract that is subject to a Full
Prepayment exceeds the Scheduled Balance of such
Contract. See "The Certificates and the
Agreement -- Servicing Fee."
Surety Bond................ On the Closing Date, the Insurer will issue a
principal/interest surety bond (the "Surety Bond")
to the Trustee pursuant to an Insurance and
Reimbursement Agreement (the "Insurance
Agreement"), dated as of December , 1996, among
the Insurer, Onyx, the Seller and the Trustee.
Pursuant to the Surety Bond, the Insurer will
unconditionally and irrevocably guarantee payment
of the Interest Distribution and Principal
Distribution on each Distribution Date to the
Trustee for the benefit of the Certificateholders.
If on the fifth Business Day prior to any
Distribution Date (a "Servicer Report Date") the
amount on deposit and available in the Collection
Account, after giving effect to all amounts
deposited or payable from the Pre-Funding Account
and the Payahead Account and/or pursuant to the
Yield Supplement Agreement with respect to such
Distribution Date, is less than the sum of the
Servicing Fee, the Principal Distribution and
Interest Distribution for the related Distribution
Date, the Trustee, by delivering a notice to the
Insurer, shall demand payment under the Surety Bond
in an amount equal to such deficiency. The Insurer
shall pay or cause to be paid such amount to the
Trustee for credit to the Collection Account and
the Trustee shall withdraw from the Collection
Account and shall pay such amount to the
Certificateholders on the related Distribution
Date. On the Final Distribution Date, to the extent
the amount on deposit and available in the
Collection Account is less than all remaining
unpaid interest and principal on the Certificates,
the Insurer shall pay or cause to be paid an amount
equal to such shortfall. See "The Certificates and
the Agreement -- The Surety Bond."
Contracts.................. Approximately 71.7% of the Aggregate Scheduled
Balance of the Initial Contracts as of the Cut-Off
Date allocate interest and principal in accordance
with the Rule of 78's (the "Rule of 78's
Contracts"), and approximately 28.3% in accordance
with the Simple Interest Method (the "Simple
Interest Contracts"). Approximately 81.05% of the
Aggregate Scheduled Balance of the Initial
Contracts as of the Cut-Off Date was originated in
California, 9.88% in Arizona, 6.56% in Washington
and the balance in Hawaii, Nevada and Oregon. The
Aggregate Scheduled Balance of the Initial
Contracts as of the Cut-Off Date will be
approximately $75,932,971 with a weighted average
annual percentage rate of 14.82% and a weighted
average remaining term of 55.5 months.
Substantially all of the Contracts (including the
Initial Contracts and Subsequent Contracts) will
have been originated by automobile dealerships
("Dealers") and assigned to Onyx, and a limited
number of Contracts will have been originated by
Onyx itself. All the Contracts will then have been
purchased by the Seller from Onyx and by the Trust
from the Seller. The Seller is required to
repurchase certain of the Contracts under certain
circumstances if certain representations and
warranties made by the Seller are incorrect in a
manner that materially and adversely affects the
Certificateholders or the Insurer. All of the
Contracts will have been selected by Onyx from its
portfolio of motor vehicle
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installment sales contracts based upon the criteria
specified in the Agreement.
No later than the second Business Day following the
Business Day on which Onyx originates or acquires a
Motor Vehicle Contract during the Funding Period,
pursuant to the Purchase Agreement, Onyx will be
obligated to sell, and the Seller will be obligated
to purchase, those Motor Vehicle Contracts that
meet the eligibility requirements at a purchase
price equal to the aggregate principal amount
thereof. Pursuant to the Agreement and subject to
the satisfaction of certain conditions described
herein, the Seller will sell Subsequent Contracts
to the Trust on each Subsequent Transfer Date.
Payment for each such Subsequent Contract sold to
the Trust shall be made by release to the Seller
from the Pre-Funding Account of an amount equal to
the amount paid by the Seller to Onyx for such
Subsequent Contract. The aggregate principal
balance of the Subsequent Contracts to be conveyed
to the Trust during the Funding Period will not
exceed $24,067,029, the Pre-Funded Amount. On the
Business Day preceding the first Distribution Date
and on the Business Day preceding each Distribution
Date immediately following a Subsequent Transfer
Date, (each such date a "Subsequent Closing Date")
UCC financing statements with respect to all
Subsequent Contracts sold to the Trust since the
preceding Subsequent Closing Date (or the Closing
Date, in the case of the first Subsequent Closing
Date) will be filed and all legal opinions,
officers' certificates and other legal
documentation with respect to the sale of such
Subsequent Contracts to the Trust will be executed
and delivered.
All collections of Monthly P&I, all prepayments on
the Contracts collected by the Servicer and all
amounts paid under the Surety Bond will be
deposited in or credited to the Collection Account.
Partial prepayments of Monthly P&I ("Payaheads") on
Rule of 78's Contracts will be transferred on the
Servicer Report Date to the Payahead Account, to be
applied against future scheduled payments of
Monthly P&I. Partial and full prepayments on Simple
Interest Contracts will be passed through to
Certificateholders on the Distribution Date
immediately following the Collection Period in
which such prepayments are received. All payments
to the Certificateholders will be made from the
Collection Account and certain funds remaining in
the Collection Account following distributions to
Certificateholders and others will be paid to the
Insurer to be promptly distributed in accordance
with the terms of the Insurance Agreement. See "The
Contracts" and "The Certificates and the
Agreement -- Payahead Account."
Optional Termination....... The Servicer may purchase all of the Contracts on
any Distribution Date as of which the Pool Balance
(after giving effect to the Principal Distribution
on such Distribution Date) has declined to 10% or
less of the sum of the initial Pool Balance and the
aggregate principal balance (as of their respective
Subsequent Transfer Dates) of all Subsequent
Contracts conveyed to the Trust, subject to certain
provisions in the Agreement. See "The Certificates
and the Agreement -- Repurchase of Contracts."
Tax Status................. In the opinion of counsel to the Seller, the Trust
will be classified for Federal income tax purposes
as a grantor trust and not as a partnership or as
an association taxable as a corporation.
Certificateholders must report
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their respective allocable shares of income earned
on Trust assets and, subject to certain limitations
applicable to individuals, estates and trusts, may
deduct their respective allocable shares of
reasonable servicing and other fees. See "Certain
Tax Consequences."
ERISA Considerations....... The Certificates may not be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"). See "ERISA Considerations."
Rating..................... It is a condition of issuance of the Certificates
that they be rated in the highest rating category
by two nationally recognized rating agencies. This
rating will be based primarily on the issuance of
the Surety Bond by the Insurer. See "Risk
Factors -- Rating."
Registration of the
Certificates............... The Certificates will initially be represented by
certificates registered in the name of Cede & Co.
("Cede"), as the nominee of The Depository Trust
Company ("DTC"). No person acquiring an interest in
a Certificate through the facilities of DTC (a
"Certificate Owner") will be entitled to receive a
Definitive Certificate representing such person's
interest in the Trust, except in the event that
Definitive Certificates are issued in certain
limited circumstances. See "The Certificates and
the Agreement."
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RISK FACTORS
LIMITED LIQUIDITY
There is currently no secondary market for the Certificates, and there will
be no application to list the Certificates on an exchange. The Underwriter
currently intends, but is not obligated, to make a market in the Certificates.
However, there can be no assurance that the Underwriter will make such a market,
that a secondary market will develop or, if it does develop, that it will
provide Certificateholders with liquidity of investment or will continue for the
life of the Certificates.
LIMITED OPERATING HISTORY OF ONYX
All of the Initial Contracts were, and all of the Subsequent Contracts
shall be, originally purchased by Onyx from Dealers or originated by Onyx itself
in accordance with credit underwriting criteria established by Onyx. In February
1994, Onyx commenced its operations as a purchaser and servicer of motor vehicle
retail installment sales contracts. Thus, Onyx has historical performance data
for only a 35 month period with respect to the motor vehicle retail installment
sales contracts it purchases and originates. Delinquencies and loan losses may
increase from existing levels in the portfolio with the passage of time.
Onyx is still at an early stage of operations and is subject to all of the
risks inherent in the establishment of a new business enterprise and must, among
other things, continue to attract, retain and motivate qualified personnel,
support and grow its auto lending and contract servicing business, maintain its
existing relationships with automobile dealers and develop new relationships
with dealers in and beyond Onyx's present market region. Onyx experienced
operating losses from inception through December 31, 1995. Onyx's audited
operating losses for the year-ended December 31, 1994 and December 31, 1995 were
$3.5 million and $3.1 million, respectively.
CERTAIN LEGAL ASPECTS -- THE CONTRACTS
The transfer of the Contracts to the Trust is subject to the perfection
requirements of the Uniform Commercial Code, as in effect in California ("UCC").
The Seller will take or cause to be taken such action as is required to perfect
the Trust's rights in the Contracts and will warrant that the Trust has good
title free and clear of liens and encumbrances to each Initial Contract on the
date the Certificates are issued (the "Closing Date"). The Seller will covenant
to take such actions as are necessary to ensure that the Trust will have good
title free and clear of all liens and encumbrances to each Subsequent Contract
on each related Subsequent Transfer Date and will deliver all Subsequent
Contracts to the Trustee on the related Subsequent Transfer Dates. The
Subsequent Contracts delivered on each Subsequent Transfer Date will be
physically held by the Trustee. Upon the Subsequent Closing Date, UCC-1
financing statements will be filed with respect to the related Subsequent
Contracts to continue and maintain the Trust's perfection therein. The Agreement
permits the Servicer with the consent of the Insurer (such consent not to be
unreasonably withheld) to hold the Contracts on behalf of the Trustee and the
Insurer after the filing of UCC-1 financing statements relating to the
perfection of the Trust's security interest in the Contracts. Accordingly, if
Onyx or the Seller sell and deliver a Contract to another purchaser, there is a
risk that the purchaser could acquire an interest in the Contract superior to
the interest of the Trust and the Certificateholders. Onyx will agree in the
Agreement to take all necessary action to preserve and protect the Trust's
ownership interest in the Contracts. The Seller will represent that each
Contract is secured by a Financed Vehicle. After a Contract is purchased or
originated by Onyx and the appropriate application is processed by the
department of motor vehicles or similar state agency responsible for vehicle
records in the state in which the Contract was originated, the certificate of
title (or computerized title record in the case of Contracts originated in
California, for which there will be no paper certificates) to the Financed
Vehicle securing the Contract shows Onyx as the secured party holding a lien in
the Financed Vehicle. When Contracts are sold to the Seller and then to the
Trust, Onyx remains the secured party named on the related certificates of title
(or computerized title records in the case of Contracts originated in
California), and such certificates (or electronic records) are not endorsed or
otherwise marked to identify the Trustee as secured party, due to the
administrative burden and expense of applying to the department of motor
vehicles or similar state agency in each of the states of Contract origination
to identify the Trustee as secured party, and because retaining Onyx's name as
secured party enables Onyx to more
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efficiently service the Contracts. Even though the Trust is not identified as
secured party, because the Trust has a security interest in the Contracts, it is
the beneficial owner of the security interest in the related Financed Vehicles.
There exists a risk, however, in not identifying the Trust as the new secured
party on the certificate of title (or computerized title record) that, through
fraud or negligence, the security interest of the Trust could be released.
Moreover, statutory liens for repairs or unpaid taxes may have priority even
over perfected security interests in the Financed Vehicles. Notwithstanding the
failure of the Trust to have obtained a valid, first priority security interest
in a Financed Vehicle, the Insurer will remain unconditionally and irrevocably
obligated on its guarantee of the Interest Distribution and the Principal
Distribution on each Distribution Date. See "Certain Legal Aspects of the
Contracts."
CERTAIN LEGAL ASPECTS -- BANKRUPTCY CONSIDERATIONS
It is intended by Onyx and the Seller that the transfer of the Contracts by
Onyx to the Seller constitute a "true sale" of the Contracts to the Seller. If
the transfer constitutes such a "true sale," the Contracts and the proceeds
thereof would not be part of Onyx's bankruptcy estate should it become the
subject of a bankruptcy case subsequent to the transfer of the Contracts to the
Seller.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by Onyx under the United States Bankruptcy Code or similar state laws
("Insolvency Laws") will not result in consolidation of the assets and
liabilities of the Seller with those of Onyx. These steps include the creation
of the Seller as a separate, limited-purpose subsidiary pursuant to a
certificate of incorporation containing certain limitations (including
restrictions on the nature of the Seller's business and a restriction on the
Seller's ability to commence a voluntary case or proceeding under any Insolvency
Law without the prior unanimous affirmative vote of all of its directors).
However, there can be no assurance that the activities of the Seller would not
result in a court concluding that the assets and liabilities of the Seller
should be consolidated with those of Onyx in a proceeding under any Insolvency
Law. If a court were to reach such a conclusion, then delays in distributions on
the Certificates could occur or reductions in the amounts of such distributions
could result. Notwithstanding the holding by a court that the assets and
liabilities of the Seller should be consolidated with those of Onyx in a
proceeding under any Insolvency Law, the Insurer will remain unconditionally and
irrevocably obligated on the Surety Bond to guarantee payment of the Interest
Distribution and Principal Distribution on each Distribution Date. See "The
Seller."
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948, (10th Cir. 1993)
cert. denied, 114 S. Ct. 554 (1993), the United States Court of Appeals for the
10th Circuit suggested that even where a transfer of accounts from a seller to a
buyer constitutes a "true sale," the accounts would nevertheless constitute
property of the seller's estate in a bankruptcy of the seller. If Onyx or the
Seller were to become subject to a bankruptcy proceeding and a court were to
follow the Octagon Gas court's reasoning, Certificateholders might experience
delays in payment or possibly losses on their investment in the Certificates.
Counsel to the Seller has advised the Seller that the reasoning of the Octagon
Gas case appears to be inconsistent with precedent and the Uniform Commercial
Code. See "The Seller."
PREPAYMENT CONSIDERATIONS
The rate of distribution of principal on the Certificates will depend on
the rate of payment (including prepayments, liquidations and repurchases by the
Seller or purchases by Onyx under certain conditions) on the Contracts which is
not possible to predict and, as discussed under "Mandatory Partial Prepayment"
immediately below, on whether sufficient additional Motor Vehicle Contracts are
generated for purchase with the Pre-Funded Amount before the end of the Funding
Period. Any full prepayments and repurchases of the Contracts can reduce the
average life of the Contracts and the aggregate interest received by the
Certificateholders over the life of the Certificates. Prepayments on Simple
Interest Contracts will shorten the average life of such Contracts and,
therefore, of the Certificates, because they will be passed through to
Certificateholders on the Distribution Date immediately following the Collection
Period in which such prepayments are received. Partial prepayments on Rule of
78's Contracts will be treated as Payaheads and accordingly will not affect the
average life of the Contracts because such payments will be held in the name of
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Bankers Trust Company, acting on behalf of the Obligors and the
Certificateholders, as their interests may appear, until passed through in
accordance with the original schedule of payments for such Contracts. See "The
Certificates and Agreement -- Payahead Account."
Onyx began purchasing Motor Vehicle Contracts in February 1994, and thus
has records of the historical prepayment experience of its Motor Vehicle
Contract portfolio only for the past 35 months. No assurance can be given that
prepayments on the Contracts will conform to any historical experience, and no
prediction can be made as to the actual prepayment rates which will be
experienced on the Contracts. See "-- Limited Operating History of Onyx" and
"Maturity and Prepayment Assumptions." Certificateholders will bear all
reinvestment risk resulting from the rate of prepayment of the Contracts.
MANDATORY PARTIAL PREPAYMENT
The rate of distribution of principal on the Certificates will in part
depend on whether sufficient additional Motor Vehicle Contracts are generated
for purchase with the Pre-Funded Amount before the end of the Funding Period. No
assurances can be given that sufficient Subsequent Contracts will be generated
to avoid Mandatory Partial Prepayment of the Certificates. In the event Onyx
does not generate, for purchase by the Trust, sufficient Subsequent Contracts to
avoid Mandatory Partial Prepayment of the Certificates, the weighted average
life of the Certificates will be shortened by any such Mandatory Partial
Prepayment under the circumstances described under "The Certificates and the
Agreement -- The Pre-Funding Account; Mandatory Partial Prepayment of the
Certificates." Certificateholders will bear all reinvestment risk resulting from
the payment of the Pre-Funded Amount due to Onyx's inability to generate
sufficient additional Motor Vehicle Contracts during the Funding Period.
Upon the occurrence of a Mandatory Partial Prepayment, the holders of
Certificates will receive an amount equal to the portion of the Pre-Funded
Amount remaining in the Pre-Funding Account. It is anticipated that the
aggregate principal amount of Subsequent Contracts sold to the Trust during the
Funding Period will not be exactly equal to the Pre-Funded Amount and that
therefore there will be at least a nominal amount of principal prepaid to
Certificateholders.
GEOGRAPHIC CONCENTRATION
Economic conditions in the states where the obligors under the Contracts
(each, an "Obligor") reside may affect the delinquency, loan loss and
repossession experience of the Trust with respect to the Contracts.
Approximately 81.0% of the Aggregate Scheduled Balance of the Initial Contracts
as of the Cut-Off Date was originated in California, 9.9% in Arizona, 6.6% in
Washington and 2.5% in Hawaii, Nevada and Oregon combined. Accordingly, adverse
economic conditions or other factors particularly affecting California, Arizona
or Washington could adversely affect the delinquency, loan loss or repossession
experience of the Trust with respect to the Contracts.
LIMITED ASSETS
The Trust does not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Contracts and amounts on
deposit in the Pre-Funding Account and the right to receive payments under the
Surety Bond. The Certificates represent interests solely in the Trust and will
not be insured or guaranteed by the Seller, the Servicer, the Trustee or any
other person or entity except the Insurer. Consequently, holders of the
Certificates will only be able to look to payments on the Contracts and the
Surety Bond for payment.
RATING
It is a condition of issuance of the Certificates that they be rated in the
highest rating category by two nationally recognized rating agencies. A security
rating is not a recommendation to buy, sell or hold securities and may be
revised or withdrawn at any time by the assigning rating agency. There can be no
assurance that a rating will not be lowered or withdrawn if, in the sole
judgment of a rating agency, circumstances in the future so warrant, including a
downgrading of the Insurer. The Seller cannot predict with certainty what effect
any revision or withdrawal of a rating may have on the liquidity or market value
of the Certificates. Such ratings of
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the Certificates address the likelihood of the timely payment of each scheduled
Interest Distribution and Principal Distribution, which are guaranteed by the
Insurer pursuant to the Surety Bond. Therefore, the ratings are primarily
dependent on the rating of the Insurer, and a change in the Insurer's rating may
affect the ratings of the Certificates. See "Description of the Insurer" for a
description of the Insurer's rating.
BOOK-ENTRY REGISTRATION
The Certificates initially will be registered in the name of Cede, the
nominee for DTC, and will not be registered in the names of the Certificate
Owners or their nominees. Because of this, unless and until Definitive
Certificates are issued, Certificate Owners will not be recognized by the
Trustee as Certificateholders, as that term is used in the Agreement. Hence,
until such time, Certificate Owners will only be able to receive payments from,
and exercise the rights of Certificateholders indirectly through, DTC and its
participating organizations, and, unless a Certificate Owner requests a copy of
any such report from the Trustee, will receive reports and other information
provided for only if, when and to the extent provided to Certificate Owners by
DTC and its participating organizations. In addition, the ability of Certificate
Owners to pledge Certificates to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such Certificates, may
be limited due to the lack of physical certificates for such Certificates. See
"Description of the Certificates and the Agreement -- Book Entry Registration"
and "-- Definitive Certificates."
THE TRUST
Pursuant to the Agreement, the Seller will establish the Onyx Acceptance
Grantor Trust 1996-4 (the "Trust") by selling and assigning the following
property to Bankers Trust Company in its capacity as trustee of the Trust (the
"Trustee") in exchange for the Certificates executed and authenticated by the
Trustee: (i) the Initial Contracts purchased from the Seller and, in the case of
Subsequent Contracts, Contracts purchased on or before March , 1997 and
secured by Financed Vehicles, (ii) certain documents relating to the Contracts,
(iii) certain monies due under the Contracts on or after the Initial Cut-Off
Date or Subsequent Transfer Date, as applicable, (iv) security interests in the
Financed Vehicles and the rights to receive proceeds from claims on certain
insurance policies covering the Financed Vehicles or the Obligors and the right
to certain proceeds under the Blanket Insurance Policy, (v) all amounts on
deposit in the Collection Account, including all Eligible Investments credited
thereto (but excluding any income on Eligible Investments, which will be paid to
the Servicer), (vi) the right of the Seller under the Purchase Agreement to
cause Onyx to repurchase certain Contracts under certain circumstances, (vii)
all right, title and interest of the Seller under the Yield Supplement
Agreement, (viii) funds on deposit in the Pre-Funding Account, and (ix) all
proceeds of the foregoing. The Trust Property will also include the benefits of
the Surety Bond of the Insurer, proceeds of which will be available to the
Trustee in the event collections from Obligors are insufficient to pay the
Interest Distributions and Principal Distributions to Certificateholders and
unpaid principal and interest on the Certificates on the Final Scheduled
Distribution Date. Each Certificate will represent a fractional undivided
interest in the Trust.
The Pool Balance as of the Cut-Off Date will equal the Aggregate Scheduled
Balance of the Initial Contracts as of such date. The Pool Balance will be
increased during the Funding Period by the aggregate principal amount of
Subsequent Contracts conveyed to the Trust on each Subsequent Transfer Date
during the Funding Period. Any such additions of Subsequent Contracts will be
conditioned on the compliance with the procedures described in the Agreement.
The Seller will confirm on each such Subsequent Transfer Date that the
representations and warranties set forth in the Agreement with respect to such
Subsequent Contracts are true and correct. The Seller expects that substantially
all of the Pre-Funded Amount will be applied to purchase Subsequent Contracts by
the scheduled end of the Funding Period; however, there can be no assurance that
a sufficient amount of Motor Vehicle Contracts will be available for such
purpose. If the Pre-Funded Amount has not been reduced to zero by the end of the
Funding Period, the remaining portion thereof will be distributed to
Certificateholders as a prepayment of principal as described under "The
Certificates and the Agreement -- The Pre-Funding Account; Mandatory Partial
Prepayment of the Certificates."
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The Trust will be formed for this transaction pursuant to the Agreement
and, prior to formation, will have had no assets or obligations. After
formation, the Trust will not engage in any activity other than acquiring and
holding the Contracts, issuing the Certificates, distributing payments thereon
and as otherwise described herein and as provided in the Agreement. The Trust
will not acquire any Motor Vehicle Contracts or assets other than the Trust
Property and will not have any need for additional capital resources. As the
Trust does not have any operating history and will not engage in any significant
activity other than issuing the Certificates and making distributions thereon,
no historical or pro forma financial statements or ratio of earnings to fixed
charges with respect to the Trust have been included.
THE ONYX PORTFOLIO OF MOTOR VEHICLE CONTRACTS
PURCHASE AND ORIGINATION OF MOTOR VEHICLE CONTRACTS
Onyx's portfolio of retail installment sales contracts and installment loan
agreements are secured by new and used automobile and light-duty trucks ("Motor
Vehicle Contracts"). The Initial Contracts were, and Subsequent Contracts will
be, originated by Dealers and purchased by Onyx, except for a limited number of
Initial Contracts and Subsequent Contracts which will be originated by Onyx
itself. All of the Initial Contracts were, and Subsequent Contracts will be,
subsequently sold to the Seller and then to the Trust. Onyx currently has
agreements with 1,373 Dealers, of which 86% are franchised new car dealerships
and 14% are independent used car dealerships. The Dealers are located in
metropolitan areas in the states in which the Contracts are or will be
originated, which are California, Arizona, Washington, Oregon, Hawaii and
Nevada. Each Dealer from which Onyx purchases Contracts has entered into an
agreement with Onyx whereby the Dealer represents that it will comply with
federal and state laws regarding motor vehicle financing, that the Dealer will
obtain the requisite financial information required of the Obligor in order to
extend credit, and that the Dealer will truthfully disclose to Onyx such
financial information, the identity of the Obligor and other information in
connection with the loan transaction. The Dealers with whom Onyx has agreements
and Dealers with whom Onyx would like to have agreements are regularly contacted
by Onyx account managers by telephone and in person in an effort to obtain a
continued supply of Motor Vehicle Contracts for Onyx to purchase. Before
purchasing Contracts from independent used car Dealers, Onyx completes a credit
review of the Dealer's financial condition (including a review of financial
information provided by the Dealer and a Dun & Bradstreet report on the Dealer)
and a review of the underwriting criteria used by the Dealer.
Approximately 81.0% of the Aggregate Scheduled Balance of the Initial
Contracts as of the Cut-Off Date were originated in California, 9.9% in Arizona,
6.6% in Washington and the balance in Oregon, Hawaii and Nevada. See "Risk
Factors -- Geographic Concentration." The payment obligations of the Obligor
under each Motor Vehicle Contract are secured by the vehicle purchased with the
loan proceeds provided under that Motor Vehicle Contract (the "Financed
Vehicle").
Onyx services all of the Motor Vehicle Contracts and will continue to serve
as the primary servicer after the Motor Vehicle Contracts are sold by the Seller
to the Trust. The servicing functions performed by Onyx include customer
service, document filekeeping, computerized account recordkeeping, vehicle title
processing and collections.
UNDERWRITING OF MOTOR VEHICLE CONTRACTS
Onyx underwrites the Motor Vehicle Contracts through its eight regional
contract purchasing offices ("Auto Finance Centers"), six of which are in
California and one in each of Arizona and Washington. Contracts purchased from
Hawaii, Oregon and Nevada are currently underwritten in either the California or
Washington Auto Finance Centers. Each Motor Vehicle Contract is fully amortizing
and provides for level payments over its term with the portion of principal and
interest of each level payment determined either on the basis of the Rule of
78's or the Simple Interest Method. See "The Contracts."
To evaluate the potential purchase of a Motor Vehicle Contract, Onyx
reviews the application package received from the Dealer originating the Motor
Vehicle Contract, or in the case of Contracts originated by Onyx the application
package received from the Obligor, that sets forth the Obligor's income,
liabilities, credit
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and employment history, and other personal information, as well as a description
of the Financed Vehicle that secures the Motor Vehicle Contract. The credit
applications do not consist of forms provided by Onyx. However, at the time a
Dealer underwrites a Motor Vehicle Contract, Onyx reviews the related
application for completeness and for compliance with Onyx's underwriting
guidelines and applicable federal and state consumer statutes and regulations.
To evaluate credit applications, Onyx reviews information in the application and
from credit bureau reports obtained by Onyx.
Each proposed Motor Vehicle Contract is evaluated using uniform
underwriting standards developed by Onyx. These underwriting standards are
intended to assess the Obligor's ability to repay all amounts due under the
Motor Vehicle Contract and the adequacy of the Financed Vehicle as collateral,
based upon a review of the information contained in the Motor Vehicle Contract
application. Among the criteria considered by an Onyx credit manager in
evaluating the individual applications are (i) stability of the Obligor with
specific regard to the Obligor's occupation, length of employment and length of
residency, (ii) the Obligor's payment history based on information known
directly by Onyx or as provided by various credit reporting agencies with
respect to present and past debt, (iii) a debt service-to-gross monthly income
ratio test, and (iv) the principal amount of the Motor Vehicle Contract taking
into account the age, type and market value of the Financed Vehicle. The general
policy of Onyx has been not to allow an Obligor's debt service-to-gross monthly
income ratio to exceed 45%.
After review of an application, an Onyx credit manager, via an electronic
system utilized by Onyx, communicates an appropriate decision to the Dealer, or
by telephone or otherwise to the Obligor in the case of Motor Vehicle Contracts
originated by Onyx, specifying approval (subject to the receipt of the required
documentation), denial or a counter-offer on the proposed Motor Vehicle
Contract. If the response to the Dealer or Obligor requires stipulations to the
approval, (including an additional downpayment, reduction in the term of the
financing, or the addition of a co-signer to the Motor Vehicle Contract), these
are communicated concurrently to the Dealer or Obligor, and become a condition
of the approval. Subsequent to approval, the Dealer will (if Onyx is the chosen
source of financing) forward the necessary documentation to Onyx, which consists
of the following: (i) a signed application; (ii) the only original and a copy of
the executed contract; (iii) an agreement by the Obligor to provide insurance;
(iv) a report of sale or guarantee of title; (v) an application for
registration; (vi) a co-signer notification (if applicable); (vii) a copy of any
supplemental warranty purchased with respect to the Financed Vehicle; (viii)
vehicle valuation documentation acceptable to Onyx; and (ix) any other required
documentation.
Once the appropriate documentation is in hand for funding, the file
relating to the Motor Vehicle Contract is ready to forward to an Onyx contract
processor for a pre-funding audit. The contract processor then audits such
documents for completeness and consistency with the application, providing final
approval for purchase of the Motor Vehicle Contract once these requirements have
been satisfied (subject to the receipt of the required documentation).
The amount advanced by Onyx under any Motor Vehicle Contract does not
exceed (i) for a new Financed Vehicle, the manufacturer's suggested retail price
plus taxes, title and license fees, extended warranty (if any) and credit
insurance, or (ii) for a used Financed Vehicle, the value assigned by a
nationally recognized used car value guide, plus taxes, title and license fees
and extended warranty (if any). However, the actual amount advanced for a Motor
Vehicle Contract is often less than the maximum permissible amount depending on
a number of factors, including the length of the Motor Vehicle Contract term and
the model and year of the Financed Vehicle. These adjustments are made to assure
that the Financed Vehicle constitutes adequate collateral to secure the Motor
Vehicle Contract. Under no circumstances is the amount advanced for a Motor
Vehicle Contract greater than the amount payable by the Obligor with respect to
the purchase of the Financed Vehicle.
Periodically, Onyx makes a detailed analysis of its portfolio of Motor
Vehicle Contracts to evaluate the effectiveness of Onyx's credit guidelines. If
external economic factors, credit delinquencies or credit losses change, Onyx
adjusts its credit guidelines to maintain the asset quality deemed acceptable by
Onyx's management. Onyx reviews, on a daily basis, the quality of its Motor
Vehicle Contracts by conducting audits
16
<PAGE> 18
of certain randomly selected Motor Vehicle Contracts to ensure compliance with
established policies and procedures.
INSURANCE
Each related Motor Vehicle Contract requires the Obligor to obtain
comprehensive and collision insurance with respect to the related Financed
Vehicle with Onyx as a loss payee. Onyx does not presently track whether
Obligors maintain the required insurance. To protect against Obligors who do not
obtain any insurance, or who do not obtain the right type or level of insurance,
Onyx has purchased limited comprehensive and collision insurance, referred to as
the "Blanket Insurance Policy" coverage. The Blanket Insurance Policy provides
Onyx with protection on each uninsured or underinsured Financed Vehicle against
total loss, damage or theft. Onyx has obtained its Blanket Insurance Policy from
United Financial Casualty Company, which is rated "A" by A.M. Best & Co. For the
Blanket Insurance Policy, Onyx is assessed a premium based on each Motor Vehicle
Contract acquired. The insurer under the Blanket Insurance Policy is required to
settle any claim complying with the policy conditions within 60 days from the
date reported. Onyx has paid the premium for the Blanket Insurance Policy
allocable to each Initial Contract sold to the Trust prior to such Initial
Contract's sale to the Trust and will pay the premium at each Subsequent Closing
Date for the Subsequent Contracts. The proceeds under the Blanket Insurance
Policy, to the extent they relate to any Contract, will constitute part of the
Trust Property.
COLLECTION PROCEDURES
Collection activities with respect to delinquent Motor Vehicle Contracts
are performed by Onyx at its eight Auto Finance Centers. Collection activities
include prompt investigation and evaluation of the causes of any delinquency. An
Obligor is considered delinquent when he or she has failed to make a scheduled
payment under the Motor Vehicle Contract within 30 days of the related due date
(each, a "Due Date").
To automate its collection procedures, Onyx uses features of the computer
system of its third party service bureau, Online Computer Systems, Inc. ("OCS")
to provide tracking and notification of delinquencies. The collection system
provides relevant Obligor information (for example, current addresses, phone
numbers and loan information) and records of all Motor Vehicle Contracts. The
system also records an Obligor's promise to pay and affords supervisors the
ability to review collection personnel activity and to modify collection
priorities with respect to Motor Vehicle Contracts. Onyx utilizes a predictive
dialing system centrally located within its Irvine headquarters to make phone
calls to Obligors whose payments are past due by more than five days but less
than 30 days. The predictive dialer is a computer-controlled telephone dialing
system which dials phone numbers of Obligors from a file of records extracted
from Onyx's database. By eliminating time wasted on attempting to reach
Obligors, the system gives a single collector, on average, the ability to speak
with and work 300 to 350 accounts per day. Once a live voice responds to the
automated dialer's call, the system automatically transfers the call to a
collector and the relevant account information to the collector's computer
screen. The system also tracks and notifies collection management of phone
numbers that the system has been unable to reach within a specified number of
days, thereby promptly identifying for management all Obligors who cannot be
reached by telephone.
Once an Obligor is 30 days or more delinquent, those accounts are assigned
to specific collectors at the Irvine Collection Center who have primary
responsibility for such delinquent account until it is resolved. To expedite
collections from late paying Obligors, Onyx uses Western Union "Quick Collect,"
which allows an Obligor to pay at numerous locations any late payments and Onyx
to print at its Irvine headquarters a check evidencing the payment. Onyx also
uses an automatic payment system that allows an Obligor to authorize Onyx to
present a draft on the Obligor's bank account directly to the Obligor's bank for
payment to Onyx.
Generally, after a scheduled payment under a Motor Vehicle Contract
continues to be past due for 45 days, Onyx will initiate repossession of the
Financed Vehicle. However, if a Motor Vehicle Contract is deemed uncollectible,
if the Financed Vehicle is deemed by collection personnel to be in danger of
being damaged, destroyed or made unavailable for repossession, or if the Obligor
voluntarily surrenders the Financed Vehicle, Onyx may repossess it without
regard to the length or existence of payment delinquency. Repossessions are
conducted by third parties who are engaged in the business of repossessing
vehicles for
17
<PAGE> 19
secured parties. Under California law, after repossession, the Obligor generally
has an additional 15 days to redeem the Financed Vehicle before the Financed
Vehicle may be resold by Onyx in an effort to recover the balance due under the
Motor Vehicle Contract.
Losses may occur in connection with delinquent Motor Vehicle Contracts and
can arise in several ways, including inability to locate the Financed Vehicle or
the Obligor, or because of a discharge of the Obligor in a bankruptcy
proceeding. The current policy of Onyx is to recognize losses at the time a
Motor Vehicle Contract is deemed uncollectible or during the month a scheduled
payment under a Motor Vehicle Contract becomes 120 days or more past due,
whichever occurs first.
Upon repossession and sale of the Financed Vehicle, any deficiency
remaining is pursued against the Obligor to the extent deemed practical by Onyx
and to the extent permitted by law. The loss recognition and collection policies
and practices of Onyx may change over time in accordance with Onyx's business
judgment. However, the Agreement requires that Onyx service the Contracts and
collect all amounts due using reasonable care and in at least the same manner as
it services and collects amounts due with respect to Motor Vehicle Contracts
serviced by it for its own account.
MODIFICATIONS AND EXTENSIONS
Onyx offers certain credit-related extensions to Obligors. Generally, these
extensions are offered only when (i) Onyx believes that the Obligor's financial
difficulty has been resolved or will no longer impair the Obligor's ability to
make future payments, (ii) the extension will result in the Obligor's payments
being brought current, (iii) the total number of credit-related extensions
granted on the Motor Vehicle Contract will not exceed three and the total
credit-related extensions granted on the Motor Vehicle Contract will not exceed
three months in the aggregate, (iv) there have been no credit-related extensions
granted on the Motor Vehicle Contract in the immediately preceding twelve
months, and (v) Onyx (or its assignee) had held the Motor Vehicle Contract for
at least six months. Any deviation from this policy requires the concurrence of
Onyx's collection manager and an Auto Finance Center manager.
DELINQUENCY AND LOAN LOSS INFORMATION
The following tables set forth information with respect to the experience
of Onyx relating to delinquencies, loan losses and recoveries for the portfolio
of Motor Vehicle Contracts owned and serviced by Onyx on a quarterly basis
commencing December 31, 1994. The tables include delinquency information
relating to those Motor Vehicle Contracts that were purchased, originated, sold
and serviced by Onyx. All of the Motor Vehicle Contracts were originally
purchased by Onyx from Dealers or originated by Onyx itself in accordance with
credit underwriting criteria established by Onyx. In February 1994, Onyx
commenced its operations as a purchaser and servicer of motor vehicle retail
installment sales contracts. Thus, Onyx has historical performance for only a
limited time period with respect to the Motor Vehicle Contracts it purchases and
originates and thus delinquencies and loan losses may increase from existing
levels in the portfolio with the passage of time. Delinquency and loan loss
experience may be influenced by a variety of economic, social and other factors.
See "Risk Factors."
The delinquency and loss levels of the Motor Vehicle Contracts at September
30, 1996 were higher than in prior periods due to the performance of Motor
Vehicle Contracts originated in prior quarters through Onyx's North Hollywood
Auto Finance Center. The North Hollywood Auto Finance Center had a higher
concentration of used car dealerships than Onyx's other Auto Finance Centers,
and this concentration of used car dealerships was principally responsible for
the deterioration in the performance of Onyx's portfolio during the second and
third quarters.
To address the performance issues of this center, following the end of the
second quarter of 1996 management reevaluated all used car dealerships from
which Onyx purchases Motor Vehicle Contracts to ensure that such dealerships
meet Onyx's underwriting criteria, and Onyx terminated its relationships with a
majority of the used car dealerships serviced by the North Hollywood Auto
Finance Center. Originations in the North Hollywood office, as a result, have
declined in value.
18
<PAGE> 20
During the third quarter of 1996 management further enhanced the credit
review process by promoting a senior credit manager to the position of Chief
Credit Officer and by increasing staffing in the credit review department. This
department continues to audit contracts within a few days after funding. The
results of the audits are communicated back to the originating office on a daily
basis.
DELINQUENCY EXPERIENCE OF ONYX CONTRACT PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, AT JUNE 30, AT SEPTEMBER 30,
1994 1995 1995 1995
---------------- ----------------- ----------------- ------------------
AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT NO.
------- ----- -------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio............ $74,581 6,893 $104,895 9,772 $140,198 13,006 $177,532 16,433
Delinquencies
30-59 days(1)(2)............. $ 15 2 $ 165 18 $ 999 65 $ 1,420 121
60-89 days(1)(2)............. 27 4 171 15 192 14 633 51
90+ days(1)(2)............... 12 1 72 7 175 11 439 35
Total delinquencies as a
percent of servicing
portfolio.................... 0.07% 0.10% 0.39% 0.40% 0.97% 0.69% 1.40% 1.21%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, AT JUNE 30, AT SEPTEMBER 30,
1995 1996 1996 1996
----------------- ----------------- ----------------- ------------------
AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT NO.
-------- ------ -------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio.............. $218,207 20,156 $266,251 24,648 $317,054 29,494 $359,104 33,879
Delinquencies
30-59 days(1)(2)............... $ 1,773 166 $ 1,262 122 $ 2,317 191 $ 2,979 270
60-89 days(1)(2)............... 603 44 566 55 1,274 104 1,554 136
90+ days(1)(2)................. 756 56 1,116 88 1,219 97 1,461 128
Total delinquencies as a percent
of servicing portfolio......... 1.44% 1.32% 1.11% 1.08% 1.52% 1.33% 1.67% 1.58%
</TABLE>
- ---------------
(1) Delinquencies include principal amounts only.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
LOAN LOSS EXPERIENCE FOR THE QUARTERS ENDED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Contracts outstanding..... 6,893 9,772 13,006 16,433 20,156 24,648 29,494 33,879
Period end outstanding.............. $ 74,581 $104,895 $140,198 $177,532 $218,207 $266,251 $317,054 $359,104
Average outstanding................. 60,211 88,776 121,892 156,122 197,320 239,601 290,848 337,513
Number of gross charge-offs......... 0 1 29 60 135 141 231 298
Gross charge-offs................... 0 $ 12 $ 58 $ 134 $ 345 $ 385 $ 1,043 $ 2,264
Net charge-offs(1).................. 0 $ 12 $ 56 $ 121 $ 340 $ 371 $ 937 $ 1,927
Net charge-offs as a percent of
period end outstanding............ 0 0.01% 0.04% 0.07% 0.16% 0.14% 0.30% 0.54%
Net charge-offs as a percent of
average outstanding............... 0 0.01% 0.05% 0.08% 0.17% 0.15% 0.32% 0.57%
</TABLE>
- ---------------
(1) Net charge-offs are gross charge-offs minus recoveries of Contracts
previously charged off.
19
<PAGE> 21
THE CONTRACTS
All of the Contracts will have been purchased by the Seller from Onyx.
Substantially all of the Contracts will have been purchased by Onyx from new and
used car Dealers unaffiliated with Onyx or the Seller, and a limited number of
Contracts will have been originated by Onyx itself. See "The Onyx Portfolio of
Motor Vehicle Contracts." Each of the Initial Contracts in the Trust is, and all
Subsequent Contracts in the Trust will be, fixed rate contracts where the
allocation of each payment between interest and principal is calculated using
the Rule of 78's or the Simple Interest Method. Approximately 71.7% of the
Aggregate Scheduled Balance of the Initial Contracts as of the Cut-Off Date
allocate interest and principal in accordance with the Rule of 78's (the "Rule
of 78's Contracts"), and approximately 28.3% in accordance with the Simple
Interest Method (the "Simple Interest Contracts"). Rule of 78's Contracts
provide for the payment by the Obligor of a specified total amount of payments,
payable in equal monthly installments, which total represents the principal
amount financed plus add-on interest in an amount calculated as if such Contract
were a self-amortizing, level-yield Contract bearing interest at a per annum
rate equal to the stated annual percentage rate as set forth in the Contract
("APR"). Under the Rule of 78's, the amount of each payment allocable to
interest on a Contract is determined by multiplying the total amount of add-on
interest payable over the term of the Contract by a fraction derived as
described below. The fraction used in the calculation of add-on interest earned
each month under a contract governed by the Rule of 78's has as its denominator
a number equal to the sum of a series of numbers representing the total number
of monthly payments due under the Contract. For example, with a Contract
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of a series of numbers from 1 to 12. The numerator of the fraction for a
given month is the number of payments remaining before giving effect to the
payment to which the fraction is being applied. Accordingly, in the example of a
twelve-payment Contract, the fraction for the first payment is 12/78, for the
second payment 11/78, for the third payment 10/78, and so on through the final
payment, for which the fraction is 1/78. The applicable fraction is then
multiplied by the total add-on interest payment over the entire term of the
Contract, and the resulting amount is the amount of add-on interest earned that
month. The difference between the amount of the monthly payment by the Obligor
and the amount of earned add-on interest calculated for the month is applied to
principal reduction.
For Simple Interest Contracts, interest due is calculated on the Due Date
based on the actual principal balance of the Contract on that date (the "Simple
Interest Method"). For such Contracts, interest accrued as of the Due Date is
paid first, and then the remaining payment is applied to the unpaid principal
balance. Accordingly, if an Obligor pays the fixed monthly installment in
advance of the Due Date, the portion of the payment allocable to interest for
the period since the preceding payment will be less than it would be if the
payment were made on the Due Date, and the portion of the payment allocable to
reduce the principal balance will be correspondingly greater. Conversely, if an
Obligor pays the fixed monthly installment after its Due Date, the portion of
the payment allocable to interest for the period since the preceding payment
will be greater than it would be if the payment were made on the Due Date, and
the portion of the payment allocable to reduce the principal balance will be
correspondingly smaller. When necessary, an adjustment is made at the maturity
of the Contract to the scheduled final payment to reflect the larger or smaller,
as the case may be, allocations of payments to the amount financed under the
Contract as a result of early or late payments, as the case may be.
The purchase price paid by the Trust for each Contract will reflect the
principal balance of such Contract as of the Cut-Off Date calculated either
under the Rule of 78's or the Simple Interest Method (the "Cut-Off Date
Scheduled Balance"). For Rule of 78's Contracts a greater portion of the early
payments under a Contract is allocated to interest than would be the case using
the actuarial method. Therefore, the Cut-Off Date Scheduled Balance of each Rule
of 78's Contract exceeds the amount that would have been its principal balance
as of the Cut-Off Date if each Contract had been amortized from origination
under the actuarial method. The Trustee and the Servicer intend to account for
interest and principal on the Rule of 78's Contracts using the actuarial method,
but based on the Cut-Off Date Scheduled Balance. The remaining payments due on a
Rule of 78's Contract are not sufficient to amortize the Cut-Off Date Scheduled
Balance of such Contract at a yield equal to its APR. Accordingly, in order to
amortize the Cut-Off Date Scheduled Balance over the remaining term of the Rule
of 78's Contract using the actuarial method of accounting, the Servicer will
recompute the effective yield of such Contract based on the remaining payments
due and the
20
<PAGE> 22
Cut-Off Date Scheduled Balance (such yield, stated as a per annum rate, the
"Recomputed Yield") and will allocate each payment of Monthly P&I between
principal and interest on each Rule of 78's Contract based on the Cut-Off Date
Scheduled Balance and the Recomputed Yield for such Contract (such method, the
"Recomputed Actuarial Method").
The Initial Contracts were, and the Subsequent Contracts will be, selected
from the Motor Vehicle Contracts in the portfolio of Onyx using the following
criteria (the "Eligibility Requirements"). No selection procedures used with
respect to the Initial Contracts were, or, with respect to the Subsequent
Contracts, shall be, adverse to the Certificateholders or the Insurer.
Approximately 23.94% of the Aggregate Scheduled Balance of the Initial
Contracts, as of the Cut-Off Date, were secured by new Financed Vehicles and
approximately 76.06% of the Aggregate Scheduled Balance of the Initial
Contracts, as of the Cut-Off Date, were secured by used Financed Vehicles. The
Seller may not substitute other Motor Vehicle Contracts for the Contracts at any
time during the term of the Agreement.
The Seller has represented that all of the Contracts included, or to be
included in the Trust satisfy the following Eligibility Requirements:
(a) Such Contracts are, or will be, secured by a new or used
automobile or light-duty truck;
(b) Such Contracts have or will have remaining maturity, as of the
Cut-Off Date or Subsequent Transfer Date, as applicable, of not more than
72 months;
(c) Such Contracts have or will have an original maturity of not more
than 72 months;
(d) Such Contracts (i) are, or will be, fully-amortizing fixed rate
contracts which provide for level scheduled monthly payments determined on
the basis of the Rule of 78's or the Simple Interest Method (except for the
last payment, which may be minimally different from the level payments) and
(ii) have, or will have, a Recomputed Yield that equals or exceeds %
(using the Recomputed Yield for the Rule of 78's Contracts);
(e) Such Contracts are, or will be, secured by Financed Vehicles that,
as of the Cut-Off Date or Subsequent Transfer Date as applicable, have not
been repossessed without reinstatement;
(f) Such Contracts have, or will have, no payment more than 30 days
past due as of the Cut-Off Date or Subsequent Transfer Date as applicable;
(g) Such Contracts have, or will have, remaining principal balances,
as of the Cut-Off Date or Subsequent Transfer Date as applicable, of at
least $500;
(h) Such Contracts were made to Obligors located in the State of
California, Arizona, Hawaii, Nevada, Washington or Oregon; and
(i) As of the Cut-Off Date or the Subsequent Transfer Date, as
applicable, the Seller has not received notice that any of the Obligors
under such Contracts has filed for bankruptcy.
21
<PAGE> 23
The composition of the Initial Contracts and distribution by APR of the
Initial Contracts as of the Cut-Off Date are as set forth in the following
tables.
COMPOSITION OF THE INITIAL CONTRACTS
<TABLE>
<S> <C>
Aggregate principal balance............................... $75,932,971
Number of Initial Contracts............................... 6,215
Average principal balance outstanding..................... $12,218
Average original amount financed.......................... $12,320
Original amount financed (range).......................... $1,458.05-75,887.69
Weighted average APR...................................... 14.82%
APR (range)............................................... 8.050-25.00%
Weighted average original term............................ 56.6 months
Original term (range)..................................... 12-72 months
Weighted average remaining term........................... 55.5 months
Remaining term (range).................................... 9-72 months
</TABLE>
DISTRIBUTION BY APRS OF THE INITIAL CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE
NUMBER OF % OF PRINCIPAL POOL
APR RANGE(1) CONTRACTS CONTRACTS BALANCE BALANCE
------------------------------------ --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
8.001-9.000......................... 277 4.46% $ 4,305,709 5.67%
9.001-10.000........................ 428 6.89% 6,306,876 8.31%
10.001-11.000....................... 425 6.84% 5,821,749 7.67%
11.001-12.000....................... 380 6.11% 5,127,464 6.75%
12.001-13.000....................... 509 8.19% 6,560,933 8.64%
13.001-14.000....................... 531 8.54% 7,028,442 9.26%
14.001-15.000....................... 573 9.22% 7,338,232 9.66%
15.001-16.000....................... 523 8.42% 6,560,438 8.64%
16.001-17.000....................... 448 7.21% 5,236,161 6.90%
17.001-18.000....................... 447 7.19% 5,149,242 6.78%
18.001-19.000....................... 277 4.46% 2,997,492 3.95%
19.001-20.000....................... 319 5.13% 3,499,184 4.61%
20.001-21.000....................... 796 12.81% 8,029,183 10.57%
21.001 and over..................... 282 4.54% 1,971,866 2.60%
----- ------ ----------- ------
Totals.................... 6,215 100.00% $75,932,971 100.00%
===== ====== =========== ======
</TABLE>
- ---------------
(1) The APRs set forth herein are the APRs of the Initial Contracts. Because the
principal balance of each Initial Contract sold to the Trust is the Cut-Off
Date Scheduled Balance, which in the case of Rule of 78's Contracts is
higher than what the principal balance of the Rule of 78's Contracts would
have been had principal and interest been allocated from the date of
origination in accordance with the actuarial method, the Recomputed Yield
for each Initial Rule of 78's Contract is less than the APR of such Initial
Contract specified herein. On a weighted average basis, the yield for all
the Contracts using the Recomputed Yield for the Initial Rule of 78's
Contracts, in the aggregate, is %. See "The Contracts."
22
<PAGE> 24
GEOGRAPHIC CONCENTRATION OF THE INITIAL CONTRACTS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
CONTRACTS BALANCE BALANCE
--------- ----------- -------------
<S> <C> <C> <C>
California................................. 5,020 $61,546,121 81.05%
Arizona.................................... 624 7,502,535 9.88%
Washington................................. 398 4,984,374 6.56%
Hawaii, Nevada and Oregon (combined)....... 173 1,899,941 2.50%
----- ----------- ------
Total............................ 6,215 $75,932,971 100.00%
===== =========== ======
</TABLE>
MATURITY AND PREPAYMENT ASSUMPTIONS
The Contracts are prepayable in full by the Obligors at any time without
penalty. Prepayments on Simple Interest Contracts will be passed through to
Certificateholders on the Distribution Date following the Collection Period in
which they are received. Partial prepayments on Rule of 78's Contracts however
will be treated as Payaheads and will not be passed through until the Collection
Period in which such payments are due or until the amount of such partial
prepayment equals the amount the Obligor would be required to pay in order to
prepay the Contract in full. See "The Certificates and the Agreement -- Payahead
Account." To the extent that any Contract is prepaid in full ("Full Prepayment")
whether by the Obligor, or as the result of a purchase by the Servicer or a
repurchase by the Seller or otherwise, the actual weighted average life of the
Contracts will be shorter than a weighted average life calculation based on the
assumptions that payments will be made on schedule and that no prepayments will
be made. Weighted average life means the average amount of time in which each
dollar of principal on a Contract is repaid. Full Prepayments may also result
from liquidations due to default, receipt of proceeds from theft, physical
damage, credit life and credit disability insurance policies, repurchases by the
Seller as a result of the failure of a Contract to meet certain criteria set
forth in the Agreement, purchases by the Servicer as a result of a breach of
certain of its covenants with respect to the Contracts made by it in the
Agreement or as a result of an exercise by the Servicer of its option to
purchase the Trust Property. See "The Certificates and the
Agreement -- Repurchases of Contracts."
In addition, the weighted average maturity of the Certificates will be
reduced to the extent that sufficient additional Motor Vehicle Contracts are not
generated for purchase by the Trust with the Pre-Funded Amount before the end of
the Funding Period, because any remaining Pre-Funded Amount will be included in
the Principal Distribution made to Certificateholders on the Distribution Date
immediately following the end of the Funding Period (or on the Distribution Date
on which the Funding Period ends if the Funding Period ends on a Distribution
Date), but in no event later than the April 15, 1997 Distribution Date.
The rate of Full Prepayments by Obligors on the Contracts may be influenced
by a variety of economic, social and other factors, including the fact that an
Obligor may not sell or transfer the Financed Vehicle securing a Contract
without the consent of the Servicer. These factors may also include
unemployment, servicing decisions, seasoning of loans, destruction of vehicles
by accident, sales of vehicles and market interest rates.
California, Washington and Arizona law requires that retail installment
sales contracts such as the Contracts permit full prepayment without penalty.
Any Full Prepayments reduce the average life of the Contracts. The Servicer will
permit the sale or other transfer of a Financed Vehicle without accelerating the
maturity of the related Contract if such Contract is assumed by a person
satisfying Onyx's then current underwriting standards. See "The Onyx Portfolio
of Motor Vehicle Contracts -- Underwriting of Motor Vehicle Contracts."
Onyx has only 35 months of operating history and began purchasing and
originating Motor Vehicle Contracts only in February 1994. Thus, the records of
the historical prepayment experience of Onyx's Motor Vehicle Contract portfolio
are only available for such period. No assurance can be given that prepayments
on the Contracts will conform to any historical experience, and no prediction
can be made as to the actual prepayment rates which will be experienced on the
Contracts. Although Onyx believes that sufficient additional Motor Vehicle
Contracts will be originated for purchase with the Pre-Funded Amount by the end
of the Funding Period, no assurances can be given in that regard.
Certificateholders will bear all reinvestment
23
<PAGE> 25
risk resulting from the rate of prepayment of the Contracts or the inability to
purchase additional Motor Vehicle Contracts with the Pre-Funded Amount.
YIELD CONSIDERATIONS
Interest due will be passed through on each Distribution Date in an amount
equal to the product of one-twelfth of the Pass-Through Rate and the Certificate
Balance as of the close of the preceding Collection Period (or as of December
, 1996 in the case of the first Distribution Date). In the event of a
principal prepayment on a Contract during a Collection Period,
Certificateholders will receive interest for the full month on the related
Distribution Date. See "The Certificates and the Agreement -- Distributions of
Principal and Interest."
Although the Contracts have different APRs, the yield on each individual
Contract equals or exceeds % (using the Recomputed Yield for Rule of 78's
Contracts.). Therefore, disproportionate rates of prepayments between Contracts
with higher and lower APRs will not affect the yield to Certificateholders.
POOL FACTOR
The "Pool Factor" will be a six-digit decimal which the Servicer will
compute each month indicating the Pool/Pre-Funding Balance at the end of the
month as a fraction of the original Pool/Pre-Funding Balance as of the Cut-Off
Date. The "Pool/Pre-Funding Balance" as of any date is the sum of (i) the
Aggregate Scheduled Balance of the Contracts as of such date, excluding those
Contracts which, as of such date, have become Liquidated Contracts or have been
purchased by the Servicer or repurchased by the Seller and (ii) the amount on
deposit in the Pre-Funding Account (excluding any investment earnings). The Pool
Factor will be 1.000000 as of the Cut-Off Date; thereafter, the Pool Factor will
decline to reflect reductions in the Pool/Pre-Funding Balance. The amount of a
Certificateholder's pro rata share of the Pool/Pre-Funding Balance for a given
month can be determined by multiplying the original denomination of such
holder's Certificate by the Pool Factor for that month.
Pursuant to the Agreement, Certificateholders will receive monthly reports
from the Trustee concerning payments received on the Contracts, the
Pool/Pre-Funding Balance, the Pool Factor, the amount remaining on deposit in
the Pre-Funding Account and various other items of information.
Certificateholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "The Certificates and the Agreement."
USE OF PROCEEDS
The net proceeds to be received by the Seller from the sale of Certificates
will be used to repay loans incurred pursuant to its short-term funding program
with respect to the Initial Contracts or to fund the Pre-Funded Amount to permit
the purchase of additional Motor Vehicle Contracts during the Funding Period.
THE SELLER
The Seller is a wholly-owned, limited-purpose finance subsidiary of Onyx
which was incorporated under the laws of the State of Delaware on July 28, 1994
and has a limited operating history. The principal office of the Seller is
located at 8001 Irvine Center Drive, 5th Floor, Irvine, CA 92718. The telephone
number of such office is (714) 753-1191.
The Seller was organized principally for the purpose of purchasing retail
installment sales contracts from Onyx in connection with its activities as a
finance subsidiary of Onyx. The Seller was organized for limited purposes, and
its certificate of incorporation limits its activities to purchasing Contracts
from Onyx and transferring such Contracts to third parties and any activities
incidental to and necessary or convenient for the accomplishment of such
purposes.
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The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by Onyx under any Insolvency Law will not result in consolidation of
the assets and liabilities of the Seller with those of Onyx. These steps include
the creation of the Seller as a separate, limited-purpose subsidiary pursuant to
a certificate of incorporation containing certain limitations (including
restrictions on the nature of the Seller's business and a restriction on the
Seller's ability to commence a voluntary case or proceeding under any Insolvency
Law without the unanimous affirmative vote of all of its directors). However,
there can be no assurance that the activities of the Seller would not result in
a court concluding that the assets and liabilities of the Seller should be
consolidated with those of Onyx in a proceeding under any Insolvency Law.
The Seller has received the advice of counsel to the effect that, subject
to certain facts, assumptions and qualifications, it would not be a proper
exercise by a court of its equitable discretion to disregard the separate
corporate existence of the Seller and to require the consolidation of the assets
and liabilities of the Seller with the assets and liabilities of Onyx in the
event of the application of the federal bankruptcy laws to Onyx. Among other
things, it is assumed by counsel that the Seller will follow certain procedures
in the conduct of its affairs, including maintaining records and books of
account separate from those of Onyx, refraining from commingling its assets with
those of Onyx and refraining from holding itself out as having agreed to pay, or
being liable for, the debts of Onyx. The Seller intends to follow and has
represented to such counsel that it will follow these and other procedures
related to maintaining its separate corporate identity. However, there can be no
assurance that a court would not conclude that the assets and liabilities of the
Seller should be consolidated with those of Onyx. If a court were to reach such
a conclusion, or a filing were made under any Insolvency Law by or against the
Seller, or if an attempt were made to litigate any of the foregoing issues,
delays in distributions on the Certificates could occur or reductions in the
amounts of such distributions could result.
The Contracts have been and will be sold by Onyx to the Seller from time to
time pursuant to a Sale and Servicing Agreement dated as of September 8, 1994
(the "Purchase Agreement"). The Initial Contracts were sold and the Subsequent
Contracts will be sold by the Seller to the Trust pursuant to the Agreement.
Onyx and the Seller intend that the transfer of the Contracts by Onyx to the
Seller under the Purchase Agreement constitute a "true sale" of the Contracts to
the Seller. If the transfer constitutes such a "true sale," the Contracts and
the proceeds thereof would not be part of the bankruptcy estate of Onyx under
Section 541 of the Bankruptcy Code should Onyx become the subject of a
bankruptcy case subsequent to the transfer of the Contracts to the Seller.
The Seller has received the advice of counsel to the effect that, subject
to certain facts, assumptions and qualifications, in the event Onyx were to
become the subject of a voluntary or involuntary case under the Bankruptcy Code
subsequent to the transfer of the Contracts to the Seller, the transfer of the
Contracts by Onyx to the Seller pursuant to the Purchase Agreement would be
characterized as a "true sale" of the Contracts from Onyx to the Seller and the
Contracts and the proceeds thereof would not form part of Onyx's bankruptcy
estate pursuant to Section 541 of the Bankruptcy Code.
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir. 1993) cert.
denied, 114 S. Ct. 554 (1993), the United States Court of Appeals for the 10th
Circuit suggested that even where a transfer of accounts from a seller to a
buyer constitutes a "true sale," the accounts would nevertheless constitute
property of the seller's bankruptcy estate in a bankruptcy of the seller. If
Onyx or the Seller were to become subject to a bankruptcy proceeding and a court
were to follow the Octagon Gas court's reasoning, Certificateholders might
experience delays in payment or possibly losses on their investment in the
Certificates. As part of the advice of counsel described above, counsel has
advised the Seller that the reasoning of the Octagon Gas case appears to be
inconsistent with precedent and the Uniform Commercial Code. As the Octagon case
indicates, however, a court may reach a different conclusion with respect to
these or similar matters.
THE SERVICER
The Contracts will be serviced by Onyx Acceptance Corporation ("Onyx").
Onyx was incorporated in California in 1993 and reincorporated in Delaware in
1996 in connection with its initial public offering of Common Stock which was
successfully completed in March 1996 and all stock offered in connection with
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such public offering was sold. Onyx is engaged principally in the business of
providing indirect automobile financing to new car dealerships and selected used
car dealerships within California, and to an increasing degree in other Western
states. Onyx has been in existence for nearly three years and is headed by a
management team with extensive experience in the origination and servicing of
indirect and direct automobile loans (average tenure of 14 years), and who, from
1985 to present, have actively participated in a number of public
securitizations of motor vehicle installment contracts.
Onyx is headquartered in Irvine, California and operates eight Auto Finance
Centers, six in California and one in each of Arizona and Washington. The
California centers are located in: (i) Orange and Metropolitan Los Angeles
Counties, (ii) North Los Angeles and Ventura Counties, (iii) the San Francisco
Bay Area, (iv) Riverside and San Bernardino Counties, (v) San Diego County, and
(vi) Sacramento County. Through these offices, Onyx is able to service the most
populous California counties including Los Angeles, Riverside, San Bernardino,
Ventura, Orange, San Diego, San Francisco, Santa Clara, Alameda, San Mateo,
Santa Cruz, Marin, Contra Costa, and Sacramento counties. In addition, Onyx
services Hawaii and Nevada through its California centers. The Arizona center is
located in Phoenix, and is able to service the Phoenix metropolitan and suburban
areas. The Washington center is located in Seattle and is able to service the
Seattle metropolitan and suburban areas. Onyx currently has agreements with
1,373 Dealers.
Onyx acquires individual motor vehicle installment contracts from Dealers
after reviewing and approving the customer's credit application in accordance
with its underwriting policies and procedures. See "The Contracts." Onyx
acquired motor vehicle installment contracts totaling approximately $521.9
million from commencement of operations through September 30, 1996. As of
September 30, 1996, Onyx has amassed a servicing portfolio of approximately $359
million. As of September 30, 1996, approximately 77.7% of Onyx's servicing
portfolio consisted of motor vehicle installment contracts secured by used motor
vehicles, and 22.3% secured by new motor vehicles. As of September 30, 1996,
Onyx had total assets of approximately $69.2 million and shareholders equity of
$36.9 million.
Onyx finances its acquisition of motor vehicle installment contracts on a
short term basis through a commercial paper conduit program and has previously
financed its acquisition of motor vehicle installment contracts on a long term
basis through sales of Contracts to grantor trusts.
THE CERTIFICATES AND THE AGREEMENT
The Certificates will be issued pursuant to the Agreement, a form of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries of certain provisions of the
Agreement do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreement. Where
particular provisions of or terms used in the Agreement are referred to, the
actual provisions (including definitions of terms) are incorporated by reference
as part of such summaries.
GENERAL
The Certificates will be offered for purchase in minimum denominations of
$1,000 and integral multiples thereof, except that one Certificate may be issued
in a denomination that includes any residual portion of the Pool/Pre-Funding
Balance as of the Cut-Off Date. Each Certificate will rank pari passu with each
other Certificate. The Certificates will initially be represented by one or more
Certificates registered in the name of the nominee of DTC except as set forth
below. The interests of holders of beneficial interests in the Certificates
(each a "Certificate Owner") will be available for purchase in denominations of
$1,000 and integral multiples thereof in book-entry form only. The Seller has
been informed by DTC that DTC's nominee will be Cede. Accordingly, Cede is
expected to be the holder of record of the Certificates. Unless and until
Definitive Certificates are issued under the limited circumstances described
herein, no Certificate Owner will be entitled to receive a certificate
representing such person's interest in the Certificates. All references herein
to actions by Certificateholders shall refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Certificateholders shall refer to distributions, notices, reports and statements
to DTC or Cede, as the
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registered holder of the Certificates, as the case may be, for distribution to
Certificate Owners in accordance with DTC procedures. See "The Certificates and
the Agreement -- Book-Entry Registration" and
"-- Definitive Certificates."
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
On each Distribution Date, monthly interest due on the Contracts (the
"Interest Distribution") at a rate equal to the product of one-twelfth of the
Pass-Through Rate and the Certificate Balance as of the close of the related
Collection Period will be distributed to the Certificateholders of record on a
pro rata basis as of the immediately preceding Record Date (defined below). The
Certificate Balance will initially equal $100,000,000 (the "Original Certificate
Balance") and as of any Distribution Date will equal the Original Certificate
Balance, reduced by all previous Principal Distributions, including any amounts
from the Pre-Funding Account which are distributed on the Distribution Date
immediately following the end of the Funding Period. Interest will be paid (i)
to the extent of the portion of the Certificate Balance related to Contracts,
from collections received on the Contracts on deposit in the Collection Account
or previously collected and available for distribution, and (ii) to the extent
of the portion of the Certificate Balance related to the Pre-Funding Account
from investment earnings thereon and from payments under the Yield Supplement
Agreement. A "Collection Period" with respect to a Distribution Date will be the
calendar month preceding the month in which such Distribution Date occurs;
provided, that with respect to Liquidated Contracts (as defined below) the
Collection Period will be the period from but excluding the sixth Business Day
preceding the immediately preceding Distribution Date to and including the sixth
Business Day preceding such Distribution Date. With respect to the first
Distribution Date the "Collection Period" for Liquidated Contracts will be the
period from and including the Cut-Off Date to and including the sixth Business
Day preceding such first Distribution Date. Each Interest Distribution will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Unless Definitive Certificates have been issued, distributions on each
Distribution Date will be made through the facilities of DTC and will be payable
to Certificateholders registered as such on the Business Day prior to such
Distribution Date (or, if Definitive Certificates are issued, the last day of
the calendar month preceding such Distribution Date) (the "Record Date"), except
that the final distribution of principal of and interest on each Certificate
will be made only upon presentation and surrender of such Certificate on or
after the Final Scheduled Distribution Date (or such earlier termination date as
is provided by the Agreement) at the office or agency of the Trustee maintained
for that purpose.
On each Distribution Date, Principal Distributions for the related
Collection Period will be passed through to the Certificateholders. The
"Principal Distribution" on any Distribution Date will be an amount equal to the
Aggregate Scheduled Balance Decline during the related Collection Period and,
with respect to the Distribution Date immediately following the last day of the
Funding Period, any portion of the Pre-Funded Amount remaining on deposit in the
Pre-Funding Account. The Principal Distribution on the Final Distribution Date
will include the Aggregate Scheduled Balance of all Contracts that are
outstanding at the end of the Collection Period immediately prior to the Final
Distribution Date. The "Aggregate Scheduled Balance Decline" for any
Distribution Date will be the sum of (x) the amount by which the Aggregate
Scheduled Balance of the Contracts as of the beginning of the related Collection
Period exceeds the Aggregate Scheduled Balance of such Contracts as of the end
of the related Collection Period (excluding any Contracts added as Subsequent
Contracts during the related Collection Period) and (y) the amount by which the
Aggregate Scheduled Balance of the Subsequent Contracts (determined as of each
related Subsequent Transfer Date) transferred to the Trust during the related
Collection Period exceeds the Aggregate Scheduled Balance of such Contracts as
of the end of the related Collection Period. The "Aggregate Scheduled Balance"
of the Contracts is the sum of the Scheduled Balances of each Contract. The
"Scheduled Balance" of a Rule of 78's Contract at any date is equal to the
Cut-Off Date Scheduled Balance of such Contract reduced by the portion of each
scheduled payment of principal and interest due on such Contract (the "Monthly
P&I") on or prior to the date of calculation that is allocable to principal
under the Recomputed Actuarial Method. The Scheduled Balance of a Simple
Interest Contract at any date is equal to the Cut-Off Date Scheduled Balance of
such Contract reduced by the portion of Monthly P&I on or prior to the date of
calculation that is allocated to principal under the Simple Interest Method. The
Scheduled Balance of any Contract that is a Liquidated Contract or that has been
purchased by the Servicer or repurchased by the Seller will equal zero. A
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"Liquidated Contract" is a Contract that (a) is the subject of a Full
Prepayment, (b) is a Defaulted Contract with respect to which Liquidation
Proceeds constituting, in the Servicer's reasonable judgment, the final amounts
recoverable have been received, (c) is paid in full on or after its Maturity
Date or (d) has been a Defaulted Contract for four or more Collection Periods
and as to which Liquidation Proceeds constituting the final amounts recoverable
have not been received; provided, however, that in any event a Contract that is
delinquent in the amount of five monthly payments at the end of a Collection
Period is a Liquidated Contract. A "Defaulted Contract" with respect to any
Collection Period is a Contract (a) which is, at the end of such Collection
Period, delinquent in the amount of two monthly payments or (b) with respect to
which the related Financed Vehicle has been repossessed or repossession efforts
have been commenced.
The Monthly P&I for a Contract due on each Due Date is substantially equal
for the term of the Contract. The Scheduled Balance of each Initial Contract as
of the Cut-Off Date, which will be treated as being equal to the Cut-Off Date
Scheduled Balance, will be set forth in a schedule to the Agreement. The yield
of each Contract will at least equal % (using the Recomputed Yield for Rule
of 78's Contracts).
At the issuance of the Certificates, the Original Certificate Balance will
equal the sum of the Aggregate Scheduled Balance of all the Initial Contracts
and the Pre-Funded Amount.
THE PRE-FUNDING ACCOUNT; MANDATORY PARTIAL PREPAYMENT OF THE CERTIFICATES
The Pre-Funding Account. The Servicer will establish an account in the
name of the Trustee for the benefit of the Certificateholders into which the
Pre-Funded Amount (which equals $24,067,029, or approximately 24% of the
Original Certificate Balance) will be deposited on the Closing Date from the net
proceeds received from the sale of the Certificates and from which monies will
be released during the Funding Period to purchase Subsequent Contracts from the
Seller (the "Pre-Funding Account"). The Funding Period will be the period from
the Closing Date until the earliest to occur of (i) the date on which the
Pre-Funded Amount is less than $20,000, (ii) the date on which an Event of
Default occurs, or (iii) the close of business on March , 1997. The
Pre-Funding Account will be an Eligible Account. An "Eligible Account" is (i) a
trust account that is either (a) maintained by the Trustee, (b) maintained with
a depository institution or trust company the commercial paper or other
short-term debt obligations of which have credit ratings from Standard & Poor's
at least equal to "A-1" and from Moody's equal to "P-1," which account is fully
insured up to applicable limits by the Federal Deposit Insurance Corporation or
(c) maintained with a depository institution acceptable to the Insurer or (ii) a
general ledger account or deposit account at a depository institution acceptable
to the Insurer. The Pre-Funding Account will be part of the Trust but monies on
deposit therein will not be available to cover losses on or in respect of the
Contracts. Any portion of the Pre-Funded Amount remaining on deposit in the
Pre-Funding Account as of the end of the Funding Period will be payable as
described below as prepayment of principal to the Certificateholders. Monies on
deposit in the Pre-Funding Account may be invested in Eligible Investments under
the circumstances and in the manner described in the Agreement. Earnings on
investment of funds in the Pre-Funding Account will be used, together with the
Yield Supplement Amount paid under the Yield Supplement Agreement, to pay the
Pass-Through Rate on the portion of the Certificate Balance relating to the
Pre-Funding Account. The Trust will not be required to register under the
Investment Company Act of 1940.
Upon each conveyance of Subsequent Contracts on each Subsequent Transfer
Date to the Trust, an amount equal to the purchase price paid by the Seller to
Onyx for such Subsequent Contracts on the related Subsequent Transfer Date will
be released from the Pre-Funding Account and paid to the Seller.
Mandatory Partial Prepayment of the Certificates. The Certificates will be
subject to partial Mandatory Partial Prepayment on the Distribution Date
immediately succeeding the date on which the Funding Period ends (or on the
Distribution Date on which the Funding Period ends if the Funding Period ends on
a Distribution Date), to the extent that any portion of the Pre-Funded Amount,
exclusive of any investment earnings thereon, remains on deposit in the
Pre-Funding Account after giving effect to the purchase by the Seller and
conveyance to the Trust of any Subsequent Contracts on the related Subsequent
Transfer Dates, including any such purchase and conveyance on the date on which
the Funding Period ends.
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Upon the occurrence of a Mandatory Partial Prepayment, the holders of
Certificates will receive an amount equal to the portion of the Pre-Funded
Amount remaining in the Pre-Funding Account. It is anticipated that the
aggregate principal amount of Subsequent Contracts purchased by the Trust and
delivered to the Trustee during the Funding Period will not be exactly equal to
the Pre-Funded Amount and that therefore there will be at least a nominal amount
of principal prepaid to Certificateholders.
YIELD SUPPLEMENT AGREEMENT AND YIELD SUPPLEMENT RESERVE ACCOUNT
Simultaneously with the sale and assignment of the Contracts by the Seller
to the Trust, Onyx and the Seller will enter into the Yield Supplement
Agreement, pursuant to which Onyx will be obligated to pay the Yield Supplement
Amount, if any, on or before five Business Days prior to each Distribution Date,
ending with the Distribution Date following the end of the Funding Period. The
Seller will assign its rights under the Yield Supplement Agreement to the Trust.
The purpose of the Yield Supplement Agreement is to cover the shortfall between
interest distributable on the portion of the Certificate Balance represented by
the Pre-Funded Amount and interest which will be earned by the Trust on the
Pre-Funded Amount prior to the time it is used to purchase Subsequent Contracts.
The Yield Supplement Agreement will be in effect from the Closing Date until
April 15, 1997, which is the Distribution Date following the end of the Funding
Period. Payments of the Yield Supplement Amounts due under the Yield Supplement
Agreement will be secured by funds on deposit in a segregated trust deposit
account (the "Yield Supplement Reserve Account") established in the name of
Bankers Trust Company, acting as agent for the benefit of the Certificateholders
and the Insurer (in such capacity, the "Yield Supplement Agent"). The Yield
Supplement Reserve Account will be an Eligible Account. The amount required to
be deposited in such Yield Supplement Reserve Account on the Closing Date will
be the maximum aggregate Yield Supplement Amounts that may become owing under
the Yield Supplement Agreement, assuming that, with respect to the Pre-Funded
Amount during the Funding Period, a certain rate of interest (set forth in the
Agreement) is earned and no Subsequent Contracts are acquired. The "Yield
Supplement Amount," with respect to any Distribution Date for any Collection
Period up through the last Collection Period in the Funding Period, is an amount
equal to the difference between (a) one month's interest on the Pre-Funded
Amount on deposit in the Pre-Funding Account as of the first day of such
Collection Period at the Pass-Through Rate and (b) the earnings received by the
Trustee during the related Collection Period from investment of the Pre-Funded
Amount on deposit in the Pre-Funding Account. On each Subsequent Closing Date,
an amount will be released to Onyx from the Yield Supplement Reserve Account so
that the amount remaining in the account after such release will equal the
maximum Yield Supplement Amount which could become owing during the remainder of
the Funding Period assuming that no additional Subsequent Contracts are conveyed
to the Trust. Any amounts remaining on deposit in the Yield Supplement Reserve
Account after the Mandatory Partial Prepayment of that portion of the Pre-Funded
Amount not used to purchase Subsequent Contracts will be released to Onyx on the
date of such Mandatory Partial Prepayment.
THE SURETY BOND
If on any Servicer Report Date the amount on deposit in the Collection
Account after giving effect to all amounts deposited to or payable from the
Pre-Funding Account and the Payahead Account with respect to the related
Distribution Date, is less than the sum of the Servicing Fee, the Principal
Distribution and Interest Distribution for the related Distribution Date, the
Trustee by delivering a notice to the Insurer shall demand payment under the
Surety Bond in an amount equal to such deficiency. The Insurer shall pay or
cause to be paid such amount to the Trustee for credit to the Collection
Account. The Trustee shall withdraw from the Collection Account and shall pay
such amount to the Certificateholders on the related Distribution Date.
If on the Business Day preceding the Final Distribution Date, any principal
amount of Certificates is still outstanding, then the Trustee shall demand
payment on the Surety Bond in an amount equal to the amount by which the
outstanding principal amount of the Certificates, plus interest thereon at the
Pass-Through Rate, exceeds the amount on deposit in the Collection Account which
is available for distribution on the Final Distribution Date. The Insurer shall
pay or cause to be paid such amount to the Trustee pursuant to the Trustee's
instructions for credit to the Collection Account and on the Final Scheduled
Distribution Date, the Trustee shall withdraw from the Collection Account and
shall pay such amount to the Certificateholders.
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BOOK-ENTRY REGISTRATION
Certificateholders may hold their Certificates through DTC if they are
participants of such system, or indirectly through organizations which are
participants ("Participants") in such system.
Cede, as nominee for DTC, will hold one or more global Certificates.
Transfers between Participants will occur in the ordinary way in accordance with
DTC rules.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations (including the Underwriters).
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Certificates may do so only through Participants and Indirect Participants.
In addition, Certificateholders will receive all distributions of principal of
and interest on the Certificates from the Trustee, as paying agent, or its
successor in such capacity (the "Paying Agent"), through the Participants who in
turn will receive them from DTC. Under a book-entry format, Certificate Owners
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Paying Agent to Cede, as nominee for DTC. DTC will forward
such payments to its Participants which thereafter will forward them to Indirect
Participants or Certificate Owners. It is anticipated that the only
"Certificateholder" will be Cede, as nominee of DTC. Certificate Owners will not
be recognized by the Trustee as Certificateholders, as such term is used in the
Agreement, and Certificate Owners will only be permitted to exercise the rights
of Certificateholders indirectly through the Participants who in turn will
exercise the rights of Certificateholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess Certificates, Certificate Owners will receive payments and will
be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge Certificates to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such Certificates, may
be limited due to the lack of a physical certificate for such Certificates.
DTC has advised the Seller that it will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Additionally, DTC has advised the Seller that it will take such actions with
respect to the particular portion of the Certificates represented by the
undivided interests held by Participants which have directed DTC, on their
behalf, to take such action. DTC may take conflicting actions with respect to
other undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Certificates among participants of DTC, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
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DEFINITIVE CERTIFICATES
The Certificates will be issued in fully registered, certificated form in
denominations of $1,000 and integral multiples thereof to Certificate Owners or
their nominees (the "Definitive Certificates"), rather than to DTC or its
nominee, only if (i) the Seller advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as depositary
with respect to the Certificates, and the Trustee or the Seller are unable to
locate a qualified successor, or (ii) after the occurrence of an Event of
Default, Certificate Owners representing in the aggregate more than 50% of the
Pool/Pre-Funding Balance advise the Trustee and DTC through Participants in
writing that the continuation of a book-entry system with respect to the
Certificates through any depositary is no longer in the best interest of the
Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the Definitive Certificates representing the Certificates and instructions for
reregistration, the Trustee will issue the Certificates as Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as holders under the Agreement (collectively,
"Holders").
Distribution of principal of and interest on the Certificates will be made
by the Paying Agent directly to Holders of Definitive Certificates in accordance
with the procedures set forth herein and in the Agreement. Interest
Distributions and Principal Distributions on each Distribution Date and on the
Final Distribution Date will be made to Holders in whose names the Definitive
Certificates were registered at the close of business on the related Record
Date. Distributions will be made by check mailed to the address of such Holder
as it appears on the certificate register. The final payment of any Certificate
(whether Definitive Certificates or the Certificate registered in the name of
DTC's nominee), however, will be made only upon presentation and surrender of
such Certificate at the office or agency specified in the notice of final
distribution to Certificateholders. The Trustee will provide such notice to
registered Certificateholders not later than the fifteenth day of the month of
such final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be the
Trustee. No service charge will be imposed for any registration of transfer or
exchange, but the Transfer Agent and Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
SALE AND ASSIGNMENT OF THE CONTRACTS
At the time of issuance of the Certificates, the Seller will sell and
assign to the Trustee, without recourse, the Seller's entire interest in the
Initial Contracts and the proceeds thereof, including its security interests in
the Initial Financed Vehicles. Concurrently with the sale and assignment of the
Initial Contracts, the Seller will sell and assign to the Trustee, against
payment therefor from the Pre-Funded Amount, all of the Seller's interest in the
Subsequent Contracts thereafter created and delivered to the Trustee. Each
Initial Contract will be identified in a schedule appearing as an exhibit to the
Agreement. The Trustee will, concurrently with such sale and assignment,
execute, authenticate and deliver the definitive certificates representing the
Certificates to the Underwriter against payment to the Seller of the net
purchase price of the sale of the Certificates. Pursuant to the Purchase
Agreement, prior to sale of the Initial Contracts to the Trustee and the
issuance of the Certificates, Onyx sold and assigned to the Seller Onyx's entire
interest in the Initial Contracts.
During the Funding Period, pursuant to the Purchase Agreement, Onyx will be
obligated to sell and the Seller will be obligated to purchase, Subsequent
Contracts. On each Subsequent Transfer Date, Onyx will sell and assign to the
Seller, without recourse, its entire right, title and interest in and to
Subsequent Contracts, including its security interest in the Subsequent Financed
Vehicles. The purchase price to be paid to Onyx for each Subsequent Contract
will equal the principal balance thereof as of the related Subsequent Transfer
Date. Pursuant to the Agreement, the Seller will in turn sell the Subsequent
Contracts to the Trust. Each Subsequent Contract will be sold to the Trust
within two Business Days of its acquisition by Onyx. In connection with each
purchase of Subsequent Contracts, the Trust will be required to pay to the
Seller an amount equal to the amount paid by the Seller to Onyx for such
Subsequent Contracts, which purchase price will be paid from monies on deposit
in the Pre-Funding Account. Each Subsequent Contract delivered to the Trustee on
each Subsequent
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Transfer Date will be accompanied by a certificate of the Seller (a "Transfer
Certificate") setting forth the aggregate principal balance of the related
Subsequent Contracts, the aggregate principal balance of the Subsequent
Contracts delivered to the Trustee during the Funding Period up to and including
such Subsequent Transfer Date and an affirmation of the representations and
warranties set forth in the Agreement with respect to the Seller and such
Subsequent Contracts. Upon the conveyance of Subsequent Contracts to the Trust
on a Subsequent Transfer Date, the Pool Balance will increase in an amount equal
to the aggregate Cut-Off Date Scheduled Balance of such Subsequent Contracts as
of the related Subsequent Transfer Date.
Each conveyance of Subsequent Contracts will be subject to the following
conditions, among others: (i) such Subsequent Contracts must satisfy the
Eligibility Requirements; (ii) such Subsequent Contracts were not selected by
Onyx or the Seller in a manner that either believes is adverse to the interests
of the Certificateholders or the Insurer; (iii) the weighted average APR of the
Contracts (after giving effect to the purchase of the related Subsequent
Contracts) is not less than %; (iv) the weighted average remaining term of
the Contracts (including the Subsequent Contracts) as of the related Subsequent
Transfer Date will not be greater than 72 months; and (v) the Seller and the
Trustee shall not have been advised by either Rating Agency that the conveyance
of such Subsequent Contracts will result in a qualification, modification or
withdrawal of its then current rating of the Certificates.
On the Business Day preceding each Distribution Date during and immediately
following the Funding Period (each such date a "Subsequent Closing Date") UCC-1
financing statements will be filed naming the Seller as seller and the Trustee
as the purchaser with respect to the Subsequent Contracts delivered to the
Trustee since the preceding Subsequent Closing Date (or the Closing Date, in the
case of the first Subsequent Closing Date) and all legal opinions, officers'
certificates and other documentation necessary with respect to the Subsequent
Contracts delivered to the Trustee since the preceding Subsequent Closing Date
(or the Closing Date, as the case may be) will be executed and delivered.
Failure to comply with any of the conditions set forth in the Agreement with
respect to a Subsequent Closing Date will be deemed to be a breach of a
representation and warranty with respect to the Subsequent Contracts to which
such Subsequent Closing Date relates and accordingly the Seller will be
obligated to repurchase such Subsequent Contracts from the Trust as described
below.
Because the Subsequent Contracts will be originated after the Initial
Contracts, following their conveyance to the Trust, the characteristics of the
Contracts, including the Subsequent Contracts, may vary from those of the
Initial Contracts.
Pursuant to the Agreement, the Seller will represent to the Trustee and the
Trust for the benefit of holders of the Certificates and the Insurer that: (i)
each Contract contains customary and enforceable provisions such that the rights
and remedies of the holder thereof shall be adequate for realization against the
collateral of the benefits of the security; (ii) each Contract and the sale of
the related Financed Vehicle complied at the time it was made in all material
respects with all requirements of applicable federal, state, and local laws, and
regulations thereunder, including usury laws, the Federal Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal
Trade Commission Act, state adaptations of the National Consumer Act and of the
Uniform Consumer Credit Code, and any other consumer credit, equal opportunity
and disclosure laws applicable to such Contract and sale; (iii) each Contract
constitutes the legal, valid, and binding payment obligation in writing of the
Obligor, enforceable by the holder thereof in all respects in accordance with
its terms, subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization, liquidation and other similar laws and equitable principles
relating to or affecting the enforcement of creditors' rights; (iv) immediately
prior to the sale and assignment thereof to the Trust, each Contract was secured
by a validly perfected first priority security interest in the Financed Vehicle
in favor of the Seller as secured party or all necessary action with respect to
such Contract has been taken to perfect a first priority security interest in
the related Financed Vehicle in favor of the Seller as secured party, which
security interest is assignable and has been so assigned by the Seller to the
Trust; (v) as of the Closing Date in the case of the Initial Contracts and each
Subsequent Transfer Date in the case of each Subsequent Contract, the Seller had
good and marketable title to and was the sole owner of each Contract, free of
liens, claims, encumbrances and rights of others; (vi) as of the Closing Date in
the case of the Initial Contracts and each Subsequent Transfer Date in the case
of the Subsequent Contracts, there are no rights of rescission, offset,
counterclaim, or defense, and the Seller has no knowledge of the same being
asserted or threatened, with
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respect to any Contract; (vii) as of the Closing Date in the case of the Initial
Contracts and each Subsequent Transfer Date in the case of the Subsequent
Contracts, the Seller had no knowledge of any liens or claims that have been
filed, including liens for work, labor, materials or unpaid taxes relating to a
Financed Vehicle, that would be liens prior to, or equal or coordinate with, the
lien granted by the Contract; (viii) except for payment defaults continuing for
a period of not more than 30 days as of the Cut-Off Date in the case of the
Initial Contracts, and each Subsequent Transfer Date in the case of Subsequent
Contracts, the Seller has no knowledge that a default, breach, violation, or
event permitting acceleration under the terms of any Contract exists, and the
Seller has no knowledge that a continuing condition that with notice or lapse of
time would constitute a default, breach, violation or event permitting
acceleration under the terms of any Contract exists, and the Seller has not
waived any of the foregoing; (ix) each Contract requires that the Obligor
thereunder obtain comprehensive and collision insurance covering the Financed
Vehicle; (x) each Contract was acquired from a dealer with whom Onyx ordinarily
does business (except for Contracts originated by Onyx); (xi) no adverse
selection procedures were utilized in selecting the Contracts; (xii) scheduled
payments under each Contract have been applied in accordance with the method for
allocating principal and interest set forth in the Contract (either the Rule of
78's or Simple Interest Method) and (xiii) there is only one original of each
Contract and such original is being held by the Trustee as custodian on behalf
of the Trust and Insurer. As of the last day of the Collection Period following
the Collection Period (or, if the Seller elects, the last day of such Collection
Period) during which the Seller becomes aware or receives written notice from
the Trustee or the Servicer that a Contract does not meet any of the criteria in
the Agreement and such failure materially and adversely affects the interests of
the Certificateholders or the Insurer in a Contract, the Seller, unless it cures
the failed criterion, will repurchase the Contract from the Trustee at a price
equal to the Scheduled Balance thereof plus accrued interest (the "Repurchase
Amount"). The repurchase obligation will constitute the sole remedy available to
the Certificateholders or the Trustee for the failure of a Contract to meet any
of the criteria set forth in the Agreement.
THE COLLECTION ACCOUNT AND ELIGIBLE INVESTMENTS
The Servicer will cause all collections made on the Contracts during a
Collection Period to be deposited in or credited to an account (the "Collection
Account") established by the Servicer under the Agreement. Funds in the
Collection Account will be invested in Eligible Investments by the Trustee
acting at the direction of the Insurer. "Eligible Investments" are (a) direct
obligations issued or fully guaranteed by the United States or any agency or
instrumentality of the United States whose obligations are backed by the full
faith and credit of the United States and, to the extent, at the time of the
investment, acceptable to the Insurer and each statistical rating agency rating
the Certificates for securities having a rating equivalent to the rating of the
Certificates at the Closing Date, the direct obligations of, or obligations
fully guaranteed by, the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association; (b) deposits in or other obligations of any bank
(including the Trustee) whose long-term unsecured debt obligations are rated
"AA-" or better by Standard & Poor's Ratings Services ("Standard & Poor's") and
"Aa2" or better by Moody's Investors Service, Inc. ("Moody's") or any bank
acceptable to the Insurer; (c) repurchase obligations with respect to federal
government or agency securities described in clause (a) above entered into with
any bank described in clause (b) above; (d) interest-bearing or discount
corporate securities rated "AA-" or better by Standard & Poor's and "Aa2" or
better by Moody's; (e) commercial paper having the highest rating obtainable
from Standard & Poor's and Moody's; (f) investments in money market funds or
money market mutual funds having a rating from Standard & Poor's and Moody's in
the highest investment category granted thereby, including funds for which the
Trustee or any of its affiliates is investment manager or advisor; and (g) such
other securities that are acceptable to the Insurer. Eligible Investments made
with respect to the Collection Account will mature no later than the next
following Distribution Date. Income from amounts on deposit in the Collection
Account which are invested in Eligible Investments will be paid to the Servicer
monthly unless earlier directed by the Servicer.
PAYAHEAD ACCOUNT
For Simple Interest Contracts, payments made by an Obligor in excess of the
Monthly P&I due on the current Due Date and any other amount currently due on a
Contract (including Full Prepayments) will be
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passed through to the Certificateholders on the Distribution Date immediately
following the Collection Period in which such payment was collected.
For Rule of 78's Contracts, however, payments made by an Obligor in excess
of the Monthly P&I due on the current Due Date and any other amount currently
due on a Contract (other than Full Prepayments) ("Payaheads") will be initially
deposited in the Collection Account and subsequently transferred from the
Collection Account, as of each Servicer Report Date, to an account established
in the name of Bankers Trust Company for the benefit of the Obligors and the
Certificateholders as their interests may appear (the "Payahead Account") and
shall be held in such account until passed through in accordance with the
original schedule of payments for the related Contract or until the amount of
such partial prepayment equals the amount the Obligor would be required to pay
in order to prepay the Contract in full. The Payahead Account will be an
Eligible Account. Amounts on deposit in the Payahead Account will be invested in
Eligible Investments with maturity dates such that on each Distribution Date
Monthly P&I for each Rule of 78's Contract with respect to which a partial
prepayment had been made will be available to be passed through to
Certificateholders. The Payahead Account will not be part of the Trust and the
Trustee will not have a security interest in the Payahead Account. Earnings on
Eligible Investments credited to the Payahead Account will be paid to the
Servicer. Full Prepayments during any Collection Period will be deposited
directly into the Collection Account for distribution to Certificateholders on
the Distribution Date next succeeding such Collection Period.
PAYMENTS ON CONTRACTS
All collections on the Contracts will be deposited in or credited to the
Collection Account within two Business Days of the receipt by the Servicer of
payments from Obligors. Such collections will include: Full Prepayments and
partial prepayments (pending transfer of Payaheads on Rule of 78's Contracts to
the Payahead Account), Net Liquidation Proceeds and Net Insurance Proceeds, any
amounts deposited by Onyx or the Seller in the Collection Account to purchase
Contracts because of certain material defects in documents related to the
Contracts or certain breaches in representations or warranties regarding the
Contracts made by Onyx or the Seller in the Agreement that materially and
adversely affect the interests of the Certificateholders or the Insurer, any
amounts deposited by the Servicer in the Collection Account to purchase
Contracts as to which the Servicer has breached certain servicing covenants; and
any amounts deposited by the Servicer in the Collection Account as a result of
such entity exercising its right under certain circumstances to purchase all or
a portion of the Contracts. "Net Liquidation Proceeds" are proceeds received by
the Servicer (net of Liquidation Expenses) upon liquidation of any Defaulted
Contract. "Liquidation Expenses" are the reasonable out-of-pocket expenses
(exclusive of overhead expenses) incurred by the Servicer in realizing upon a
Defaulted Contract which are not recoverable under any insurance policy. "Net
Insurance Proceeds" are proceeds paid by any insurer under a comprehensive and
collision or vendor's single interest insurance policy related to a Contract
(other than funds used for the repair of the related Financed Vehicle or
otherwise released to the related Obligor in accordance with normal servicing
procedures) and proceeds from the Blanket Insurance Policy, after reimbursement
to the Servicer of expenses recoverable under such policy. Partial prepayments
of Rule of 78's Contracts are initially deposited in the Collection Account and
are transferred to the Payahead Account on the Servicer Report Date.
DISTRIBUTIONS
Subject to the last sentence of this paragraph, distributions on the
Certificates will be made on each Distribution Date by the Trustee out of net
collections on the Contracts (exclusive of amounts representing payment due in
the Collection Period in which such Distribution Date occurs and any future
Collection Periods) for the Collection Period preceding such Distribution Date
plus any Yield Supplement Amounts. The amount of such net collections and Yield
Supplement Amounts on each Distribution Date will be applied, first, to the
Servicer in payment of the Servicing Fee; second, payment of the Interest
Distribution and the Principal Distribution to the Certificateholders on such
Distribution Date in accordance with the Agreement (such Principal Distribution
to include the portion of the Pre-Funded Amount remaining in the Pre-Funding
Account at the end of the Funding Period), third, to the Insurer, the Surety
Bond Fee, and fourth, any balance
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shall be distributed to a separate spread account trust to be applied in
accordance with the spread account trust agreement and the Insurance Agreement,
which provide that to the extent funds are not required to reimburse the Insurer
for draws on the Surety Bond, to satisfy obligations owing to the Insurer or to
reserve against the possibility of future draws, amounts remaining shall be
released to the beneficiaries of the spread account trust. Any amounts
distributed pursuant to clause fourth above will not be available to make
distributions to the Certificateholders on the current or any future
Distribution Date. Under the Surety Bond, the Insurer is obligated to provide
for payment to the Trustee on each Distribution Date of the amount, if any, by
which the amount available for distribution from the net collections on
Contracts plus the Yield Supplement Amount is less than the sum of the Servicing
Fee, the Interest Distribution and the Principal Distribution due to the
Certificateholders for such Distribution Date. See "-- Distributions of
Principal and Interest."
INSURANCE ON FINANCED VEHICLES
Each Obligor on a Contract is required to maintain insurance covering
physical damage to the Financed Vehicle of such Obligor in an amount not less
than the lesser of its maximum insurable value or the unpaid principal balance
under such Contract. Onyx is required to be named as a loss payee under the
policy of insurance obtained by the Obligor. The Financed Vehicle is required to
be insured against loss and damage due to fire, theft, transportation, collision
and other risks covered by comprehensive coverage. Onyx also maintains a
vendor's single interest insurance policy, as to which the Seller has been named
as an additional insured, which provides coverage upon repossession of a
Financed Vehicle in an amount equal to the lesser of the actual cash value of
such Financed Vehicle, the cost of repair or replacement for such Financed
Vehicle and the unpaid balance of the related Contract. Since Obligors may
choose their own insurers to provide the required coverage, the specific terms
and conditions of their policies vary.
Onyx has obtained the Blanket Insurance Policy from United Financial
Casualty Company with a rating of "A" by A.M. Best, with respect to each
Contract. Subject to certain conditions, the Blanket Insurance Policy covers the
lesser of actual damage to a Financed Vehicle or the amount by which the
Obligor's unpaid remaining principal balance on the related Contract exceeds the
proceeds from disposition of the Financed Vehicle. Onyx's rights under the
Blanket Insurance Policy with respect to the Contracts under the Blanket
Insurance Policy have been assigned to the Trust pursuant to the Agreement.
SERVICER REPORTS TO THE TRUSTEE AND THE INSURER
The Servicer will perform certain monitoring and reporting functions for
the Trustee and the Insurer, including the preparation and delivery on the
Servicer Report Date to the Trustee and the Insurer of a statement setting forth
the amounts on deposit in the Collection Account, the sources of such amounts
and the amounts to be paid to Certificateholders (the "Distribution Date
Statement"). The Distribution Date Statement shall also include information
regarding Contracts purchased by the Servicer or repurchased by the Seller.
REPURCHASE OF CONTRACTS
The Servicer will have the option to purchase the remaining Contracts, and
thereby cause early retirement of the Certificates, as of any Distribution Date
on which, after giving effect to the Principal Distribution on such Distribution
Date, the Aggregate Scheduled Balance of the Contracts is 10% or less of the sum
of the initial Pool Balance and the aggregate principal balance of all
Subsequent Contracts (as of each related Subsequent Transfer Date) conveyed to
the Trust. Any such purchase must be effected at a price equal to the Aggregate
Scheduled Balance of the Contracts in the Trust on the date of repurchase, plus
accrued interest and all amounts due to the Insurer under the Insurance
Agreement. In addition, Onyx or the Seller is required to purchase or
repurchase, respectively, Contracts under certain circumstances if certain
representations and warranties made by Onyx or the Seller respectively are
incorrect in any manner that materially and adversely affects the interest of
the Certificateholders or the Insurer. Additionally, the Servicer is required to
purchase Contracts as to which the Servicer has breached certain servicing
covenants.
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SERVICING FEE
The Servicer will be entitled to compensation for the performance of its
obligations under the Agreement. The Servicer shall be entitled to receive an
amount equal to the product of one-twelfth of 1.00% per annum (the "Servicing
Fee Rate") and the Pool Balance as of the close of the preceding Collection
Period. As additional compensation, the Servicer or its designee shall be
entitled to retain all late payment charges, extension fees and similar items
paid in respect of the Contracts. The Servicer or its designee will also receive
as servicing compensation reinvestment earnings on Eligible Investments and the
amount, if any, by which the outstanding principal balance based on the Rule of
78's of a Contract that is subject to a Full Prepayment exceeds the Scheduled
Balance of such Contract. The Servicer shall pay all expenses incurred by it in
connection with its servicing activities under the Agreement and shall not be
entitled to reimbursement of such expenses except to the extent they constitute
Liquidation Expenses or expenses recoverable under an applicable insurance
policy.
REALIZATION UPON DEFAULTED CONTRACTS
The Servicer will liquidate any Contract that comes into and continues in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. Such liquidation may be through repossession or sale of
the Financed Vehicle securing such Contract or otherwise. In connection with
such repossession or other conversion, the Servicer will follow such procedures
as are normal and usual for holders of motor vehicle retail installment sales
contracts. In this regard, the Servicer may sell the Financed Vehicle at a
repossession or other sale.
DESCRIPTION OF THE INSURER
The following information with respect to the Insurer has been furnished by
the Insurer and none of Onyx, the Seller or the Underwriter have made any
independent investigation of such information.
The Insurer is a New York-domiciled monoline stock insurance company which
engages only in the business of financial guarantee and surety insurance. The
Insurer is licensed in 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. The Insurer insures
structured asset-backed, corporate, municipal and other financial obligations in
the U.S. and international capital markets. The Insurer also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
The Insurer's claims-paying ability is rated "Aaa" by Moody's, "AAA" by
Standard & Poor's, "AAA" by Duff & Phelps Credit Rating Co. and "AAA" by Nippon
Investors Service Inc. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies.
The Insurer is a wholly owned subsidiary of CapMAC Holdings Inc.
("Holdings"). NEITHER HOLDINGS NOR ANY OF ITS STOCKHOLDERS IS OBLIGATED TO PAY
ANY CLAIMS UNDER ANY SURETY BOND ISSUED BY THE INSURER OR ANY DEBTS OF THE
INSURER OR TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS TO THE INSURER.
The Insurer is regulated by the Superintendent of Insurance of the State of
New York. In addition, the Insurer is subject to regulation by the insurance
laws and regulations of the other jurisdictions in which it is licensed. Such
insurance laws regulate, among other things, the amount of net exposure per risk
that the Insurer may retain, capital transfers, dividends, investment of assets,
changes in control, transactions with affiliates and consolidations and
acquisitions. The Insurer is subject to periodic regulatory examinations by the
same regulatory authorities.
The Insurer's obligations under the Surety Bond may be reinsured. Such
reinsurance does not relieve the Insurer of any of its obligations under the
Surety Bond.
THE SURETY BOND IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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As of December 31, 1995 and 1994, the Insurer had qualified statutory
capital (which consists of policyholders' surplus and contingency reserve) of
approximately $240 million and $170 million, respectively, and had not incurred
any debt obligations. Article 69 of the New York State Insurance Law requires
the Insurer to establish and maintain the contingency reserve, which is
available to cover claims under surety bonds issued by the Insurer.
The audited financial statements of the Insurer prepared in accordance with
generally accepted accounting principles as of December 31, 1995 and 1994 and
for each of the years in the three-year period ended December 31, 1995 are
included in this Prospectus beginning at F-1. The unaudited financial statements
of the Insurer for the three and nine month periods ended September 30, 1996 and
1995 are made a part of this Prospectus beginning at F-19. Copies of the
Insurer's financial statements prepared in accordance with statutory accounting
standards, which differ from generally accepted accounting principles, are filed
with the Insurance Department of the State of New York and are available upon
request. The Insurer is located at 885 Third Avenue, New York, New York 10022,
and its telephone number is (212) 755-1155.
ADDITIONAL PROVISIONS OF THE AGREEMENT
STATEMENTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will include with each distribution
to each Certificateholder a statement (the "Distribution Date Statement")
setting forth for such Distribution Date the following information:
(i) the amount of the distribution to Certificateholders allocable to
principal;
(ii) the amount of the distribution to Certificateholders allocable to
interest;
(iii) the certificate distribution amount for such Distribution Date;
(iv) the premiums payable to the Insurer and the amount to be deposited
in the spread account;
(v) during the Funding Period, the Aggregate Scheduled Balance of
Subsequent Contracts transferred to the Trust during such
Collection Period;
(vi) during the Funding Period, the remaining amount on deposit, if
any, in the Pre-Funding Account, after giving effect to (v) above;
(vii) at the end of the Funding Period, the amount of the Mandatory
Partial Prepayment;
(viii) the aggregate Servicing Fee paid to the Servicer with respect to
the Contracts for the related Collection Period; and
(ix) the number of, and aggregate amount of monthly principal and
interest payments due on, the Contracts which are delinquent as of
the end of the related Collection Period presented on a 30-day,
60-day and 90-day basis;
(x) the amount available in the Collection Account for payment of the
Certificate distribution amount and the Servicing Fee and the
amount, if any, required from the Insurer pursuant to the Surety
Bond to pay any shortfall;
(xi) the aggregate amount of Liquidation Proceeds received for
Defaulted Contracts;
(xii) the net credit losses for the Collection Period;
(xiii) the number and net outstanding balance of Contracts for which
the Financed Vehicle has been repossessed;
(xiv) the Pool Balance;
(xv) the amount in the Collection Account available for such
Distribution Date; and
(xvi) the amount of claims (if any) made on the Surety Bond.
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Within a reasonable period of time after the end of each calendar year, but
not later than the latest date permitted by law, commencing with the year ended
December 31, 1996, the Trustee and the Paying Agent shall furnish to each person
who on any Record Date during such calendar year shall have been a registered
Certificateholder a statement containing the sum of the amounts described in
(i), (ii) and (viii) above and such other information in respect of the
Certificates as may be reasonably necessary for such Certificateholder's
preparation of federal income tax returns. See "Certain Tax Consequences."
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that a firm of independent public accountants
will furnish to the Trustee and the Insurer, on or before each March 15 after
the end of each fiscal year of the Servicer, beginning with the fiscal year
ended December 31, 1997, a statement as to compliance by the Servicer during the
preceding fiscal year with certain standards relating to the servicing of the
Contracts.
The Agreement will also provide for delivery to the Trustee and the
Insurer, on each March 15 after the end of each fiscal year of the Servicer,
commencing with the fiscal year ended December 31, 1997, of a certificate signed
by an authorized officer of the Servicer stating that the Servicer has fulfilled
its obligations under the Agreement throughout the preceding fiscal year or, if
there has been a default in the fulfillment of any such obligation, describing
each such default.
Copies of such statements and certificates may be obtained by
Certificateholders by a request in writing addressed to the Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder except upon determination that the
Servicer's performance of such duties is no longer permissible under applicable
law. No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's servicing obligations and duties under the
Agreement. See "-- The Trustee."
The Agreement will further provide that neither the Servicer nor any of its
directors, officers, employees, and agents shall be under any liability to the
Trust or the Certificateholders for taking any action or for refraining from
taking any action pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence (except errors in judgment) in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Agreement will provide that the Servicer is
under no obligation to appear in, prosecute or defend any legal action that is
not incidental to the Servicer's servicing responsibilities under the Agreement
and that, in its opinion, may cause it to incur any expense or liability. The
Servicer may, however, undertake any reasonable action that it may deem
necessary or desirable in respect of the Agreement and the rights and duties of
the parties thereto and the interests of the Certificateholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust, and
the Servicer will be entitled to be reimbursed therefor out of the Collection
Account. Any such indemnification or reimbursement could reduce the amount
otherwise available for distribution to Certificateholders.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer is a party or any corporation succeeding to the business of the
Servicer, or, with respect to the Servicer's obligation as the Servicer, will be
the successor of the Servicer under the Agreement.
EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any failure by
the Servicer to deposit in or credit to the Collection Account, the Payahead
Account or the Yield Supplement Reserve Account any amount required to be so
deposited or credited or to make the required distribution to
Certificateholders, which failure continues unremedied for three Business Days
after written notice from the Trustee or the
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Insurer is received by the Servicer or discovery by the Servicer; (ii) any
failure by the Servicer to deliver to the Insurer or the Trustee certain reports
required by the Agreement by the fifth Business Day prior to the related
Distribution Date or to perform certain other covenants under the Agreement;
(iii) any failure by the Servicer or the Seller duly to observe or perform in
any material respect any other covenants or agreements of the Servicer or the
Seller in the Agreement, which failure materially and adversely affects the
rights of Certificateholders, the Insurer or the Trustee and which continues
unremedied for 30 days after the giving of written notice of such failure (A) to
the Servicer or the Seller as the case may be, by the Trustee or the Insurer or
(B) to the Servicer or the Seller, as the case may be, and to the Trustee by
Holders of Certificates evidencing not less than 25% of the Pool/Pre-Funding
Balance or by the Insurer; (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings and certain
actions by the Servicer or Seller indicating its insolvency, reorganization
pursuant to bankruptcy or similar proceedings or inability to pay its
obligations; (v) any breach of any of the representations and warranties of the
Servicer or the Seller (except for any breaches relating to Contracts
repurchased by the Seller or the Servicer) which breach has a material adverse
effect on the Trust and which continues for 30 days after the giving of notice
of such breach to the Seller or the Servicer, as the case may be, by the Trustee
or the Holders of Certificates evidencing not less than 25% of the
Pool/Pre-Funding Balance or the Insurer; (vi) any change in control of the
Servicer in violation of the covenant set forth in Section 7.2 of the Agreement;
and (vii) any determination by the Insurer that the quality of performance of
the Servicer is not in compliance with either the terms of the Agreement or that
the Servicer's performance is not adequate, as measured in accordance with
industry standards, in respect of all contracts serviced by the Servicer.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied, the
Trustee, the Insurer or Holders of Certificates evidencing not less than 25% of
the Pool/Pre-Funding Balance may terminate all the rights and obligations of the
Servicer under the Agreement, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements; provided, however, that
the Trustee will not be obligated to purchase Contracts if certain
representations and warranties of Onyx as Servicer prove incorrect or if certain
covenants of Onyx as Servicer are breached. In the event that the Trustee is
unwilling or unable so to act, it may appoint, with the consent of the Insurer,
or petition a court of competent jurisdiction for the appointment of a successor
with a net worth of at least $50,000,000 and whose regular business includes the
servicing of automobile retail installment sale contract receivables.
The Holders of Certificates evidencing not less than 51% of the
Pool/Pre-Funding Balance (not including any Certificates held by the Seller, the
Servicer or any affiliate) may, on behalf of all Certificateholders, with the
consent of the Insurer, waive any default by the Servicer or the Seller in the
performance of its obligations, other than failure to make any required deposits
to or payments from the Collection Account.
The Trustee is under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct, or defend any litigation thereunder or in
relation thereto at the request, order, or direction on any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby. No Certificateholder will have any
right under the Agreement to institute any proceeding with respect to the
Agreement, unless such Holder previously has given to the Trustee written notice
of default and unless the Holders of Certificates evidencing not less than 25%
of the Pool/Pre-Funding Balance with the consent of the Insurer have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and the
Trustee for 30 days has neglected or refused to institute any such proceedings.
Notwithstanding any provision in the Agreement to the contrary, in the
event that the Insurer is in default under the Surety Bond or is subject to any
insolvency proceeding, the Insurer shall not have the right to terminate the
Servicer, or to control or direct the actions of the Seller, the Servicer or the
Trustee pursuant to the terms of the Agreement, nor shall the consent of the
Insurer be required with respect to any action (or
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waiver of a right to take action) to be taken by the Seller, the Servicer or the
Trustee; provided, that the consent of the Insurer shall be required at all
times with respect to any amendment of the Agreement.
AMENDMENT
The Agreement may be amended by the Seller, the Servicer and the Trustee,
without the consent of the Certificateholders but with the consent of the
Insurer, to cure any ambiguity, correct or supplement any provision therein
which may be inconsistent with any other provision therein, or make any other
provisions with respect to matters or questions arising under such Agreement
which are not inconsistent with the provisions of the Agreement; provided that
such action will not, in the opinion of counsel satisfactory to the Trustee,
materially and adversely affect the interest of any Certificateholder. The
Agreement may also be amended by the Seller, the Servicer and the Trustee with
the consent of the Holders of Certificates evidencing not less than 51% of the
Pool/Pre-Funding Balance and the Insurer for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Agreement or of modifying in any manner the rights of Certificateholders;
provided, however, that no such amendment may (i) increase or reduce in any
manner the amount of, or accelerate or delay the timing of, collection of
payments on Contracts or distributions required to be made on any Certificate or
(ii) reduce the aforesaid percentage required to consent to any such amendment,
without the consent of all Certificateholders.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Servicer, the Trustee will provide to the
Servicer within 15 days after receipt of such request a list of the names and
addresses of all Certificateholders of record as of the most recent Record Date.
Upon written request by three or more Certificateholders or by Holders of
Certificates evidencing not less than 25% of the Pool/Pre-Funding Balance, the
Trustee will afford such Certificateholders access during business hours to the
current list of Certificateholders for purposes of communicating with other
Certificateholders with respect to their rights under the Agreement.
The Agreement will not provide for the holding of any annual or other
meetings of Certificateholders.
TERMINATION
The obligations of the Seller, the Servicer and the Trustee to the
Certificateholders pursuant to the Agreement will terminate upon the earlier of
(i) the maturity or other liquidation of the last Contract and the disposition
of any amounts received upon liquidation of any remaining Contracts that are
part of the Trust Property and (ii) (a) the payment to Certificateholders of all
amounts required to be paid to them pursuant to the Agreement and the
disposition of all property held as part of the Trust, (b) termination of the
Surety Bond in accordance with its terms and surrender of the Surety Bond to the
Insurer for cancellation, (c) the payment of all amounts owed to the Trustee
under the Agreement and (d) the payment of all amounts owed to the Insurer under
the Insurance Agreement and the spread account trust agreement. In order to
avoid excessive administrative expense, the Servicer is permitted at its option
to purchase the remaining Contracts from the Trust as of the Distribution Date
as of which the then outstanding Aggregate Scheduled Balance of the Contracts is
10% or less of the sum of the initial Pool Balance and the aggregate principal
balance of all Subsequent Contracts (as of each respective Subsequent Transfer
Date) conveyed to the Trust at a price equal to the Aggregate Scheduled Balance
of such Contracts plus accrued interest on the Contracts and all amounts due to
the Insurer under the Insurance Agreement. The Trustee will give written notice
of termination to each Certificateholder of record. The final distribution to
any Certificateholder will be made only upon surrender and cancellation of such
Certificateholder's Certificate at an office or agency of the Trustee specified
in the notice of termination. Any funds remaining in the Trust, after the
Trustee has taken certain measures to locate a Certificateholder and such
measures have failed, will be distributed to a charity designated by the
Servicer.
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THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Certificates, or any Contracts or related documents, or the
investment of any monies by the Servicer before such monies are deposited in or
credited to the Collection Account. The Trustee has not examined the Contracts.
If no Event of Default has occurred, the Trustee is required to perform only
those duties specifically required of it under the Agreement. Generally, those
duties are limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Trustee under the Agreement, the
making of distributions to Certificateholders in the amounts specified in
certificates provided by the Servicer and drawing on the Surety Bond if required
to make distributions to the Certificateholders.
Bankers Trust Company is the Trustee under the Agreement. The Trustee, and
any of its affiliates, may hold Certificates in their own names. In addition,
for the purpose of meeting the legal requirements of certain local
jurisdictions, the Servicer and the Trustee acting jointly shall have the power
to appoint co-trustees or separate trustees of all or any part of the Trust. In
the event of such appointment, all rights, powers, duties and obligations
conferred or imposed upon the Trustee by the Agreement shall be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in
any jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee may resign at any time, in which event a successor trustee will
be appointed pursuant to the terms of the Agreement. The Trustee may be removed
if it ceases to be eligible to continue as such under the Agreement or if the
Trustee becomes insolvent. Any resignation or removal of the Trustee and
appointment of a successor does not become effective until acceptance of the
appointment by the successor trustee.
The Trustee shall be entitled to a fee payable on an annual basis by Onyx.
The Agreement will further provide that the Trustee will be entitled to
indemnification by the Servicer for, and will be held harmless against, any
loss, liability, or expense incurred by the Trustee not resulting from the
Trustee's own willful misfeasance, bad faith, or negligence (other than errors
in judgment) or by reason of breach of any of their respective representations
or warranties set forth in the Agreement, except to the extent that such loss,
liability, or expense relates to a specific Contract or Contracts or certain
taxes that could be asserted against the Trustee, the Trust or the Contracts, in
which case the Trustee would be entitled to be indemnified by the Trust.
Onyx and the Insurer may maintain other banking relationships with the
Trustee in the ordinary course of business.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
GENERAL
The Contracts are "chattel paper" as defined in the Uniform Commercial Code
as in effect in California ("UCC"). Pursuant to the UCC, an ownership interest
in chattel paper may be perfected by possession of the collateral or filing a
UCC-1 financing statement with the California Secretary of State.
Under the Agreement, the Trustee initially will have custody of the
Contracts following the sale of the Contracts to the Trust and will hold the
Contracts as bailee for the benefit of the Trust. Upon receiving the prior
consent of the Insurer, which cannot be unreasonably withheld, the Servicer may
be appointed by the Trustee to act as the custodian of the Contracts. Upon such
appointment physical possession of the Contracts would shift from the Trustee to
the Servicer. While the Contracts will not be physically marked to indicate the
ownership interest thereof by the Trust, UCC-1 financing statements will be
filed with the California Secretary of State to perfect by filing and give
notice of the Trust's ownership interest in the Contracts. If, through
inadvertence or otherwise, any of the Contracts were sold to another party who
purchased such Contracts in the ordinary course of its business and took
possession of such Contracts, the purchaser would acquire an interest in the
Contracts superior to the interests of the Trust if the purchaser acquired the
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Contracts in good faith, for value and without actual knowledge of the Trust's
ownership interest in the Contracts.
SECURITY INTERESTS IN THE FINANCED VEHICLES
All Financed Vehicles were either registered in the State of California,
Arizona, Washington or one of the other states listed above under "THE
CONTRACTS" at the time of origination of the related Contract. Perfection of
security interests in motor vehicles is generally governed by state certificate
of title statutes or by the motor vehicle registration laws of the state in
which each vehicle is located. Security interests in vehicles registered in the
State of California (the state in which approximately 81.0% of the Financed
Vehicles are located) may be perfected by depositing with the California
Department of Motor Vehicles a properly endorsed certificate of title showing
the secured party as legal owner or an application for an original registration
together with an application for registration of the secured party as legal
owner. Security interests in vehicles registered in the State of Arizona (the
state in which approximately 9.9% of the Financed Vehicles are located) are
perfected by delivering to the assessor of the county in which the Obligor
resides a properly completed application for a certificate of title signed by
the Obligor upon a form supplied by the Motor Vehicle Division of the Arizona
Department of Transportation, noting the name of the lienholder, the amount and
date of the lien and the lienholder's mailing address. Security interests in
vehicles registered in the State of Washington (the state in which approximately
6.56% of the Financed Vehicles are located) are perfected upon the Washington
Department of Licensing's receipt of the existing certificate of ownership, if
any, and an application for a certificate of ownership containing the name and
address of the secured party, and tender of the required fee. Security interests
in vehicles registered in Hawaii, Nevada and Oregon, the other states in which
Contracts were originated, are perfected, generally, in the same manner. The
Seller has warranted to the Trust in the Agreement that Onyx has taken all steps
necessary to obtain a perfected first priority security interest with respect to
all Financed Vehicles securing the Contracts and that such security interest has
been assigned to the Trust. If Onyx fails, because of clerical errors or
otherwise, to effect or maintain the notation of its security interest on the
certificate of title relating to a Financed Vehicle, the Trust may not have a
first priority security interest in such Financed Vehicle.
The Seller will sell the Contracts and assign the security interest in each
Financed Vehicle to the Trust. However, because of the administrative burden and
expense, the Trust will not amend the certificates of title to identify the
Trust as the new secured party. Accordingly, Onyx, will continue to be named as
the secured party on the certificates of title relating to the Financed
Vehicles. Under the law of California, Arizona, Washington and most other states
including Hawaii, Nevada and Oregon, the assignment of the Contracts is an
effective conveyance of the security interests in the Financed Vehicles without
amendment of the lien noted on the related certificate of title and the new
secured party succeeds to the assignor's rights as the secured party. However,
there exists a risk in not identifying the Trust as the new secured party on the
certificate of title that, through fraud or negligence, the security interest of
the Trust could be released.
In the absence of fraud or forgery by the Financed Vehicle owner or
administrative error by state recording officials, notation of the lien of Onyx
will be sufficient to protect the Trust against the rights of subsequent
purchasers of a Financed Vehicle or subsequent lenders who take a security
interest in a Financed Vehicle. If there are any Financed Vehicles as to which
Onyx has failed to perfect the security interest assigned to the Trust, such
security interest would be subordinate to, among others, subsequent purchasers
of the Financed Vehicles and holders of perfected security interests.
In the event that the owner of a Financed Vehicle relocates to a state
other than the state in which the Financed Vehicle was registered at the
inception of the Contract, under the laws of most states the perfected security
interest in the Financed Vehicle would continue for four months after such
relocation and thereafter, in most instances, until the owner re-registers the
Financed Vehicle in such state. A majority of states generally require surrender
of a certificate of title to re-register a vehicle. Therefore, the Servicer will
provide the department or motor vehicles or other appropriate state or county
agency of the state of relocation with the certificate of title so that the
owner can effect the re-registration. If the Financed Vehicle owner moves to a
state that provides for notation of lien on the certificate of title to perfect
the security interests in the Financed Vehicle, Onyx, absent clerical errors or
fraud, would receive notice of surrender of the certificate of title if
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Onyx's lien is noted thereon. Accordingly, Onyx will have notice and the
opportunity to re-perfect the security interest in the Financed Vehicle in the
state of relocation. If the Financed Vehicle owner moves to a state which does
not require surrender of a certificate of title for registration of a motor
vehicle, reregistration could defeat perfection. In the ordinary course of
servicing its portfolio of motor vehicle installment sales contracts, Onyx takes
steps to effect such re-perfection upon receipt of notice of registration or
information from the Obligor as to relocation. Similarly, when an Obligor under
a Contract sells a Financed Vehicle, the Servicer must provide the owner with
the certificate of title, or the Servicer will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related Contract before release of the lien. Under the
Agreement, Onyx, at its cost, is obligated to maintain the continuous perfection
of its security interest in the Financed Vehicle.
Under the law of California and most other states, liens for unpaid taxes,
storage of and repairs performed on a motor vehicle take priority even over a
perfected security interest. Under the laws of Arizona and Washington, however,
certain liens for storage of and repairs performed on a motor vehicle do not
take priority over a perfected security interest. The Internal Revenue Code of
1986, as amended, also grants priority to certain federal tax liens over the
lien of a secured party. The Seller will represent in the Agreement that as of
the initial issuance of the Certificates no such state or federal liens exist
with respect to any Financed Vehicle securing payment on any Contract. However,
such liens could arise at any time during the term of a Contract. No notice will
be given to the Servicer in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN FINANCED VEHICLES
The Servicer, on behalf of the Trust, may take action itself to enforce its
security interest with respect to Defaulted Contracts by repossession and resale
of the Financed Vehicles securing such Defaulted Contracts. In addition to the
provisions of the UCC, under California law the Contracts originated in
California are subject to the provisions of the Rees-Levering Motor Vehicle
Sales and Finance Act (the "Rees-Levering Act"). In California the provisions of
the Rees-Levering Act control in the event of a conflict with the provisions of
the UCC. Contracts originated in Arizona are subject to the Motor Vehicle Time
Sales Disclosure Act of Arizona. Contracts originated in Washington are subject
to the Credit Disclosure Act of Washington. Contracts originated in states other
than California, Arizona and Washington may be subject to retail installment
sales laws and similar laws of those states. Under the UCC and laws applicable
in most states, a creditor can, without prior notice to the debtor, repossess a
motor vehicle securing a motor vehicle installment contract by voluntary
surrender, by "self-help" repossession without breach of peace, and by judicial
process. The Rees-Levering Act in California and similar laws in Arizona,
Washington and other states place restrictions on repossession sales, including
notice to the debtor of the intent to sell and of the debtor's right to redeem
the vehicle. In addition, the UCC requires commercial reasonableness in the
conduct of the sale.
In the event of such repossession and resale of a Financed Vehicle, the
Servicer for the benefit of the Trust would be entitled to be paid out of the
sale proceeds before such proceeds could be applied to the payment of the claims
of unsecured creditors or the holders of subsequently perfected security
interests or, thereafter, to the debtor.
Under the UCC and laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the motor vehicle securing such debtor's motor vehicle installment
contract. However, some states impose prohibitions or limitations on deficiency
judgments, including the State of Washington. Under California and Arizona law
the proceeds from the resale of the motor vehicle securing the debtor's motor
vehicle installment contract are applied first to the expenses of resale and
repossession, and if the remaining proceeds are not sufficient to repay the
indebtedness, the creditor may seek a deficiency judgment for the balance. The
priority of application of proceeds from the sale of repossessed vehicles under
the Contracts originated in most other states, including Hawaii, Nevada and
Oregon, is similar.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws, may limit or delay the ability of the creditor to repossess
and resell collateral or enforce a deficiency judgment.
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In the event that deficiency judgments are not satisfied, are satisfied at
a discount or are discharged in whole or in part, in bankruptcy proceedings,
including proceeds under Chapter 13 of Bankruptcy Reform Act of 1978, as
amended, the loss will be borne by the Trust.
OTHER MATTERS
The so-called "holder-in-due-course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the Obligor may also assert the rule to
set off remaining amounts due as a defense against a claim brought by the
Trustee against such Obligor.
The courts have imposed general equitable principles on repossession and
litigation involving deficiency balances. These equitable principles may have an
effect of relieving an Obligor from some or all of the legal consequences of a
default.
Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and servicing of the Contracts,
including the Truth-in-Lending Act, the Federal Trade Commission Act, the Fair
Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity
Act, the Fair Debt Collection Practices Act, and the Rees-Levering Act. The
Seller has represented to the Trust in the Agreement that each of the Contracts,
and the sale of the related Financed Vehicles sold thereunder, complied with all
material requirements of such laws and the regulations issued pursuant thereto.
REPURCHASE OBLIGATION
Under the Agreement, the Seller will make representations and warranties
relating to validity, subsistence, perfection and priority of the security
interest in each Initial Financed Vehicle as of the Closing Date and the
security interest in each Subsequent Financed Vehicle as of each related
Subsequent Transfer Date. See "The Certificates and the Agreement -- Sale and
Assignment of the Contracts." Accordingly, if any defect exists in the
perfection of the security interest in any Financed Vehicle as of the Closing
Date or any Subsequent Transfer Date, as applicable, and such defect adversely
affects the Trust's interest in the related Contract, such defect would
constitute a breach of a warranty under the Agreement and would create an
obligation of the Seller to repurchase such Contract unless the breach is cured.
Additionally, in the Agreement the Servicer will make certain representations,
warranties and affirmative covenants regarding, among other things, the
maintenance of the security interest in each Financed Vehicle, the breach of
which would create an obligation of the Servicer to purchase any affected
Contract from the Trust unless the breach is cured.
CERTAIN TAX CONSEQUENCES
The following is a summary of the material anticipated Federal income tax
consequences of the purchase, ownership, and disposition of Certificates. This
summary is based upon laws, regulations, rulings, and decisions currently in
effect, all of which are subject to change (which change may be retroactive).
The discussion does not deal with all Federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules. In
addition, this summary is generally limited to investors who will hold the
Certificates as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). Consequences to individual investors of investment in the
Certificates will vary according to their individual circumstances. In addition,
this summary generally does not address foreign, state or local taxation issues.
Accordingly, investors should consult their own tax advisors to determine the
Federal, state, local, and other tax consequences of the purchase, ownership,
and disposition of the Certificates. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"IRS") with respect to any of the Federal income tax consequences discussed
below, and no assurance can be given that the IRS will not take contrary
positions.
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BECAUSE MANY OF THE ISSUES DISCUSSED HEREIN ARE COMPLEX AND THEIR
RESOLUTION IS UNCERTAIN, INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS TO
DETERMINE THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES.
TAX STATUS OF THE TRUST
In the opinion of Brobeck, Phleger and Harrison, special tax counsel to the
Seller, the Trust will be classified as a grantor trust and not as a partnership
or as an association taxable as a corporation for Federal income tax purposes.
Accordingly, subject to the discussion below, each Certificate Owner will be
subject to Federal income taxation as if it owned directly its interest in each
asset owned by the Trust and paid directly its share of reasonable expenses paid
by the Trust.
TREATMENT OF CERTIFICATE OWNERS' INTEREST IN TRUST ASSETS
Each Certificate Owner could be considered to own either (i) an undivided
interest in a single debt obligation held by the Trust and having a principal
amount equal to the total stated principal amount of the Contracts and an
interest rate equal to the Pass-Through Rate, or (ii) an interest in each of the
Contracts, in the Pre-Funding Account, in the Yield Supplement Agreement and any
other Trust Property. The Agreement will express the intent of the Seller to
sell, and the Certificateholders to purchase, the Contracts (other than the
Retained Strip (as defined below)) and the Seller, the Certificateholders, and
each Certificate Owner, by accepting a beneficial interest in a Certificate,
will agree to treat the Certificates as ownership interests in the Contracts,
the Pre-Funding Account, the Yield Supplement Agreement and any other Trust
Property.
Treatment as Debt Obligation. If a Certificate Owner were considered to
own an undivided interest in a single debt obligation, rather than reporting its
share of the interest accrued on each Contract it would, in general, be required
to include in income interest accrued or received on the principal amount of the
Certificates at the Pass-Through Rate in accordance with its usual method of
accounting.
The Certificates would be subject to the original issue discount ("OID")
rules, generally in the manner discussed below with respect to Stripped
Contracts. However, in determining whether such OID is de minimis, the weighted
average life of the Certificates would be determined using a reasonable
assumption regarding anticipated prepayments (a "Prepayment Assumption").
Original issue discount includible in income for any accrual period (generally,
the period between payment dates) would generally be calculated using a
Prepayment Assumption and an anticipated yield established as of the date of
initial sale of the Certificates, and would increase or decrease to reflect
prepayments at a faster or slower rate than anticipated. The Certificates would
also be subject to the market discount provisions of the Code to the extent that
a Certificate Owner purchased such Certificates at a discount from the initial
issue price (as adjusted to reflect prior accruals of original issue discount).
The remainder of the discussion herein assumes that a Certificate Owner
will be treated as owning an interest in each Contract (and the proceeds
thereof), in the Pre-Funding Account, and an interest in the Yield Supplement
Agreement and any other Trust Property, although the Servicer will report
information on an aggregate basis.
SPECIFIC TAX ISSUES CONCERNING RULE OF 78'S CONTRACTS
For the Rule of 78's Contracts, the purchase price paid by the
Certificateholders for each Contract will reflect the principal balance of such
Contract as of the Cut-Off Date (with respect to Initial Contracts) or as of the
applicable Subsequent Transfer Date (with respect to Subsequent Contracts) based
on the Rule of 78's (the "Cut-Off Date Scheduled Balance"). Because the Rule of
78's allocates a greater portion of the early payments under a Contract to
interest than the actuarial method, the Cut-Off Date Scheduled Balance of each
Contract exceeds the amount that would have been its principal balance as of the
Cut-Off Date or Subsequent Transfer Date if each Contract had been amortized
from origination under an actuarial method (such amount, the "Cut-Off Date
Actuarial Balance").
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The Trustee and the Servicer intend to account for interest and principal
on the Rule of 78's Contracts using the actuarial method, but based on the
Cut-Off Date Scheduled Balance rather than the Cut-Off Date Actuarial Balance.
As described above, the remaining payments due on a Rule of 78's Contract are
not sufficient to amortize the Cut-Off Date Scheduled Balance of such Contract
at a yield equal to its APR. Accordingly, in order to amortize the Cut-Off Date
Scheduled Balance over the remaining term of the Rule of 78's Contract using the
actuarial method of accounting, the Servicer will recompute the effective yield
of such Contract based on the remaining payments due and the Cut-Off Date
Scheduled Balance (such yield, stated as a per annum rate, the "Recomputed
Yield") and will allocate each payment of Monthly P&I between principal and
interest on each Contract beginning with the Cut-Off Date Scheduled Balance by
applying the Recomputed Yield instead of the APR.
The proper tax method for accounting for the Rule of 78's Contracts is
uncertain. As described above, the Servicer and the Trustee intend to report
income to the Certificateholders based on the Recomputed Actuarial Method (as
defined below) and assuming for purposes of calculating OID, that the income on
the Scheduled Balance of each Contract, at a rate equal to the Recomputed Yield
minus the Retained Strip, would be treated as "qualified stated interest." See
"-- Discount and Premium -- Original Issue Discount on Stripped Contracts."
However, prospective investors should consult their tax advisors as to whether
they may be required or permitted to use the Rule of 78's method to account for
interest on the Rule of 78's Contracts. A Certificateholder will be furnished
information for federal income tax purposes enabling him to report interest on
such Contracts under the Rule of 78's method of accounting only upon written
request to the Trustee, and payment of the actual costs of producing the same.
Alternatively, the IRS could take the position that a Certificate Owner that
amortizes a Rule of 78's Contract under the Recomputed Actuarial Method (rather
than under the Rule of 78's method) has actually acquired a Contract having an
actual principal balance equal to the Cut-Off Date Actuarial Balance at a
premium equal to the difference between the Cut-Off Date Actuarial Balance and
the Cut-Off Date Scheduled Balance, and that the actuarial method must be
applied from the time of a Contract's origination using its actual APR. In that
event (unless the Certificate Owner were to make a Total Accrual Election, as
described below) it appears likely that the Certificate Owner would be required
to include income at a rate equal to the full APR of the Contract (minus the
Retained Strip) on a balance equal to the Cut-Off Date Actuarial Balance
amortized based on the APR and an actuarial method, and should be entitled to
amortize the difference between the Cut-Off Date Scheduled Balance and the Cut-
Off Date Actuarial Balance to the extent it had a valid election in effect. See
"-- Discount and Premium."
As an alternative to separately accruing stated interest, OID, de minimis
OID, market discount, de minimis market discount, unstated interest, premium,
and acquisition premium, a Certificate Owner may elect to include all income
that accrues on the Certificate using the constant yield method. If a
Certificate Owner makes this election (the "Total Accrual Election"), income on
a Certificate will be calculated as though (i) the issue price of the
Certificate were equal to the Certificate Owner's adjusted basis in the
Certificate immediately after its acquisition by the Certificate Owner; (ii) the
Certificate were issued on the Certificate Owner's acquisition date; and (iii)
none of the interest payments on the Certificate are "qualified stated interest"
payments. A Certificate Owner may make such an election for a Certificate that
has premium or market discount, respectively, only if the Certificate Owner
makes, or has previously made, an election to amortize bond premium or to
include market discount in income currently.
If a Rule of 78's Contract is prepaid in full, any amount collected from
the Obligor pursuant to the Contract in excess of the principal balance thereof
and accrued interest thereon, computed using the actuarial method and the
Recomputed Yield, as described above (such method, the "Recomputed Actuarial
Method" and such amount, the "Recomputed Principal Balance"), will be paid to
the owner of retained yield. Such amount may be treated as additional income in
the nature of a prepayment penalty to a Certificate Owner who had reported
income with respect to the Contracts on the Recomputed Actuarial Method, and
would be deductible only to the extent described below. Alternatively, such
amount might be treated as an interest in the Contract retained by the owner of
retained yield, in which event it would not be included in a Certificate Owner's
income.
46
<PAGE> 48
INCOME ON ALL CONTRACTS AND PRE-FUNDING ACCOUNT
For federal income tax purposes, the owner of retained yield will be
treated as having retained a portion (the "Retained Strip") of the interest due
on each Contract having a yield in excess of % calculated using the actuarial
method (each, a "Stripped Contract") equal to the difference between (x) the
Recomputed Yield of the Contract and (y) %. The Retained Strip will be treated
as "stripped coupons" within the meaning of Section 1286 of the Code, and the
Stripped Contracts will be treated as "stripped bonds." If, as described above,
the IRS were to take the position that the actuarial method must be applied
consistently from the time of origination of a Contract, the Retained Strip
would consist of a different portion of the interest that accrues at the APR on
the actuarial principal balance of a Contract for each. ("Contract Due Period").
Each Certificate Owner will be required to report on its federal income tax
return its share of the gross income of the Trust, including interest and
certain other charges accrued on the Contracts and on investments in the
Pre-Funding Account, original issue discount and market discount (to the extent
described below), payments received under the Yield Supplement Agreement (to the
extent treated as income), investment earnings on amounts held pending
distribution, and any gain upon collection or disposition of the Contracts. Such
income (other than any original issue discount or market discount, as described
below) would be includible in income in accordance with a Certificate Owner's
usual method of accounting. Accordingly, interest will be includible in a
Certificate Owner's gross income at the time it accrues on the Contracts, or, in
the case of Certificate Owners who are cash basis taxpayers, when received by
the Servicer on behalf of Certificate Owners. Because (i) interest accrues on
the Contracts over differing monthly periods and is paid in arrears and (ii)
interest collected on a Contract is generally paid to Certificate Owners in the
following month, the amount of interest accruing to a Certificate Owner during
any month will not equal the interest distributed in that month.
A Certificate Owner will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust as provided in Section 162 or 212 of the Code. If
a Certificate Owner is an individual, estate or trust, the deduction for such
holder's share of such fees will be allowed only to the extent that all of such
holder's miscellaneous itemized deductions, including such holder's share of
such fees, exceed 2% of such holder's adjusted gross income. In addition, in the
case of Certificate Owners who are individuals, certain otherwise allowable
itemized deductions will be reduced, but not by more than 80%, by an amount
equal to 3% of such holder's adjusted gross income in excess of a statutorily
defined threshold ($117,950 in the case of a married couple filing jointly for
the taxable year beginning in 1996 and will be adjusted for inflation each year
thereafter). The Servicer will not report to Certificate Owners the amount of
income or deductions attributable to interest earned on collections and certain
other amounts (which are includible in gross income, but the deductions of which
are subject to the foregoing limitations) and, accordingly, such a holder will
not have sufficient information from the report itself to accurately reflect the
holder's net taxable income.
For administrative convenience, the Servicer intends to report the total
amount of income with respect to the Certificates on an aggregate basis (as
though all of the Contracts, the Pre-Funding Account and the Yield Supplement
Agreement were a single obligation), rather than on an asset-by-asset basis. The
amount and, in some instances, character, of the income reported to a
Certificate Owner may differ under this method for a particular period from that
which would be reported if income were reported on a precise asset-by-asset
basis. Accordingly, the IRS could require that a Certificate Owner calculate its
income either (i) on an asset-by-asset basis, accounting separately for each
Contract, for earnings on amounts on deposit in the Pre-Funding Account, and for
payments made under the Yield Supplement Agreement, or (ii) aggregating all
Stripped Contracts under the aggregation rule described below and accounting for
the remaining Contracts, the Pre-Funding Account and the Yield Supplement
Agreement on an asset-by-asset basis. If reporting on an aggregate basis results
in under-reporting of income, or if the IRS were to take a position different
from that adopted by the Trust with respect to any issue, a Certificate Owner
could be required to pay interest on underpayments of tax and could be subject
to penalties for under-reporting of income. See "-- Discount and
Premium -- Original Issue Discount on Stripped Contracts." In computing its
income on an asset-by-asset basis, a Certificate Owner would allocate its tax
basis among the Contracts and its interest in the Pre-Funding
47
<PAGE> 49
Account and in the Yield Supplement Agreement in proportion to their fair market
values. Because the Recomputed Yields of the Contracts vary widely, the
allocation of basis and computation of income on an asset-by-asset basis could
have a more significant effect on the income of a Certificate Owner than it
would if the Contracts had more uniform characteristics.
The remainder of the disclosure generally describes the Code provisions
governing reporting of income on the Contracts, the Pre-Funding Account and the
Yield Supplement Agreement on a separate asset basis.
DISCOUNT AND PREMIUM
In determining whether a Certificate Owner has purchased its interest in
the Contracts (or any Contract) at a discount and whether such Contracts (or any
Contract) have OID, a portion of the purchase price of a Certificate should be
allocated to the Certificate Owner's undivided interest in accrued but unpaid
interest, amounts collected at the time of purchase but not distributed and
rights to receive Yield Supplement Amounts. As a result, the portion of the
purchase price allocable to a Certificate Owner's undivided interest in the
Contracts (or any Contract) (the "Purchase Price") will be decreased and the
potential OID on the Contracts (or any Contract) could be increased.
Original Issue Discount on Stripped Contracts. Because the Stripped
Contracts represent stripped bonds, they will be subject to the OID rules of the
Code. Under Treasury Regulations issued under Section 1286 of the Code (the
"Section 1286 Regulations"), it appears that, in general, the portion of the
interest on each Contract payable to the Certificate Owners may be treated as
"qualified stated interest." As a result, the amount of OID on a Contract (or
Contracts) will equal the amount, if any, by which the Purchase Price is less
than the portion of the remaining principal balance of the Contract (or
Contracts) allocable to the interest acquired. However, if the IRS were to take
the position that the actuarial method must be applied consistently from the
time of origination of a Contract at a rate equal to the Contract's APR (such
method, the "Origination Actuarial Method"), then a Certificate Owner would be
deemed to receive interest at a different rate for each Collection Period and
the remainder of the interest deemed to accrue at the Contract's APR on the
actuarial principal balance would be included in the Retained Strip. As a
result, it appears that none of the interest on the Stripped Contracts would be
"qualified stated interest." In that event, the entire yield deemed to accrue to
a Certificate Owner would be includible in income as OID, based on a yield which
should generally equal a rate equal to %.
The Trustee will calculate OID, if any, on all of the Contracts (including
Stripped Contracts) on an aggregate basis and without the use of a prepayment
assumption. Regulations issued under the OID provisions of the Code (the "OID
Regulations") suggest that all payments on the Stripped Contracts that are
Initial Contracts allocable to the Certificates may be aggregated in determining
whether the Stripped Contracts will be treated as having OID, although the
regulation does not include the Subsequent Contracts, which cannot technically
be aggregated with the Initial Contracts because the Stripped Contracts are
issued on a subsequent date. Separate accounting for the Stripped Contracts and
the Contracts that are not stripped would reduce the possibility that the
Stripped Contracts would be treated as issued with OID; however, as discussed
below, (any Contracts having a yield equal to % (using a Recomputed Yield
for Rule of 78's Contracts)) would be treated as having imputed interest, market
discount, or both. In addition, it is not clear whether use of a prepayment
assumption is required in computing OID. If the IRS were to require that OID be
computed on a Contract-by-Contract basis, or that a prepayment assumption be
used, the character and timing of a Certificate Owner's income could be
adversely affected. Because under the stripped bond rules each sale of a
Certificate results in a recalculation of OID, a Certificate Owner technically
will not be subject to the market discount provisions of the Code with respect
to Stripped Contracts.
The tax treatment of a Stripped Contract (or the Stripped Contracts in the
aggregate) will depend upon whether the amount of OID on the Contract or
Contracts is less than a statutorily defined de minimis amount. In general,
under the Section 1286 Regulations the amount of OID on a Stripped Contract will
be de minimis if it is less than 1/4 of one percent for each full year of
weighted average maturity remaining after the purchase date until the maturity
of the Contract (although it is not clear whether expected prepayments are taken
into account). If the amount of OID is de minimis under this rule, a Stripped
Contract would not be treated as
48
<PAGE> 50
having OID. The actual amount of discount on a Stripped Contract would be
includible in income as principal payments are received on the Contract, in the
proportion that each principal payment bears to the total principal amount of
the Contract. If the IRS were to require the use of the Origination Actuarial
Method, the OID on a Contract would not be de minimis.
If the OID on a Contract (or Contracts) is not treated as being de minimis,
a Certificate Owner will be required to include in income any OID as it accrues
on a daily basis, regardless of when cash payments are received, using a method
reflecting a constant yield to maturity on the Contract (or Contracts). Accrued
OID would increase a Certificate Owner's tax basis in the Certificate (and the
applicable Contracts). Distributions of principal and other items attributable
to accrued OID (other than payments of interest on the Contracts at %)
would reduce a Certificate Owner's tax basis. Application of the OID rules,
particularly if a prepayment assumption is required and the Contracts are not
aggregated, would be complex and could significantly affect the timing of
inclusion of income on a Certificate.
The Trustee intends to account for OID, if any, reportable by holders of
Certificates by reference to the price paid for a Certificate by an initial
purchaser, although the amount of OID will differ for subsequent purchasers.
Such subsequent purchasers should consult their tax advisors regarding the
proper calculation of OID on the interest in Contracts represented by a
Certificate.
Premium. In the event that a Contract is treated as purchased at a premium
(i.e., its Purchase Price exceeds the portion of the remaining principal balance
of such Contract allocable to the Certificate Owner), such premium will be
amortizable by the Certificate Owner as an offset to interest income (with a
corresponding reduction in the Certificate Owner's basis) under a constant
yield-to-maturity method over the term of the Contract if an election under
Section 171 of the Code is made with respect to the interests in the Contracts
represented by the Certificates or was previously in effect. Any such election
will also apply to all debt instruments held by the Certificate Owner during the
year in which the election is made and all debt instruments acquired thereafter.
YIELD SUPPLEMENT AMOUNTS
The proper federal income tax characterization of the Yield Supplement
Amounts is not clear. The rights of a Certificate Owner in the Pre-Funding
Account plus the right to receive Yield Supplement Amounts could together be
treated as a debt obligation of the Seller bearing interest at the Pass-Through
Rate. Alternatively, a Certificate Owner could be treated as owning the
investments in the Pre-Funding Account and the right to receive Yield Supplement
Amounts. If the right to receive Yield Supplement Amounts may be treated as a
separate asset purchased by each Certificate Owner, in which event a portion of
the purchase price paid by each Certificate Owner for a Certificate should be
allocated to such right (such portion, the "Allocated Amount"). The Allocated
Amount itself may be treated as a loan made by the Certificate Owner to the
Seller, in which case a portion of the Yield Supplement Amounts should be
treated as interest includible in income as accrued or received and the
remainder should be treated as a return of the principal amount of the deemed
loan. If the entire amount of each Yield Supplement Amount should be included in
income as accrued or received, the Certificate Owner should be entitled to
amortize the Allocated Amount. No assurance can be given, however, that either
of these two characterizations will be accepted by the IRS.
SALE OF A CERTIFICATE
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale and the Certificate Owner's
adjusted basis in the Contracts and any other assets held by the Trust. A
Certificate Owner's adjusted basis will equal the Certificate Owner's cost for
the Certificate, increased by any discount previously included in income, and
decreased by any deduction previously allowed for accrued premium and by the
amount of principal payments previously received on the Contracts. Any gain or
loss not attributable to accrued interest or accrued market discount will be
capital gain or loss if the Certificate was held as a capital asset.
49
<PAGE> 51
FOREIGN CERTIFICATE OWNER
Interest attributable to Contracts which is payable to a foreign
Certificate Owner that is not engaged in a trade or business in the United
States will generally not be subject to the 30% withholding tax generally
imposed with respect to such payments, provided that such Certificate Owner
fulfills certain certification requirements. Under such certification
requirements, the Certificate Owner must certify, under penalties of perjury,
that it is not a "United States person" and it is the beneficial owner of the
Certificates, and must provide its name and address. For this purpose, "United
States person" means a citizen or resident of the United States, a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust the
income of which is includible in gross income for United States Federal income
tax purposes, regardless of its source (except, with respect to the tax year of
any trust that begins after December 31, 1996, a United States person shall also
mean a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries who have
the authority to control all substantial decisions of the trust).
BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to a "backup" withholding tax of 31% unless, in
general, the Certificate Owner fails to comply with certain reporting procedures
and is not an exempt recipient under applicable provisions of the Code.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans ("Plans") subject to
ERISA and persons who have certain specified relationship to such Plans
("Parties in Interest"). ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA and prohibits certain transactions between
a Plan and Parties in Interest with respect to such Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant.)
The Department of Labor ("DOL") has issued a final regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulation"). This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, grantor trusts and certain other entities in which a Plan (which
is subject to ERISA) makes an "equity" investment will be deemed for purposes of
ERISA to be assets of the investing Plan unless certain exceptions apply. The
Plan Asset Regulation contains certain exceptions to this general rule.
Accordingly if a Plan purchases the Certificates, the Trust could be deemed to
hold plan assets unless one of the exceptions under the Plan Assets Regulation
is applicable to the Trust.
Under the terms of the Plan Asset Regulation, if the Trust were deemed to
hold Plan assets by reason of a Plan's investment in a Certificate, such Plan
assets would include an undivided interest in the Trust and Contracts underlying
the Trust and any other assets held by the Trust. In such an event, the persons
providing services with respect to the assets of the Trust, including the
Contracts, may be subject to the fiduciary responsibility provisions of Title I
of ERISA. In addition, those persons and certain other persons, including
Obligors on the receivables held in the Trust, may be subject to the prohibited
transaction provisions of ERISA and Section 4975 of the Code with respect to
certain transactions involving such assets or the Certificates. Accordingly, the
Certificates may not be purchased by or on behalf of Plans.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated December , 1996 (the "Underwriting Agreement") between the Seller and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), the
Seller has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase the entire principal amount of the Certificates.
50
<PAGE> 52
The Seller has been advised by the Underwriter that it proposes initially
to offer the Certificates to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at such price less a
concession not in excess of % of the principal amount thereof. The
Underwriter may allow, and such dealers may reallow, a discount not in excess of
% of the principal amount of the Certificates on sales to certain other
dealers. After the initial public offering, the public offering price of the
Certificates and such concession and discount may be changed. The Underwriter is
obligated to purchase and pay for all of the Certificates if any Certificates
are purchased. The Underwriter currently intends, but is not obligated, to make
a market in the Certificates.
The Seller and Onyx have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under applicable securities laws, or
contribute to payments the Underwriter may be required to make in respect
thereof.
LEGAL MATTERS
Certain matters with respect to the legality of the Certificates and with
respect to the federal income tax matters discussed under "Certain Tax
Consequences" will be passed upon for the Seller by Brobeck, Phleger & Harrison
LLP, Newport Beach, California. As of November 30, 1996, members of Brobeck,
Phleger & Harrison beneficially owned 22,899 shares of Onyx's Common Stock.
Bruce R. Hallett, a member of Brobeck, Phleger & Harrison LLP is Corporate
Secretary and a director of Onyx. Certain legal matters with respect to the
Certificates will be passed upon for the Underwriter by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York. Certain legal matters relating to the
Surety Bond will be passed upon for the Insurer by Shaw, Pittman, Potts &
Trowbridge, New York, New York.
EXPERTS
The financial statements of Capital Markets Assurance Corporation as of
December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995 are included herein beginning on page F-1 and have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their report thereon and are included in reliance upon the
authority of such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements
referred to above contains an explanatory paragraph with regard to Capital
Markets Assurance Corporation's adoption at December 31, 1993 of Financial
Accounting Standard Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
51
<PAGE> 53
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
Aggregate Scheduled Balance..................................................... 5, 27
Aggregate Scheduled Balance Decline............................................. 5, 27
Agreement....................................................................... 3
APR............................................................................. 20
Auto Finance Centers............................................................ 15
Blanket Insurance Policy........................................................ 17
Business Day.................................................................... 10
Cede............................................................................ 10
Certificate Balance............................................................. 4
Certificate Owner............................................................... 10, 26
Certificates.................................................................... 1, 3
Closing Date.................................................................... 6, 11
Code............................................................................ 44
Collection Period............................................................... 5, 27
Collection Account.............................................................. 4, 33
Commission...................................................................... 2
Contract Due Period............................................................. 47
Contracts....................................................................... 1, 4
Cut-Off Date.................................................................... 1, 3
Cut-Off Date Actuarial Balance.................................................. 45
Cut-Off Date Scheduled Balance.................................................. 3, 20, 45
Dealers......................................................................... 8
Defaulted Contract.............................................................. 6
Definitive Certificates......................................................... 31
Distribution Date............................................................... 1, 4
Distribution Date Statement..................................................... 2, 37
DOL............................................................................. 50
Due Date........................................................................ 17
DTC............................................................................. 10
Eligibility Requirements........................................................ 21
Eligible Accounts............................................................... 28
Eligible Investments............................................................ 33
ERISA........................................................................... 50
Events of Default............................................................... 38
Final Distribution Date......................................................... 1, 4
Financed Vehicles............................................................... 1, 4
Full Prepayment................................................................. 23
Funding Period.................................................................. 6
Holders......................................................................... 31
Holdings........................................................................ 36
Indirect Participants........................................................... 30
Initial Contracts............................................................... 1, 3
</TABLE>
52
<PAGE> 54
<TABLE>
<S> <C>
Initial Financed Vehicles....................................................... 1, 3
Insolvency Laws................................................................. 12
Insurance Agreement............................................................. 8
Insurer......................................................................... 1, 4
Interest Distribution........................................................... 1, 4, 27
IRS............................................................................. 44
Liquidated Contract............................................................. 5, 28
Liquidation Expenses............................................................ 34
Liquidation Proceeds............................................................ 34
Mandatory Partial Prepayment.................................................... 6
Monthly P&I..................................................................... 5, 27
Moody's......................................................................... 33
Motor Vehicle Contracts......................................................... 15
Net Insurance Proceeds.......................................................... 34
Net Liquidation Proceeds........................................................ 34
Obligor......................................................................... 13
OCS............................................................................. 17
OID............................................................................. 48
OID Regulations................................................................. 48
Onyx............................................................................ 1, 3
Original Certificate Balance.................................................... 4
Origination Actuarial Method.................................................... 48
Participants.................................................................... 30
Parties in Interest............................................................. 50
Pass-Through Rate............................................................... 4
Payaheads....................................................................... 9, 34
Payahead Account................................................................ 34
Paying Agent.................................................................... 30
Plans........................................................................... 50
Plan Asset Regulation........................................................... 50
Pool Balance.................................................................... 7
Pool/Pre-Funding Balance........................................................ 24
Pool Factor..................................................................... 24
Pre-Funding Account............................................................. 1, 4
Pre-Funded Amount............................................................... 1, 6
Prepayment Assumption........................................................... 45
Principal Distribution.......................................................... 1, 5, 27
Purchase Agreement.............................................................. 25
Purchase Price.................................................................. 48
Rating.......................................................................... 13
Recomputed Actuarial Method..................................................... 21, 46
Recomputed Principal Balance.................................................... 46
Recomputed Yield................................................................ 46
</TABLE>
53
<PAGE> 55
<TABLE>
<S> <C>
Record Date..................................................................... 27
Rees-Levering Act............................................................... 43
Reinsurer....................................................................... 34
Repurchase Amount............................................................... 33
Retained Strip.................................................................. 47
Rule of 78's Contracts.......................................................... 8, 20
Scheduled Balance............................................................... 5, 27
Section 1286 Regulations........................................................ 48
Seller.......................................................................... 1, 3
Servicer........................................................................ 1, 3
Servicer Report Date............................................................ 8
Servicing Fee................................................................... 7
Servicing Fee Rate.............................................................. 7, 36
Simple Interest Contracts....................................................... 8, 20
Simple Interest Method.......................................................... 20
Standard & Poor's............................................................... 33
Stripped Contract............................................................... 47
Subsequent Contracts............................................................ 1, 4
Subsequent Closing Date......................................................... 8, 32
Subsequent Financed Vehicles.................................................... 1, 4
Subsequent Transfer Date........................................................ 4
Surety Bond..................................................................... 1, 4, 8
Total Accrual Election.......................................................... 46
Transfer Certificate............................................................ 32
Trust........................................................................... 1, 3, 14
Trust Property.................................................................. 3
Trustee......................................................................... 3, 14
UCC............................................................................. 11, 41
Underwriter..................................................................... 50
Underwriting Agreement.......................................................... 50
Yield Supplement Agent.......................................................... 29
Yield Supplement Agreement...................................................... 4, 29
Yield Supplement Amount......................................................... 7, 29
Yield Supplement Reserve Account................................................ 7, 29
</TABLE>
54
<PAGE> 56
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CAPITAL MARKETS ASSURANCE CORPORATION:
We have audited the accompanying balance sheets of Capital Markets
Assurance Corporation as of December 31, 1995 and 1994 and the related
statements of income, stockholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," at December 31, 1993.
/s/ KPMG Peat Marwick LLP
New York, New York
January 25, 1996
F-2
<PAGE> 58
CAPITAL MARKETS ASSURANCE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Bonds at fair value (amortized cost $210,651 at December 31, 1995
and $178,882 at December 31, 1994)............................... $215,706 172,016
Short-term investments (at amortized cost which approximates fair
value)........................................................... 68,646 2,083
Mutual funds at fair value (cost $16,434 at December 31, 1994)..... -- 14,969
------------ ------------
Total investments............................................. 284,352 189,068
------------ ------------
Cash............................................................... 344 85
Accrued investment income.......................................... 3,136 2,746
Deferred acquisition costs......................................... 35,162 24,860
Premiums receivable................................................ 3,540 3,379
Prepaid reinsurance................................................ 13,171 5,551
Other assets....................................................... 3,428 3,754
------------ ------------
Total assets.................................................. $343,133 229,443
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums.................................................. $ 45,767 25,905
Reserve for losses and loss adjustment expenses.................... 6,548 5,191
Ceded reinsurance.................................................. 2,469 1,497
Accounts payable and other accrued expenses........................ 10,844 10,372
Current income taxes............................................... 136 --
Deferred income taxes.............................................. 11,303 3,599
------------ ------------
Total liabilities............................................. 77,067 46,564
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock....................................................... 15,000 15,000
Additional paid-in capital......................................... 205,808 146,808
Unrealized appreciation (depreciation) on investments, net of
tax.............................................................. 3,286 (5,499)
Retained earnings.................................................. 41,972 26,570
------------ ------------
Total stockholder's equity.................................... 266,066 182,879
------------ ------------
Total liabilities and stockholder's equity.................... $343,133 229,443
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 59
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Direct premiums written............................. $ 56,541 43,598 24,491
Assumed premiums written............................ 935 1,064 403
Ceded premiums written.............................. (15,992) (11,069) (3,586)
------------ ------------ ------------
Net premiums written.............................. 41,484 33,593 21,308
Increase in unearned premiums....................... (12,242) (10,490) (3,825)
------------ ------------ ------------
Net premiums earned............................... 29,242 23,103 17,483
Net investment income............................... 11,953 10,072 10,010
Net realized capital gains.......................... 1,301 92 1,544
Other income........................................ 2,273 120 354
------------ ------------ ------------
Total revenues................................. 44,769 33,387 29,391
------------ ------------ ------------
EXPENSES:
Losses and loss adjustment expenses................. 3,141 1,429 902
Underwriting and operating expenses................. 13,808 11,833 11,470
Policy acquisition costs............................ 7,203 4,529 2,663
------------ ------------ ------------
Total expenses................................. 24,152 17,791 15,035
------------ ------------ ------------
Income before income taxes........................ 20,617 15,596 14,356
------------ ------------ ------------
INCOME TAXES:
Current income tax.................................. 2,113 865 1,002
Deferred income tax................................. 3,102 2,843 2,724
------------ ------------ ------------
Total income taxes............................. 5,215 3,708 3,726
------------ ------------ ------------
NET INCOME.......................................... $ 15,402 11,888 10,630
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 60
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of period...................... $ 15,000 15,000 15,000
------------ ------------ ------------
Balance at end of period.......................... 15,000 15,000 15,000
------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period...................... 146,808 146,808 146,808
Paid-in capital..................................... 59,000 -- --
------------ ------------ ------------
Balance at end of period.......................... 205,808 146,808 146,808
------------ ------------ ------------
UNREALIZED (DEPRECIATION) APPRECIATION ON
INVESTMENTS, NET OF TAX:
Balance at beginning of period...................... (5,499) 3,600 --
Unrealized appreciation (depreciation) on
investments....................................... 8,785 (9,099) 3,600
------------ ------------ ------------
Balance at end of period.......................... 3,286 (5,499) 3,600
------------ ------------ ------------
RETAINED EARNINGS:
Balance at beginning of period...................... 26,570 14,682 4,052
Net income.......................................... 15,402 11,888 10,630
------------ ------------ ------------
Balance at end of period.......................... 41,972 26,570 14,682
------------ ------------ ------------
Total stockholder's equity..................... $266,066 182,879 180,090
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 61
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 15,402 11,888 10,630
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment expenses... 1,357 1,429 902
Unearned premiums................................. 19,862 15,843 4,024
Deferred acquisition costs........................ (10,302) (9,611) (9,815)
Premiums receivable............................... (161) (2,103) (432)
Accrued investment income......................... (390) (848) (110)
Income taxes payable.............................. 3,621 2,611 2,872
Net realized capital gains........................ (1,301) (92) (1,544)
Accounts payable and other accrued expenses....... 472 3,726 1,079
Prepaid reinsurance............................... (7,620) (5,352) (199)
Other, net........................................ 992 689 1,201
------------ ------------ ------------
Total adjustments.............................. 6,530 6,292 (2,022)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 21,932 18,180 8,608
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investments............................ (158,830) (77,980) (139,061)
Proceeds from sales of investments.................. 49,354 39,967 24,395
Proceeds from maturities of investments............. 28,803 19,665 106,042
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES............. (80,673) (18,348) (8,624)
------------ ------------ ------------
Cash flows from financing activities:
Capital contribution................................ 59,000 -- --
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 59,000 -- --
------------ ------------ ------------
Net increase (decrease) in cash..................... 259 (168) (16)
Cash balance at beginning of period................. 85 253 269
------------ ------------ ------------
CASH BALANCE AT END OF PERIOD..................... $ 344 85 253
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid................................... $ 1,450 1,063 833
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 62
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1) BACKGROUND
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a New
York-domiciled monoline stock insurance company which engages only in the
business of financial guaranty and surety insurance. CapMAC is a wholly-owned
subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed in 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 "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by S&P Ratings Group ("S&P"), "AAA" by Duff & Phelps
Credit Rating Co. ("Duff & Phelps"), and "AAA" by Nippon Investors Service,
Inc., a Japanese rating agency. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
2) SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements are as follows:
a) BASIS OF PRESENTATION
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles ("GAAP"). Such accounting
principles differ from statutory reporting practices used by insurance
companies in reporting to state regulatory authorities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes the most
significant estimates relate to deferred acquisition costs, reserve for
losses and loss adjustment expenses and disclosures of financial
guarantees outstanding. Actual results could differ from those
estimates.
b) INVESTMENTS
At December 31, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115, the
Company can classify its debt and marketable equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the
securities until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale. As of December
31, 1995 and 1994, all of the Company's securities have been classified
as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair value is
based upon quoted market prices. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of
stockholder's
F-7
<PAGE> 63
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equity until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer.
A decline in the fair value of any available-for-sale security below
cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Short-term investments are those investments having a maturity of less
than one year at purchase date. Short-term investments are carried at
amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
Realized gains and losses are included in earnings and are derived using
the FIFO (first-in, first-out) method for determining the cost of
securities sold.
C) REVENUE RECOGNITION
Premiums which are payable monthly to CapMAC are reflected in income
when due, net of amounts payable to reinsurers. Premiums which are
payable quarterly, semi-annually or annually are reflected in income,
net of amounts payable to reinsurers, on an equal monthly basis over the
corresponding policy term. Premiums that are collected as a single
premium at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by allocating
premium to each bond maturity based on the principal amount and earning
it straight-line over the term of each bond maturity. For the year ended
December 31, 1995, 91% of net premiums earned were attributable to
premiums payable in installments and 9% were attributable to premiums
collected on an upfront basis.
D) DEFERRED ACQUISITION COSTS
Certain costs incurred by CapMAC, which vary with and are primarily
related to the production of new business, are deferred. These costs
include direct and indirect expenses related to underwriting, marketing
and policy issuance, rating agency fees and premium taxes. The deferred
acquisition costs are amortized over the period in proportion to the
related premium earnings. The actual amount of premium earnings may
differ from projections due to various factors such as renewal or early
termination of insurance contracts or different run-off patterns of
exposure resulting in a corresponding change in the amortization pattern
of the deferred acquisition costs.
E) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a
Supplemental Loss Reserve ("SLR") and a case basis loss reserve. The SLR
is established based on expected levels of defaults resulting from
credit failures on currently insured issues. This SLR is based on
estimates of the portion of earned premiums required to cover those
claims.
A case basis loss reserve is established for insured obligations when,
in the judgement of management, a default in the timely payment of debt
service is imminent. For defaults considered temporary, a case basis
loss reserve is established in an amount equal to the present value of
the anticipated defaulted debt service payments over the expected period
of default. If the default is judged not to be temporary, the present
value of all remaining defaulted debt service payments is recorded as a
case basis loss reserve. Anticipated salvage recoveries are considered
in establishing case basis loss reserves when such amounts are
reasonably estimable.
Management believes that the current level of reserves is adequate to
cover the estimated liability for claims and the related adjustment
expenses with respect to financial guaranties issued by
F-8
<PAGE> 64
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CapMAC. The establishment of the appropriate level of loss reserves is
an inherently uncertain process involving numerous estimates and
subjective judgments by management, and therefore there can be no
assurance that losses in CapMAC's insured portfolio will not exceed the
loss reserves.
f) DEPRECIATION
Leasehold improvements, furniture and fixtures are being depreciated
over the lease term or useful life, whichever is shorter, using the
straight-line method.
g) INCOME TAXES
Deferred income taxes are provided with respect to temporary differences
between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse.
h) RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
3) INSURED PORTFOLIO
At December 31, 1995 and 1994, the principal amount of financial
obligations insured by CapMAC was $16.9 billion and $11.6 billion, respectively,
and net of reinsurance (net principal outstanding), was $12.6 billion and $9.4
billion, respectively, with a weighted average life of 6.0 years and 5.0 years,
respectively. CapMAC's insured portfolio was broadly diversified by geographic
distribution and type of insured obligations, with no single insured obligation
in excess of statutory single risk limits, after giving effect to any
reinsurance and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory contingency
reserve). At December 31, 1995 and 1994, the statutory qualified capital was
approximately $240 million and $170 million, respectively.
<TABLE>
<CAPTION>
NET PRINCIPAL OUTSTANDING
--------------------------------------
DECEMBER 31,
DECEMBER 31, 1995 1994
----------------- ----------------
TYPE OF OBLIGATIONS INSURED AMOUNT % AMOUNT %
- --------------------------------------------------------- ------- ----- ------ -----
$ IN MILLIONS
<S> <C> <C> <C> <C>
Consumer receivables..................................... $ 6,959 55.1 $4,740 50.4
Trade and other corporate obligations.................... 4,912 38.9 4,039 43.0
Municipal/government obligations......................... 757 6.0 618 6.6
------- ----- ------ -----
Total............................................... $12,628 100.0 $9,397 100.0
======= ===== ====== =====
</TABLE>
At December 31, 1995, approximately 85% of CapMAC's insured portfolio was
comprised of structured asset-backed transactions. Under these structures, a
pool of assets covering at least 100% of the principal amount guaranteed under
its insurance contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the impairment of
cash flows due to delinquency or loss on the underlying assets. CapMAC,
therefore, evaluates all the factors affecting past and future asset performance
by studying historical data on losses, delinquencies and recoveries of the
underlying assets. Each transaction is reviewed to ensure that an appropriate
legal structure is used to protect against the bankruptcy risk of the originator
of the assets. Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or dilution.
This first level of loss protection is usually available from reserve funds,
excess cash flows, overcollateralization, or recourse to a third party. The
F-9
<PAGE> 65
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
$2,200,000 of income which has been included in other income in the accompanying
financial statements.
The following entities each accounted for, through referrals and otherwise,
10% or more of total revenues for each of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
- ------------------------------- ------------------------------- -------------------------------
% OF % OF % OF
NAME REVENUES NAME REVENUES NAME REVENUES
- --------------------- -------- --------------------- -------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Citicorp............. 15.2 Citicorp............. 16.3 Citicorp............. 13.7
Merrill Lynch &
Co................... 14.1
</TABLE>
4) INVESTMENTS
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995 and
1994 were as follows ($ in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- -------------------------------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury obligations......................... $ 4,153 55 -- 4,208
Mortgage-backed securities of U.S. government
instrumentalities and agencies.................. 100,628 313 79 100,862
Obligations of states, municipalities and
political subdivisions.......................... 166,010 4,809 82 170,737
Corporate and asset-backed securities............. 8,506 45 6 8,545
--------- ---------- --- ---------
Total........................................ $ 279,297 5,222 167 284,352
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- -------------------------------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury obligations......................... $ 4,295 -- 153 4,142
Mortgage-backed securities of U.S. government
instrumentalities and agencies.................. 40,973 -- 2,986 37,987
Obligations of states, municipalities and
political subdivisions.......................... 128,856 364 3,994 125,226
Corporate and asset-backed securities............. 6,841 15 112 6,744
Mutual funds...................................... 16,434 -- 1,465 14,969
--------- --- ---------- ---------
Total........................................ $ 197,399 379 8,710 189,068
======== ======== ======== =======
</TABLE>
F-10
<PAGE> 66
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's investment in mutual funds in 1994 represents an investment
in an open-end management investment company which invests primarily in
investment-grade fixed-income securities denominated in foreign and United
States currencies.
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 by contractual maturity are shown below ($ in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
AMORTIZED ESTIMATED
SECURITIES AVAILABLE-FOR-SALE COST FAIR VALUE
- --------------------------------------------------------------------- -------- ----------
<S> <C> <C>
Less than one year to maturity....................................... $ 5,569 5,572
One to five years to maturity........................................ 37,630 38,553
Five to ten years to maturity........................................ 99,567 102,264
Greater than ten years to maturity................................... 35,903 37,101
-------- ----------
Sub-total.......................................................... 178,669 183,490
Mortgage-backed securities........................................... 100,628 100,862
-------- ----------
Total........................................................... $279,297 284,352
======== ========
</TABLE>
Actual maturities may differ from contractual maturities because borrowers
may call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investment securities were approximately $49
million, $40 million and $24 million in 1995, 1994 and 1993, respectively. Gross
realized capital gains of $1,320,000, $714,000 and $1,621,000, and gross
realized capital losses of $19,000, $622,000 and $77,000 were realized on those
sales for the years ended December 31, 1995, 1994 and 1993, respectively.
Investments include bonds having a fair value of approximately $3,985,000
and $3,873,000 (amortized cost of $3,970,000 and $4,011,000) which are on
deposit at December 31, 1995 and 1994, respectively, with state regulators as
required by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
$ IN THOUSANDS
<S> <C> <C> <C>
Bonds............................................... $ 11,105 9,193 7,803
Short-term investments.............................. 1,245 484 572
Mutual funds........................................ (162) 579 1,801
Investment expenses................................. (235) (184) (166)
------------ ------------ ------------
Total.......................................... $ 11,953 10,072 10,010
========== ========== ==========
</TABLE>
F-11
<PAGE> 67
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The change in unrealized appreciation (depreciation) on available-for-sale
securities is included in a separate component of stockholder's equity as shown
below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
$ IN THOUSANDS
Balance at beginning of period................................... $ (5,499) 3,600
Change in unrealized appreciation (depreciation)................. 13,386 (13,786)
Income tax effect................................................ (4,601) 4,687
------------ ------------
Net change....................................................... 8,785 (9,099)
------------ ------------
BALANCE AT END OF PERIOD....................................... $ 3,286 (5,499)
========== ==========
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 10% of stockholder's equity as of December
31, 1995.
5) DEFERRED ACQUISITION COSTS
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
$ IN THOUSANDS
Balance at beginning of period...................... $ 24,860 15,249 5,434
Additions........................................... 17,505 14,140 12,478
Amortization (policy acquisition costs)............. (7,203) (4,529) (2,663)
------------ ------------ ------------
BALANCE AT END OF PERIOD.......................... $ 35,162 24,860 15,249
========== ========== ==========
</TABLE>
6) EMPLOYEE BENEFITS
On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. ("CFS"), which was then a newly formed wholly-owned
subsidiary of Holdings. Under the Service Agreement, CFS has agreed to provide
various services, including underwriting, reinsurance, data processing and other
services to CapMAC in connection with the operation of CapMAC's insurance
business. CapMAC pays CFS an arm's length fee for providing such services, but
not in excess of CFS's cost for such services. CFS incurred, on behalf of
CapMAC, total compensation expenses, excluding bonuses, of $13,484,000,
$11,081,000 and $9,789,000 in 1995, 1994 and 1993, respectively.
CFS maintains an incentive compensation plan for its employees. The plan is
an annual discretionary bonus award based upon Holdings' and an individual's
performance. CFS also has a health and welfare plan and a 401(k) plan to cover
substantially all of its employees. CapMAC reimburses CFS for all out-of-pocket
expenses incurred by CFS in providing services to CapMAC, including awards given
under the incentive compensation plan and benefits provided under the health and
welfare plan. For the years ended December 31, 1995, 1994 and 1993, the Company
had provided approximately $7,804,000, $5,253,000 and $3,528,000, respectively,
for the annual discretionary bonus plan.
F-12
<PAGE> 68
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
One June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain deferred
compensation. On December 7, 1995, the RSU's were converted to cash in the
amount of approximately $3.7 million, and such officers agreed to defer receipt
of such cash amount in exchange for receiving the same number of new shares of
restricted stock of Holdings as the number of RSU's such officers previously
held. The cash amount will be held by Holdings and invested in accordance with
certain guidelines. Such amount, including the investment earnings thereon, will
be paid to each officer upon the occurrence of certain events but no later than
December, 2000.
7) EMPLOYEE STOCK OWNERSHIP PLAN
On June 25, 1992, Holdings adopted an Employee Stock Ownership Plan
("ESOP") to provide its employees the opportunity to obtain beneficial interests
in the stock of Holdings through a trust (the "ESOP Trust"). The ESOP Trust
purchased 750,000 shares at $13.33 per share of Holdings' stock. The ESOP Trust
financed its purchase of common stock with a loan from Holdings in the amount of
$10 million. The ESOP loan is evidenced by a promissory note delivered to
Holdings. An amount representing unearned employee compensation, equivalent in
value to the unpaid balance of the ESOP loan, is recorded as a deduction from
stockholder's equity (unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to Holdings. The ESOP expense is calculated using
the shares allocated method. Shares are released for allocation to the
participants and held in trust for the employees based upon the ratio of the
current year's principal and interest payment to the sum of principal and
interest payments estimated over the life of the loan. As of December 31, 1995
approximately 262,800 shares were allocated to the participants. Compensation
expense related to the ESOP was approximately $2,087,000, $2,086,000 and
$1,652,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
8) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995 CapMAC incurred its first claim on a financial guaranty policy.
Based on its current estimate, the Company expects the aggregate amount of
claims and related expenses not to exceed $2.7 million, although no assurance
can be given that such claims and related expenses will not exceed that amount.
Such loss amount was covered through a recovery under a quota share reinsurance
agreement of $0.2 million and a reduction in the SLR of $2.5 million. The
portion of such claims and expenses not covered under the quota share agreement
is being funded through payments to CapMAC from the Lureco Trust Account (see
note 12).
F-13
<PAGE> 69
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
<TABLE>
<S> <C>
CASE BASIS LOSS RESERVE
Net balance at January 1, 1995.................................................... $ --
------
INCURRED RELATED TO:
Current year.................................................................... 2,473
Prior years..................................................................... --
------
Total incurred............................................................... 2,473
------
PAID INCURRED TO:
Current year.................................................................... 1,853
Prior years..................................................................... --
------
Total paid................................................................... 1,853
------
Balance at December 31, 1995...................................................... 620
------
Reinsurance recoverable........................................................... 69
------
Supplemental loss reserve......................................................... 5,859
------
Total........................................................................ $6,548
======
</TABLE>
9) INCOME TAXES
Pursuant to a tax sharing agreement with Holdings, the Company is included
in Holdings' consolidated U.S. Federal income tax return. The Company's annual
Federal income tax liability is determined by computing its pro rata share of
the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
--------------- --------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ ----
$ IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed at the
statutory rate............................. $7,216 35.0 $5,303 34.0 $4,881 34.0
Increase (decrease) in tax resulting from:
Tax-exempt interest........................ (2,335) (11.3) (1,646) (10.6) (1,140) (7.9)
Other, net................................. 334 1.6 51 0.4 (15) (0.1)
------ ----- ------ ----- ------ ----
Total income tax expense................ $5,215 25.3 $3,708 23.8 $3,726 26.0
====== ===== ====== ===== ====== ====
</TABLE>
F-14
<PAGE> 70
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
$ IN THOUSANDS
<S> <C> <C>
DEFERRED TAX ASSETS:
Unrealized capital losses on investments......................... $ -- (2,833)
Deferred compensation............................................ (1,901) (1,233)
Losses and loss adjustment expenses.............................. (1,002) (936)
Unearned premiums................................................ (852) (762)
Other, net....................................................... (98) (228)
------------ ------------
Total gross deferred tax assets............................. (3,853) (5,992)
------------ ------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs....................................... 12,307 8,453
Unrealized capital gains on investments.......................... 1,769 --
Deferred capital gains on investments............................ 654 726
Other, net....................................................... 426 412
------------ ------------
Total gross deferred tax liabilities........................ 15,156 9,591
------------ ------------
Net deferred tax liability..................................... $ 11,303 3,599
========== ==========
</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.
10) INSURANCE REGULATORY RESTRICTIONS
CapMAC is subject to insurance regulatory requirements of the State of New
York and other states in which it is licensed to conduct business. Generally,
New York insurance laws require that dividends be paid from earned surplus and
restrict the amount of dividends in any year that may be paid without obtaining
approval for such dividends from the Superintendent of Insurance to the lower of
(i) net investment income as defined or (ii) 10% of statutory surplus as of
December 31 of the preceding year. No dividends were paid by CapMAC to Holdings
during the years ended December 31, 1995, 1994 and 1993. No dividends could be
paid during these periods because CapMAC had negative earned surplus. Statutory
surplus at December 31, 1995 and 1994 was approximately $195,018,000 and
$139,739,000, respectively. Statutory surplus differs from stockholder's equity
determined under GAAP principally due to the mandatory contingency reserve
required for statutory accounting purposes and differences in accounting for
investments, deferred acquisition costs, SLR and deferred taxes provided under
GAAP. Statutory net income was $9,000,000, $4,543,000 and $4,528,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. Statutory net income
differs from net income determined under GAAP principally due to deferred
acquisition costs, SLR and deferred income taxes.
F-15
<PAGE> 71
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11) COMMITMENTS AND CONTINGENCIES
On January 1, 1988, the Company assumed from Citibank, N.A. the obligations
of a sublease agreement for space occupied in New York. On November 21, 1993,
the sublease was terminated and a new lease was negotiated which expires on
November 20, 2008. CapMAC has a lease agreement for its London office beginning
October 1, 1992 and expiring October 1, 2002. As of December 31, 1995, future
minimum payments under the lease agreements are as follows:
<TABLE>
<CAPTION>
PAYMENT
--------------
$ IN THOUSANDS
<S> <C>
1996............................................................................ $ 2,255
1997............................................................................ 2,948
1998............................................................................ 3,027
1999............................................................................ 3,476
2000 and thereafter............................................................. 36,172
--------------
Total...................................................................... $ 47,878
==========
</TABLE>
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
CapMAC has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") provided by a consortium of banks, headed by Bank of
Montreal, as agent, which is rated "A-1+" and "P-1" by S&P and Moody's,
respectively. Under the Liquidity Facility, CapMAC will be able, subject to
satisfying certain conditions, to borrow funds from time to time in order to
enable it to fund any claim payments or payments made in settlement or
mitigation of claim payments under its insurance contracts. For the years ended
December 31, 1995, 1994 and 1993, no draws had been made under the Liquidity
Facility.
12) REINSURANCE
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily designed to
minimize losses from large risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
$ IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Direct................. $ 56,541 36,853 43,598 28,561 24,491 20,510
Assumed................ 935 761 1,064 258 403 364
Ceded.................. (15,992) (8,372) (11,069) (5,716) (3,586) (3,391)
-------- -------- -------- -------- -------- --------
Net Premiums...... $ 41,484 29,242 33,593 23,103 21,308 17,483
======== ======== ======== ======== ======== ========
</TABLE>
Although the reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders, it is the industry practice of insurers
for financial statement purposes to treat reinsured risks as though they were
risks for which the ceding insurer was only contingently liable. A contingent
liability exists with respect to the aforementioned reinsurance arrangements
which may become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At
F-16
<PAGE> 72
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995 and 1994, CapMAC had ceded loss reserves of $69,000 and $0,
respectively, and had ceded unearned premiums of $13,171,000 and $5,551,000,
respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco Treaty")
with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a European-based
reinsurer. The agreement is renewable annually at the Company's option, subject
to satisfying certain conditions. The agreement reinsured and indemnified the
Company for any loss incurred by CapMAC during the agreement period up to the
limits of the agreement. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's fee
payable to Lureco, be deposited in a trust account (the "Lureco Trust Account")
to be applied by CapMAC, at its option, to offset losses and loss expenses
incurred by CapMAC in connection with incurred claims. Amounts on deposit in the
Lureco Trust Account which have not been applied against claims are
contractually due to CapMAC at the termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been reflected
as assets by CapMAC during the term of the agreement. Premiums in excess of the
deposit amounts have been recorded as ceded premiums in the statements of
income. In the 1994 policy year, the agreement provided $5 million of loss
coverage in excess of the premium deposit amounts of $2 million retained in the
Lureco Trust Account. No losses were applied against the Lureco Trust Account or
ceded to the Lureco Treaty in 1994. The agreement was renewed for the 1995
policy year and provides $5 million of loss coverage in excess of the premium
deposit amount of $4.5 million retained in the Lureco Trust Account. Additional
coverage is provided for losses incurred in excess of 200% of the net premiums
earned up to $4 million for any one agreement year. In September 1995, a claim
of approximately $2.5 million on an insurance policy was applied against the
Lureco Trust Account.
In addition to its capital (including statutory contingency reserves) and
other reinsurance available to pay claims under its insurance contracts, on June
25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement (the "Stop-loss
Agreement") with Winterthur Swiss Insurance Company ("Winterthur") which is
rated "AAA" by S&P and "Aaa" by Moody's. At the same time, CapMAC and Winterthur
also entered into a Quota Share Reinsurance Agreement (the "Winterthur Quota
Share Agreement") pursuant to which Winterthur had the right to reinsure on a
quota share basis 10% of each policy written by CapMAC.
The Winterthur Stop-loss Agreement had an original term of seven years and
was renewable for successive one-year periods. In April 1995, Winterthur
notified CapMAC that it was canceling the Winterthur Stop-loss Agreement and the
Winterthur Quota Share Agreement effective June 30, 1996.
CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss Reinsurance
Agreement with Mitsui Marine (the "Mitsui Stop-loss Agreement"). Under the
Mitsui Stop-loss Agreement, Mitsui Marine would be required to pay any losses in
excess of $100 million in the aggregate incurred by CapMAC during the term of
the Mitsui Stop-loss Agreement on the insurance policies in effect on December
1, 1995 and written during the one-year period thereafter, up to an aggregate
limit payable under the Mitsui Stop-loss Agreement of $50 million. The Mitsui
Stop-loss Agreement has a term of seven years and is subject to early
termination by CapMAC in certain circumstances.
The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC will reassume the liability, principally unearned
premium, for all policies reinsured by Winterthur. As a result, CapMAC will
reassume approximately $1.4 billion of principal insured by Winterthur as of
December 31, 1995. In connection with the commutation, Winterthur will return
the unearned premiums as of December 31, 1995, net of ceding commission and
federal excise tax. Such amount is expected to total approximately $2.0 million.
F-17
<PAGE> 73
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995 and 1994. SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
$ IN THOUSANDS
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Investments................................... $284,352 284,352 189,068 189,068
OFF-BALANCE-SHEET INSTRUMENTS:
Financial Guarantees Outstanding.............. $ -- 147,840 -- 93,494
Ceding Commission............................. $ -- 44,352 -- 28,048
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments summarized above:
INVESTMENTS
The fair values of fixed maturities and mutual funds are based upon quoted
market prices. The fair value of short-term investments approximates amortized
cost.
FINANCIAL GUARANTEES OUTSTANDING
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2) the fair
value of installment revenue which is derived by calculating the present value
of the estimated future cash inflow to CapMAC of policies in force having
installment premiums, net of amounts payable to reinsurers, at a discount rate
of 7% at December 31, 1995 and 1994. The amount calculated is equivalent to the
consideration that would be paid under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a third
party under reinsurance and other agreements. Ceding commission represents the
expected amount that would be paid to CapMAC to compensate CapMAC for
originating and servicing the insurance contracts. In constructing estimated
future cash inflows, management makes assumptions regarding prepayments for
amortizing asset-backed securities which are consistent with relevant historical
experience. For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of installment
premium actually realized by the Company could be reduced in the future due to
factors such as early termination of insurance contracts, accelerated
prepayments of underlying obligations or lower than anticipated utilization of
insured structured programs, such as commercial paper conduits. Although
increases in future installment revenue due to renewals of existing insurance
contracts historically have been greater than reductions in future installment
revenue due to factors such as those described above, there can be no assurance
that future circumstances might not cause a net reduction in installment
revenue, resulting in lower revenues.
14) CAPITALIZATION
The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized, issued
and outstanding shares at December 31, 1995 and 1994 were 15,000,000 at $1.00
per share.
In 1995, $59.0 million of the proceeds received by Holdings from the sale
of shares in connection with an Initial Public Offering and private placements
were contributed to CapMAC.
F-18
<PAGE> 74
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
F-19
<PAGE> 75
CAPITAL MARKETS ASSURANCE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
September 30,1996 December 31,1995
(Unaudited)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $283,996 at September
30, 1996 and $210,651 at December 31, 1995) $ 284,595 215,706
Short-term investments (at amortized cost which
approximates fair value) 23,081 68,646
- -------------------------------------------------------------------------------------------------------
Total investments 307,676 284,352
- -------------------------------------------------------------------------------------------------------
Cash 514 344
Accrued investment income 3,604 3,136
Deferred acquisition costs 42,350 35,162
Premiums receivable 4,068 3,540
Prepaid reinsurance 17,801 13,171
Other assets 4,194 3,428
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 380,207 343,133
=======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
LIABILITIES:
Unearned premiums $ 61,410 45,767
Reserve for losses and loss adjustment expenses 9,602 6,548
Ceded reinsurance 2,455 2,469
Accounts payable and other accrued expenses 12,446 10,844
Current income taxes - 136
Deferred income taxes 13,608 11,303
- -------------------------------------------------------------------------------------------------------
Total liabilities 99,521 77,067
- -------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 389 3,286
Retained earnings 56,822 41,972
- -------------------------------------------------------------------------------------------------------
Total stockholder's equity 280,686 266,066
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 380,207 343,133
=======================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 76
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Direct premiums written $ 17,206 12,204 49,983 45,042
Assumed premiums written 8 102 1,032 925
Ceded premiums written (4,129) (6,188) (11,142) (11,834)
- ----------------------------------------------------------------------------------------------------
Net premiums written 13,085 6,118 39,873 34,133
(Increase) decrease in unearned premiums (3,042) 1,193 (11,014) (12,418)
- ----------------------------------------------------------------------------------------------------
Net premiums earned 10,043 7,311 28,859 21,715
Net investment income 4,307 3,013 12,296 8,606
Net realized capital gains (loss) (57) 364 111 449
Other income 25 14 104 38
- ----------------------------------------------------------------------------------------------------
Total revenues 14,318 10,702 41,370 30,808
- ----------------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 1,248 821 3,432 2,279
Underwriting and operating expenses 3,780 2,563 11,142 9,939
Policy acquisition costs 2,126 2,022 6,249 5,481
- ----------------------------------------------------------------------------------------------------
Total expenses 7,154 5,406 20,823 17,699
- ----------------------------------------------------------------------------------------------------
Income before income taxes 7,164 5,296 20,547 13,109
- ----------------------------------------------------------------------------------------------------
INCOME TAXES:
Current federal income tax 1,027 231 3,008 895
Deferred federal income tax 718 1,280 2,689 2,256
- ----------------------------------------------------------------------------------------------------
Total income taxes 1,745 1,511 5,697 3,151
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 5,419 3,785 14,850 9,958
====================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 77
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
- ------------------------------------------------------------------------
<S> <C>
COMMON STOCK:
Balance at beginning of period $ 15,000
- ------------------------------------------------------------------------
Balance at end of period 15,000
- ------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 205,808
Capital contribution 2,667
- ------------------------------------------------------------------------
Balance at end of period 208,475
- ------------------------------------------------------------------------
UNREALIZED (DEPRECIATION) APPRECIATION
ON INVESTMENTS, NET OF TAX:
Balance at beginning of period 3,286
Unrealized depreciation on investments (2,897)
- ------------------------------------------------------------------------
Balance at end of period 389
- ------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 41,972
Net income 14,850
- ------------------------------------------------------------------------
Balance at end of period 56,822
- ------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 280,686
========================================================================
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 78
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,850 9,958
- -----------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment expenses 3,054 1,474
Unearned premiums 15,643 17,982
Deferred acquisition costs (7,188) (6,981)
Premiums receivable (528) 81
Accrued investment income (468) 63
Income taxes payable 2,341 2,447
Net realized capital gains (111) (449)
Accounts payable and other accrued expenses 5,445 3,456
Prepaid reinsurance (4,630) (5,564)
Other, net (381) 2,253
- -----------------------------------------------------------------------------------------------------------
Total adjustments 13,177 14,762
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,027 24,720
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (154,308) (109,235)
Proceeds from sale of investments 35,388 38,577
Proceeds from maturities of investments 91,063 37,361
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (27,857) (33,297)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in capital - 9,000
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 9,000
- -----------------------------------------------------------------------------------------------------------
Net increase in cash 170 423
Cash balance at beginning of period 344 85
- -----------------------------------------------------------------------------------------------------------
CASH BALANCE AT END OF PERIOD $ 514 508
===========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid $ 3,225 650
Tax and loss bonds purchased $ 131 54
===========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 79
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BACKGROUND
Capital Markets Assurance Corporation ("CapMAC") is a New
York-domiciled monoline stock insurance company which engages only in
the business of financial guaranty and surety insurance. CapMAC is a
wholly-owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is
licensed in all 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also
provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other
major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating
agency. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating
agencies.
2. BASIS OF PRESENTATION
CapMAC's unaudited interim financial statements have been prepared on
the basis of generally accepted accounting principles and, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of the CapMAC's financial condition, results of operations
and cash flows for the periods presented. The results of operations for
the nine months ended September 30, 1996 may not be indicative of the
results that may be expected for the full year ending December 31,
1996. These financial statements and notes should be read in
conjunction with the financial statements and notes included in the
audited financial statements of CapMAC as of December 31, 1995 and
1994, and for each of the years in the three-year period ended December
31, 1995.
3. RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
F-24
<PAGE> 80
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF A TIME SUBSEQUENT TO THE DATE OF SUCH
INFORMATION. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................... 2
Reports to Certificateholders........... 2
Summary................................. 3
Risk Factors............................ 11
The Trust............................... 14
The Onyx Portfolio of Motor Vehicle
Contracts............................. 15
The Contracts........................... 20
Maturity and Prepayment Assumptions..... 23
Yield Considerations.................... 24
Pool Factor............................. 24
Use of Proceeds......................... 24
The Seller.............................. 24
The Servicer............................ 25
The Certificates and the Agreement...... 26
Description of the Insurer.............. 36
Additional Provisions of the
Agreement............................. 37
Certain Legal Aspects of the
Contracts............................. 41
Certain Tax Consequences................ 44
ERISA Considerations.................... 50
Underwriting............................ 50
Legal Matters........................... 51
Experts................................. 51
Financial Statements of Insurer......... F-1
------------------
UNTIL MARCH , 1997 (90 DAYS AFTER THE
DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------
- ---------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
$100,000,000
ONYX ACCEPTANCE
GRANTOR TRUST 1996-4
% AUTO LOAN
PASS-THROUGH CERTIFICATES
LOGO
ONYX ACCEPTANCE FINANCIAL CORPORATION,
Seller
ONYX ACCEPTANCE CORPORATION,
Servicer
---------------------------
P R O S P E C T U S
---------------------------
MERRILL LYNCH & CO.
DECEMBER , 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fee.......................................................... $ 30,030
Printing and Engraving.................................................... $ 42,000
Trustee's Fee............................................................. $ 7,500
Legal Fees and Expenses................................................... $155,000
Blue Sky Fees and Expenses................................................ $ 15,000
Accountant's Fees and Expenses............................................ $ 20,000
Rating Agency Fees........................................................ $ 50,000
Miscellaneous Fees and Expenses........................................... $ 5,470
--------
Total Expenses....................................................... $325,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law ("Delaware Law")
Onyx Acceptance Financial Corporation (the "Company") has broad powers to
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). The Company's Bylaws (the "Bylaws") (Exhibit 3.2 hereto)
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by law and requires the Company to advance litigation
expenses upon receipt by the Company of an undertaking by the director or
officer to repay such advances if it is ultimately determined that the director
is not entitled to indemnification. The Bylaws further provide that rights
conferred under such Bylaws shall not be deemed to be exclusive of any other
right such persons may have or acquire under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise.
The Certificate of Incorporation (the "Certificate of Incorporation")
(Exhibit 3.1 hereto) provides that, pursuant to Delaware Law, its directors
shall not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefits to the director, and for payment
of dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware Law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate of Incorporation further
provides that the Company shall indemnify its directors and officers to the
fullest extent permitted by law, and requires the Company to advance litigation
expenses in the case of stockholder derivative actions or other actions, against
an undertaking by the director to repay such advances if it is ultimately
determined that the director is not entitled to indemnification. The Certificate
of Incorporation also provides that rights conferred under such Certificate of
Incorporation shall not be deemed to be exclusive of any other right such
persons may have or acquire under any statute, the Certificate of Incorporation,
the Bylaws, agreement, vote of stockholders or disinterested directors, or
otherwise.
The Company plans to acquire a directors' and officers' liability insurance
policy that, subject to the terms and conditions of the policy, insures the
directors and officers of the Company against losses arising from any wrongful
act (as defined by the policy) in his or her capacity as a director or officer.
The policy reimburses the Company for amounts which the Company lawfully
indemnifies or for which it is required or permitted by law to indemnify its
directors and officers.
In addition, the Company expects to enter into agreements to indemnify its
directors and certain of its officers in addition to indemnification provided
for in the Certificate of Incorporation and Bylaws. These
II-1
<PAGE> 82
agreements will, among other things, indemnify the Company's directors and
certain of its officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company or as a director or officer
of any subsidiary of the Company, or as a director or officer of any other
company or enterprise that the person provides services to at the request of the
Company.
The Underwriting Agreement provides for indemnification by the Company of
the Underwriters, for certain liabilities rising under the Securities Act or
otherwise. It also provides, in certain limited instances, for indemnification
by the Underwriters of the Company with respect to information furnished by or
on behalf of the Underwriter that are contained in this prospectus or included
as part of this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Seller incorporated herein by reference
to the Registrant's Registration Statement on Form S-1 No. 333-4220
3.2 Bylaws of the Seller incorporated herein by reference to the Registrant's
Registration Statement on Form S-1 No. 333-4220
4.1 Form of Pooling and Servicing Agreement among the Seller, the Servicer and
the Trustee*
5.1 Opinion of Brobeck, Phleger & Harrison LLP, re: Legality*
8.1 Opinion of Brobeck, Phleger & Harrison LLP, re: Tax Matters*
23.1 Consent of Brobeck, Phleger & Harrison LLP, (contained in Exhibit 5.1)*
23.2 Consent of Brobeck, Phleger & Harrison LLP, (contained in Exhibit 8.1)*
23.3 Consent of KPMG Peat Marwick LLP with respect to financial statements of
Capital Markets Assurance Corporation*
24 Powers of Attorney (included in signature page)*
</TABLE>
- ---------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Not applicable.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of
II-2
<PAGE> 83
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities
Act of 1933, each post effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on December 11, 1996.
Onyx Acceptance Financial Corporation
By: *
----------------------------------
John W. Hall
Director, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------- -----------------
<S> <C> <C>
* President and Chief December 11, 1996
- --------------------------------------------- Executive Officer,
John W. Hall Director
(Principal Executive
Officer)
* Executive Vice President December 11, 1996
- --------------------------------------------- and Chief Financial
Don P. Duffy Officer,
Director (Principal
Financial
and Accounting Officer)
/s/ REGAN E. KELLY Executive Vice President, December 11, 1996
- --------------------------------------------- Director
Regan E. Kelly
* Director December 11, 1996
- ---------------------------------------------
Kurt C. Bicknell
* Director December 11, 1996
- ---------------------------------------------
Steve M. Bond
*By: /s/ REGAN E. KELLY
- ---------------------------------------------
Regan K. Kelly,
Attorney-in-Fact
</TABLE>
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<PAGE> 85
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*......................................
3.1 Certificate of Incorporation of the Seller incorporated herein by
reference to the Registrant's Registration Statement on Form S-1 No.
333-4220.............................................................
3.2 Bylaws of the Seller incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 No. 33-4220..........
4.1 Form of Pooling and Servicing Agreement among the Seller, the
Servicer and the Trustee*............................................
5.1 Opinion of Brobeck, Phleger & Harrison LLP, re: Legality*............
8.1 Opinion of Brobeck, Phleger & Harrison LLP, re: Tax Matters*.........
23.1 Consent of Brobeck, Phleger & Harrison LLP, (contained in Exhibit
5.1)*................................................................
23.2 Consent of Brobeck, Phleger & Harrison LLP, (contained in Exhibit
8.1)*................................................................
23.3 Consent of KPMG Peat Marwick LLP with respect to financial statements
of Capital Markets Assurance Corporation*............................
24 Powers of Attorney (included in signature page)*.....................
</TABLE>
- ---------------
* Previously filed.
