<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1) under
the Securities Act of
1933 in connection with
Registration No. 333-40089 and
Registration No. 333-40089-01
PROSPECTUS
$166,000,000
[ONYX LOGO] ONYX ACCEPTANCE GRANTOR TRUST 1997-4
6.30% AUTO LOAN PASS-THROUGH CERTIFICATES, SERIES 1997-4
ONYX ACCEPTANCE FINANCIAL CORPORATION,
Seller
ONYX ACCEPTANCE CORPORATION,
Servicer
------------------------
The 6.30% Auto Loan Pass-Through Certificates (the "Certificates") will
represent undivided fractional interests in the Onyx Acceptance Grantor Trust
1997-4 (the "Trust") to be formed by Onyx Acceptance Financial Corporation (the
"Seller"), a wholly-owned, limited purpose finance subsidiary of Onyx Acceptance
Corporation ("Onyx"). Initially, 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, 1997 (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"), amounts on deposit in the
Prefunding Account described herein, a security interest in amounts on deposit
in the Capitalized Interest Account described herein and certain other property,
all as more fully described herein. The initial Aggregate Scheduled Balance (as
defined herein) of the Initial Contracts as of the Cut-Off Date was
$155,914,168. From time to time on or before January 9, 1998, the Prefunded
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 6.30% 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, 1998 and ending on May 15, 2004 (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 January 9 1998, will include any
portion of the Prefunded Amount remaining on deposit in the Prefunding 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."
------------------------
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>
<S> <C> <C> <C>
==========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1) DISCOUNT SELLER(1)(2)
- ----------------------------------------------------------------------------------------------------------
Per Certificate...................... 99.921875% .25% 99.671875%
- ----------------------------------------------------------------------------------------------------------
Total................................ $165,870,312.50 $415,000 $165,455,312.50
==========================================================================================================
</TABLE>
(1) Plus accrued interest, if any, calculated from December 12, 1997.
(2) Before deducting expenses payable by the Seller estimated to be $345,000.
------------------------
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 12, 1997, through the facilities of The Depository Trust
Company ("DTC").
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is December 9, 1997.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CERTIFICATES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
CERTIFICATES, AND THE IMPOSITION OF PENALTY BIDS, DURING AND AFTER THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed a Registration Statement
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates offered pursuant
to this Prospectus. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement and the exhibits thereto. For further information, reference is made
to the Registration Statement and amendments thereof and to the exhibits
thereto, which are available for inspection without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission at 7 World Trade Center, Suite 1300, New
York, New York 10048 and at the Northwestern Atrium Building, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies of which may be
obtained from the Commission at prescribed rates. The Commission also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Servicer, and the address is http://www.sec.gov. The Servicer, on
behalf of the Trust, will also file or cause to be filed with the Commission
such periodic reports as are required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the rules and regulations of the Commission
thereunder, and such reports can be obtained as described above. Such reports
will include Current Reports on Form 8-K filed after each Distribution Date, and
an Annual Report on Form 10-K. Such reports will contain certain financial
information regarding the Trust, including the Distribution Date Statement which
will be furnished monthly to Certificateholders as described under "Reports to
Certificateholders" below. Reports on Form 8-K and Form 10-K will not be filed
for any period which ends after December 31, 1997; however, the
Certificateholders will continue to receive the Distribution Date Statement
monthly, as described below.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued (which will occur under
the limited circumstances described herein), the unaudited monthly Distribution
Date Statements and unaudited annual reports concerning the Trust which are
described herein under "Additional Provisions of the Agreement -- Statements to
Certificateholders" and are prepared by the Servicer, will be sent by the
Trustee only to Cede & Co. as the nominee of The Depository Trust Company
("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> 3
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Certain capitalized
terms used in this Summary are defined elsewhere in this Prospectus. See the
Index of Principal Definitions for the location herein of the definitions of
certain capitalized terms. An investment in the Certificates involves various
risks, and potential purchasers should carefully consider the matters discussed
under "Risk Factors" herein in considering an investment in the Certificates.
Issuer..................... Onyx Acceptance Grantor Trust 1997-4 (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, 1997 (the "Agreement"), among the Seller, Onyx
Acceptance Corporation (the "Servicer") and Bankers
Trust Company (the "Trustee").
Securities Offered......... 6.30% Auto Loan Pass-Through Certificates (the
"Certificates") representing fractional undivided
interests in the Trust. The Certificates will be
offered for purchase in denominations of $1,000 and
integral multiples thereof. See "The Certificates
and the Agreement -- General."
Initial Certificate
Balance.................... The initial principal balance of the Certificates
is equal to the aggregate principal balance of the
Initial Contracts as of the Cut-Off Date,
calculated in accordance with the Rule of 78's or
Simple Interest Method, plus the Prefunded Amount.
The term "Cut-Off Date Scheduled Balance" means,
with respect to each Initial Contract, the
principal balance thereof as of the Cut-Off Date
and, with respect to each Subsequent Contract,
means the principal balance thereof as of the
related Subsequent Transfer Date, in each case
calculated in accordance with the Rule of 78's or
Simple Interest Method. See "The Contracts."
Seller..................... Onyx Acceptance Financial Corporation, a
wholly-owned, limited purpose subsidiary of Onyx
Acceptance Corporation ("Onyx"). The Seller's
principal executive offices are located at 8001
Irvine Center Drive, 6th Floor, Irvine, California
92618 and its telephone number is (714) 753-1191.
See "The Seller." All of the Contracts will have
been purchased by the Seller from Onyx.
Substantially all of the Contracts have been
purchased by Onyx from new and used car Dealers
unaffiliated with Onyx or the Seller, and a limited
number of Contracts have been originated by Onyx
itself. See "The Onyx Portfolio of Motor Vehicle
Contracts."
Servicer................... Onyx. The Servicer's principal executive offices
are located at 8001 Irvine Center Drive, 5th Floor,
Irvine California 92618 and its telephone number is
(714) 450-5500. See "The Servicer."
Trustee.................... Bankers Trust Company.
Trust Property............. The Trust's assets (the "Trust Property") will
include: (i) a pool of fixed rate motor vehicle
retail installment sales contracts (the "Initial
Contracts") of which approximately 42.39% of the
Aggregate Scheduled Balance as of the Cut-Off Date
are Rule of 78's Contracts and approximately 57.61%
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 the Cut-Off Date, (iv) security interests
in the
3
<PAGE> 4
Initial 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) the benefits under
the Capitalized Interest Agreement, dated as of
December 1, 1997, between the Seller and the
Trustee on behalf of the Trust (the "Capitalized
Interest Agreement"), (ix) funds on deposit in a
trust account established for the benefit of the
Certificateholders (the "Prefunding 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 Prefunding
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.......... 6.30% 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, 1998 (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.... May 15, 2004.
Interest Distribution...... On each Distribution Date, monthly interest (the
"Interest Distribution") in an amount equal to the
product of one-twelfth of the Pass-Through Rate and
the Pool Balance as of the end of the Collection
Period preceding the related Collection Period will
be distributed to the Certificateholders of record
on a pro rata basis as of the related Record Date.
The amount of interest payable on the Certificates
on the first Distribution Date will be $0.175 per
$1,000.00 dollars. 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, plus the
amount, if any, remaining on deposit in the
Prefunding Account on such date (excluding any
4
<PAGE> 5
investment earnings thereon). Interest will be paid
(i) to the extent of the portion of the Pool
Balance represented by 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 Pool Balance represented by
the Prefunded Amount from investment earnings
thereon, and from payments under the Capitalized
Interest Agreement. A "Collection Period" with
respect to a Distribution Date will be the calendar
month preceding the month in which such
Distribution Date occurs; provided, that with
respect to Liquidated Contracts (as defined below)
the Collection Period will be the period from but
excluding the sixth Business Day preceding the
immediately preceding Distribution Date to and
including the sixth Business Day preceding such
Distribution Date. With respect to the first
Distribution Date the "Collection Period" for
Liquidated Contracts will be the period from and
including the Cut-Off Date to and including the
sixth Business Day preceding such first
Distribution Date. See "The Certificates and the
Agreement -- Distributions of Principal and
Interest."
Principal Distribution..... On each Distribution Date, the Principal
Distribution 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 Prefunded Amount
remaining on deposit in the Prefunding 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 Subsequent
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
5
<PAGE> 6
Proceeds constituting, in the Servicer's reasonable
judgment, the final amounts recoverable have been
received, (c) is paid in full on or after its
Maturity Date or (d) has been a Defaulted Contract
for four or more Collection Periods and as to which
Liquidation Proceeds constituting the final amounts
recoverable have not been received; provided,
however, that in any event a Contract that is
delinquent in the amount of five monthly payments
at the end of a Collection Period is a Liquidated
Contract. A "Defaulted Contract" with respect to
any Collection Period is a Contract (a) which is,
at the end of such Collection Period, delinquent in
the amount of two monthly payments or (b) with
respect to which the related Financed Vehicle has
been repossessed or repossession efforts have been
commenced. See "The Contracts" and "The
Certificates and the Agreement -- Distributions of
Principal and Interest."
The Prefunding Account..... The Prefunding 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 Prefunding 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 Prefunded Amount will be payable
from earnings received by the Trustee during the
related Collection Period from investment of the
Prefunded Amount on deposit in the Prefunding
Account and from payments made under the
Capitalized Interest Agreement, and will not be
payable from collections on the Contracts.
The Prefunding Account will be created with an
initial deposit by the Seller of $10,085,832.00
(the "Prefunded 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
Prefunded Amount is less than $20,000, (ii) the
date on which an Event of Default occurs or (iii)
the close of business on January 9, 1998. During
the Funding Period, on one or more Subsequent
Transfer Dates (as defined herein), the Prefunded
Amount will be applied to purchase Subsequent
Contracts from the Seller. The Seller expects that
the Prefunded 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 Prefunded Amount remaining on
deposit in the Prefunding 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 Prefunding 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 Prefunded Amount remains on
deposit in the Prefunding 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
to be distributed to Certificateholders in
connection with any Mandatory
6
<PAGE> 7
Partial Prepayment will equal the remaining
Prefunded Amount. See "The Certificates and the
Agreement -- The Prefunding Account; Mandatory
Partial Prepayment of the Certificates."
Capitalized Interest
Agreement.................. The Seller will enter into the Capitalized Interest
Agreement with the Trustee on behalf of the Trust.
The purpose of the Capitalized Interest Agreement
is to cover the shortfall between interest
distributable on the portion of the Certificate
Balance represented by the Prefunded Amount and
interest which will be earned by the Trust on the
Prefunded Amount prior to the time it is used to
purchase Subsequent Contracts. The Capitalized
Interest Agreement will be in effect from the
Closing Date until February 16, 1998. The
Capitalized Interest Agreement will provide for
payment of the Capitalized Interest Amount on or
before five business days prior to each
Distribution Date, ending with the Distribution
Date on February 16, 1998. The "Capitalized
Interest Amount," with respect to any Collection
Period is an amount equal to (a) one month's
interest on the Prefunded Amount on deposit in the
Prefunding Account as of the first day of such
Collection Period at the Pass-Through Rate plus (b)
1/12 of the premium for the Surety Bond on the
Prefunded Amount minus (c) the earnings received by
the Trustee during the related Collection Period
from investment of the Prefunded Amount on deposit
in the Prefunding Account.
The obligation of the Seller to pay the Capitalized
Interest 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 "Capitalized Interest Account"). The
amount required to be deposited in the Capitalized
Interest Account will initially be equal to the
maximum Capitalized Interest Amount that may become
owing under the Capitalized Interest Agreement
assuming that with respect to the Prefunded 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 the Seller from the Capitalized
Interest 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 -- Capitalized Interest Agreement and
Capitalized Interest 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, 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 (excluding the Prefunded Amount)
as of the end of the Collection Period preceding
the related Collection Period. As additional
compensation, the Servicer will be entitled to any
late fees and other administrative fees and
expenses or similar charges collected with respect
to the Contracts. The Servicer or its designee will
also receive as servicing compensation investment
earnings on Eligible Investments (other than
earnings on amounts on deposit in the Prefunding
Account) 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 (the
"Servicing Fee"). See "The Certificates and the
Agreement -- Servicing Fee."
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<PAGE> 8
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 12, 1997, by and
among the Insurer, Onyx, the Seller and the
Trustee. Pursuant to the Surety Bond, the Insurer
will unconditionally and irrevocably guarantee
payment of the Interest Distribution and Principal
Distribution on each Distribution Date to the
Trustee for the benefit of the Certificateholders.
If on the Servicer Report Date with respect to any
Distribution Date the amount on deposit and
available in the Collection Account, after giving
effect to all amounts deposited or payable from the
Payahead Account, the Prefunding Account and/or
pursuant to the Capitalized Interest Agreement
(including from the Capitalized Interest Account)
is less than the sum of the Servicing Fee, the
Principal Distribution and Interest Distribution
for the related Distribution Date, the Trustee, by
delivering a notice to the Insurer, shall demand
payment under the Surety Bond in an amount equal to
such deficiency. The Insurer shall pay or cause to
be paid such amount to the Trustee for credit to
the Collection Account and the Trustee shall
withdraw from the Collection Account and shall pay
such amount to the Certificateholders on the
related Distribution Date. On the Final
Distribution Date, to the extent the amount on
deposit and available in the Collection Account is
less than all remaining unpaid interest and
principal on the Certificates, the Insurer shall
pay or cause to be paid an amount equal to such
shortfall. See "The Certificates and the
Agreement -- The Surety Bond."
Contracts.................. The Aggregate Scheduled Balance of the Initial
Contracts as of the Cut-Off Date was $155,914,168.
As of the Cut-Off Date the Initial Contracts had a
weighted average annual percentage rate of 14.70%
and a weighted average remaining term of 56.4
months. Approximately 42.39% 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 57.61% in accordance
with the Simple Interest Method (the "Simple
Interest Contracts"). Approximately 60.37% of the
Aggregate Scheduled Balance of the Initial
Contracts as of the Cut-Off Date were originated in
California, 8.51% in Arizona, 7.87% in Illinois,
7.04% in Florida, 6.60% in Washington and 5.21% in
Nevada. No other state represents more than 5.0% of
the Initial Contracts.
Substantially all of the Contracts (including the
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 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 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
8
<PAGE> 9
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 Prefunding
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 $10,085,832.00,
which is equal to the Prefunded 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 Cut-Off Date Scheduled Balance for all
of the Initial Contracts plus the Prefunded Amount
(the "Original Pool Balance"), subject to certain
provisions in the Agreement. See "The Certificates
and the Agreement -- Repurchase of Contracts."
Federal Income Tax
Status..................... In the opinion of counsel to the Seller, the Trust
will be treated for Federal income tax purposes as
a grantor trust and not as an association taxable
as a corporation. Certificateholders must report
their respective allocable shares of income earned
on Trust assets and, subject to certain limitations
applicable to individuals, estates and trusts, may
deduct their respective allocable shares of
reasonable servicing and other fees. See "Certain
Federal Income Tax Consequences."
ERISA Considerations....... The Certificates may be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") upon satisfaction of certain conditions
described herein. See "ERISA Considerations."
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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 will
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 relatively short period with respect to the motor vehicle retail
installment sales contracts it purchases and originates. Delinquencies and loan
losses may increase from existing levels in the portfolio with the passage of
time.
Onyx is still at an early stage of operations and is subject to all of the
risks inherent in the establishment of a new business enterprise and must, among
other things, continue to attract, retain and motivate qualified personnel,
support and grow its auto lending and contract servicing business, maintain its
existing relationships with automobile dealers and develop new relationships
with dealers in and beyond Onyx's present market region. Onyx experienced
operating losses from inception through December 31, 1995. Onyx's operating
losses for the years ended December 31, 1994 and December 31, 1995 were $3.5
million and $3.1 million, respectively. Onyx's net income for the year ended
December 31, 1996 was $7.7 million and for the nine month period ended September
30, 1997 was $1.9 million.
CERTAIN LEGAL ASPECTS -- THE CONTRACTS
The transfer of the Contracts to the Trust is subject to the perfection
requirements of the Uniform Commercial Code ("UCC"), as in effect in California.
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 the 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
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the Trustee as secured party, and because retaining Onyx's name as secured party
enables Onyx to more efficiently service the Contracts. Even though the Trust is
not identified as secured party, because the Trust has a security interest in
the Contracts, it is the beneficial owner of the security interest in the
related Financed Vehicles. There exists a risk, however, in not identifying the
Trust as the new secured party on the certificate of title (or computerized
title record) that, through fraud or negligence, the security interest of the
Trust could be released. Moreover, statutory liens for repairs or unpaid taxes
may have priority even over perfected security interests in the Financed
Vehicles. Notwithstanding the failure of the Trust to have obtained a valid,
first priority security interest in a Financed Vehicle, the Insurer will remain
unconditionally and irrevocably obligated on its guarantee of the Interest
Distribution and the Principal Distribution on each Distribution Date. See
"Certain Legal Aspects of the Contracts."
CERTAIN LEGAL ASPECTS -- BANKRUPTCY CONSIDERATIONS
It is intended by Onyx and the Seller that the transfer of the Contracts by
Onyx to the Seller constitute a "true sale" of the Contracts to the Seller. If
the transfer constitutes such a "true sale," the Contracts and the proceeds
thereof would not be part of Onyx's bankruptcy estate should it become the
subject of a bankruptcy case subsequent to the transfer of the Contracts to the
Seller.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by Onyx under the United States Bankruptcy Code or similar state laws
("Insolvency Laws") will not result in consolidation of the assets and
liabilities of the Seller with those of Onyx. These steps include the creation
of the Seller as a separate, limited purpose subsidiary pursuant to a
certificate of incorporation containing certain limitations (including
restrictions on the nature of the Seller's business and a restriction on the
Seller's ability to commence a voluntary case or proceeding under any Insolvency
Law without the prior unanimous affirmative vote of all of its directors).
However, there can be no assurance that the activities of the Seller would not
result in a court concluding that the assets and liabilities of the Seller
should be consolidated with those of Onyx in a proceeding under any Insolvency
Law. If a court were to reach such a conclusion, then delays in distributions on
the Certificates could occur or reductions in the amounts of such distributions
could result. Notwithstanding the holding by a court that the assets and
liabilities of the Seller should be consolidated with those of Onyx in a
proceeding under any Insolvency Law, the Insurer will remain unconditionally and
irrevocably obligated on the Surety Bond to guarantee payment of the Interest
Distribution and Principal Distribution on each Distribution Date. See "The
Seller."
PREPAYMENT CONSIDERATIONS
The rate of distribution of principal on the Certificates will depend on
the rate of payment (including prepayments, liquidations and repurchases by the
Seller or purchases by Onyx under certain conditions) on the Contracts which is
not possible to predict and, as discussed under "Mandatory Partial Prepayment"
immediately below, on whether sufficient additional Motor Vehicle Contracts are
generated for purchase with the Prefunded 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
Bankers Trust Company, acting on behalf of the Obligors and the
Certificateholders, as their interests may appear, until passed through in
accordance with the original schedule of payments for such Contracts. See "The
Certificates and Agreement -- Payahead Account."
Onyx has limited historical experience with respect to prepayments, has not
as of the date hereof prepared data on prepayment rates, and is not aware of
publicly available industry statistics that set forth principal prepayment
experience for retail installment sales contracts similar to the Contracts. Onyx
can make no prediction as to the actual prepayment rates that will be
experienced on the Contracts in either stable or
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changing interest rate environments. See "-- Limited Operating History of Onyx"
and "Maturity and Prepayment Assumptions." Certificateholders will bear all
reinvestment risk resulting from the rate of prepayment of the Contracts.
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 Prefunded 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 Prefunding Account; Mandatory Partial Prepayment of the
Certificates." Certificateholders will bear all reinvestment risk resulting from
the payment of the Prefunded 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 Prefunded Amount
remaining in the Prefunding 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 Prefunded 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 60.37% of the Aggregate Scheduled Balance of the Initial Contracts
as of the Cut-Off Date will have been originated in California, 8.51% in
Arizona, 7.87% in Illinois, 7.04% in Florida, 6.60% in Washington and 5.21% in
Nevada. No other state represents more than 5.0% of the Initial Contracts.
Accordingly, adverse economic conditions or other factors particularly affecting
California, Arizona, Illinois, Florida, Washington or Nevada could adversely
affect the delinquency, loan loss or repossession experience of the Trust.
LIMITED ASSETS
The Trust does not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Contracts, amounts on
deposit in the Prefunding Account, the right to receive payments under the
Capitalized Interest Agreement (including from amounts on deposit in the
Capitalized Interest 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 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.
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CONSUMER PROTECTION LAWS
The Contracts are subject to federal and state consumer protection laws
which impose requirements with respect to the making, transfer, acquisition,
enforcement and collection of consumer loans. Such laws, as well as any new laws
or rules which may be adopted, may adversely affect the Servicer's ability to
collect on the Contracts. Any failure by the originator thereof to have
complied, or the Servicer to comply, with such requirements could adversely
affect the enforceability of the Contracts. The Seller will make representations
and warranties relating to the validity and enforceability of the Contracts and
its compliance with applicable law in connection with its performance of the
transactions contemplated by the Agreement. Pursuant to the Agreement, if the
Trust's interest in a Contract is materially and adversely affected by the
failure of such Contract to comply with the applicable requirements of any
consumer protection law, such Contract will be repurchased by the Seller. The
sole remedy if any such representation or warranty is not complied with and such
noncompliance continues beyond the applicable cure period is that the Contracts
affected thereby will be required to be repurchased by the Seller. See "The
Certificates and the Agreement -- Repurchase of Contracts" and "Certain Legal
Aspects of the Contracts -- Repurchase Obligation."
THE TRUST
Pursuant to the Agreement, the Seller will establish the Onyx Acceptance
Grantor Trust 1997-4 (the "Trust") by selling and assigning the following
property (the "Trust Property") to Bankers Trust Company in its capacity as
trustee of the Trust (the "Trustee") in exchange for the Certificates executed
and authenticated by the Trustee: (i) the Contracts purchased from the Seller
and secured by Financed Vehicles, (ii) certain documents relating to the
Contracts, (iii) certain monies due under the Contracts on or after the Cut-Off
Date (or, in the case of Subsequent Contracts, on or after the related
Subsequent Transfer Date), (iv) security interests in the Financed Vehicles and
the rights to receive proceeds from claims on certain insurance policies
covering the Financed Vehicles or the Obligors and the right to certain proceeds
under the Blanket Insurance Policy, (v) all amounts on deposit in the Collection
Account, including all Eligible Investments credited thereto (but excluding any
income on Eligible Investments, which will be paid to the Servicer), (vi) the
right of the Seller under the Purchase Agreement (as defined under "the Seller")
to cause Onyx to repurchase certain Contracts under certain circumstances, (vii)
the benefits under the Capitalized Interest Agreement (including the Seller's
interest in amounts on deposit in the Capitalized Interest Account), (viii)
funds on deposit in the Prefunding 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 Distribution Date. Each Certificate will
represent a fractional undivided interest in the Trust.
The Trust will be formed for this transaction pursuant to the Agreement
and, prior to formation, will have had no assets or obligations. After
formation, the Trust will not engage in any activity other than acquiring and
holding the Contracts, issuing the Certificates, distributing payments thereon
and as otherwise described herein and as provided in the Agreement. The Trust
will not acquire any Motor Vehicle Contracts or assets other than the Subsequent
Contracts and Subsequent Financed Vehicles described herein and will not have
any need for additional capital resources.
THE ONYX PORTFOLIO OF MOTOR VEHICLE CONTRACTS
PURCHASE AND ORIGINATION OF MOTOR VEHICLE CONTRACTS
Onyx's portfolio of retail installment sales contracts and installment loan
agreements are secured by new and used automobile and light-duty trucks ("Motor
Vehicle Contracts"). The Initial Contracts were, and the Subsequent Contracts
will be, originated by Dealers and purchased by Onyx, except for a limited
number of Contracts which were or will have been originated by Onyx itself. All
of the Initial Contracts were, and all Subsequent Contracts will have been, sold
to the Seller and then to the Trust. Onyx currently has agreements with over
2,300 Dealers, of which approximately 95.5% are franchised new car dealerships
and approximately 4.5% are independent used car dealerships. The Dealers are
located in metropolitan areas in the states in which the Contracts are or will
be originated, which are California, Arizona, Washington, Oregon, Florida,
Georgia, Nevada, Illinois, Indiana, Idaho, Colorado, New York, Utah and
Virginia. Each Dealer from which
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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 60.37% of the Aggregate Scheduled Balance of the Initial
Contracts as of the Cut-Off Date will have been originated in California, 8.51%
in Arizona, 7.87% in Illinois, 7.04% in Florida, 6.60% in Washington and 5.21%
in Nevada. No other state represents more than 5.0% of the Initial Contracts.
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
Vehicles").
Onyx services all of the Motor Vehicle Contracts and initially will serve
as the primary servicer after the Motor Vehicle Contracts are sold by the Seller
to the Trust. The servicing functions performed by Onyx include customer
service, document filekeeping, computerized account recordkeeping, vehicle title
processing and collections.
UNDERWRITING OF MOTOR VEHICLE CONTRACTS
Onyx underwrites the Motor Vehicle Contracts through its ten regional
contract purchasing offices (each, an "Auto Finance Center"), five of which are
in California and one in each of Arizona, Florida, Nevada, Washington and
Illinois. Motor Vehicle Contracts purchased from Oregon and Idaho are currently
underwritten in the Washington Auto Finance Center, Motor Vehicle Contracts
purchased from Indiana are underwritten in the Illinois Auto Finance Center,
Motor Vehicle Contracts purchased from Georgia are underwritten in the Florida
Auto Finance Center, Motor Vehicle Contracts purchased from Colorado and Utah
are underwritten in the Nevada Auto Finance Center and Motor Vehicle Contracts
purchased from New York and Virginia are currently underwritten in the Irvine
Auto Finance Center. Each Motor Vehicle Contract is fully amortizing and
provides for level payments over its term with the portion of principal and
interest of each level payment determined either on the basis of the Rule of
78's or the Simple Interest Method. See "The Contracts."
To evaluate the potential purchase of a Motor Vehicle Contract, Onyx
reviews the application package received from the Dealer originating the Motor
Vehicle Contract, or in the case of Contracts originated by Onyx, the
application package received from the Obligor, that sets forth the Obligor's
income, liabilities, credit and employment history, and other personal
information, as well as a description of the Financed Vehicle that secures the
Motor Vehicle Contract. The credit applications do not consist of forms provided
by Onyx. However, at the time a Dealer underwrites a Motor Vehicle Contract,
Onyx reviews the related application for completeness and for compliance with
Onyx's underwriting guidelines and applicable federal and state consumer
statutes and regulations. To evaluate credit applications, Onyx reviews
information in the application and from credit bureau reports obtained by Onyx.
Each proposed Motor Vehicle Contract is evaluated using uniform
underwriting standards developed by Onyx. These underwriting standards are
intended to assess the Obligor's ability to repay all amounts due under the
Motor Vehicle Contract and the adequacy of the Financed Vehicle as collateral,
based upon a review of the information contained in the Motor Vehicle Contract
application. Among the criteria considered by an Onyx credit manager in
evaluating the individual applications are (i) stability of the Obligor with
specific regard to the Obligor's occupation, length of employment and length of
residency, (ii) the Obligor's payment history based on information known
directly by Onyx or as provided by various credit reporting agencies with
respect to present and past debt, (iii) a debt service-to-gross monthly income
ratio test, and (iv) the principal amount of the Motor Vehicle Contract taking
into account the age, type and market value of the Financed
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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 of certain randomly selected Motor
Vehicle Contracts to ensure compliance with established policies and procedures.
INSURANCE
Each related Motor Vehicle Contract requires the Obligor to obtain
comprehensive and collision insurance with respect to the related Financed
Vehicle with Onyx as a loss payee. Onyx does not presently track whether
Obligors maintain the required insurance. To protect against losses with respect
to Obligors who do not obtain or maintain any insurance, or who do not obtain or
maintain the right type or level of insurance, Onyx has purchased limited
comprehensive and collision insurance, referred to as the "Blanket Insurance
Policy" coverage. The Blanket Insurance Policy provides Onyx with protection on
each uninsured or underinsured Financed Vehicle against total loss, damage or
theft. Onyx has obtained its Blanket Insurance Policy from United Financial
Casualty Company, which is rated "A" by A.M. Best & Co. For the Blanket
Insurance Policy, Onyx is assessed a premium based on each Motor Vehicle
Contract acquired. The insurer under the Blanket Insurance Policy is required to
settle any claim complying with the policy conditions within 60 days from the
date reported. Onyx has paid the premium for the Blanket Insurance Policy
allocable to each Initial Contract sold to the Trust prior to such Initial
Contract's sale to the Trust and will pay the premium at
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each Subsequent Transfer 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 Irvine collection center. Collection activities
include prompt investigation and evaluation of the causes of any delinquency. An
Obligor is considered delinquent when he or she has failed to make a scheduled
payment under the Motor Vehicle Contract within 30 days of the related due date
(each, a "Due Date").
To automate its collection procedures, Onyx uses features of the computer
system of its third party service bureau, Online Computer Systems, Inc. ("OCS")
to provide tracking and notification of delinquencies. The collection system
provides relevant Obligor information (for example, current addresses, phone
numbers and loan information) and records of all Motor Vehicle Contracts. The
system also records an Obligor's promise to pay and affords supervisors the
ability to review collection personnel activity and to modify collection
priorities with respect to Motor Vehicle Contracts. Onyx utilizes a predictive
dialing system centrally located within its Irvine headquarters to make phone
calls to Obligors whose payments are past due by more than eight days but less
than 30 days. The predictive dialer is a computer-controlled telephone dialing
system which dials phone numbers of Obligors from a file of records extracted
from Onyx's database. By eliminating time wasted on attempting to reach
Obligors, the system gives a single collector, on average, the ability to speak
with and work 250 to 300 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 20 days or more delinquent, those accounts are assigned
to specific collectors at the Irvine collection center who have primary
responsibility for such delinquent account until it is resolved. To expedite
collections from late paying Obligors, Onyx uses Western Union "Quick Collect,"
which allows an Obligor to pay at numerous locations any late payments and Onyx
to print at its Irvine headquarters a check evidencing the payment. Onyx also
uses an automatic payment system that allows an Obligor to authorize Onyx to
present a draft on the Obligor's bank account directly to the Obligor's bank for
payment to Onyx.
Generally, after a scheduled payment under a Motor Vehicle Contract
continues to be past due for between 45 and 60 days, Onyx will initiate
repossession of the Financed Vehicle. However, if a Motor Vehicle Contract is
deemed uncollectible, if the Financed Vehicle is deemed by collection personnel
to be in danger of being damaged, destroyed or made unavailable for
repossession, or if the Obligor voluntarily surrenders the Financed Vehicle,
Onyx may repossess it without regard to the length or existence of payment
delinquency. Repossessions are conducted by third parties who are engaged in the
business of repossessing vehicles for secured parties. Under the laws of
California and the other states in which the Contracts were or will be
originated, after repossession the Obligor generally has an additional period of
up to 15 days to redeem the Financed Vehicle before the Financed Vehicle may be
resold by Onyx in an effort to recover the balance due under the Motor Vehicle
Contract.
Losses may occur in connection with delinquent Motor Vehicle Contracts and
can arise in several ways, including inability to locate the Financed Vehicle or
the Obligor, or because of a discharge of the Obligor in a bankruptcy
proceeding. The current policy of Onyx is to recognize losses at the time a
Motor Vehicle Contract is deemed uncollectible or during the month a scheduled
payment under a Motor Vehicle Contract becomes 120 days or more past due,
whichever occurs first.
Upon repossession and sale of the Financed Vehicle, any deficiency
remaining is pursued against the Obligor to the extent deemed practical by Onyx
and to the extent permitted by law. The loss recognition and collection policies
and practices of Onyx may change over time in accordance with Onyx's business
judgment. However, the Agreement requires that Onyx service the Contracts and
collect all amounts due using reasonable care and in at least the same manner as
it services and collects amounts due with respect to Motor Vehicle Contracts
serviced by it for its own account.
17
<PAGE> 18
MODIFICATIONS AND EXTENSIONS
Onyx offers certain credit-related extensions to Obligors. Generally, these
extensions are offered only when (i) Onyx believes that the Obligor's financial
difficulty has been resolved or will no longer impair the Obligor's ability to
make future payments, (ii) the extension will result in the Obligor's payments
being brought current, (iii) the total number of credit-related extensions
granted on the Motor Vehicle Contract will not exceed three and the total
credit-related extensions granted on the Motor Vehicle Contract will not exceed
three months in the aggregate, (iv) there have been no more than two
credit-related extensions granted on the Motor Vehicle Contract in the
immediately preceding twelve months, and (v) Onyx (or its assignee) had held the
Motor Vehicle Contract for at least six months. Any deviation from this policy
requires the concurrence of Onyx's collection manager and an Auto Finance Center
manager.
DELINQUENCY AND LOAN LOSS INFORMATION
The following tables set forth information with respect to the experience
of Onyx relating to delinquencies, loan losses and recoveries for the portfolio
of Motor Vehicle Contracts owned and serviced by Onyx on an annual basis
commencing December 31, 1994. The tables include delinquency information
relating to those Motor Vehicle Contracts that were purchased, originated, sold
and serviced by Onyx. All of the Motor Vehicle Contracts were originally
purchased by Onyx from Dealers or originated by Onyx itself in accordance with
credit underwriting criteria established by Onyx. In February 1994, Onyx
commenced its operations as a purchaser and servicer of motor vehicle retail
installment sales contracts. Thus, Onyx has historical performance for only a
limited time period with respect to the Motor Vehicle Contracts it purchases and
originates and thus delinquencies and loan losses may increase from existing
levels in the portfolio with the passage of time. Delinquency and loan loss
experience may be influenced by a variety of economic, social and other factors.
See "Risk Factors."
The delinquency and loss levels of the Motor Vehicle Contracts in Onyx's
portfolio at December 31, 1996 and September 30, 1997 were higher than in prior
periods due generally to the seasoning of such contracts. In addition, the
increase in delinquency and loss levels at December 31, 1996 and September 30,
1997 were influenced by disproportionately high delinquency and loss levels of
the Motor Vehicle Contracts originated through the third quarter of 1996 through
Onyx's North Hollywood Auto Finance Center. The North Hollywood Auto Finance
Center had a higher concentration of used car dealerships than Onyx's other Auto
Finance Centers, and this concentration of used car dealerships was principally
responsible for the deterioration in the performance of the portion of Onyx's
portfolio that was originated from July 1995 to September 1996. Onyx expects the
increase in delinquency and loss levels will continue through at least year end
1997.
To address the performance issues of the North Hollywood Auto Finance
Center, management re-evaluated all used car dealerships from which Onyx
purchases Motor Vehicle Contracts to ensure that such dealerships met Onyx's
underwriting criteria, and Onyx terminated relationships with a majority of the
used car dealerships serviced by the Center.
Management further enhanced the credit review process by promoting a senior
credit manager to the position of Chief Credit Officer and by increasing
staffing in the credit review department. This department continues to audit
contracts within a few days after funding. The results of the audits are
communicated back to the originating office on a daily basis.
In addition, during the fourth quarter of 1996 and first quarter of 1997
management further enhanced the collections process by completing the
centralization of collections at Onyx's Irvine headquarters and hiring a manager
with over 25 years of collections experience to head the department. Collections
were previously handled at each of Onyx's Auto Finance Centers, each of which
was responsible for collections in certain geographic areas. Centralized
collections is intended to reduce cost and enhance effectiveness by enabling
personnel to specialize in specific stages of the collections process, rather
than focusing on specific geographic areas. For example, a collections officer
previously working at a regional Auto Finance Center might have focused on a
particular geographic region and covered all stages of collections (e.g., from
delinquencies through bankruptcies). In the centralized collections operation,
this officer might cover all geographic areas, but focus on a particular stage
of collections (e.g., 60-day delinquencies).
18
<PAGE> 19
DELINQUENCY EXPERIENCE OF ONYX MOTOR VEHICLE CONTRACT PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31, AT SEPTEMBER 30,
1994 1995 1996 1997
----------------- ------------------ ------------------ ------------------
AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT NO.
------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio... $74,581 6,893 $218,207 20,156 $400,665 38,275 $649,563 62,977
Delinquencies
30-59 days(1)(2).... $ 15 2 $ 1,608 153 $ 5,022 478 $ 9,467 974
60-89 days(1)(2).... 27 4 470 35 1,816 162 2,904 296
90+ days(1)(2)...... 12 1 547 42 1,279 111 2,920 264
Total delinquencies as
a percent of
servicing
portfolio........... .07% .10% 1.20% 1.14% 2.03% 1.96% 2.35% 2.44%
</TABLE>
- ---------------
(1) Delinquencies include principal amounts only, net of repossessed inventory.
Repossessed inventory as a percent of the servicing portfolio was .00%,
.24%, .56% and 1.05% at December 31, 1994, 1995, 1996 and at September 30,
1997, respectively.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
LOAN LOSS EXPERIENCE FOR THE PERIODS ENDED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
--------------------------------- ENDED
DEC. -------------
31, DEC. 31, DEC. 31, SEPTEMBER 30,
1994 1995 1996 1997
------- -------- -------- -------------
<S> <C> <C> <C> <C>
Number of Motor Vehicle Contracts
outstanding................................. 6,893 20,156 38,275 62,977
Period end outstanding........................ $74,581 $218,207 $400,665 $ 649,563
Average outstanding........................... 29,301 141,029 311,340 518,898
Number of gross charge-offs................... 0 197 987 1,466
Gross charge-offs............................. $ 0 $ 548.2 $5,789.2 $ 8,987
Net charge-offs(1)............................ $ 0 $ 528.7 $5,066.1 $ 7,881
Net charge-offs as a percent of period end
outstanding................................. 0.0% .24% 1.26% 1.62%(2)
Net charge-offs as a percent of average
outstanding................................. 0.0% .37% 1.63% 2.03%(2)
</TABLE>
- ---------------
(1) Net charge-offs are gross charge-offs minus recoveries of Motor Vehicle
Contracts previously charged off.
(2) Annualized.
19
<PAGE> 20
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 Contracts in the Trust (including each
Subsequent Contract) will be a fixed rate contract pursuant to which the
allocation of each payment between interest and principal is calculated using
the Rule of 78's or the Simple Interest Method. Approximately 42.39% 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 57.61% in accordance with the Simple
Interest Method (the "Simple Interest Contracts"). Rule of 78's Contracts
provide for the payment by the Obligor of a specified total amount of payments,
payable in equal monthly installments, which total represents the principal
amount financed plus add-on interest in an amount calculated as if such Contract
were a self-amortizing, level-yield Contract bearing interest at a per annum
rate equal to the stated annual percentage rate as set forth in the Contract
("APR"). Under the Rule of 78's, the amount of each payment allocable to
interest on a Contract is determined by multiplying the total amount of add-on
interest payable over the term of the Contract by a fraction derived as
described below. The fraction used in the calculation of add-on interest earned
each month under a contract governed by the Rule of 78's has as its denominator
a number equal to the sum of a series of numbers representing the total number
of monthly payments due under the Contract. For example, with a Contract
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of a series of numbers from 1 to 12. The numerator of the fraction for a
given month is the number of payments remaining before giving effect to the
payment to which the fraction is being applied. Accordingly, in the example of a
twelve-payment Contract, the fraction for the first payment is 12/78, for the
second payment 11/78, for the third payment 10/78, and so on through the final
payment, for which the fraction is 1/78. The applicable fraction is then
multiplied by the total add-on interest payment over the entire term of the
Contract, and the resulting amount is the amount of add-on interest earned that
month. The difference between the amount of the monthly payment by the Obligor
and the amount of earned add-on interest calculated for the month is applied to
principal reduction.
For Simple Interest Contracts, interest due is calculated on the Due Date
based on the actual principal balance of the Contract on that date (the "Simple
Interest Method"). For such Contracts, interest accrued as of the Due Date is
paid first, and then the remaining payment is applied to the unpaid principal
balance. Accordingly, if an Obligor pays the fixed monthly installment in
advance of the Due Date, the portion of the payment allocable to interest for
the period since the preceding payment will be less than it would be if the
payment were made on the Due Date, and the portion of the payment allocable to
reduce the principal balance will be correspondingly greater. Conversely, if an
Obligor pays the fixed monthly installment after its Due Date, the portion of
the payment allocable to interest for the period since the preceding payment
will be greater than it would be if the payment were made on the Due Date, and
the portion of the payment allocable to reduce the principal balance will be
correspondingly smaller. When necessary, an adjustment is made at the maturity
of the Contract to the scheduled final payment to reflect the larger or smaller,
as the case may be, allocations of payments to the amount financed under the
Contract as a result of early or late payments, as the case may be.
The purchase price paid by the Trust for each Contract will reflect the
principal balance of such Contract as of the Cut-Off Date, calculated either
under the Rule of 78's or the Simple Interest Method. For each of the Contracts
the term "Cut-Off Date Scheduled Balance" means the principal balance of such
Contract as of the Cut-Off Date. For Rule of 78's Contracts a greater portion of
the early payments under a Contract is allocated to interest than would be the
case using the actuarial method. Therefore, the Cut-Off Date Scheduled Balance
of each Rule of 78's Contract exceeds the amount that would have been its
principal balance as of the Cut-Off Date if each Contract had been amortized
from origination under the actuarial method. The Trustee and the Servicer intend
to account for interest and principal on the Rule of 78's Contracts using the
actuarial method, but based on the Cut-Off Date Scheduled Balance. The remaining
payments due on a Rule of 78's Contract are not sufficient to amortize the
Cut-Off Date Scheduled Balance of such Contract at a yield equal to its APR.
Accordingly, in order to amortize the Cut-Off Date Scheduled
20
<PAGE> 21
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
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 were used
with respect to the Initial Contracts and none will be used with respect to the
Subsequent Contracts that are adverse to the Certificateholders or the Insurer.
Approximately 22.47% of the Aggregate Scheduled Balance of the Initial Contracts
are secured by new Financed Vehicles and approximately 77.53% of the Aggregate
Scheduled Balance of the Initial Contracts are secured by used Financed
Vehicles. The Seller may not substitute other Motor Vehicle Contracts for the
Contracts at any time during the term of the Agreement.
The Seller has represented that all of the Contracts included in the Trust
satisfy the following Eligibility Requirements:
(a) Such Contracts are or will be secured by new or used automobiles
or light-duty trucks;
(b) Such Contracts have remaining maturities as of the Cut-Off Date or
related Subsequent Transfer Dates, as applicable, of not more than 72
months;
(c) Such Contracts have or will have original maturities 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 yields (using the Recomputed Yield for the Rule of
78's Contracts) that equal or exceed 7.48%;
(e) Such Contracts are or will be secured by Financed Vehicles that,
as of the Cut-Off Date or related Subsequent Transfer Dates, 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 related Subsequent Transfer Dates, as
applicable;
(g) Such Contracts have or will have remaining principal balances as
of the Cut-Off Date or related Subsequent Transfer Dates, as applicable of
at least $500;
(h) Such Contracts were or will be made to Obligors located in the
states of Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois,
Indiana, Nevada, New York, Oregon, Utah, Virginia and Washington; and
(i) As of the Cut-Off Date or related Subsequent Transfer Dates, as
applicable, the Seller has not received notice that any of the related
Obligors has filed for bankruptcy.
21
<PAGE> 22
Set forth below is data concerning the Initial Contracts originated prior
to the Cut-Off Date which, as of such date, had an Aggregate Scheduled Balance
of $155,914,168.
COMPOSITION OF THE INITIAL CONTRACTS
<TABLE>
<S> <C>
Aggregate principal balance............................. $155,914,168
Number of Initial Contracts............................. 12,974
Average principal balance outstanding................... $12,017.43
Average original amount financed........................ $12,118.79
Original amount financed (range)........................ $800.00 to $67,804.84
Weighted average APR.................................... 14.70%
APR (range)............................................. 7.90% to 39.99%
Weighted average original term.......................... 57.3 months
Original term (range)................................... 12 to 72 months
Weighted average remaining term......................... 56.4 months
Remaining term (range).................................. 8 to 72 months
</TABLE>
DISTRIBUTION BY APRS OF THE INITIAL CONTRACTS
<TABLE>
<CAPTION>
% OF
NUMBER OF % OF AGGREGATE
INITIAL INITIAL PRINCIPAL SCHEDULED
APR RANGE(1) CONTRACTS CONTRACTS BALANCE BALANCE
-------------------------------------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C>
7.001% to 8.000%...................... 103 .79% $ 1,779,363 1.14%
8.001% to 9.000%...................... 636 4.90 10,177,162 6.53
9.001% to 10.000%..................... 850 6.55 12,451,540 7.99
10.001% to 11.000%.................... 827 6.37 11,482,107 7.36
11.001% to 12.000%.................... 777 5.99 10,702,393 6.86
12.001% to 13.000%.................... 884 6.81 11,595,447 7.44
13.001% to 14.000%.................... 1,123 8.66 14,506,153 9.30
14.001% to 15.000%.................... 1,210 9.33 15,088,951 9.68
15.001% to 16.000%.................... 1,115 8.59 13,274,378 8.51
16.001% to 17.000%.................... 1,005 7.75 11,732,382 7.52
17.001% to 18.000%.................... 1,096 8.45 12,004,791 7.70
18.001% to 19.000%.................... 676 5.21 7,092,703 4.55
19.001% to 20.000%.................... 662 5.10 6,600,206 4.23
20.001% to 21.000%.................... 1,299 10.01 12,982,761 8.33
21.001% and over...................... 711 5.49 4,443,831 2.85
------ ------ ------------ ------
Totals...................... 12,974 100.00% $155,914,168 100.00%
====== ====== ============ ======
</TABLE>
- ---------------
(1) Because the principal balance of each such Contract sold to the Trust is the
Cut-Off Date Scheduled Balance, which in the case of Rule of 78's Contracts
is higher than what the principal balance of the Rule of 78's Contracts
would have been had principal and interest been allocated from the date of
origination in accordance with the actuarial method, the Recomputed Yield
for each Rule of 78's Contract is less than the APR of such Contract
specified herein. On a weighted average basis, the yield for all the Initial
Contracts, using the Recomputed Yield for the Rule of 78's Contracts, in the
aggregate, is 14.64%. See "The Contracts."
22
<PAGE> 23
GEOGRAPHIC CONCENTRATION OF THE INITIAL CONTRACTS
<TABLE>
<CAPTION>
% OF
NUMBER OF % OF AGGREGATE
INITIAL INITIAL PRINCIPAL SCHEDULED
CONTRACTS CONTRACTS BALANCE BALANCE
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Arizona............................... 1,090 8.40% $ 13,272,275 8.51%
California............................ 7,710 59.43 94,118,540 60.37
Colorado.............................. 53 0.41 601,120 0.39
Florida............................... 861 6.64 10,973,648 7.04
Georgia............................... 45 0.35 616,790 0.40
Idaho................................. 6 0.05 64,086 0.04
Illinois.............................. 943 7.27 12,270,557 7.87
Indiana............................... 160 1.23 1,911,854 1.23
Nevada................................ 677 5.22 8,118,502 5.21
New York.............................. 3 0.02 21,876 0.01
Oregon................................ 386 2.98 3,612,670 2.32
Utah.................................. 1 0.01 3,180 0.00
Virginia.............................. 3 0.02 33,624 0.02
Washington............................ 1,036 7.99 10,295,447 6.60
------ ------ ------------ ------
Total....................... 12,974 100.00% $155,914,168 100.00%
====== ====== ============ ======
</TABLE>
23
<PAGE> 24
MATURITY AND PREPAYMENT ASSUMPTIONS
The Contracts are or will be 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 Prefunded Amount before the end of
the Funding Period, because any remaining Prefunded Amount will be included in
the Principal Distribution made to Certificateholders on the Distribution Date
at or immediately following the end of the Funding Period, but in no event later
than the January 15, 1998 Distribution Date. Although Onyx believes that
sufficient additional Motor Vehicle Contracts will be originated for purchase
with the Prefunded Amount by the end of the Funding Period, no assurances can be
given in that regard. Certificateholders will bear all reinvestment risk
resulting from prepayment of the Contracts. See "Risk Factors -- Prepayment
Considerations."
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 law and the law of some other states require that retail
installment sales contracts such as the Contracts permit full prepayment without
penalty. Any Full Prepayments reduce the average life of the Contracts. The
Servicer will permit the sale or other transfer of a Financed Vehicle without
accelerating the maturity of the related Contract if such Contract is assumed by
a person satisfying Onyx's then current underwriting standards. See "The Onyx
Portfolio of Motor Vehicle Contracts -- Underwriting of Motor Vehicle
Contracts."
Onyx has limited historical experience with respect to prepayments, has not
as of the date hereof prepared data on prepayment rates, and is not aware of
publicly available industry statistics that set forth principal prepayment
experience for retail installment sales contracts similar to the Contracts. Onyx
can make no prediction as to the actual prepayment rates that will be
experienced on the Contracts in either stable or changing interest rate
environments. Certificate Owners will bear all reinvestment risk resulting from
the rate of prepayment of the Contracts.
24
<PAGE> 25
YIELD CONSIDERATIONS
Interest due will be passed through on each Distribution Date in an amount
equal to the product of one-twelfth of the Pass-Through Rate and the Pool
Balance as of the end of the Collection Period preceding the related Collection
Period (or the Original Pool Balance, in the case of the first Distribution
Date). In the event of a principal prepayment on a Contract during a Collection
Period, Certificateholders will receive interest for the full month on the
related Distribution Date. See "The Certificates and the Agreement --
Distributions of Principal and Interest."
Although the Contracts have different APRs, the yield on each individual
Contract, using the Recomputed Yield for Rule of 78's Contracts, will equal or
exceed 7.48%. 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 Balance at the end of the month as a
fraction of the Original Pool Balance. The Pool Factor will be 1.000000 as of
the Closing Date; thereafter, the Pool Factor will decline to reflect reductions
in the Pool Balance. The amount of a Certificateholder's pro rata share of the
Pool Balance for a given month can be determined by multiplying the original
denomination of such holder's Certificate by the Pool Factor for that month.
Pursuant to the Agreement, Certificateholders will receive monthly reports
from the Trustee concerning payments received on the Contracts, the Pool
Balance, the Pool Factor, and various other items of information.
Certificateholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "The Certificates and the Agreement."
USE OF PROCEEDS
The net proceeds to be received by the Seller from the sale of Certificates
will be used to repay certain indebtedness incurred in connection with its
acquisition of the Contracts, to fund the Prefunded Amount to permit the
purchase of Subsequent Contracts during the Funding Period, to fund amounts on
deposit in the Capitalized Interest Account and to pay certain other expenses in
connection with the pooling of the Contracts and the issuance of the
Certificates.
THE SELLER
The Seller is a wholly-owned, limited purpose finance subsidiary of Onyx
which was incorporated under the laws of the State of Delaware on July 28, 1994
and has a limited operating history. The principal office of the Seller is
located at 8001 Irvine Center Drive, 6th Floor, Irvine, CA 92618. The telephone
number of such office is (714) 753-1191.
The Seller was organized principally for the purpose of purchasing retail
installment sales contracts from Onyx in connection with its activities as a
finance subsidiary of Onyx. The Seller was organized for limited purposes, and
its certificate of incorporation limits its activities to purchasing Contracts
from Onyx and transferring such Contracts to third parties and any activities
incidental to and necessary or convenient for the accomplishment of such
purposes.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by Onyx under any Insolvency Law will not result in consolidation of
the assets and liabilities of the Seller with those of Onyx. These steps include
the creation of the Seller as a separate, limited purpose subsidiary pursuant to
a certificate of incorporation containing certain limitations (including
restrictions on the nature of the Seller's business and a restriction on the
Seller's ability to commence a voluntary case or proceeding under any Insolvency
Law without the unanimous affirmative vote of all of its directors). However,
there can be no assurance that the activities of the Seller would not result in
a court concluding that the assets and liabilities of the Seller should be
consolidated with those of Onyx in a proceeding under any Insolvency Law.
25
<PAGE> 26
The Seller has received the advice of counsel to the effect that, subject
to certain facts, assumptions and qualifications, it would not be a proper
exercise by a court of its equitable discretion to disregard the separate
corporate existence of the Seller and to require the consolidation of the assets
and liabilities of the Seller with the assets and liabilities of Onyx in the
event of the application of any Insolvency Law to Onyx. However, there can be no
assurance that a court would not conclude that the assets and liabilities of the
Seller should be consolidated with those of Onyx. If a court were to reach such
a conclusion, or a filing were made under any Insolvency Law by or against the
Seller, or if an attempt were made to litigate any of the foregoing issues,
delays in distributions on the Certificates could occur or reductions in the
amounts of such distributions could result.
The Contracts have been 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,
as amended (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 United States Bankruptcy Code (the "Bankruptcy
Code") should Onyx become the subject of a bankruptcy case subsequent to the
transfer of the Contracts to the Seller.
The Seller has received the advice of counsel to the effect that, subject
to certain facts, assumptions and qualifications, in the event Onyx were to
become the subject of a voluntary or involuntary case under the Bankruptcy Code
subsequent to the transfer of the Contracts to the Seller, the transfer of the
Contracts by Onyx to the Seller pursuant to the Purchase Agreement would be
characterized as a "true sale" of the Contracts from Onyx to the Seller and the
Contracts and the proceeds thereof would not form part of Onyx's bankruptcy
estate pursuant to Section 541 of the Bankruptcy Code.
THE SERVICER
The Contracts initially will be serviced by Onyx Acceptance Corporation
("Onyx"). Onyx was incorporated in California in 1993 and reincorporated in
Delaware in 1996 in connection with its initial public offering of Common Stock
which was successfully completed in March 1996 and all stock offered in
connection with such public offering was sold. Onyx is engaged principally in
the business of providing indirect automobile financing to new car dealerships
and selected used car dealerships within California, and to an increasing degree
in other states across the country. Onyx has been in existence for over three
years and is headed by a management team with extensive experience in the
origination and servicing of indirect and direct automobile loans, and who, from
1985 to present, have actively participated in a number of public
securitizations of motor vehicle installment contracts.
Onyx is headquartered in Irvine, California and operates ten Auto Finance
Centers, five in California and one in each of Arizona, Florida, Nevada,
Washington and Illinois. The California centers are located in: (i) Orange and
Metropolitan Los Angeles Counties, (ii) North Los Angeles and Ventura Counties,
(iii) the San Francisco Bay Area, (iv) Riverside and San Bernardino Counties,
(v) San Diego County, and (vi) Sacramento County. Through these offices, Onyx is
able to service the most populous California counties including Los Angeles,
Riverside, San Bernardino, Ventura, Orange, San Diego, San Francisco, Santa
Clara, Alameda, San Mateo, Santa Cruz, Marin, Contra Costa, and Sacramento
counties. In addition, Onyx services Oregon and Idaho through its Washington
center. The Arizona center is located in Phoenix, and is able to service the
Phoenix metropolitan and suburban areas. The Washington center is located in
Seattle and is able to service the Seattle metropolitan and suburban areas and
Oregon and Idaho. The Nevada center is located in Las Vegas and is able to
service the Las Vegas metropolitan and suburban areas as well as Colorado and
Utah. The Florida center is located in Deerfield Beach and is able to service
Florida and Georgia. The Illinois office is located in Rosemont and services the
Chicago metropolitan area and Indiana. All other states are currently serviced
by the Irvine office. Onyx currently has agreements with over 2,300 Dealers.
Onyx acquires individual motor vehicle installment contracts from Dealers,
and to a lesser extent directly originates such contracts, after reviewing and
approving the customer's credit application in accordance with its underwriting
policies and procedures. See "The Contracts." Onyx has acquired motor vehicle
installment
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contracts totaling approximately $1 billion from commencement of operations
through September 30, 1997. As of September 30, 1997, Onyx has amassed a
servicing portfolio of approximately $649.6 million. As of September 30, 1997,
approximately 84% of Onyx's servicing portfolio consisted of motor vehicle
installment contracts secured by used motor vehicles, and 16% secured by new
motor vehicles. As of September 30, 1997, Onyx had total assets of approximately
$128 million and stockholders' equity of $40 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 Original Pool
Balance. Each Certificate will rank pari passu with each other Certificate. The
Certificates will initially be represented by one or more Certificates
registered in the name of Cede & Co. ("Cede"), as nominee of DTC, except as set
forth below. The interests of holders of beneficial interests in the
Certificates (each a "Certificate Owner") will be available for purchase in
denominations of $1,000 and integral multiples thereof in book-entry form only.
The Seller has been informed by DTC that DTC's nominee will be Cede.
Accordingly, Cede is expected to be the holder of record of the Certificates.
Unless and until Definitive Certificates are issued under the limited
circumstances described herein, no Certificate Owner will be entitled to receive
a certificate representing such person's interest in the Certificates. All
references herein to actions by Certificateholders shall refer to actions taken
by DTC upon instructions from its participating organizations (the
"Participants") and all references herein to distributions, notices, reports and
statements to Certificateholders shall refer to distributions, notices, reports
and statements to DTC or Cede, as the registered holder of the Certificates, as
the case may be, for distribution to Certificate Owners in accordance with DTC
procedures. See "The Certificates and the Agreement -- Book-Entry Registration"
and "-- Definitive Certificates."
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
On each Distribution Date, monthly interest due on the Contracts (the
"Interest Distribution") at a rate equal to the product of one-twelfth of the
Pass-Through Rate and the Pool Balance as of the end of the Collection Period
preceding the related Collection Period will be distributed on a pro rata basis
to the Certificateholders of record as of the related Record Date. The amount of
interest payable on the Certificates on the first Distribution Date will be
$0.175 per $1,000 dollars. 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, plus the amount, if any, remaining
on deposit in the Prefunding Account on such date (excluding investment earnings
thereon). Interest will be paid (i) to the extent of the portion of the Pool
Balance represented by 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 Pool Balance
represented by the Prefunded Amount from investment earnings thereon, and from
payments under the Capitalized Interest Agreement. A "Collection Period" with
respect to a Distribution Date will be the calendar month preceding the month in
which such Distribution Date occurs; provided, that with respect to Liquidated
Contracts the
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Collection Period will be the period from but excluding the sixth Business Day
preceding the immediately preceding Distribution Date to and including the sixth
Business Day preceding such Distribution Date. With respect to the first
Distribution Date the "Collection Period" for Liquidated Contracts will be the
period from and including the Cut-Off Date to and including the sixth Business
Day preceding such first Distribution Date. Each Interest Distribution will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Unless and until Definitive Certificates have been issued, distributions on each
Distribution Date will be made through the facilities of DTC and the related
"Record Date" will be the Business Day prior to such Distribution Date. If
Definitive Certificates are issued, the related "Record Date" will be the last
day of the calendar month preceding such Distribution Date. The final
distribution of principal of and interest on each Certificate will be made only
upon presentation and surrender of such Certificate on or after the Final
Distribution Date (or such earlier termination date as is provided by the
Agreement) at the office or agency of the Trustee maintained for that purpose.
On each Distribution Date, the Principal Distribution 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 on or following the last day
of the Funding Period, any portion of the Prefunded Amount remaining on deposit
in the Prefunding 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
"Liquidated Contract" is a Contract that (a) is the subject of a Full
Prepayment, (b) is a Defaulted Contract with respect to which Liquidation
Proceeds constituting, in the Servicer's reasonable judgment, the final amounts
recoverable have been received, (c) is paid in full on or after its Maturity
Date or (d) has been a Defaulted Contract for four or more Collection Periods
and as to which Liquidation Proceeds constituting the final amounts recoverable
have not been received; provided, however, that in any event a Contract that is
delinquent in the amount of five monthly payments at the end of a Collection
Period is a Liquidated Contract. A "Defaulted Contract" with respect to any
Collection Period is a Contract (a) which is, at the end of such Collection
Period, delinquent in the amount of two monthly payments or (b) with respect to
which the related Financed Vehicle has been repossessed or repossession efforts
have been commenced.
The Monthly P&I for a Contract due on each Due Date is substantially equal
for the term of the Contract. The Scheduled Balance of each Contract as of the
Cut-Off Date, which will be treated as being equal to the Cut-Off Date Scheduled
Balance, will be set forth in a schedule to the Agreement. The yield of each
Contract (using the Recomputed Yield for Rule of 78's Contracts) will at least
equal 7.48%.
At the issuance of the Certificates, the initial aggregate principal amount
of the Certificates will equal the sum of the Aggregate Scheduled Balance of all
the Initial Contracts as of the Cut-Off Date plus the Prefunded Amount.
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THE PREFUNDING ACCOUNT; MANDATORY PARTIAL PREPAYMENT OF THE CERTIFICATES
The Prefunding Account. The Servicer will establish an account in the name
of the Trustee for the benefit of the Certificateholders into which the
Prefunded Amount (which equals $10,085,832.00, or approximately 6% of the
Original Pool 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 "Prefunding Account"). The Funding Period will be the period from
the Closing Date until the earliest to occur of (i) the date on which the
Prefunded Amount is less than $20,000, (ii) the date on which an Event of
Default occurs, or (iii) the close of business on January 9, 1998.
The Prefunding 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 Prefunding 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 Prefunded Amount remaining on
deposit in the Prefunding 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 Prefunding Account may be invested in Eligible
Investments in the manner described in the Agreement. Earnings on investment of
funds in the Prefunding Account will be used, together with the Capitalized
Interest Amount paid under the Capitalized Interest Agreement, to pay the
Pass-Through Rate on the portion of the Pool Balance relating to the Prefunding
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 Prefunding 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 at or succeeding the date on which the Funding Period ends, to the
extent that any portion of the Prefunded Amount, exclusive of any investment
earnings thereon, remains on deposit in the Prefunding 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.
Upon the occurrence of a Mandatory Partial Prepayment, the holders of
Certificates will receive an amount equal to the portion of the Prefunded Amount
remaining in the Prefunding 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 Prefunded
Amount and that therefore there will be at least a nominal amount of principal
prepaid to Certificateholders.
CAPITALIZED INTEREST AGREEMENT AND CAPITALIZED INTEREST ACCOUNT
Simultaneously with the sale and assignment of the Contracts by the Seller
to the Trust, the Seller and the Trustee on behalf of the Trust will enter into
the Capitalized Interest Agreement, pursuant to which the Seller will be
obligated to pay the Capitalized Interest Amount, if any, on or before five
business days prior to each Distribution Date, ending with the February 1998
Distribution Date. The purpose of the Capitalized Interest Agreement is to cover
the shortfall between interest distributable on the portion of the Pool Balance
represented by the Prefunded Amount and interest which will be earned by the
Trust on the Prefunded Amount prior to the time it is used to purchase
Subsequent Contracts. The Capitalized Interest Agreement will be in effect from
the Closing Date until February 16, 1998. Payments of the Capitalized Interest
Amounts due under the Capitalized Interest Agreement will be secured by funds on
deposit in a segregated trust deposit account (the "Capitalized Interest
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
"Capitalized Interest
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Agent"). The Capitalized Interest Account will be an Eligible Account. Monies on
deposit in the Capitalized Interest Account may be invested in Eligible
Investments in the manner described in the Agreement.
The amount required to be deposited in such Capitalized Interest Account on
the Closing Date will be the maximum aggregate Capitalized Interest Amounts that
may become owing under the Capitalized Interest Agreement, assuming that, with
respect to the Prefunded Amount during the Funding Period, a certain rate of
interest (set forth in the Agreement) is earned and no Subsequent Contracts are
acquired. The "Capitalized Interest 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 (a) one month's interest on the Prefunded
Amount on deposit in the Prefunding Account as of the first day of such
Collection Period at the Pass-Through Rate plus (b) 1/12 of the premium for the
Surety Bond on the Prefunded Amount minus (c) the earnings received by the
Trustee during the related Collection Period from investment of the Prefunded
Amount on deposit in the Prefunding Account. On each Subsequent Closing Date, an
amount will be released to the Seller from the Capitalized Interest Account so
that the amount remaining in the account after such release will equal the
maximum Capitalized Interest 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 Capitalized
Interest Account after giving effect to the payment on the Certificates on the
February 1998 Distribution Date will be released to the Seller on such date.
THE SURETY BOND
If on any Servicer Report Date the amount on deposit in the Collection
Account after giving effect to all amounts deposited to or payable from the
Payahead Account, the Prefunding Account or pursuant to the Capitalized Interest
Agreement (including from the Capitalized Interest 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 Distribution
Date, the Trustee shall withdraw from the Collection Account and shall pay such
amount to the Certificateholders.
BOOK-ENTRY REGISTRATION
Certificateholders may hold their Certificates through DTC if they are
participants of such system, or indirectly through organizations which are
participants ("Participants") in such system.
Cede, as nominee for DTC, will hold one or more global Certificates.
Transfers between Participants will occur in the ordinary way in accordance with
DTC rules.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations (including the
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Underwriter). 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.
DEFINITIVE CERTIFICATES
The Certificates will be issued in fully registered, certificated form in
denominations of $1,000 and integral multiples thereof to Certificate Owners or
their nominees (the "Definitive Certificates"), rather than to DTC or its
nominee, only if (i) the Seller advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as depositary
with respect to the Certificates, and the Trustee or the Seller are unable to
locate a qualified successor, or (ii) after the occurrence of an Event of
Default, Certificate Owners representing in the aggregate more than 50% of the
Pool Balance advise the Trustee and DTC through Participants in writing that the
continuation of a book-entry system with respect to the Certificates through any
depositary is no longer in the best interest of the Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the Definitive Certificates representing the Certificates and instructions for
reregistration, the Trustee
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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 Prefunded 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 Prefunding Account. Each Subsequent Contract delivered to the Trustee on
each Subsequent 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
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purchase of the related Subsequent Contracts) is not less than 7.48%; (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 or will contain 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 at the date of origination
complied or will comply in all material respects with all requirements of
applicable federal, state, and local laws, and regulations thereunder, including
usury laws, the Federal Truth-in-Lending Act, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Federal Trade Commission Act, the Fair Debt
Collection Practices Act, the Fair Credit Billing Act, the Magnuson-Moss
Warranty Act, the Federal Reserve Board's Regulations B and Z, the Soldiers' and
Sailors' Civil Relief Act of 1940, state adaptations of the National Consumer
Act and of the Uniform Consumer Credit Code, and any other consumer credit,
equal opportunity and disclosure laws applicable to such Contract and sale;
(iii) each Contract constitutes or will constitute the legal, valid, and binding
payment obligation in writing of the Obligor, enforceable by the holder thereof
in all respects in accordance with its terms, subject, as to enforcement, to
applicable bankruptcy, insolvency, reorganization, liquidation and other similar
laws and equitable principles relating to or affecting the enforcement of
creditors' rights; (iv) as of the Closing Date or related Subsequent Transfer
Date, as applicable, each Contract was or will be 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
or will be 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 or will be assignable and has been or will be so assigned by the
Seller to the Trust; (v) as of the Closing Date or related Subsequent Transfer
Date, as applicable, the Seller had or will have good and marketable title to
and was or will be the sole owner of each Contract, free of liens, claims,
encumbrances and rights of others; (vi) as of the Closing Date or related
Subsequent Transfer Date, as applicable, there are no rights of rescission,
offset, counterclaim, or defense, and the Seller had or will have had no
knowledge of the same being asserted or threatened, with respect to any
Contract; (vii) as of the Closing Date or related Subsequent Transfer Date, as
applicable, the Seller had or will have 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
or related Subsequent Transfer Date, as applicable, the Seller has or will have
had no knowledge that a default, breach, violation, or event permitting
acceleration under the terms of any Contract exists, and the Seller has or will
have had no knowledge that a continuing condition that with notice or lapse of
time would constitute a default, breach, violation or event permitting
acceleration under
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the terms of any Contract exists, and the Seller has not waived any of the
foregoing; (ix) each Contract requires or will require that the Obligor
thereunder obtain comprehensive and collision insurance covering the related
Financed Vehicle; (x) each Contract was or will be 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 or will be 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 or will be only one original of each Contract and such original is or
will be 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 passed through to the
Certificateholders as part of the Principal Distribution 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
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"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 amounts payable from the Payahead Account, the Prefunding Account and/or
pursuant to the Capitalized Interest Agreement (including from the Capitalized
Interest Account). Such amount will be applied, first, to the Servicer in
payment of the Servicing Fee, second, to payment of the Interest Distribution
and the Principal Distribution to the Certificateholders on such Distribution
Date in accordance with the Agreement (including the distribution of any
Mandatory Partial Prepayment), third, to the Insurer, the premium for the Surety
Bond, and fourth, any balance shall be distributed to a separate spread account
trust to be applied in accordance with the spread account trust agreement and
the Insurance Agreement, which provide that to the extent funds are not required
to reimburse the Insurer for draws on the Surety Bond, to satisfy obligations
owing to the Insurer or to reserve against the possibility of future draws,
amounts so 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 and amounts payable from the
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Payahead Account, the Prefunding Account and/or pursuant to the Capitalized
Interest Agreement (including from the Capitalized Interest Account), 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 the Distribution Date
Statement setting forth the amounts on deposit in the Collection Account, the
sources of such amounts and the amounts to be paid to Certificateholders (the
"Distribution Date Statement"). The Distribution Date Statement shall also
include information regarding Contracts purchased by the Servicer or repurchased
by the Seller.
REPURCHASE OF CONTRACTS
The Servicer will have the option to purchase the remaining Contracts, and
thereby cause early retirement of the Certificates, as of any Distribution Date
on which, after giving effect to the Principal Distribution on such Distribution
Date, the Aggregate Scheduled Balance of the Contracts is 10% or less of the
Original Pool Balance. Any such purchase must be effected at a price equal to
the Aggregate Scheduled Balance of the Contracts in the Trust on the date of
repurchase, plus accrued interest thereon and all amounts due to the Insurer
under the Insurance Agreement. In addition, Onyx or the Seller is required to
purchase or repurchase, respectively, Contracts under certain circumstances if
certain representations and warranties made by Onyx or the Seller respectively
are incorrect in any manner that materially and adversely affects the interest
of the Certificateholders or the Insurer. Additionally, the Servicer is required
to purchase Contracts as to which the Servicer has breached certain servicing
covenants.
SERVICING FEE
The Servicer will be entitled to compensation for the performance of its
obligations under the Agreement. The Servicer shall be entitled to receive an
amount equal to the product of one-twelfth of 1.00% per annum (the "Servicing
Fee Rate") and the Pool Balance (excluding the Prefunded Amount) as of the end
of the Collection Period preceding the related Collection Period. As additional
compensation, the Servicer or its designee shall be entitled to retain all late
payment charges, extension fees and similar items paid in respect of the
Contracts. The Servicer or its designee will also receive as servicing
compensation reinvestment earnings on Eligible Investments (other than earnings
on amounts on deposit in the Prefunding Account) 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
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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"). On November 14, 1997, Holdings announced that it had signed an
agreement to merge with MBIA Inc. The merger, which is subject to approval by
regulatory authorities and the shareholders of Holdings, is anticipated to occur
in the first quarter of 1998. MBIA Inc., through its wholly owned subsidiary,
MBIA Insurance Corporation, is a financial guaranty insurer of municipal bonds
and structured finance transactions, and has a claims paying rating of triple-A
from Moody's, Standard & Poor's and Fitch Investors Service.
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.
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THE SURETY BOND IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As of December 31, 1996 and 1995, the Insurer had qualified statutory
capital (which consists of policyholders' surplus and contingency reserve) of
approximately $260 million and $240 million, respectively, and had not incurred
any debt obligations. Article 69 of the New York State Insurance Law requires
the Insurer to establish and maintain the contingency reserve, which is
available to cover claims under surety bonds issued by the Insurer.
The audited financial statements of the Insurer prepared in accordance with
generally accepted accounting principles as of December 31, 1996 and 1995 and
for each of the years in the three-year period ended December 31, 1996 are
included in this Prospectus beginning at F-1. The unaudited financial statements
of the Insurer for the nine month periods ended September 30, 1996 and 1997 are
made a part of this Prospectus beginning at F-21. Copies of the Insurer's
financial statements prepared in accordance with statutory accounting standards,
which differ from generally accepted accounting principles, are filed with the
Insurance Department of the State of New York and are available upon request.
The Insurer is located at 885 Third Avenue, New York, New York 10022, and
its telephone number is (212) 755-1155.
ADDITIONAL PROVISIONS OF THE AGREEMENT
STATEMENTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will include with each distribution
to each Certificateholder 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 Prefunding 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;
(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, 1997, the Trustee and the Paying Agent shall furnish to each person
who on any Record Date during such calendar year shall have been a registered
Certificateholder a statement containing the sum of the amounts described in
(i), (ii) and (xi) above and such other information in respect of the
Certificates as may be reasonably necessary for such Certificateholder's
preparation of federal income tax returns. See "Certain Federal Income Tax
Consequences."
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that a firm of independent public accountants
will furnish to the Trustee and the Insurer, on or before each March 15 after
the end of each fiscal year of the Servicer, beginning with the fiscal year
ended December 31, 1997, a statement as to compliance by the Servicer during the
preceding fiscal year with certain standards relating to the servicing of the
Contracts.
The Agreement will also provide for delivery to the Trustee and the
Insurer, on each March 15 after the end of each fiscal year of the Servicer,
commencing with the fiscal year ended December 31, 1997, of a certificate signed
by an authorized officer of the Servicer stating that the Servicer has fulfilled
its obligations under the Agreement throughout the preceding fiscal year or, if
there has been a default in the fulfillment of any such obligation, describing
each such default.
Copies of such statements and certificates may be obtained by
Certificateholders by a request in writing addressed to the Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder except upon determination that the
Servicer's performance of such duties is no longer permissible under applicable
law. No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's servicing obligations and duties under the
Agreement. See "-- The Trustee."
The Agreement will further provide that neither the Servicer nor any of its
directors, officers, employees, and agents shall be under any liability to the
Trust or the Certificateholders for taking any action or for refraining from
taking any action pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence (except errors in judgment) in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Agreement will provide that the Servicer is
under no obligation to appear in, prosecute or defend any legal action that is
not incidental to the Servicer's servicing responsibilities under the Agreement
and that, in its opinion, may cause it to incur any expense or liability. The
Servicer may, however, undertake any reasonable action that it may deem
necessary or desirable in respect of the Agreement and the rights and duties of
the parties thereto and the interests of the Certificateholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust, and
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 Capitalized Interest Account any amount required to be so
deposited or credited or to make the required distribution to
Certificateholders, which failure continues unremedied for three Business Days
after written notice from the Trustee or the Insurer is received
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by the Servicer or discovery by the Servicer; (ii) any failure by the Servicer
to deliver to the Insurer or the Trustee certain reports required by the
Agreement by the fifth Business Day prior to the related Distribution Date or to
perform certain other covenants under the Agreement; (iii) any failure by the
Servicer or the Seller duly to observe or perform in any material respect any
other covenants or agreements of the Servicer or the Seller in the Agreement,
which failure materially and adversely affects the rights of Certificateholders,
the Insurer or the Trustee and which continues unremedied for 30 days after the
giving of written notice of such failure (A) to the Servicer or the Seller as
the case may be, by the Trustee or the Insurer or (B) to the Servicer or the
Seller, as the case may be, and to the Trustee by Holders of Certificates
evidencing not less than 25% of the Pool Balance or by the Insurer; (iv) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings and certain actions by the Servicer or
Seller indicating its insolvency, reorganization pursuant to bankruptcy or
similar proceedings or inability to pay its obligations; (v) any breach of any
of the representations and warranties of the Servicer or the Seller (except for
any breaches relating to Contracts repurchased by the Seller or the Servicer)
which breach has a material adverse effect on the Trust and which continues for
30 days after the giving of notice of such breach to the Seller or the Servicer,
as the case may be, by the Trustee or the Holders of Certificates evidencing not
less than 25% of the Pool Balance or the Insurer; (vi) any change in control of
the Servicer in violation of the covenant set forth in Section 7.2 of the
Agreement; and (vii) any determination by the Insurer that the quality of
performance of the Servicer is not in compliance with either the terms of the
Agreement or that the Servicer's performance is not adequate, as measured in
accordance with industry standards, in respect of all contracts serviced by the
Servicer.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied, the
Trustee, the Insurer or Holders of Certificates evidencing not less than 25% of
the Pool Balance may terminate all the rights and obligations of the Servicer
under the Agreement, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements; provided, however, that
the Trustee will not be obligated to purchase Contracts if certain
representations and warranties of Onyx as Servicer prove incorrect or if certain
covenants of Onyx as Servicer are breached. In the event that the Trustee is
unwilling or unable so to act, it may appoint, with the consent of the Insurer,
or petition a court of competent jurisdiction for the appointment of a successor
with a net worth of at least $50,000,000 and whose regular business includes the
servicing of automobile retail installment sale contract receivables.
The Holders of Certificates evidencing not less than 51% of the Pool
Balance (not including any Certificates held by the Seller, the Servicer or any
affiliate) may, on behalf of all Certificateholders, with the consent of the
Insurer, waive any default by the Servicer or the Seller in the performance of
its obligations, other than failure to make any required deposits to or payments
from the Collection Account.
The Trustee is under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct, or defend any litigation thereunder or in
relation thereto at the request, order, or direction on any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby. No Certificateholder will have any
right under the Agreement to institute any proceeding with respect to the
Agreement, unless such Holder previously has given to the Trustee written notice
of default and unless the Holders of Certificates evidencing not less than 25%
of the Pool Balance with the consent of the Insurer have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 30 days has neglected or refused to institute any such proceedings.
Notwithstanding any provision in the Agreement to the contrary, in the
event that the Insurer is in default under the Surety Bond or is subject to any
insolvency proceeding, the Insurer shall not have the right to terminate the
Servicer, or to control or direct the actions of the Seller, the Servicer or the
Trustee pursuant to the terms of the Agreement, nor shall the consent of the
Insurer be required with respect to any action (or
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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 Balance and the Insurer for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of Certificateholders; provided, however,
that no such amendment may (i) increase or reduce in any manner the amount of,
or accelerate or delay the timing of, collection of payments on Contracts or
distributions required to be made on any Certificate or (ii) reduce the
aforesaid percentage required to consent to any such amendment, without the
consent of all Certificateholders.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Servicer, the Trustee will provide to the
Servicer within 15 days after receipt of such request a list of the names and
addresses of all Certificateholders of record as of the most recent Record Date.
Upon written request by three or more Certificateholders or by Holders of
Certificates evidencing not less than 25% of the Pool Balance, the Trustee will
afford such Certificateholders access during business hours to the current list
of Certificateholders for purposes of communicating with other
Certificateholders with respect to their rights under the Agreement.
The Agreement will not provide for the holding of any annual or other
meetings of Certificateholders.
TERMINATION
The obligations of the Seller, the Servicer and the Trustee to the
Certificateholders pursuant to the Agreement will terminate upon the earlier of
(i) the maturity or other liquidation of the last Contract and the disposition
of any amounts received upon liquidation of any remaining Contracts that are
part of the Trust Property and (ii) (a) the payment to Certificateholders of all
amounts required to be paid to them pursuant to the Agreement and the
disposition of all property held as part of the Trust, (b) termination of the
Surety Bond in accordance with its terms and surrender of the Surety Bond to the
Insurer for cancellation, (c) the payment of all amounts owed to the Trustee
under the Agreement and (d) the payment of all amounts owed to the Insurer under
the Insurance Agreement and the spread account trust agreement. In order to
avoid excessive administrative expense, the Servicer is permitted at its option
to purchase the remaining Contracts from the Trust as of the Distribution Date
as of which the then outstanding Aggregate Scheduled Balance of the Contracts is
10% or less of the Original Pool Balance at a price equal to the Aggregate
Scheduled Balance of such Contracts plus accrued interest on the Contracts and
all amounts due to the Insurer under the Insurance Agreement. The Trustee will
give written notice of termination to each Certificateholder of record. The
final distribution to any Certificateholder will be made only upon surrender and
cancellation of such Certificateholder's Certificate at an office or agency of
the Trustee specified in the notice of termination. Any funds remaining in the
Trust, after the Trustee has taken certain measures to locate a
Certificateholder and such measures have failed, will be distributed to a
charity designated by the Servicer.
THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Certificates, or any Contracts or related documents, or the
investment of any monies by the Servicer before such monies are deposited in or
credited to the Collection Account. The Trustee has not examined the Contracts.
If no
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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 the
Servicer. 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
("UCC") as in effect in California. 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
Contracts in good faith, for value and without actual knowledge of the Trust's
ownership interest in the Contracts.
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SECURITY INTERESTS IN THE FINANCED VEHICLES
All Financed Vehicles were registered in the State of California 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 60.37% of the Financed Vehicles as of the Cut-Off Date
will be located) may be perfected by depositing with the California Department
of Motor Vehicles a properly endorsed certificate of title showing the secured
party as legal owner or an application for an original registration together
with an application for registration of the secured party as legal owner. 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 and most other states, 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 of motor vehicles or other appropriate state or county
agency of the state of relocation with the certificate of title so that the
owner can effect the re-registration. If the Financed Vehicle owner moves to a
state that provides for notation of lien on the certificate of title to perfect
the security interests in the Financed Vehicle, Onyx, absent clerical errors or
fraud, would receive notice of surrender of the certificate of title if Onyx's
lien is noted thereon. Accordingly, Onyx will have notice and the opportunity to
re-perfect the security interest in the Financed Vehicle in the state of
relocation. If the Financed Vehicle owner moves to a state which does not
require surrender of a certificate of title for registration of a motor vehicle,
reregistration could defeat perfection. In the ordinary course of servicing its
portfolio of motor vehicle installment sales contracts, Onyx takes steps to
effect such re-perfection upon receipt of notice of registration or information
from the Obligor as to relocation. Similarly, when an Obligor under a Contract
sells a Financed Vehicle, the Servicer must provide the owner with the
certificate of title, or the Servicer will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related Contract before release of the lien. Under the
Agreement, Onyx, at its cost, is obligated to maintain the continuous perfection
of its security interest in the Financed Vehicle.
Under the law of California and most other states, liens for unpaid taxes,
storage of and repairs performed on a motor vehicle take priority even over a
perfected security interest.The Internal Revenue Code of 1986, as
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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 states other than California 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
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. Under California law and the law of most other states 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 is similar.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws, may limit or delay the ability of the creditor to repossess
and resell collateral or enforce a deficiency judgment.
In the event that deficiency judgments are not satisfied, are satisfied at
a discount or are discharged in whole or in part, in bankruptcy proceedings,
including proceedings under Chapters 7 or 13 of the Bankruptcy Code, the loss
will be borne by the Trust.
OTHER MATTERS
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, other statutes or the common law, has the effect
of subjecting a seller (and certain related creditors and their assigns) in a
consumer credit transaction to all claims and defenses which the Obligor could
assert against the seller of goods. Liability under the FTC Rule is limited to
amounts paid under a Contract; however, the Obligor may also assert the FTC 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.
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Numerous other federal and state consumer protection laws and related
regulations impose requirements applicable to the origination, sale and
servicing of the Contracts, including the Federal Truth-in-Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act, the Rees-Levering Act, the Magnuson-Moss Warranty Act, the
Federal Reserve Board's Regulations B and Z, the Soldiers' and Sailors' Civil
Relief Act of 1940, state adoptions of the National Consumers Act and of the
Uniform Consumer Credit Code and other state motor vehicle retail installment
sales acts and similar laws. The Seller has represented to the Trust in the
Agreement that each of the Contracts, and the sale of the related Financed
Vehicles sold thereunder, complied with all material requirements of such laws
and the regulations issued pursuant thereto.
REPURCHASE OBLIGATION
Under the Agreement, the Seller will make representations and warranties
relating to validity, subsistence, perfection and priority of the security
interest in each Initial Financed Vehicle as of the Closing Date and the
security interest in each Subsequent Financed Vehicle as of the 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 any such security interest and such defect adversely affects the
Trust's interest in the related Contract, such defect would constitute a breach
of a warranty under the Agreement and would create an obligation of the Seller
to repurchase such Contract unless the breach is cured. Additionally, in the
Agreement the Servicer will make certain representations, warranties and
affirmative covenants regarding, among other things, the maintenance of the
security interest in each Financed Vehicle, the breach of which would create an
obligation of the Servicer to purchase any affected Contract from the Trust
unless the breach is cured.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated Federal income tax
consequences of the purchase, ownership, and disposition of Certificates. This
summary is based upon laws, regulations, rulings, and decisions currently in
effect, all of which are subject to change (which change may be retroactive).
The discussion does not deal with all Federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules. In
addition, this summary is generally limited to investors who will hold the
Certificates as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). Consequences to individual investors of investment in the
Certificates will vary according to their individual circumstances. In addition,
this summary generally does not address foreign, state or local taxation issues.
Accordingly, investors should consult their own tax advisors to determine the
Federal, state, local, and other tax consequences of the purchase, ownership,
and disposition of the Certificates. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"IRS") with respect to any of the Federal income tax consequences discussed
below, and no assurance can be given that the IRS will not take contrary
positions.
BECAUSE MANY OF THE ISSUES DISCUSSED HEREIN ARE COMPLEX AND THEIR
RESOLUTION IS UNCERTAIN, INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS TO
DETERMINE THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES.
FEDERAL INCOME TAX STATUS OF THE TRUST
In the opinion of O'Melveny & Myers LLP, special tax counsel to the Seller,
the Trust will be classified as a grantor trust and not as an association
taxable as a corporation for Federal income tax purposes. Accordingly, subject
to the discussion below, each Certificate Owner will be subject to Federal
income taxation as if it owned directly its interest in each asset owned by the
Trust and paid directly its share of reasonable expenses paid by the Trust.
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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, the Prefunding Account, the rights of the Seller under the
Capitalized Interest 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 Prefunding Account, the rights of the
Seller under the Capitalized Interest Agreement and any other Trust Property.
Treatment as Debt Obligation. If a Certificate Owner were considered to
own an undivided interest in a single debt obligation, rather than reporting its
share of the interest accrued on each Contract it would, in general, be required
to include in income interest accrued or received on the principal amount of the
Certificates at the Pass-Through Rate in accordance with its usual method of
accounting.
The Certificates would be subject to the original issue discount ("OID")
rules, generally in the manner discussed below with respect to Stripped
Contracts. However, in determining whether such OID is de minimis, the weighted
average life of the Certificates would be determined using a reasonable
assumption regarding anticipated prepayments (a "Prepayment Assumption"). OID
includible in income for any accrual period (generally, the period between
payment dates) would generally be calculated using a Prepayment Assumption and
an anticipated yield established as of the date of initial sale of the
Certificates, and would increase or decrease to reflect prepayments at a faster
or slower rate than anticipated. The Certificates would also be subject to the
market discount provisions of the Code to the extent that a Certificate Owner
purchased such Certificates at a discount from the initial issue price (as
adjusted to reflect prior accruals of original issue discount).
The remainder of the discussion herein assumes that a Certificate Owner
will be treated as owning an interest in each Contract (and the proceeds
thereof), the Prefunding Account, the rights of the Seller under the Capitalized
Interest 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 deemed paid by the
Certificate Owners for each Contract will reflect the principal balance of such
Contract as of the Cut-Off Date or related Subsequent Transfer Date, as
applicable, in each case 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 related Subsequent Transfer
Date, as applicable, in each case if such Contract had been amortized from
origination under an actuarial method (such amount, the "Cut-Off Date Actuarial
Balance").
The Trustee and the Servicer intend to account for interest and principal
on the Rule of 78's Contracts using the actuarial method, but based on the
Cut-Off Date Scheduled Balance rather than the Cut-Off Date Actuarial Balance.
As described above, the remaining payments due on a Rule of 78's Contract are
not sufficient to amortize the Cut-Off Date Scheduled Balance of such Contract
at a yield equal to its APR. Accordingly, in order to amortize the Cut-Off Date
Scheduled Balance over the remaining term of the Rule of 78's Contract using the
actuarial method of accounting, the Servicer will recompute the effective yield
of such Contract based on the remaining payments due and the Cut-Off Date
Scheduled Balance (such yield, stated as a per annum rate, the "Recomputed
Yield") and will allocate each payment of Monthly P&I between principal and
interest on each Contract beginning with the Cut-Off Date Scheduled Balance by
applying the Recomputed Yield instead of the APR.
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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 Certificate Owners 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."
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 (such
method, the "Origination Actuarial Method"). In that event (unless the
Certificate Owner were to make a Total Accrual Election, as described
immediately below) it appears likely that the Certificate Owner would be
required to include income at a rate equal to the full APR of the Contract
(minus the Retained Strip) on a balance equal to the Cut-Off Date Actuarial
Balance amortized based on the APR and an actuarial method, and should be
entitled to amortize the difference between the Cut-Off Date Scheduled Balance
and the Cut-Off Date Actuarial Balance to the extent it had a valid election in
effect. See "-- Discount and Premium."
As an alternative to separately accruing stated interest, OID, de minimis
OID, market discount, de minimis market discount, unstated interest, premium,
and acquisition premium, a Certificate Owner may elect to include all income
that accrues on the Certificate using the constant yield method. If a
Certificate Owner makes this election (the "Total Accrual Election"), income on
a Certificate will be calculated as though (i) the issue price of the
Certificate were equal to the Certificate Owner's adjusted basis in the
Certificate immediately after its acquisition by the Certificate Owner; (ii) the
Certificate were issued on the Certificate Owner's acquisition date; and (iii)
none of the interest payments on the Certificate are "qualified stated interest"
payments. A Certificate Owner may make such an election for a Certificate that
has premium or market discount, respectively, only if the Certificate Owner
makes, or has previously made, an election to amortize bond premium or to
include market discount in income currently.
If a Rule of 78's Contract is prepaid in full, any amount collected from
the Obligor pursuant to the Contract in excess of the principal balance thereof
and accrued interest thereon, computed using the actuarial method and the
Recomputed Yield, as described above (such method, the "Recomputed Actuarial
Method" and such amount, the "Recomputed Principal Balance"), will be paid to
the owner of retained yield. Such amount may be treated as additional income in
the nature of a prepayment penalty to a Certificate Owner who had reported
income with respect to the Contracts on the Recomputed Actuarial Method, and
would be deductible only to the extent described below. Alternatively, such
amount might be treated as an interest in the Contract retained by the owner of
retained yield, in which event it would not be included in a Certificate Owner's
income.
INCOME ON ALL CONTRACTS
For federal income tax purposes, the owner of retained yield will be
treated as having retained a portion (the "Retained Strip") of the interest due
on each Contract having a yield in excess of 7.48% calculated using the
actuarial method (each, a "Stripped Contract") equal to the difference between
(x) the Recomputed Yield of the Contract and (y) 7.48%. 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 Origination Actuarial Method
must be applied, the Retained Strip would consist of a different portion of the
interest that accrues at the APR on the actuarial principal balance of a
Contract for each monthly period over which interest accrues on such Contract
("Contract Due Period").
Each Certificate Owner will be required to report on its federal income tax
return its share of the gross income of the Trust, including interest and
certain other charges accrued on the Contracts and original issue discount and
market discount (to the extent described below), investment earnings on amounts
held pending distribution, and any gain upon collection or disposition of the
Contracts. Such income (other than any
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original issue discount or market discount, as described below) will be
includible in income in accordance with a Certificate Owner's usual method of
accounting. Accordingly, interest will be includible in a Certificate Owner's
gross income at the time it accrues on the Contracts, or, in the case of
Certificate Owners who are cash basis taxpayers, when received by the Servicer
on behalf of Certificate Owners. Because (i) interest accrues on the Contracts
over differing monthly periods and is paid in arrears and (ii) interest
collected on a Contract is generally paid to Certificate Owners in the following
month, the amount of interest accruing to a Certificate Owner during any month
will not equal the interest distributed in that month.
A Certificate Owner will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust as provided in Section 162 or 212 of the Code. If
a Certificate Owner is an individual, estate or trust, the deduction for such
holder's share of such fees will be allowed only to the extent that all of such
holder's miscellaneous itemized deductions, including such holder's share of
such fees, exceed 2% of such holder's adjusted gross income. In addition, in the
case of Certificate Owners who are individuals, certain otherwise allowable
itemized deductions will be reduced, but not by more than 80%, by an amount
equal to 3% of such holder's adjusted gross income in excess of a statutorily
defined threshold ($124,500 in the case of a married couple filing jointly for
the taxable year beginning in 1998 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 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, or (ii) aggregating all Stripped
Contracts under the aggregation rule described below and accounting for the
remaining Contracts 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 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 on a separate asset basis.
DISCOUNT AND PREMIUM
In determining whether a Certificate Owner has purchased its interest in
the Contracts (or any Contract) at a discount and whether such Contracts (or any
Contract) have OID or market discount, a portion of the purchase price of a
Certificate should be allocated to the Certificate Owner's undivided interest in
accrued but unpaid interest and amounts collected at the time of purchase but
not distributed. As a result, the portion of the purchase price allocable to a
Certificate Owner's undivided interest in the Contracts (or any Contract) (the
"Purchase Price") will be decreased and the potential OID and/or market discount
on the Contracts (or any Contract) could be increased.
Original Issue Discount on Stripped Contracts. Because the Stripped
Contracts represent stripped bonds, they will be subject to the OID rules of the
Code. Under Treasury Regulations issued under Section 1286 of the Code (the
"Section 1286 Regulations"), it appears that, in general, the portion of the
interest on each
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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
Origination Actuarial Method must be applied, 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 7.48%.
The Trustee will calculate OID, if any, on all of the Contracts (including
Stripped Contracts) on an aggregate basis and without the use of a prepayment
assumption. Regulations issued under the OID provisions of the Code (the "OID
Regulations") suggest that all payments on the Stripped Contracts that are
allocable to the Certificates may be aggregated in determining whether the
Stripped Contracts will be treated as having OID, although the regulation does
not include the Contracts that are not "stripped bonds." Separate accounting for
the Stripped Contracts and the Contracts that are not stripped would reduce the
possibility that the Stripped Contracts would be treated as issued with OID;
however, as discussed below, any Contracts having a yield equal to 7.48% (using
a Recomputed Yield for Rule of 78's Contracts) may be treated as having imputed
interest, market discount, or both. In addition, it is not clear whether use of
a prepayment assumption is required in computing OID. If the IRS were to require
that OID be computed on a Contract-by-Contract basis, or that a prepayment
assumption be used, the character and timing of a Certificate Owner's income
could be adversely affected. Because under the stripped bond rules each sale of
a Certificate results in a recalculation of OID, a Certificate Owner technically
will not be subject to the market discount provisions of the Code with respect
to Stripped Contracts.
The tax treatment of a Stripped Contract (or the Stripped Contracts in the
aggregate) will depend upon whether the amount of OID on the Contract or
Contracts is less than a statutorily defined de minimis amount. In general,
under the Section 1286 Regulations the amount of OID on a Stripped Contract will
be de minimis if it is less than 1/4 of one percent for each full year of
weighted average maturity remaining after the purchase date until the maturity
of the Contract (although it is not clear whether expected prepayments are taken
into account). If the amount of OID is de minimis under this rule, a Stripped
Contract would not be treated as having OID. In such case, 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 7.48%) would
reduce a Certificate Owner's tax basis. Application of the OID rules,
particularly if a prepayment assumption is required and the Contracts are not
aggregated, would be complex and could significantly affect the timing of
inclusion of income on a Certificate.
The Trustee intends to account for OID, if any, reportable by holders of
Certificates by reference to the price paid for a Certificate by an initial
purchaser, although the amount of OID will differ for subsequent purchasers.
Such subsequent purchasers should consult their tax advisors regarding the
proper calculation of OID on the interest in Contracts represented by a
Certificate.
Market Discount. Contracts, other than the Stripped Contracts, will not be
treated as stripped bonds. However, to the extent that the portion of the
purchase price allocated to a Certificate Owner's undivided interest in a
Contract other than a Stripped Contract is less than the "stated redemption
price at maturity",
49
<PAGE> 50
such Contract could have market discount. The market discount on such a Contract
will be considered to be zero if it is less than a statutorily defined de
minimis amount.
In general, under the market discount provisions of the Code, principal
payments received by the Trust and all or a portion of the gain recognized upon
a sale or other disposition of a Contract or upon the sale or other disposition
of a Certificate in an amount in excess of accrued market discount will be
treated as capital gain, assuming such Certificate Owner held such Certificate
as a capital asset. In addition, a portion of the interest deductions of the
Certificate Owner attributable to any indebtedness treated as incurred or
continued to purchase or carry a Contract may have to be deferred, unless a
Certificate Owner makes an election to include market discount in income
currently as it accrues, which election would apply to all debt instruments
acquired by the taxpayer on or after the first day of the first taxable year to
which such election applies. Taxpayers may, in general, elect to accrue market
discount either under a constant yield-to-maturity method or in the proportion
that the period the taxpayer held the obligation bears to the period from the
date the taxpayer acquired the obligation until the maturity of such obligation.
Premium. In the event that a Contract is treated as purchased at a premium
(i.e., its Purchase Price exceeds the portion of the remaining principal balance
of such Contract allocable to the Certificate Owner), such premium will be
amortizable by the Certificate Owner as an offset to interest income (with a
corresponding reduction in the Certificate Owner's basis) under a constant
yield-to-maturity method over the term of the Contract if an election under
Section 171 of the Code is made with respect to the interests in the Contracts
represented by the Certificates or was previously in effect. Any such election
will also apply to all debt instruments held by the Certificate Owner during the
year in which the election is made and all debt instruments acquired thereafter.
SALE OF A CERTIFICATE
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale and the Certificate Owner's
adjusted basis in the Contracts and any other assets held by the Trust. A
Certificate Owner's adjusted basis will equal the Certificate Owner's cost for
the Certificate, increased by any discount previously included in income, and
decreased by any deduction previously allowed for accrued premium and by the
amount of principal payments previously received on the Contracts. Any gain or
loss not attributable to accrued interest or accrued market discount will be
capital gain or loss if the Certificate was held as a capital asset.
FOREIGN CERTIFICATE OWNER
Interest attributable to Contracts which is payable to a foreign
Certificate Owner that is not engaged in a trade or business in the United
States will generally not be subject to the 30% withholding tax generally
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 (except, in the case of a
partnership as otherwise provided by regulations), an estate, the income of
which is includible in gross income for United States federal income tax
purposes regardless of its source or a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have authority to control all substantial decisions of
the trust.
Final Treasury Regulations (the "Final Regulations") could affect the
procedures to be followed by a nonresident investor in complying with United
States Federal withholding, backup withholding and information reporting rules
for payments made after December 31, 1998. Prospective investors are urged to
consult their tax advisors regarding the effect, if any, of the Final
Regulations on the purchase, ownership and disposition of the Certificates.
50
<PAGE> 51
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"),
and Section 4975 of the Code impose certain restrictions on (i) employee benefit
plans subject to ERISA, (ii) "plans" (as defined in Section 4975(e)(1) of the
Code) and (iii) entities whose underlying assets include plan assets by reason
of a plan's investment in such entities (each, a "Plan"), and on persons who
have certain specified relationships to such Plans ("Parties in Interest" under
ERISA and "Disqualified Persons" under the Code). ERISA also imposes certain
duties on persons who are fiduciaries of Plans subject to ERISA, and ERISA and
the Code prohibit certain transactions between a Plan and Parties in Interest or
Disqualified Persons with respect to such Plans. Under ERISA, any person who
exercises any discretionary authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant.)
The Department of Labor ("DOL") has issued a final regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulation"). This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, grantor trusts and certain other entities in which a Plan (which
is subject to Title I of ERISA and/or Section 4975 of the Code) makes an
"equity" investment will be deemed to be assets of the investing Plan unless
certain exceptions apply. The Plan Asset Regulation contains certain exceptions
to this general rule. Accordingly if a Plan purchases the Certificates, the
Trust could be deemed to hold plan assets unless one of the exceptions under the
Plan Assets Regulation is applicable to the Trust.
Under the terms of the Plan Asset Regulation, if the Trust were deemed to
hold plan assets by reason of a Plan's investment in Certificates, such plan
assets would include an undivided interest in the Trust and Contracts underlying
the Trust and any other assets held by the Trust. In such an event, the persons
providing services with respect to the assets of the Trust, including the
Contracts, may be subject to the fiduciary responsibility provisions of Title I
of ERISA. In addition, those persons and certain other persons, including
Obligors on the receivables held in the Trust, may be subject to the prohibited
transaction provisions of ERISA and Section 4975 of the Code with respect to
certain transactions involving such assets or the Certificates, unless a
statutory or administrative exemption from the prohibited transaction rules
applies.
The DOL has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
an administrative exemption (Prohibited Transaction Exemption 90-29, as amended
(the "Exemption")) from certain of the prohibited transaction rules of ERISA
with respect to the initial purchase, the holding and the subsequent resale by
Plans of certificates representing interests in asset backed pass-through trusts
that consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. On July 21, 1997, the DOL adopted
an Amendment to Prohibited Transaction Exemptions (Prohibited Transaction
Exemption 97-34) that modified the Exemption with respect to transactions, such
as this one, that utilize prefunding. The receivables covered by the Exemption
include motor vehicle installment loans such as the Contracts. The Exemption
will apply to the acquisition, holding and resale of the Certificates purchased
by a Plan from the Underwriter, provided that all conditions of the Exemption
(certain of which are described below) are met.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the Certificates by or on behalf of a Plan is
on terms (including the price for the Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
51
<PAGE> 52
(2) The rights and interests evidenced by the Certificates acquired
by or on behalf of the Plan are not subordinated to the rights and
interests evidenced by other certificates of the Trust;
(3) The Certificates acquired by or on behalf of the Plan have
received a rating at the time of such acquisition that is in one of the
three highest generic rating categories from either Standard & Poor's,
Moody's, Duff & Phelps Inc. or Fitch Investors Service, Inc.;
(4) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriter in connection
with the distribution of the Certificates represents not more than
reasonable compensation for underwriting the Certificates; the sum of all
payments made to and retained by the Seller pursuant to the sale of the
Contracts to the Trust represents not more than the fair market value of
such Contracts; the sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for the
Servicer's services under the Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith;
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended;
(7) The principal amount of obligations added to the Trust after the
Closing Date does not exceed 25% of the principal balance of the
certificates being offered as of the Closing Date;
(8) All such additional obligations meet the same terms and
conditions for eligibility as the obligations originally included in the
Trust (which terms and conditions have been approved by one of the
above-named rating agencies) except that such terms and conditions may be
modified with the prior approval of a rating agency or of a majority of the
holders of the certificates offered;
(9) The addition of obligations during the funding period does not
result in a ratings downgrade;
(10) The weighted average annual percentage rate of all obligations in
the Trust at the end of the funding period is not more than 100 basis
points lower than such weighted average as of the closing date;
(11) The characteristics of the additional obligations are monitored
by a third party credit enhancer or certificate insurer which is
independent of the sponsor of the Trust, or an independent accountant
delivers a letter (with copies to the relevant rating agencies,
underwriters and trustee) stating that the characteristics of the
additional obligations conform to the characteristics with respect thereto
specified in the offering documents;
(12) The funding period ends no later than 90 days after the Closing
Date; and
(13) Amounts on deposit in the Prefunding Account and/or related
Capitalized Interest Account are invested only in investments permitted by
the relevant rating agencies that are (i) direct obligations of or fully
guaranteed by the United States or any agency or instrumentality thereof or
(ii) rated (or issued by an issuer rated) in one of the three highest
generic rating categories by the relevant rating agencies.
The Exemption provides relief from certain self-dealing/conflict of
interest prohibited transactions that may occur when the Plan fiduciary causes a
Plan to acquire certificates in a trust in which the fiduciary (or his
affiliate) is an Obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Certificates, at least 50% of each class of Certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group and at least 50% of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group; (ii) such fiduciary (or
its affiliate) is an Obligor with respect to 5% or less of the fair market value
of the obligations contained in the trust; (iii) the Plan's investment in
Certificates does not exceed 25% of all of the Certificates outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than 25% of the assets of the Plan are invested in certificates representing an
interest in one or more trusts containing assets sold or serviced by the same
entity. The Exemption does not apply to Plans sponsored by the Seller, the
Underwriter, the Trustee, the Servicer, the Insurer, any Obligor with respect to
Contracts included in the Trust constituting more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or any affiliate of
such parties (the "Restricted Group").
52
<PAGE> 53
As of the date hereof, no Obligor with respect to Contracts included in the
Trust constitutes more than 5% of the aggregate unamortized principal balance of
the assets of the Trust. Because the Certificates are the only class of
certificates to be issued by the Trust, the second general condition described
above is satisfied. It is a condition of the issuance of the Certificates that
they be rated in the highest rating category by at least two Rating Agencies. A
fiduciary of a Plan contemplating the purchase of a Certificate (other than
pursuant to the original issuance of the Certificates) must make its own
determination that at the time of such acquisition, the Certificates continue to
satisfy the third general condition described above. The Seller and the Servicer
expect that the fourth general condition set forth above will be satisfied with
respect to the Certificates. A fiduciary of a Plan contemplating purchasing a
Certificate must make its own determination that the first, fifth and sixth
general conditions set forth above will be satisfied with respect to its
purchase of Certificates.
Conditions seven through thirteen above are requirements of the Servicer
and Insurer, as applicable, as set forth in the Agreement. Any Plan fiduciary
considering the purchase of Certificates should consult with its counsel with
respect to the applicability of the Exemption and other issues and determine on
its own whether all conditions for exemptive relief have been satisfied and
whether, under the general fiduciary standards of prudent investment and
diversification, the Certificates are otherwise an appropriate investment for a
Plan under ERISA and the Code.
53
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated December 9, 1997 (the "Underwriting Agreement") between the Seller and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), the
Seller has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase the entire principal amount of the Certificates.
The Seller has been advised by the Underwriter that it proposes initially
to offer the Certificates to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at such price less a
concession not in excess of .15% of the principal amount thereof. The
Underwriter may allow, and such dealers may reallow, a discount not in excess of
.10% of the principal amount of the Certificates on sales to certain other
dealers. After the initial public offering, the public offering price of the
Certificates and such concession and discount may be changed. The Underwriter is
obligated to purchase and pay for all of the Certificates if any Certificates
are purchased. The Underwriter currently intends, but is not obligated, to make
a market in the Certificates.
During and after the offering, the Underwriter may purchase and sell the
Certificates in the open market in transactions in the United States. These
transactions may include overallotment and stabilizing transactions and
purchases to cover short positions created in connection with the offering. The
Underwriter also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the Certificates sold in the offering for their
account may be reclaimed by the Underwriter if such Certificates are repurchased
by the Underwriter in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Certificates,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected in the over-the-counter market or
otherwise, and these activities, if commenced, may be discontinued at any time.
The Seller and Onyx have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under applicable securities laws, or
contribute to payments the Underwriter may be required to make in respect
thereof.
LEGAL MATTERS
Certain matters with respect to the legality of the Certificates and with
respect to the federal income tax matters discussed under "Certain Federal
Income Tax Consequences" will be passed upon for the Seller by O'Melveny & Myers
LLP, Los Angeles, California. Certain legal matters with respect to the
Certificates will be passed upon for the Underwriter by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York. Certain legal matters relating to the
Surety Bond will be passed upon for the Insurer by Shaw Pittman Potts &
Trowbridge, New York, New York.
EXPERTS
The financial statements of Capital Markets Assurance Corporation as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 are included herein beginning on page F-1 and have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their report thereon and are included in reliance upon the
authority of such firm as experts in accounting and auditing.
54
<PAGE> 55
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
Aggregate Scheduled Balance..................................................... 5, 28
Aggregate Scheduled Balance Decline............................................. 5, 28
Agreement....................................................................... 3
APR............................................................................. 20
Auto Finance Centers............................................................ 15
Bankruptcy Code................................................................. 26
Blanket Insurance Policy........................................................ 16
Business Day.................................................................... 4
Capitalized Interest Account.................................................... 7, 30
Capitalized Interest Agent...................................................... 30
Capitalized Interest Agreement.................................................. 4
Capitalized Interest Amount..................................................... 7, 30
Cede............................................................................ 10, 27
Certificateholder............................................................... 31
Certificate Owner............................................................... 10, 24
Certificates.................................................................... 1, 3
Closing Date.................................................................... 6, 11
Code............................................................................ 45
Collection Account.............................................................. 34
Collection Period............................................................... 5, 27
Commission...................................................................... 2
Contract Due Period............................................................. 47
Contracts....................................................................... 1, 4
Cut-Off Date.................................................................... 1
Cut-Off Date Actuarial Balance.................................................. 46
Cut-Off Date Scheduled Balance.................................................. 3, 20, 46
Dealers......................................................................... 8
Defaulted Contract.............................................................. 6, 28
Definitive Certificates......................................................... 31
Distribution Date............................................................... 1, 4
Distribution Date Statement..................................................... 36
Disqualified Persons............................................................ 51
DOL............................................................................. 51
Due Date........................................................................ 17
DTC............................................................................. 1, 2, 10
Eligibility Requirements........................................................ 21
Eligible Account................................................................ 29
Eligible Investments............................................................ 29
ERISA........................................................................... 9, 51
Exchange Act.................................................................... 2
Exemption....................................................................... 51
Events of Default............................................................... 39
Final Distribution Date......................................................... 1, 4
Financed Vehicles............................................................... 1, 4
FTC Rule........................................................................ 44
Full Prepayment................................................................. 24
Funding Period.................................................................. 6, 29
Holder-in-Due-Course............................................................ 44
Holders......................................................................... 32
Holdings........................................................................ 37
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C>
Indirect Participants........................................................... 31
Initial Contracts............................................................... 1, 3
Initial Financed Vehicles....................................................... 1, 3
Insolvency Laws................................................................. 12
Insurance Agreement............................................................. 8
Insurer......................................................................... 1, 4
Interest Distribution........................................................... 1, 4, 27
IRS............................................................................. 45
Liquidated Contract............................................................. 5, 28
Liquidation Expenses............................................................ 35
Mandatory Partial Prepayment.................................................... 6
Monthly P&I..................................................................... 5, 28
Moody's......................................................................... 34
Motor Vehicle Contracts......................................................... 14
Net Insurance Proceeds.......................................................... 35
Net Liquidation Proceeds........................................................ 35
Obligor......................................................................... 13
OCS............................................................................. 17
OID............................................................................. 46
OID Regulations................................................................. 49
Onyx............................................................................ 1, 3, 26
Origination Actuarial Method.................................................... 47
Original Pool Balance........................................................... 9
Participants.................................................................... 27, 30
Parties in Interest............................................................. 51
Pass-Through Rate............................................................... 4
Payaheads....................................................................... 9, 34
Payahead Account................................................................ 35
Paying Agent.................................................................... 31
Plan............................................................................ 51
Plan Asset Regulation........................................................... 51
Pool Balance.................................................................... 4, 27
Pool Factor..................................................................... 25
Prefunded Amount................................................................ 6
Prefunding Account.............................................................. 4, 29
Prepayment Assumption........................................................... 46
Principal Distribution.......................................................... 1, 5, 28
Proposed Regulations............................................................ 50
Purchase Agreement.............................................................. 26
Purchase Price.................................................................. 48
Recomputed Actuarial Method..................................................... 21, 47
Recomputed Principal Balance.................................................... 47
Recomputed Yield................................................................ 21, 40
Record Date..................................................................... 28
Rees-Levering Act............................................................... 44
Repurchase Amount............................................................... 34
Restricted Group................................................................ 52
Retained Strip.................................................................. 47
Rule of 78's Contracts.......................................................... 8, 20
Scheduled Balance............................................................... 5, 28
Section 1286 Regulations........................................................ 48
Seller.......................................................................... 1, 3, 14
Servicer........................................................................ 1, 3
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
Servicer Report Date............................................................ 8
Servicing Fee................................................................... 7
Servicing Fee Rate.............................................................. 7, 36
Simple Interest Contracts....................................................... 8, 20
Simple Interest Method.......................................................... 20
Standard & Poor's............................................................... 34
Stripped Contract............................................................... 47
Subsequent Closing Date......................................................... 9, 33
Subsequent Contracts............................................................ 4
Subsequent Financed Vehicles.................................................... 1, 4
Subsequent Transfer Date........................................................ 1, 4
Surety Bond..................................................................... 1, 4, 7
Total Accrual Election.......................................................... 47
Transfer Certificate............................................................ 32
Trust........................................................................... 1, 3, 14
Trust Property.................................................................. 3, 14
Trustee......................................................................... 3, 14
UCC............................................................................. 11, 42
Underwriter..................................................................... 54
Underwriting Agreement.......................................................... 54
</TABLE>
57
<PAGE> 58
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
-----------------------------
KPMG PEAT MARWICK LLP
January 29, 1997
F-2
<PAGE> 60
CAPITAL MARKETS ASSURANCE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $294,861 at December 31,
1996 and $210,651 at December 31, 1995) $297,893 215,706
Short-term investments (at amortized cost which approximates
fair value) 16,810 68,646
- ---------------------------------------------------------------------------------------
Total investments 314,703 284,352
- ---------------------------------------------------------------------------------------
Cash 371 344
Accrued investment income 3,807 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 6,424 3,428
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $394,315 343,133
=======================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 8,019 10,844
Current income taxes 679 136
Deferred income taxes 15,139 11,303
- --------------------------------------------------------------------------------------
Total liabilities 104,822 77,067
- --------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding at
December 31, 1996 and 1995 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 1,970 3,286
Retained earnings 64,048 41,972
- --------------------------------------------------------------------------------------
Total stockholder's equity 289,493 266,066
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $394,315 343,133
======================================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 61
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992) (11,069)
- ---------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242) (10,490)
- ---------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Net investment income 16,992 11,953 10,072
Net realized capital gains 236 1,301 92
Other income 146 2,273 120
- ---------------------------------------------------------------------------------------------
Total revenues 57,931 44,769 33,387
- ---------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 14,613 13,808 11,833
Policy acquisition costs 7,824 7,203 4,529
- ---------------------------------------------------------------------------------------------
Total expenses 27,252 24,152 17,791
- ---------------------------------------------------------------------------------------------
Income before income taxes 30,679 20,617 15,596
- ---------------------------------------------------------------------------------------------
INCOME TAXES:
Current income tax 5,235 2,113 865
Deferred income tax 3,368 3,102 2,843
- ---------------------------------------------------------------------------------------------
Total income taxes 8,603 5,215 3,708
- ---------------------------------------------------------------------------------------------
NET INCOME $ 22,076 15,402 11,888
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 62
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 205,808 146,808 146,808
Capital contribution 2,667 59,000 --
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 208,475 205,808 146,808
- ---------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS, NET OF TAX:
Balance at beginning of year 3,286 (5,499) 3,600
Unrealized appreciation (depreciation)
on investments (1,316) 8,785 (9,099)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 1,970 3,286 (5,499)
- ---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 41,972 26,570 14,682
Net income 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 64,048 41,972 26,570
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 289,493 266,066 182,879
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 63
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,076 15,402 11,888
- --------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment
expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (671) (390) (848)
Income taxes payable 3,911 3,621 2,611
Net realized capital gains (236) (1,301) (92)
Accounts payable and other accrued
expenses 1,020 472 3,726
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (3,396) 992 689
- --------------------------------------------------------------------------------------------------------
Total adjustments 10,424 6,530 6,292
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 32,500 21,932 18,180
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (199,989) (158,830) (77,980)
Proceeds from sales of investments 57,210 49,354 39,967
Proceeds from maturities of investments 110,306 28,803 19,665
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (32,473) (80,673) (18,348)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution -- 59,000 --
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES -- 59,000 --
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27 259 (168)
Cash balance at beginning of year 344 85 253
- --------------------------------------------------------------------------------------------------------
CASH BALANCE AT END OF YEAR $ 371 344 85
========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 4,525 1,450 1,063
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 64
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) BACKGROUND
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a
New York-domiciled monoline stock insurance company which engages only
in the business of financial guarantee and surety insurance. CapMAC is
a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC
is licensed in all 50 states in addition to the District of Columbia,
the commonwealth of Puerto Rico and the territory of Guam. CapMAC
insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets.
CapMAC also provides financial guarantee reinsurance for structured
asset-backed, corporate, municipal and other financial obligations
written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
and "AAA" by Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies,
are not recommendations to buy, sell or hold securities and are subject
to revision or withdrawal at any time by such rating agencies.
(2) SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
(A) BASIS OF PRESENTATION
The accompanying financial statements are prepared on the
basis of generally accepted accounting principles ("GAAP").
Such accounting principles differ from statutory reporting
practices used by insurance companies in reporting to state
regulatory authorities.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Management believes the most
significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and
disclosures of financial guarantees outstanding. Actual
results could differ from those estimates.
(B) INVESTMENTS
As of December 31, 1996 and 1995, all of the Company's
securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair
value is generally based upon quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholder's equity
until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. A decline in
the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security.
F-7
<PAGE> 65
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Short-term investments are those investments having a maturity
of less than one year at purchase date. Short-term investments
are carried at amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses are included
in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
(C) PREMIUM REVENUE RECOGNITION
Premiums which are payable monthly to CapMAC are reflected in
income when due, net of amounts payable to reinsurers.
Premiums which are payable quarterly, semi-annually or
annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding
policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the
principal amount and earning it straight-line over the term of
each bond maturity. For the years ended December 31, 1996 and
1995, 91% of net premiums earned were attributable to premiums
payable in installments and 9% were attributable to premiums
collected on an up-front basis.
(D) DEFERRED ACQUISITION COSTS
Certain costs incurred by CapMAC, which vary with and are
primarily related to the production of new business, are
deferred. These costs include direct and indirect expenses
related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized over
the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections
due to various factors such as renewal or early termination of
insurance contracts or different run-off patterns of exposure
resulting in a corresponding change in the amortization
pattern of the deferred acquisition costs.
(E) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists
of a supplemental loss reserve ("SLR") and a case basis loss
reserve. The SLR is established for expected levels of losses
resulting from credit failures on currently insured issues and
reflects the estimated portion of earned premiums required to
cover those losses.
A case basis loss reserve is established for insured
obligations when, in the judgment of management, a default in
the timely payment of debt service is imminent. For defaults
considered temporary, a case basis loss reserve is established
in an amount equal to the present value of the anticipated
defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the
present value of all remaining defaulted debt service payments
is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss
reserves when such amounts are reasonably estimable. Case
basis loss reserves may be allocated from any SLR outstanding
at the time the case basis reserves are established.
F-8
<PAGE> 66
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Management believes that the current level of reserves is
adequate to cover the ultimate net cost of claims and the
related expenses with respect to financial guarantees issued
by CapMAC. The establishment of the appropriate level of loss
reserves is an inherently uncertain process involving
estimates and subjective judgments by management, and
therefore there can be no assurance that ultimate losses in
CapMAC's insured portfolio will not exceed the current
estimate of loss reserves.
(F) DEPRECIATION
Leasehold improvements, furniture, fixtures and electronic
data processing equipment are being amortized or depreciated
over the lease term or useful life, whichever is shorter,
using the straight-line method.
(G) INCOME TAXES
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the
enactment date.
F-9
<PAGE> 67
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(3) INSURED PORTFOLIO
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding), was
$19.7 billion and $12.6 billion, respectively, with a weighted average
life of 6.4 years and 6.0 years, respectively. CapMAC's insured
portfolio was broadly diversified by geographic distribution and type
of insured obligations, with no single insured obligation in excess of
statutory single risk limits, after giving effect to any reinsurance
and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory
contingency reserve). At December 31, 1996 and 1995, the statutory
qualified capital was approximately $260 million and $240 million,
respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
----------------------------------------
December 31, 1996 December 31, 1995
------------------- -----------------
Type of Obligations Insured ($ in millions) Amount % Amount %
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $10,362 52.8 $ 6,959 55.1
Trade and other corporate obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
-----------------------------------------------------------------------------------------------
TOTAL $19,655 100.0 $12,628 100.0
===============================================================================================
</TABLE>
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and
interest outstanding) was $23.3 billion and $15.1 billion,
respectively. At December 31, 1996, approximately 93% of CapMAC's
insured portfolio was comprised of structured asset-backed
transactions. Under these structures, a pool of assets covering at
least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying
assets. CapMAC, therefore, evaluates all the factors affecting past and
future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction
is reviewed to ensure that an appropriate legal structure is used to
protect against the bankruptcy risk of the originator of the assets.
Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to
a third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is
typically several times the normal historical loss experience for the
underlying type of assets.
During 1995, the Company sold without recourse its interest in
potential cash flows from transactions included in its insured
portfolio and recognized $2,200,000 of income which has been included
in other income in the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
% of % of % of
Revenues Revenues Revenues
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Citicorp 14.5 15.2 16.3
=============================================================================================
</TABLE>
F-10
<PAGE> 68
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(4) INVESTMENTS
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value for available-for-sale securities by major
security type at December 31, 1996 and 1995 were as follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,059 10 -- 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 109,436 265 1,160 108,541
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate and asset-backed securities 20,365 23 153 20,235
-------------------------------------------------------------------------------------------------
TOTAL $311,671 4,900 1,868 314,703
=================================================================================================
December 31, 1995
-------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 -- 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed securities 8,506 45 6 8,545
-------------------------------------------------------------------------------------------------
TOTAL $279,297 5,222 167 284,352
=================================================================================================
</TABLE>
F-11
<PAGE> 69
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996 by contractual maturity are shown below
($ in thousands):
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
Amortized Estimated
Securities Available-for-sale Cost Fair Value
--------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 11,627 11,644
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 82,337 83,503
--------------------------------------------------------------------
Sub-total 202,235 206,162
Mortgage-backed securities 109,436 108,541
--------------------------------------------------------------------
TOTAL $311,671 314,703
====================================================================
</TABLE>
Actual maturities may differ from contractual maturities because
borrowers may call or prepay obligations with or without call or
prepayment penalties.
Proceeds from sales of investment securities were approximately $57.2
million, $49.3 million and $39.9 million in 1996, 1995 and 1994,
respectively. Gross realized capital gains of $772,000, $1,320,000 and
$714,000, and gross realized capital losses of $536,000, $19,000 and
$622,000 were realized on those sales for the years ended December 31,
1996, 1995 and 1994, respectively.
Investments include bonds having a fair value of approximately
$3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
1995, respectively, with state regulators as required by law.
Investment income is comprised of interest and dividends, net of
related expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 15,726 11,105 9,193
Short-term investments 1,534 1,245 484
Mutual funds -- (162) 579
Investment expenses (268) (235) (184)
--------------------------------------------------------------------------------
TOTAL $ 16,992 11,953 10,072
================================================================================
</TABLE>
F-12
<PAGE> 70
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The change in unrealized appreciation (depreciation) on
available-for-sale securities is included as a separate component of
stockholder's equity as shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
-------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 3,286 (5,499)
Change in unrealized (depreciation) appreciation (2,024) 13,386
Income tax effect 708 (4,601)
Net change (1,316) 8,785
-------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 1,970 3,286
===========================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 2% of stockholder's equity as of
December 31, 1996 and 1995, respectively.
(5) DEFERRED ACQUISITION COSTS
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy
acquisition costs) (7,824) (7,203) (4,529)
---------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 45,380 35,162 24,860
=======================================================================================
</TABLE>
(6) EMPLOYEE BENEFITS
CapMAC has a service agreement with CapMAC Financial Services, Inc.
("CFS"). Under the service agreement, CFS has agreed to provide various
services, including underwriting, reinsurance, marketing, data
processing and other services to CapMAC in connection with the
operation of CapMAC's insurance business. CapMAC pays CFS a fee for
providing such services, but not in excess of CFS's cost for such
services. CFS incurred, on behalf of CapMAC, total compensation
expenses, excluding bonuses, of $13,374,000, $13,484,000 and
$11,081,000 in 1996, 1995 and 1994, respectively.
The Company, through CFS, maintains an incentive compensation plan for
its employees. The plan is an annual discretionary bonus award. For the
years ended December 31, 1996, 1995 and 1994, the Company had provided
approximately $8,810,000, $7,804,000 and $5,253,000, respectively, for
the plan. CFS also provides health and welfare benefits to
substantially all of its employees. The Company incurred $551,943,
$598,530, and $562,508 of expense for the years ended December 31,
1996, 1995 and 1994, respectively, for such plan. The Company also has
a defined contribution retirement plan which allows participants to
make voluntary contributions by salary reduction pursuant to section
401 (k) of the Internal Revenue Code. The Company provides for the
administrative cost for the 401 (k) plan.
F-13
<PAGE> 71
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers
agreed to defer receipt of such cash amount in exchange for receiving
the same number of new shares of restricted stock of Holdings as the
number of RSU's such officers previously held. During 1995 and 1994,
the expense was $1.3 million and $0.1 million, respectively. During
1996, Holdings assumed the liability of $3.7 million less the related
deferred tax asset of $1.1 million as capital contribution. The cash
amount is held by Holdings and invested in accordance with certain
guidelines. Such amount, including the investment earnings thereon,
will be paid to each officer upon the occurrence of certain events but
no later than December 2000.
(7) EMPLOYEE STOCK OWNERSHIP PLAN
Holdings maintains an Employee Stock Ownership Plan ("ESOP") to provide
its employees the opportunity to obtain beneficial interests in the
stock of Holdings through a trust (the "ESOP Trust"). Compensation
expense related to the ESOP and allocated to CapMAC was approximately
$2,764,000, $2,087,000 and $2,086,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
F-14
<PAGE> 72
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(8) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the
aggregate amount of claims and related expenses not to exceed $2.7
million, although no assurance can be given that such claims and
related expenses will not exceed that amount. Such loss amount was
covered through a recovery under a quota share reinsurance agreement of
$0.2 million and a reduction in the SLR of $2.5 million. The portion of
such claims and expenses not covered under the quota share agreement is
being funded through payments to CapMAC from the Lureco Trust Account
(see note 12).
The following is a summary of the activity in the case basis loss
reserve account and the components of the reserve for losses and loss
adjustment expenses ($ in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASE BASIS LOSS RESERVE:
Net balance at January 1 $ 620 -- --
-------------------------------------------------------------------------------------------------------
INCURRED RELATED TO:
Current year -- 2,473 --
Prior years -- -- --
-------------------------------------------------------------------------------------------------------
Total incurred -- 2,473 --
-------------------------------------------------------------------------------------------------------
PAID RELATED TO:
Current year -- 1,853 --
Prior years 309 -- --
-------------------------------------------------------------------------------------------------------
Total paid 309 1,853 --
Net balance at December 31 311 620 --
Reinsurance recoverable -- 69 --
-------------------------------------------------------------------------------------------------------
GROSS BALANCE AT DECEMBER 31 311 689 --
-------------------------------------------------------------------------------------------------------
SUPPLEMENTAL LOSS RESERVE
Balance at January 1 5,859 5,191 3,762
-------------------------------------------------------------------------------------------------------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve -- (2,473) --
-------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 10,674 5,859 5,191
-------------------------------------------------------------------------------------------------------
TOTAL RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES $10,985 6,548 5,191
=======================================================================================================
</TABLE>
F-15
<PAGE> 73
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(9) INCOME TAXES
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return. The
Company's annual Federal income tax liability is determined by
computing its pro rata share of the consolidated group Federal income
tax liability.
Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
--------------------------------------------------------------------------------------------------------------
$ in thousands Amount % Amount % Amount %
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $10,738 35.0 $ 7,216 35.0 $ 5,303 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (9.5) (2,335) (11.3) (1,646) (10.6)
Other, net 781 2.5 334 1.6 51 0.4
--------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 8,603 28.0 $ 5,215 25.3 $ 3,708 23.8
==============================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1996 December 31, 1995
-----------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred compensation $ 200 1,901
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 96 98
----------------------------------------------------------------------------
Total gross deferred tax assets 2,689 3,853
----------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,061 1,769
Other, net 884 1,080
----------------------------------------------------------------------------
Total gross deferred tax liabilities 17,828 15,156
----------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $15,139 11,303
============================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the deferred tax assets will be fully realized
in the future.
F-16
<PAGE> 74
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(10) INSURANCE REGULATORY RESTRICTIONS
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that
may be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income
as defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1996, 1995 and 1994. No dividends could be
paid during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1996 and 1995 was approximately
$193,726,000 and $195,018,000, respectively. Statutory surplus differs
from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting
purposes and differences in accounting for investments, deferred
acquisition costs, SLR and deferred taxes provided under GAAP.
Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Statutory
net income differs from net income determined under GAAP principally
due to deferred acquisition costs, SLR and deferred income taxes.
(11) COMMITMENTS AND CONTINGENCIES
The Company's lease agreement for the space occupied in New York
expires on November 20, 2008. CapMAC has a lease agreement for its
London office, which expires on October 1, 2002. As of December 31,
1996, future minimum payments under the lease agreements are as
follows:
<TABLE>
<CAPTION>
$ in thousands Payment
-------------------------------------------------------------
<S> <C>
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
-------------------------------------------------------------
TOTAL $40,251
=============================================================
</TABLE>
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1996, 1995 and 1994 amounted to $1,618,000, $1,939,000 and
$2,243,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity
facility (the "Liquidity Facility") scheduled to terminate in September
1999. The Liquidity Facility is provided by a consortium of banks,
headed by Bank of Montreal, as agent, which is rated "A-1+" and "P-1"
by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
will be able, subject to satisfying certain conditions, to borrow funds
from time to time in order to enable it to fund any claim payments or
payments made in settlement or mitigation of claim payments under its
insurance contracts. There have been no draws under the Liquidity
Facility.
CapMAC has agreed to make an investment of 50 million French Francs
(approximately $10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. This
investment is anticipated to be made in 1997.
F-17
<PAGE> 75
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(12) REINSURANCE
In the ordinary course of business, CapMAC cedes exposure under various
treaty and facultative reinsurance contracts, both on a pro rata and
excess of loss basis, primarily designed to minimize losses from large
risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- ---------------------
$ in thousands Written Earned Written Earned Written Earned
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,069) (5,716)
--------------------------------------------------------------------------------------------
NET PREMIUMS $ 57,734 40,557 41,484 29,242 33,593 23,103
============================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists
with respect to the aforementioned reinsurance arrangements, which may
become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At
December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
$69,000, respectively, and had ceded unearned premiums of $18,489,000
and $13,171,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The
agreement reinsured and indemnified the Company for any loss incurred
by CapMAC during the agreement period up to the limits of the
agreement. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's
fee payable to Lureco, be deposited in a trust account (the "Lureco
Trust Account") to be applied by CapMAC, at its option, to offset
losses and loss expenses incurred by CapMAC in connection with incurred
claims. Amounts on deposit in the Lureco Trust Account which have not
been applied against claims are contractually due to CapMAC at the
termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement.
Premiums in excess of the deposit amounts have been recorded as ceded
premiums in the statements of income. For the 1996 policy year, the
agreement provides $7 million of loss coverage in excess of the premium
deposit amount of $5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200%
of the net premiums earned up to $4 million for any one agreement year.
In September 1995, a claim of approximately $2.5 million on an
insurance policy was applied against the Lureco Trust Account.
F-18
<PAGE> 76
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
In addition to its capital (including statutory contingency reserves),
CapMAC has other reinsurance available to pay claims under its
insurance contracts. Effective November 30, 1995, CapMAC entered into a
Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
required to pay any losses in excess of $100 million in the aggregate
incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
the insurance policies in effect on December 1, 1995 and written during
the one-year period thereafter, up to an aggregate limit payable under
the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
Agreement has a term of seven years and is subject to early termination
by CapMAC in certain circumstances. Effective January 1, 1997 the
stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses of $150 million increasing annually based on increases
in CapMAC's statutory qualified capital. The new stop-loss reinsurance
is provided by Mitsui, AXA Re Finance S.A. ("AXA Re") and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").
On November 30, 1995, CapMAC canceled the quota share reinsurance
agreement with Winterthur Swiss Insurance Company ("Winterthur")
pursuant to which Winterthur had the right to reinsure on a quota share
basis 10% of each policy written by CapMAC. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur
on January 1, 1996. In connection with the commutation, Winterthur
returned $2.0 million of unearned premiums, net of ceding commission
and Federal excise tax.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
1995. The fair value amounts were determined by the Company using
independent market information when available, and appropriate
valuation methodologies when market information was not available. Such
valuation methodologies require significant judgment and are not
necessarily indicative of the amount the Company could recognize in a
current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------- --------------------
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Available-for-sale securities $314,703 314,703 284,352 284,352
--------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET INSTRUMENTS:
Financial guarantees outstanding $ -- 219,989 -- 147,840
Less: ceding commission -- 65,997 -- 44,352
--------------------------------------------------------------------------------------------
Net financial guarantees outstanding $ -- 153,992 103,488
============================================================================================
</TABLE>
F-19
<PAGE> 77
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
AVAILABLE-FOR-SALE SECURITIES
The fair values of fixed maturities are based upon quoted market
prices. The fair value of short-term investments approximates amortized
cost.
FINANCIAL GUARANTEES OUTSTANDING
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2)
the fair value of installment revenue which is derived by calculating
the present value of the estimated future cash inflow to CapMAC of
policies in force having installment premiums, net of amounts payable
to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
The amount calculated is assumed to be equivalent to the consideration
that would be paid by CapMAC under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a
third party under reinsurance and other agreements. Ceding commission
represents the expected amount that would be paid to CapMAC to
compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management
makes assumptions regarding prepayments for amortizing asset-backed
securities which are consistent with relevant historical experience.
For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of
future installment revenue actually realized by the Company could be
reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations
or lower than anticipated utilization of insured structured programs,
such as commercial paper conduits. Although increases in future
installment revenue earnings due to renewals of existing insurance
contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there
can be no assurance that future circumstances might not cause a
material net reduction in the future installment revenue.
(14) CAPITALIZATION
In 1995, $59.0 million of the proceeds received by Holdings from the
sale of shares in connection with an initial public offering and
private placements were contributed to CapMAC.
F-20
<PAGE> 78
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
F-21
<PAGE> 79
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, 1997 December 31,1996
(Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $323,043 at September
30, 1997 and $294,861 at December 31, 1996) $ 328,035 297,893
Short-term investments (at amortized cost which
approximates fair value) 21,119 16,810
- -----------------------------------------------------------------------------------------------------
Total investments 349,154 314,703
- -----------------------------------------------------------------------------------------------------
Cash 999 371
Accrued investment income 3,998 3,807
Deferred acquisition costs 51,137 45,380
Premiums receivable 7,132 5,141
Prepaid reinsurance 23,348 18,489
Other assets 5,666 6,424
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 441,434 394,315
=====================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums $ 76,023 68,262
Reserve for losses and loss adjustment expenses 15,389 10,985
Ceded reinsurance 5,653 1,738
Accounts payable and other accrued expenses 14,270 8,019
Current income taxes 626 679
Deferred income taxes 17,383 15,139
- -----------------------------------------------------------------------------------------------------
Total liabilities 129,344 104,822
- -----------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000 shares
are authorized, issued and outstanding at September 30, 1997
and December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized appreciation on investments, net of tax 3,251 1,970
Retained earnings 85,440 64,048
Cumulative translation adjustment, net of tax (76) -
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 312,090 289,493
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 441,434 394,315
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 80
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Direct premiums written $ 22,345 17,206 57,525 49,983
Assumed premiums written 225 8 1,141 1,032
Ceded premiums written (7,428) (4,129) (18,049) (11,142)
- -----------------------------------------------------------------------------------------------
Net premiums written 15,142 13,085 40,617 39,873
Increase in unearned premiums (1,663) (3,042) (2,903) (11,014)
- -----------------------------------------------------------------------------------------------
Net premiums earned 13,479 10,043 37,714 28,859
Net investment income 4,958 4,307 14,344 12,296
Net realized capital gains (loss) - (57) 2,549 111
Other income 51 25 139 104
- -----------------------------------------------------------------------------------------------
Total revenues 18,488 14,318 54,746 41,370
- -----------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 1,528 1,248 4,404 3,432
Underwriting and operating expenses 4,430 3,780 13,309 11,142
Policy acquisition costs 2,372 2,126 7,425 6,249
- -----------------------------------------------------------------------------------------------
Total expenses 8,330 7,154 25,138 20,823
- -----------------------------------------------------------------------------------------------
Income before income taxes 10,158 7,164 29,608 20,547
- -----------------------------------------------------------------------------------------------
INCOME TAXES:
Current income tax 2,502 1,027 6,652 3,008
Deferred income tax 172 718 1,564 2,689
- -----------------------------------------------------------------------------------------------
Total income taxes 2,674 1,745 8,216 5,697
- -----------------------------------------------------------------------------------------------
NET INCOME $ 7,484 5,419 21,392 14,850
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 81
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
<S> <C>
COMMON STOCK:
Balance at beginning of period $ 15,000
- --------------------------------------------------------------------------------
Balance at end of period 15,000
- --------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 208,475
- --------------------------------------------------------------------------------
Balance at end of period 208,475
- --------------------------------------------------------------------------------
UNREALIZED APPRECIATION ON INVESTMENTS, NET OF TAX:
Balance at beginning of period 1,970
Unrealized appreciation on investments 1,281
- --------------------------------------------------------------------------------
Balance at end of period 3,251
- --------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 64,048
Net income 21,392
- --------------------------------------------------------------------------------
Balance at end of period 85,440
- --------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENT, NET OF TAX:
Balance at beginning of period -
Translation adjustment (76)
- --------------------------------------------------------------------------------
Balance at end of period (76)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 312,090
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE> 82
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,392 14,850
- -------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment expenses 4,404 3,054
Unearned premiums, net 7,761 15,643
Deferred acquisition costs (5,757) (7,188)
Premiums receivable (1,991) (528)
Accrued investment income (191) (468)
Income taxes payable 1,511 2,341
Net realized capital gains (2,549) (111)
Accounts payable and other accrued expenses 6,251 5,445
Prepaid reinsurance (4,859) (4,630)
Other, net 5,089 (381)
- -------------------------------------------------------------------------------------------
Total adjustments 9,669 13,177
- -------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 31,061 28,027
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (137,369) (154,308)
Proceeds from sales of investments 74,768 35,388
Proceeds from maturities of investments 32,168 91,063
- -------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (30,433) (27,857)
- -------------------------------------------------------------------------------------------
Net increase in cash 628 170
Cash balance at beginning of period 371 344
- -------------------------------------------------------------------------------------------
CASH BALANCE AT END OF PERIOD $ 999 514
===========================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid $ 6,550 3,225
Tax and loss bonds purchased $ 155 131
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 83
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BACKGROUND
Capital Markets Assurance Corporation ("CapMAC") is a New
York-domiciled monoline stock insurance company which engages only in
the business of financial guaranty and surety insurance. CapMAC is a
wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). In early
1997, CapMAC made an investment of 50 million French francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. CapMAC
Assurance, S.A., is licensed to write financial guarantee insurance in
the European Union member states.
CapMAC is licensed in all 50 states in addition to the District of
Columbia, the Commonwealth of Puerto Rico and the territory of Guam.
CapMAC insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets.
CapMAC also provides financial guaranty reinsurance for structured
asset-backed, corporate, municipal and other financial obligations
written by other major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating
agency. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating
agencies.
2. BASIS OF PRESENTATION
CapMAC's consolidated unaudited interim financial statements have been
prepared on the basis of generally accepted accounting principles and,
in the opinion of management, reflect all adjustments necessary for a
fair presentation of the CapMAC's financial condition, results of
operations and cash flows for the periods presented. The results of
operations for the nine months ended September 30, 1997 may not be
indicative of the results that may be expected for the full year ending
December 31, 1997. These consolidated financial statements and notes
should be read in conjunction with the financial statements and notes
included in the audited financial statements of CapMAC as of December
31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996.
3. RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
F-26
<PAGE> 84
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR THE
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF A TIME SUBSEQUENT TO THE DATE OF SUCH
INFORMATION. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................... 2
Reports to Certificateholders........... 2
Summary................................. 3
Risk Factors............................ 11
The Trust............................... 14
The Onyx Portfolio of Motor Vehicle
Contracts............................. 14
The Contracts........................... 20
Maturity and Prepayment Assumptions..... 24
Yield Considerations.................... 25
Pool Factor............................. 25
Use of Proceeds......................... 25
The Seller.............................. 25
The Servicer............................ 26
The Certificates and the Agreement...... 27
Description of the Insurer.............. 37
Additional Provisions of the
Agreement............................. 38
Certain Legal Aspects of the
Contracts............................. 42
Certain Federal Income Tax
Consequences.......................... 45
ERISA Considerations.................... 51
Underwriting............................ 54
Legal Matters........................... 54
Experts................................. 54
Financial Statements of Insurer......... F-1
------------------
UNTIL MARCH 12, 1998 (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>
======================================================
$166,000,000
ONYX ACCEPTANCE
GRANTOR TRUST 1997-4
6.30% AUTO LOAN
PASS-THROUGH CERTIFICATES
[ONYX ACCEPTANCE LOGO]
ONYX ACCEPTANCE FINANCIAL CORPORATION,
Seller
ONYX ACCEPTANCE CORPORATION,
Servicer
---------------------------
P R O S P E C T U S
---------------------------
MERRILL LYNCH & CO.
DECEMBER 9, 1997
======================================================
