<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1) under
PROSPECTUS the Securities Act of
1933 in connection with
[ONYX ACCEPTANCE CORP LOGO] Registration No. 333-46359
$173,000,000
ONYX ACCEPTANCE GRANTOR TRUST 1998-1
5.95% AUTO LOAN PASS-THROUGH CERTIFICATES, SERIES 1998-1
ONYX ACCEPTANCE FINANCIAL CORPORATION,
Seller
ONYX ACCEPTANCE CORPORATION,
Servicer
------------------------
The 5.95% Auto Loan Pass-Through Certificates (the "Certificates") will
represent undivided fractional interests in the Onyx Acceptance Grantor Trust
1998-1 (the "Trust") to be formed by Onyx Acceptance Financial Corporation (the
"Seller"), a wholly-owned, limited purpose finance subsidiary of Onyx Acceptance
Corporation ("Onyx"). The Trust property will include a pool of fixed rate Rule
of 78's and Simple Interest Method motor vehicle retail installment sales
contracts (the "Contracts") secured by new and used automobiles and light-duty
trucks (the "Financed Vehicles"), certain monies due under certain Contracts on
or after March 1, 1998 (the "Cut-Off Date"), security interests in the Financed
Vehicles, the benefits of a financial guarantee insurance policy (the "Financial
Guarantee Insurance Policy") issued by MBIA Insurance Corporation (the
"Insurer") and certain other property, all as more fully described herein. The
initial Aggregate Scheduled Balance (as defined herein) of the Contracts as of
the Cut-Off Date was $173,000,003. Onyx will act as servicer of the Contracts
(the "Servicer").
Interest on the Certificates at the Pass-Through Rate of 5.95% 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 April 15, 1998 and ending on July 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.
It is a condition of issuance that the Certificates be rated in the highest
category by Moody's Investors Service, Inc. and Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. Such ratings will be
based primarily on the issuance of the Financial Guarantee Insurance Policy by
the Insurer. Under the Financial Guarantee Insurance Policy, 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 Financial
Guarantee Insurance Policy."
------------------------
SEE "RISK FACTORS" AT PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES OFFERED HEREBY.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND ARE NOT INSURED OR
GUARANTEED BY THE SELLER, ONYX OR ANY OF THEIR RESPECTIVE AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
======================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1) DISCOUNT SELLER(1)(2)
- ----------------------------------------------------------------------------------------------------------------------
Per Certificate...................... 99.953125% .25% 99.703125%
- ----------------------------------------------------------------------------------------------------------------------
Total................................ $172,918,906.25 $432,500 $172,486,406.25
======================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, calculated from March 13, 1998.
(2) Before deducting expenses payable by the Seller estimated to be $350,000.
------------------------
The Certificates are offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
various prior conditions, including their 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 March 13, 1998, through the facilities of The Depository Trust
Company ("DTC").
------------------------
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
------------------------
The date of this Prospectus is March 9, 1998.
<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 Trust, 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, 1998;
however, the Certificateholders will continue to receive the Distribution Date
Statement monthly, as described below.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued (which will occur under
the limited circumstances described herein), the unaudited monthly Distribution
Date Statements and unaudited annual reports concerning the Trust which are
described herein under "Additional Provisions of the Agreement -- Statements to
Certificateholders" and are prepared by the Servicer, will be sent by the
Trustee only to Cede & Co. as the nominee of DTC and the registered holder of
the Certificates. Such reports will not constitute financial statements prepared
in accordance with generally accepted accounting principles. These reports may
be obtained by Certificate Owners by a request in writing to the Trustee. See
"The Certificates and the Agreement -- Book-Entry Registration." The Seller does
not intend to send any of its financial reports to the Certificateholders.
2
<PAGE> 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 1998-1 (the "Trust"),
to be formed by Onyx Acceptance Financial
Corporation (the "Seller") pursuant to the Pooling
and Servicing Agreement, to be dated as of March 1,
1998 (the "Agreement"), among the Seller, Onyx
Acceptance Corporation (the "Servicer") and Bankers
Trust Company (the "Trustee").
Securities Offered......... 5.95% Auto Loan Pass-Through Certificates, Series
1998-1 (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 approximately equal to the aggregate principal
balance of the Contracts as of the Cut-Off Date
calculated in accordance with the Rule of 78's or
Simple Interest Method, as applicable. The term
"Cut-Off Date Scheduled Balance" means the
principal balance of a Contract as of the Cut-Off
Date. See "The Contracts."
Seller..................... Onyx Acceptance Financial Corporation, a
wholly-owned, limited purpose subsidiary of Onyx
Acceptance Corporation ("Onyx"). The Seller's
principal executive offices are located at 8001
Irvine Center Drive, 6th Floor, Irvine, California
92618 and its telephone number is (714) 790-5400.
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 purchased or
originated by subsidiaries of Onyx. 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) 450-5509. See "The Servicer."
Trustee.................... Bankers Trust Company.
Trust Property............. The Trust's assets (the "Trust Property") will
include: (i) a pool of fixed rate motor vehicle
retail installment sales contracts (the
"Contracts") of which approximately 33.78% of the
Aggregate Scheduled Balance as of the Cut-Off Date
are Rule of 78's Contracts and approximately 66.22%
of the Aggregate Scheduled Balance as of the
Cut-Off Date are Simple Interest Contracts, and all
of which were purchased from the Seller and secured
by new and used automobiles and light-duty trucks
(the "Financed Vehicles"), (ii) certain documents
relating to the Contracts, (iii) certain monies due
under such Contracts on or after the Cut-Off Date,
(iv) security interests in the Financed Vehicles
and the rights to receive proceeds from claims on
certain insurance policies covering the Financed
Vehicles or the individual obligors under each
related Contract and the right to certain proceeds
under the Blanket Insurance Policy,
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<PAGE> 4
(v) all amounts on deposit in the Collection
Account, including all Eligible Investments
credited thereto (but excluding any investment
income from Eligible Investments, which will be
paid to the Servicer), (vi) the benefits of a
financial guarantee insurance policy (the
"Financial Guarantee Insurance Policy") issued by
MBIA Insurance Corporation (the "Insurer"), (vii)
the right of the Seller to cause Onyx to repurchase
certain Contracts under certain circumstances, and
(viii) all proceeds of the foregoing. See "The
Trust."
Pass-Through Rate.......... 5.95% 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 April 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.... July 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 on a pro rata basis to the
Certificateholders of record as of the related
Record Date; provided that the Interest
Distribution with respect to the first Distribution
Date will include an additional $0.33 per $1,000 of
initial principal balance of the Certificates. The
"Pool Balance" as of any date is the Aggregate
Scheduled Balance of the Contracts as of such date,
excluding those Contracts which as of such date
have become Liquidated Contracts or have been
repurchased by the Seller or purchased by the
Servicer. Interest will be paid from collections
received on the Contracts on deposit in the
Collection Account or previously collected and
available for distribution. 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) for such Distribution Date. The
Principal Distribution on the Final Distribution
Date will include the Aggregate Scheduled Balance
of all Contracts that are outstanding at the end of
the Collection Period immediately prior to the
Final Distribution Date. The "Aggregate Scheduled
Balance Decline" for any Distribution Date is the
amount by which the Aggregate Scheduled Balance of
the Contracts as of the beginning of the related
Collection Period exceeds the
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<PAGE> 5
Aggregate Scheduled Balance of such Contracts as of
the end of the related Collection Period. The
"Aggregate Scheduled Balance" of the Contracts is
the sum of the Scheduled Balance of each Contract.
The "Scheduled Balance" of a Rule of 78's Contract
at any date is equal to the Cut-Off Date Scheduled
Balance of such Contract reduced by the portion of
each scheduled payment of principal and interest
due on such Contract (the "Monthly P&I") on or
prior to the date of calculation that is allocated
to principal under the Recomputed Actuarial Method.
The Scheduled Balance of a Simple Interest Contract
at any date is equal to the Cut-Off Date Scheduled
Balance of such Contract reduced by the portion of
Monthly P&I paid on or prior to the date of
calculation that is allocated to principal under
the Simple Interest Method. The Scheduled Balance
of any Contract that is a Liquidated Contract or
that has been purchased by the Servicer or
repurchased by the Seller will equal zero. A
"Liquidated Contract" is a Contract that (a) is the
subject of a Full Prepayment, (b) is a Defaulted
Contract and with respect to which Liquidation
Proceeds constituting, in the Servicer's reasonable
judgment, the final amounts recoverable have been
received and deposited in the Collection Account,
(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 have not been deposited in the Collection
Account; provided, however, that in any event a
Contract that is delinquent in the amount of five
monthly installments of Monthly P&I 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 installments of Monthly P&I or (b) with
respect to which the related Financed Vehicle has
been repossessed or repossession efforts with
respect to the related Financed Vehicle have been
commenced. See "The Contracts" and "The
Certificates and the Agreement -- Distributions of
Principal and Interest."
Servicing Fee.............. The Servicer will be responsible for managing,
administering, servicing, and making collections on
the Contracts. Compensation to the Servicer will
consist of a monthly fee (the "Servicing Fee"),
payable from the Trust to the Servicer on each
Distribution Date, in an amount equal to the
product of one-twelfth of 1.00% per annum (the
"Servicing Fee Rate") multiplied by the Pool
Balance as of the end of the Collection Period
preceding the related Collection Period. As
additional compensation, the Servicer will be
entitled to any late fees and other administrative
fees and expenses or similar charges collected with
respect to the Contracts. The Servicer or its
designee will also receive as servicing
compensation investment earnings on Eligible
Investments and the amount, if any, by which the
outstanding principal balance of a Rule of 78's
Contract that is subject to a Full Prepayment
exceeds the Scheduled Balance of such Contract. See
"The Certificates and the Agreement -- Servicing
Fee."
Financial Guarantee
Insurance Policy........... On the Closing Date, the Insurer will issue the
Financial Guarantee Insurance Policy to the Trustee
pursuant to an Insurance and Reimbursement
Agreement (the "Insurance Agreement"), dated as of
March 13, 1998, by and among the Insurer, Onyx, the
Seller and the Trustee. Pursuant to the Financial
Guarantee Insurance Policy, the
5
<PAGE> 6
Insurer will unconditionally and irrevocably
guarantee payment of the Interest Distribution and
Principal Distribution on each Distribution Date to
the Trustee for the benefit of the
Certificateholders. If on the fifth Business Day
prior to any Distribution Date (the "Servicer
Report Date") the amount on deposit and available
in the Collection Account, after giving effect to
all amounts deposited or payable from the Payahead
Account with respect to such Distribution Date, is
less than the sum of the Servicing Fee, the
Principal Distribution and Interest Distribution
for such Distribution Date, the Trustee, by
delivering a notice in accordance with the
Financial Guarantee Insurance Policy, shall demand
payment under the Financial Guarantee Insurance
Policy 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 Financial Guarantee Insurance
Policy."
Contracts.................. The Aggregate Scheduled Balance of the Contracts as
of the Cut-Off Date was $173,000,003. As of the
Cut-Off Date the Contracts had a weighted average
annual percentage rate of 14.92% and a weighted
average remaining term of 56.4 months.
Approximately 33.78% of the Aggregate Scheduled
Balance of the Contracts as of the Cut-Off Date
allocate interest and principal in accordance with
the Rule of 78's (the "Rule of 78's Contracts"),
and approximately 66.22% in accordance with the
Simple Interest Method (the "Simple Interest
Contracts"). Approximately 51.92% of the Aggregate
Scheduled Balance of the Contracts as of the
Cut-Off Date were originated in California, 9.41%
in Florida, 8.36% in Washington, 8.14% in Arizona,
7.85% in Illinois, and 5.22% in Nevada. No more
than 5.0% of the Contracts were originated in any
other single state.
Substantially all of the Contracts were originated
by automobile dealerships ("Dealers") and assigned
to Onyx, and a limited number of Contracts were
purchased or originated by subsidiaries of Onyx.
All the Contracts will have been purchased by the
Seller from Onyx and by the Trust from the Seller.
The Seller is required to repurchase certain of the
Contracts under certain circumstances if certain
representations and warranties made by the Seller
are incorrect in a manner that materially and
adversely affects the Certificateholders or the
Insurer. All of the Contracts have been selected by
Onyx from its portfolio of motor vehicle
installment sales contracts based upon the criteria
specified in the Agreement.
All collections of Monthly P&I, all prepayments on
the Contracts collected by the Servicer and all
amounts paid under the Financial Guarantee
Insurance Policy 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 Certifi-
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<PAGE> 7
cateholders 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
otherwise to be made on such Distribution Date) has
declined to 10% or less of the Cut-Off Date
Scheduled Balance for all of the Contracts (the
"Original Pool Balance"), subject to certain
provisions in the Agreement. See "The Certificates
and the Agreement -- Repurchase of Contracts."
Federal Income Tax
Status..................... In the opinion of counsel to the Seller, the Trust
will be treated for Federal income tax purposes as
a grantor trust and not as an association taxable
as a corporation. Certificateholders must report
their respective allocable shares of income earned
on Trust assets and, subject to certain limitations
applicable to individuals, estates and trusts, may
deduct their respective allocable shares of
reasonable servicing and other fees. See "Certain
Federal Income Tax Consequences."
ERISA Considerations....... The Certificates may be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") upon satisfaction of certain conditions
described herein. See "ERISA Considerations."
Rating..................... It is a condition of issuance of the Certificates
that they be rated in the highest rating category
by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("Standard &
Poor's"). Such ratings will be based primarily on
the issuance of the Financial Guarantee Insurance
Policy by the Insurer. See "Risk
Factors -- Rating."
Registration of the
Certificates............... The Certificates will initially be represented by
one or more 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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<PAGE> 8
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 Underwriters
currently intend, but are not obligated, to make a market in the Certificates.
However, there can be no assurance that the Underwriters will make such a
market, that a secondary market will develop or, if it does develop, that it
will provide Certificateholders with liquidity of investment or will continue
for the life of the Certificates.
LIMITED OPERATING HISTORY OF ONYX
All of the Contracts were originally purchased by Onyx from Dealers or
originated by Onyx or a subsidiary of Onyx 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 year ended 1997 was $2.6 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 Contract on the date the
Certificates are issued (the "Closing Date"). The Agreement permits the Servicer
with the consent of the Insurer (such consent not to be unreasonably withheld)
to hold the Contracts on behalf of the Trustee and the Insurer after the filing
of UCC-1 financing statements relating to the perfection of the Trust's security
interest in the Contracts. Accordingly, if Onyx or the Seller sell and deliver a
Contract to another purchaser, there is a risk that the purchaser could acquire
an interest in the Contract superior to the interest of the Trust and the
Certificateholders. Onyx will agree in the Agreement to take all necessary
action to preserve and protect the Trust's ownership interest in the Contracts.
The Seller will represent that each Contract is secured by a Financed Vehicle.
After a Contract is purchased by Onyx, or purchased or originated by a
subsidiary of 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 certain of the Contracts
originated in California, for which there will be no paper certificates of
title) to the Financed Vehicle securing the Contract shows Onyx or such
subsidiary 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 or such subsidiary
remains the secured party named on the related certificates of title (or
computerized title records in the case of certain Contracts originated in
California), and such certificates (or electronic records) are not endorsed or
otherwise marked to identify the Trustee as secured party, due to the
administrative burden and expense of applying to the department of motor
vehicles or similar state agency in each of the states of Contract origination
to identify the Trustee as secured party, and because retaining Onyx's or such
subsidiary'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
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<PAGE> 9
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 under the Financial Guarantee Insurance Policy to
guarantee payment of the Interest Distribution and Principal Distribution on
each Distribution Date. See "The Seller."
PREPAYMENT CONSIDERATIONS
The rate of distribution of principal on the Certificates will depend on
the rate of payment (including prepayments, liquidations and repurchases by the
Seller or purchases by Onyx under certain conditions) on the Contracts, which is
not possible to predict. Any full prepayments and repurchases of the Contracts
can reduce the average life of the Contracts and the aggregate interest received
by the Certificateholders over the life of the Certificates. Prepayments on
Simple Interest Contracts will shorten the average life of such Contracts and,
therefore, of the Certificates, because they will be passed through to
Certificateholders on the Distribution Date immediately following the Collection
Period in which such prepayments are received. Partial prepayments on Rule of
78's Contracts will be treated as Payaheads and accordingly will not affect the
average life of the Contracts because such payments will be held in the name of
Bankers Trust Company, acting on behalf of the Obligors and the
Certificateholders, as their interests may appear, until passed through in
accordance with the original schedule of payments for such Contracts. See "The
Certificates and Agreement -- Payahead Account."
Onyx has limited historical experience with respect to prepayments, and is
not aware of publicly available industry statistics that set forth principal
prepayment experience for retail installment sales contracts similar to the
Contracts. Onyx can make no prediction as to the actual prepayment rates that
will be experienced on the Contracts in either stable or changing interest rate
environments. See "-- Limited Operating History of Onyx" and "Maturity and
Prepayment Assumptions." Certificateholders will bear all reinvestment risk
resulting from the rate of prepayment of the Contracts.
GEOGRAPHIC CONCENTRATION
Economic conditions in the states where the obligors under the Contracts
(each, an "Obligor") reside may affect the delinquency, loan loss and
repossession experience of the Trust with respect to the Contracts.
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<PAGE> 10
Approximately 51.92% of the Aggregate Scheduled Balance of the Contracts as of
the Cut-Off Date will have been originated in California, 9.41% in Florida,
8.36% in Washington, 8.14% in Arizona, 7.85% in Illinois and 5.22% in Nevada. No
more than 5.0% of the Contracts were originated in any other single state.
Accordingly, adverse economic conditions or other factors particularly affecting
California, Arizona, Washington, Illinois, Florida 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 and the right to
receive payments under the Financial Guarantee Insurance Policy. 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 Financial Guarantee
Insurance Policy 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 Financial
Guarantee Insurance Policy. Therefore, the ratings are primarily dependent on
the rating of the Insurer, and a change in the Insurer's rating may affect the
ratings of the Certificates. See "Description of the Insurer" for a description
of the Insurer's rating.
CONSUMER PROTECTION LAWS
The Contracts are subject to federal and state consumer protection laws
which impose requirements with respect to the making, transfer, acquisition,
enforcement and collection of consumer loans. Such laws, as well as any new laws
or rules which may be adopted, may adversely affect the Servicer's ability to
collect on the Contracts. Any failure by the originator thereof to have
complied, or the Servicer to comply, with such requirements could adversely
affect the enforceability of the Contracts. The Seller will make representations
and warranties relating to the validity and enforceability of the Contracts and
its compliance with applicable law in connection with its performance of the
transactions contemplated by the Agreement. Pursuant to the Agreement, if the
Trust's interest in a Contract is materially and adversely affected by the
failure of such Contract to comply with the applicable requirements of any
consumer protection law, the Seller is obligated to repurchase such Contract.
The sole remedy if any such representation or warranty is not complied with and
such noncompliance continues beyond the applicable cure period is that the
Contracts affected thereby will be required to be repurchased by the Seller. See
"The Certificates and the Agreement -- Repurchase of Contracts" and "Certain
Legal Aspects of the Contracts -- Repurchase Obligation."
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<PAGE> 11
THE TRUST
Pursuant to the Agreement, the Seller will establish the Onyx Acceptance
Grantor Trust 1998-1 (the "Trust") by selling and assigning the following
property to Bankers Trust Company in its capacity as trustee of the Trust (the
"Trustee") in exchange for the Certificates executed and authenticated by the
Trustee: (i) the Contracts, (ii) certain documents relating to the Contracts,
(iii) certain monies due under the Contracts on or after the Cut-Off Date, (iv)
security interests in the Financed Vehicles and the rights to receive proceeds
from claims on certain insurance policies covering the Financed Vehicles or the
Obligors and the right to certain proceeds under the Blanket Insurance Policy,
(v) all amounts on deposit in the Collection Account, including all Eligible
Investments credited thereto (but excluding any investment income from 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, and (vii) all proceeds
of the foregoing. The Trust Property will also include the benefits of the
Financial Guarantee Insurance Policy of the Insurer, proceeds of which will be
available to the Trustee in the event collections from Obligors are insufficient
to pay the Interest Distributions and Principal Distributions to
Certificateholders and unpaid principal and interest on the Certificates on the
Final Distribution Date. Each Certificate will represent a fractional undivided
interest in the Trust.
The Trust will be formed for this transaction pursuant to the Agreement
and, prior to formation, will have had no assets or obligations. After
formation, the Trust will not engage in any activity other than acquiring and
holding the Contracts, issuing the Certificates, distributing payments thereon
and as otherwise described herein and as provided in the Agreement. The Trust
will not acquire any Motor Vehicle Contracts or assets other than the Trust
Property and will not have any need for additional capital resources.
THE ONYX PORTFOLIO OF MOTOR VEHICLE CONTRACTS
PURCHASE AND ORIGINATION OF MOTOR VEHICLE CONTRACTS
Onyx's portfolio of retail installment sales contracts and installment loan
agreements are secured by new and used automobiles and light-duty trucks ("Motor
Vehicle Contracts"). Motor Vehicle Contracts in Onyx's portfolio are purchased
by Onyx from Dealers that originate such contracts, purchased by a subsidiary of
Onyx from credit unions that originate such contracts, or originated by Onyx or
a subsidiary of Onyx. Substantially all of the Contracts have been purchased by
Onyx from new and used car Dealers unaffiliated with Onyx and the Seller, and a
limited number of Contracts have been purchased or originated by subsidiaries of
Onyx. All of the Contracts will have been sold to the Seller and then to the
Trust. Onyx currently has agreements with over 3,200 Dealers, of which
approximately 88.4% are franchised new car dealerships and approximately 11.6%
are independent used car dealerships. The Dealers are located in metropolitan
areas in the states in which the Motor Vehicle Contracts are or will be
originated, which are Arizona, California, Colorado, Florida, Georgia, Idaho,
Illinois, Indiana, New York, Nevada, New Jersey, Oregon, Texas, Utah, Virginia
and Washington. Each Dealer or credit union from which Onyx or a subsidiary of
Onyx purchases Motor Vehicle Contracts has entered into an agreement with Onyx
or such subsidiary whereby the applicable seller represents that it will comply
with federal and state laws regarding motor vehicle financing, that such seller
will obtain the requisite financial information required of the Obligor in order
to extend credit, and that such seller will truthfully disclose to Onyx or such
subsidiary 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 Motor Vehicle 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 51.92% of the Aggregate Scheduled Balance of the Contracts as
of the Cut-Off Date will have been originated in California, 9.41% in Florida,
8.36% in Washington, 8.14% in Arizona, 7.85% in Illinois and 5.22% in Nevada. No
more than 5.0% of the Contracts were originated in any other single state.
11
<PAGE> 12
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.
Onyx services all of the Contracts and initially will serve as the primary
servicer after the 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 purchased from Dealers through
its eleven regional contract purchasing offices ("Auto Finance Centers"), five
of which are in California and one in each of Arizona, Florida, Georgia, Nevada,
Washington and Illinois. Motor Vehicle Contracts purchased from Dealers located
in Oregon are currently underwritten in the Washington Auto Finance Center, and
contracts purchased from Dealers located in Indiana are underwritten in the
Illinois Auto Finance Center. Motor Vehicle Contracts purchased from Dealers
located in Colorado and Utah are underwritten in the Nevada Auto Finance Center
and Motor Vehicle Contracts purchased from Dealers located in New York and
Virginia are 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 originated
by a Dealer, Onyx reviews the application package received from such Dealer, or
in the case of Motor Vehicle Contracts purchased or originated by a subsidiary
of Onyx, such subsidiary reviews the application package received from the
originating credit union or the Obligor, that in any case 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. Most credit applications are not made on forms provided
by Onyx or a subsidiary of Onyx. However, Onyx or a subsidiary of 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 or a subsidiary of Onyx
reviews information in the application and from credit bureau reports obtained
by Onyx or such subsidiary.
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 related financed vehicle as
collateral, based upon a review of the information contained in the Motor
Vehicle Contract application. Among the criteria considered by credit managers
of Onyx and its subsidiaries 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 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 related
financed vehicle. The general policy of Onyx and its subsidiaries has been not
to allow an Obligor's debt service-to-gross monthly income ratio to exceed 45%.
After review of an application, a credit manager, via an electronic system,
communicates an appropriate decision to the applicable Dealer or credit union,
or by telephone or otherwise to the Obligor in the case of Motor Vehicle
Contracts originated by a subsidiary of 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, credit union 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, credit union or Obligor, and become a condition of the approval.
Subsequent to approval, if Onyx or a subsidiary of Onyx is the chosen source of
financing, Onyx or such subsidiary will obtain the necessary documentation for
processing, which consists of the following: (i) a signed application; (ii) the
only original and a copy of the executed Motor Vehicle 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
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<PAGE> 13
with respect to the financed vehicle; (viii) acceptable vehicle valuation
documentation; 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 a contract
processor for a pre-funding audit. The contract processor (who is employed by
Onyx or one of its subsidiaries) 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 or a subsidiary of 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 related financed vehicle. These
adjustments are made to assure that the related 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 related financed
vehicle.
Periodically, Onyx makes a detailed analysis of its portfolio of Motor
Vehicle Contracts (including Motor Vehicle Contracts purchased or originated by
its subsidiaries) 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 or a subsidiary of 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 one-time
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 or will have
paid the premium for the Blanket Insurance Policy allocable to each Contract
sold to the Trust prior to such Contract's sale to the Trust. The proceeds under
the Blanket Insurance Policy, to the extent they relate to any Contract, will
constitute part of the Trust Property.
COLLECTION PROCEDURES
Collection activities with respect to delinquent Motor Vehicle Contracts
are performed by Onyx at its Irvine collection center. Collection activities
include prompt investigation and evaluation of the causes of any delinquency. An
Obligor is considered delinquent when he or she has failed to make a scheduled
payment under the Motor Vehicle Contract within 30 days of the related due date
(each, a "Due Date").
To automate its collection procedures, Onyx uses features of the computer
system of its third party service bureau, Online Computer Systems, Inc. ("OCS"),
to provide tracking and notification of delinquencies. The collection system
provides relevant Obligor information (for example, current addresses, phone
numbers and loan information) and records of all Motor Vehicle Contracts. The
system also records an Obligor's promise to pay and affords supervisors the
ability to review collection personnel activity and to
13
<PAGE> 14
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 related financed vehicle. However, if the applicable Motor
Vehicle Contract is deemed uncollectible, if the related financed vehicle is
deemed by collection personnel to be in danger of being damaged, destroyed or
made unavailable for repossession, or if the related Obligor voluntarily
surrenders the related financed vehicle, Onyx may repossess the related financed
vehicle without regard to the length or existence of payment delinquency.
Repossessions are conducted by third parties who are engaged in the business of
repossessing vehicles for secured parties. Under the laws of California, Arizona
and Washington and the other states in which Motor Vehicle Contracts were or
will be originated, after repossession the Obligor generally has an additional
period of up to 15 days to redeem a financed vehicle before it 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 related 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 a financed vehicle, any deficiency remaining
is pursued against the Obligor to the extent deemed practical by Onyx and to the
extent permitted by law. The loss recognition and collection policies and
practices of Onyx may change over time in accordance with Onyx's business
judgment. However, the Agreement requires that Onyx service the Contracts and
collect all amounts due using reasonable care and in at least the same manner as
it services and collects amounts due with respect to Motor Vehicle Contracts
serviced by it for its own account.
MODIFICATIONS AND EXTENSIONS
Onyx offers certain credit-related extensions to Obligors. Generally, these
extensions are offered only when (i) Onyx believes that the Obligor's financial
difficulty has been resolved or will no longer impair the Obligor's ability to
make future payments, (ii) the extension will result in the Obligor's payments
being brought current, (iii) the total number of credit-related extensions
granted on the Motor Vehicle Contract will not exceed three and the total
credit-related extensions granted on the Motor Vehicle Contract will not exceed
three months in the aggregate, (iv) there have been no more than two
credit-related extensions granted on the Motor Vehicle Contract in the
immediately preceding twelve months, and (v) Onyx (or its assignee) had held the
Motor Vehicle Contract for at least six months. Any deviation from this policy
requires the concurrence of Onyx's collection manager and an Auto Finance Center
manager.
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<PAGE> 15
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 or a subsidiary of Onyx,
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 tables set forth below show increases in the
delinquency and loss rates experienced by Onyx over the period shown. Management
of Onyx believes that this is attributable, in part, to an increase on a
national basis in the level of bankruptcies and consumer defaults generally and
the tendency of delinquencies and losses, with respect to a pool of automobile
loans, to increase after a period of seasoning. Management believes that as the
average age of the Motor Vehicle Contracts included in Onyx's portfolio
increases, delinquencies and losses may continue to rise somewhat.
During the fourth quarter of 1996 and first quarter of 1997 management of
Onyx 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. Centralizing
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).
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<PAGE> 16
DELINQUENCY EXPERIENCE OF ONYX MOTOR VEHICLE CONTRACT PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1994 1995 1996 1997
---------------- ----------------- ----------------- -----------------
AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT NO.
------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio... $74,581 6,893 $218,207 20,156 $400,665 38,275 $757,277 73,502
Delinquencies
30-59 days(1)(2).... $ 15 2 $ 1,608 153 $ 5,022 478 $ 11,902 1,211
60-89 days(1)(2).... 27 4 470 35 1,816 162 3,370 346
90+ days(1)(2)...... 12 1 547 42 1,279 111 3,742 316
Total delinquencies as
a percent of
servicing
portfolio........... .07% .10% 1.20% 1.14% 2.03% 1.96% 2.51% 2.55%
</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 1997,
respectively.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
LOAN LOSS EXPERIENCE OF ONYX MOTOR VEHICLE CONTRACT PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1994 1995 1996 1997
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Number of Motor Vehicle Contracts outstanding... 6,893 20,156 38,275 73,502
Period end outstanding.......................... $74,581 $218,207 $ 400,665 $ 757,277
Average outstanding............................. $29,301 $141,029 $ 311,340 $ 563,343
Number of gross charge-offs..................... 0 197 987 2,161
Gross charge-offs............................... $ 0 $ 548.2 $ 5,789.2 $13,076.1
Net charge-offs(1).............................. $ 0 $ 528.7 $ 5,066.1 $11,433.9
Net charge-offs as a percent of period end
outstanding................................... 0.0% .24% 1.26% 1.51%
Net charge-offs as a percent of average
outstanding................................... 0.0% .37% 1.63% 2.03%
</TABLE>
- ---------------
(1) Net charge-offs are gross charge-offs minus recoveries of Motor Vehicle
Contracts previously charged off.
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<PAGE> 17
THE CONTRACTS
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 purchased or originated by subsidiaries of Onyx. See "The
Onyx Portfolio of Motor Vehicle Contracts." Each of the Contracts in the Trust
will be a fixed rate contract where the allocation of each payment between
interest and principal is calculated using the Rule of 78's or the Simple
Interest Method. Approximately 33.78% of the Aggregate Scheduled Balance of the
Contracts as of the Cut-Off Date allocate interest and principal in accordance
with the Rule of 78's (the "Rule of 78's Contracts"), and approximately 66.22%
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
17
<PAGE> 18
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 Contracts were selected from the Motor Vehicle Contracts in the
portfolio of Onyx using the following criteria (the "Eligibility Requirements").
No selection procedures used with respect to the Contracts were believed by Onyx
or the Seller to be adverse to the Certificateholders or the Insurer.
Approximately 18.92% of the Aggregate Scheduled Balance of the Contracts are
secured by new Financed Vehicles and approximately 81.08% of the Aggregate
Scheduled Balance of the Contracts are secured by used Financed Vehicles. The
Seller may not substitute other Motor Vehicle Contracts for the Contracts at any
time during the term of the Agreement.
The Seller will represent that all of the Contracts included in the Trust
satisfy the following Eligibility Requirements:
(a) Such Contracts are secured by a new or used automobile or
light-duty truck;
(b) Such Contracts have a remaining maturity as of the Cut-Off Date of
not more than 72 months;
(c) Such Contracts have an original maturity of not more than 72
months;
(d) Such Contracts (i) are fully-amortizing fixed rate contracts which
provide for level scheduled monthly payments determined on the basis of the
Rule of 78's or the Simple Interest Method (except for the last payment,
which may be minimally different from the level payments) and (ii) have a
yield (using the Recomputed Yield for the Rule of 78's Contracts) that
equals or exceeds 7.13%;
(e) Such Contracts are secured by Financed Vehicles that, as of the
Cut-Off Date, have not been repossessed without reinstatement;
(f) Such Contracts have no payment more than 30 days past due as of
the Cut-Off Date;
(g) Such Contracts have remaining principal balances as of the Cut-Off
Date of at least $500;
(h) Such Contracts were made to Obligors located in the States of
Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana,
Missouri, Montana, New Jersey, New York, Nevada, Oregon, Texas, Utah,
Virginia and Washington; and
(i) As of the Cut-Off Date, the Seller has not received notice that
any Obligor has filed for bankruptcy.
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<PAGE> 19
Set forth below is data concerning the Contracts which, as of the Cut-Off
Date, had an Aggregate Scheduled Balance of $173,000,003.
COMPOSITION OF THE CONTRACTS
<TABLE>
<S> <C>
Aggregate principal balance............................. $173,000,003
Number of Contracts..................................... 14,451
Average principal balance outstanding................... $11,971.49
Average original amount financed........................ $12,068.18
Original amount financed (range)........................ $1,022.75 to 75,750.00
Weighted average APR.................................... 14.92%
APR (range)............................................. 7.80% to 39.99%
Weighted average original term.......................... 57.3 months
Original term (range)................................... 10 to 72 months
Weighted average remaining term......................... 56.4 months
Remaining term (range).................................. 5 to 72 months
</TABLE>
19
<PAGE> 20
DISTRIBUTION BY APRS OF THE CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE
NUMBER OF % OF PRINCIPAL SCHEDULED
APR RANGE(1) CONTRACTS CONTRACTS BALANCE BALANCE
------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C>
7.001% to 8.000%...................... 105 0.73% $ 1,909,159 1.10%
8.001% to 9.000%...................... 600 4.15 9,217,361 5.33
9.001% to 10.000%..................... 841 5.82 12,739,957 7.36
10.001% to 11.000%.................... 753 5.21 10,829,862 6.26
11.001% to 12.000%.................... 895 6.19 11,856,322 6.85
12.001% to 13.000%.................... 1,027 7.11 13,397,630 7.74
13.001% to 14.000%.................... 1,262 8.73 16,311,765 9.43
14.001% to 15.000%.................... 1,372 9.49 17,135,757 9.91
15.001% to 16.000%.................... 1,261 8.73 15,221,650 8.80
16.001% to 17.000%.................... 1,283 8.88 15,323,546 8.86
17.001% to 18.000%.................... 1,264 8.75 13,756,809 7.95
18.001% to 19.000%.................... 835 5.78 8,894,615 5.14
19.001% to 20.000%.................... 701 4.85 7,221,791 4.17
20.001% to 21.000%.................... 1,301 9.00 13,008,819 7.52
21.001% and over...................... 951 6.58 6,174,959 3.57
------ ------ ------------ ------
Totals...................... 14,451 100.00% $173,000,003 100.00%
====== ====== ============ ======
</TABLE>
- ---------------
(1) Because the principal balance of each Contract sold to the Trust is the
Cut-Off Date Scheduled Balance, which in the case of Rule of 78's Contracts
is higher than what the principal balance of the Rule of 78's Contracts
would have been had principal and interest been allocated from the date of
origination in accordance with the actuarial method, the Recomputed Yield
for each Rule of 78's Contract is less than the APR of such Contract
specified herein. On a weighted average basis, the yield for all the
Contracts, using the Recomputed Yield for the Rule of 78's Contracts, in the
aggregate, is 14.83%. See "The Contracts."
GEOGRAPHIC CONCENTRATION OF THE CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE
NUMBER OF % OF PRINCIPAL SCHEDULED
CONTRACTS CONTRACTS BALANCE BALANCE
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Arizona............................... 1,177 8.14 $ 14,085,778 8.14
California............................ 7,213 49.91 89,826,825 51.92
Colorado.............................. 166 1.15 1,979,028 1.14
Florida............................... 1,380 9.55 16,287,553 9.41
Georgia............................... 328 2.27 3,957,621 2.29
Idaho................................. 6 0.04 70,691 0.04
Illinois.............................. 1,149 7.95 13,572,816 7.85
Indiana............................... 285 1.97 3,077,386 1.78
Missouri.............................. 15 0.10 173,805 0.10
Montana............................... 6 0.04 84,900 0.05
New Jersey............................ 1 0.01 29,214 0.02
Nevada................................ 752 5.20 9,022,454 5.22
New York.............................. 1 0.01 5,158 0.00
Oregon................................ 423 2.93 4,193,251 2.42
Texas................................. 140 0.97 2,036,907 1.18
Utah.................................. 6 0.04 60,295 0.03
Virginia.............................. 7 0.05 72,340 0.04
Washington............................ 1,396 9.66 14,463,982 8.36
------ ------ ------------ ------
Total....................... 14,451 100.00% $173,000,003 100.00%
====== ====== ============ ======
</TABLE>
20
<PAGE> 21
MATURITY AND PREPAYMENT ASSUMPTIONS
The Contracts are prepayable in full by the Obligors at any time without
penalty. Prepayments on Simple Interest Contracts will be passed through to
Certificateholders on the Distribution Date following the Collection Period in
which they are received. Partial prepayments on Rule of 78's Contracts however
will be treated as Payaheads and will not be passed through until the Collection
Period in which such payments are due or until the amount of such partial
prepayment equals the amount the Obligor would be required to pay in order to
prepay the Contract in full. See "The Certificates and the Agreement -- Payahead
Account." To the extent that any Contract is prepaid in full ("Full
Prepayment"), whether by the Obligor, or as the result of a purchase by the
Servicer or a repurchase by the Seller or otherwise, the actual weighted average
life of the Contracts will be shorter than a weighted average life calculation
based on the assumptions that payments will be made on schedule and that no
prepayments will be made. Weighted average life means the average amount of time
in which each dollar of principal on a Contract is repaid. Full Prepayments may
also result from liquidations due to default, receipt of proceeds from theft,
physical damage, credit life and credit disability insurance policies,
repurchases by the Seller as a result of the failure of a Contract to meet
certain criteria set forth in the Agreement, purchases by the Servicer as a
result of a breach of certain of its covenants with respect to the Contracts
made by it in the Agreement or as a result of an exercise by the Servicer of its
option to purchase the Trust Property. See "The Certificates and the
Agreement -- Repurchases of Contracts."
The rate of Full Prepayments by Obligors on the Contracts may be influenced
by a variety of economic, social and other factors, including the fact that an
Obligor may not sell or transfer the Financed Vehicle securing a Contract
without the consent of the Servicer. These factors may also include
unemployment, servicing decisions, seasoning of loans, destruction of vehicles
by accident, sales of vehicles and market interest rates.
California 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 and is
not aware of publicly available industry statistics that set forth principal
prepayment experience for retail installment sales contracts similar to the
Contracts. Onyx can make no prediction as to the actual prepayment rates that
will be experienced on the Contracts in either stable or changing interest rate
environments. Certificate Owners will bear all reinvestment risk resulting from
the rate of prepayment of the Contracts.
YIELD CONSIDERATIONS
Interest due will be passed through on each Distribution Date in an amount
equal to the product of one-twelfth of the Pass-Through Rate and the Pool
Balance as of the end of the Collection Period preceding the related Collection
Period (or the Original Pool Balance, in the case of the first Distribution
Date). In the event of a principal prepayment on a Contract during a Collection
Period, Certificateholders will receive interest for the full month on the
related Distribution Date. See "The Certificates and the Agreement --
Distributions of Principal and Interest."
Although the Contracts have different APRs, the yield on each individual
Contract, using the Recomputed Yield for Rule of 78's Contracts, will equal or
exceed 7.13%. 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
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<PAGE> 22
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 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) 790-5400.
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 Motor
Vehicle Contracts from Onyx and transferring such Motor Vehicle Contracts to
third parties and any activities incidental to and necessary or convenient for
the accomplishment of such purposes.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by Onyx under any Insolvency Law will not result in consolidation of
the assets and liabilities of the Seller with those of Onyx. These steps include
the creation of the Seller as a separate, limited purpose subsidiary pursuant to
a certificate of incorporation containing certain limitations (including
restrictions on the nature of the Seller's business and a restriction on the
Seller's ability to commence a voluntary case or proceeding under any Insolvency
Law without the unanimous affirmative vote of all of its directors). However,
there can be no assurance that the activities of the Seller would not result in
a court concluding that the assets and liabilities of the Seller should be
consolidated with those of Onyx in a proceeding under any Insolvency Law.
The Seller has received the advice of counsel to the effect that, subject
to certain facts, assumptions and qualifications, it would not be a proper
exercise by a court of its equitable discretion to disregard the separate
corporate existence of the Seller and to require the consolidation of the assets
and liabilities of the Seller with the assets and liabilities of Onyx in the
event of the application of any Insolvency Law to Onyx. However, there can be no
assurance that a court would not conclude that the assets and liabilities of the
Seller should be consolidated with those of Onyx. If a court were to reach such
a conclusion, or a filing were made under any Insolvency Law by or against the
Seller, or if an attempt were made to litigate any of the foregoing issues,
delays in distributions on the Certificates could occur or reductions in the
amounts of such distributions could result.
The Contracts will have been sold by Onyx to the Seller pursuant to a Sale
and Servicing Agreement dated as of September 8, 1994, as amended (the "Purchase
Agreement"). The Contracts will be sold by the Seller to the Trust pursuant to
the Agreement. Onyx and the Seller intend that the transfer of the Contracts by
Onyx to the Seller under the Purchase Agreement constitute a "true sale" of the
Contracts to the Seller. If the 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
22
<PAGE> 23
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. 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 four 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 Contracts.
Onyx is headquartered in Irvine, California and operates eleven Auto
Finance Centers, five in California and one in each of Arizona, Florida,
Georgia, 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 services the
Phoenix metropolitan and suburban areas as well as Texas. The Washington center
is located in Seattle and services the Seattle metropolitan and suburban areas
and Idaho. The Nevada center is located in Las Vegas and services the Las Vegas
metropolitan and suburban areas as well as Colorado and Utah. The Florida center
is located in Deerfield Beach and services Florida. The Georgia office is
located in Alpharetta and services Georgia. The Illinois office is located in
Rosemont and services the Chicago metropolitan and suburban areas and Michigan
and Indiana. Onyx currently has agreements with over 3,200 Dealers.
Onyx acquires individual Motor Vehicle Contracts from Dealers, and to a
lesser extent subsidiaries of Onyx purchase such contracts from credit unions or
directly originate such contracts, after reviewing and approving the customer's
credit application in accordance with its underwriting policies and procedures.
See "The Contracts." Onyx, together with its subsidiaries, had acquired or
originated Motor Vehicle Contracts totaling approximately $1.2 billion from
commencement of operations through December 31, 1997. As of December 31, 1997,
Onyx had amassed a servicing portfolio of approximately $757.3 million. As of
December 31, 1997, approximately 77% of Onyx's servicing portfolio consisted of
motor vehicle installment contracts secured by used motor vehicles, and 23%
secured by new motor vehicles. As of December 31, 1997, Onyx had total assets of
approximately $146.6 million and stockholders' equity of $40.5 million.
Onyx finances acquisitions and originations of Motor Vehicle Contracts on a
short term basis through a commercial paper conduit program and has previously
financed acquisitions and originations of motor vehicle installment contracts on
a long term basis through sales of Motor Vehicle 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
23
<PAGE> 24
to, the actual provisions (including definitions of terms) are incorporated by
reference as part of such summaries.
GENERAL
The Certificates will be offered for purchase in minimum denominations of
$1,000 and integral multiples thereof, except that one Certificate may be issued
in a denomination that includes any residual portion of the Original Pool
Balance. Each Certificate will rank pari passu with each other Certificate. The
Certificates will initially be represented by one or more Certificates
registered in the name of Cede, 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 "-- Book-Entry
Registration" and "-- Definitive Certificates."
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
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 on a pro rata basis to the
Certificateholders of record as of the related Record Date; provided that the
Interest Distribution with respect to the first Distribution Date will include
an additional $0.33 per $1,000 of initial principal balance of the Certificates.
The "Pool Balance" as of any date is the Aggregate Scheduled Balance of the
Contracts as of such date, excluding those Contracts which as of such date have
become Liquidated Contracts or have been repurchased by the Seller or purchased
by the Servicer. Interest will be paid from collections received on the
Contracts on deposit in the Collection Account or previously collected and
available for distribution. A "Collection Period" with respect to a Distribution
Date will be the calendar month preceding the month in which such Distribution
Date occurs; provided, that with respect to Liquidated Contracts the Collection
Period will be the period from but excluding the sixth Business Day preceding
the immediately preceding Distribution Date to and including the sixth Business
Day preceding such Distribution Date. With respect to the first Distribution
Date the "Collection Period" for Liquidated Contracts will be the period from
and including the Cut-Off Date to and including the sixth Business Day preceding
such first Distribution Date. Each Interest Distribution will be calculated on
the basis of a 360-day year consisting of twelve 30-day months. Unless and until
Definitive Certificates have been issued, distributions on each Distribution
Date will be made through the facilities of DTC and the related "Record Date"
will be the Business Day prior to such Distribution Date. If Definitive
Certificates are issued, the related "Record Date" will be the last day of the
calendar month preceding such Distribution Date. The final distribution of
principal of and interest on each Certificate will be made only upon
presentation and surrender of such Certificate on or after the Final
Distribution Date (or such earlier termination date as is provided by the
Agreement) at the office or agency of the Trustee maintained for that purpose.
On each Distribution Date, 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 during the related Collection Period. The Principal Distribution
on the Final Distribution Date will include the Aggregate Scheduled Balance of
all Contracts that are outstanding at the end of the Collection Period
immediately prior to the Final Distribution Date. The "Aggregate Scheduled
Balance Decline" for any Distribution Date is the amount by which the Aggregate
Scheduled Balance of the Contracts as of the beginning of the related Collection
Period exceeds the Aggregate Scheduled Balance of such Contracts as of the end
of the related Collection Period. The "Aggregate Scheduled Balance" of the
Contracts is the sum of the Scheduled Balances of each Contract. The "Scheduled
Balance" of a Rule of 78's
24
<PAGE> 25
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 paid 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
and deposited in the Collection Account, (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 have not been deposited in the
Collection Account; provided, however, that in any event a Contract that is
delinquent in the amount of five monthly installments of Monthly P&I 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 installments of
Monthly P&I or (b) with respect to which the related Financed Vehicle has been
repossessed or repossession efforts with respect to the related Financed Vehicle
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 7.13%.
At the issuance of the Certificates, the initial aggregate principal amount
of the Certificates will equal the Aggregate Scheduled Balance of all the
Contracts as of the Cut-Off Date.
THE FINANCIAL GUARANTEE INSURANCE POLICY
If on any Servicer Report Date with respect to any Distribution Date the
amount on deposit in the Collection Account after giving effect to all amounts
deposited to or payable from the Payahead Account with respect to such
Distribution Date, is less than the sum of the Servicing Fee, the Principal
Distribution and Interest Distribution for such Distribution Date, the Trustee,
by delivering a notice in accordance with the Financial Guarantee Insurance
Policy shall demand payment under the Financial Guarantee Insurance Policy 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 Financial Guarantee Insurance Policy 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, or indirectly through Participants.
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 Uniform Commercial Code, 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
25
<PAGE> 26
of its Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations
(including the Underwriters). Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly (the "Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Certificates may do so only through Participants and Indirect Participants.
In addition, Certificateholders will receive all distributions of principal of
and interest on the Certificates from the Trustee, as paying agent, or its
successor in such capacity (the "Paying Agent"), through the Participants who in
turn will receive them from DTC. Under a book-entry format, Certificate Owners
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Paying Agent to Cede, as nominee for DTC. DTC will forward
such payments to its Participants which thereafter will forward them to Indirect
Participants or Certificate Owners. It is anticipated that the only
"Certificateholder" will be Cede, as nominee of DTC. Certificate Owners will not
be recognized by the Trustee as Certificateholders, as such term is used in the
Agreement, and Certificate Owners will only be permitted to exercise the rights
of Certificateholders indirectly through the Participants who in turn will
exercise the rights of Certificateholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess Certificates, Certificate Owners will receive payments and will
be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Certificate
Owner to pledge Certificates to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such Certificates, may
be limited due to the lack of a physical certificate for such Certificates.
DTC has advised the Seller that it will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Additionally, DTC has advised the Seller that it will take such actions with
respect to the particular portion of the Certificates represented by the
undivided interests held by Participants which have directed DTC, on their
behalf, to take such action. DTC may take conflicting actions with respect to
other undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Certificates among participants of DTC, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
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 and 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
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DTC of the Definitive Certificates representing the Certificates and
instructions for reregistration, the Trustee will issue the Certificates as
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as holders under the Agreement (collectively,
"Holders").
Distribution of principal of and interest on the Certificates will be made
by the Paying Agent directly to Holders of Definitive Certificates in accordance
with the procedures set forth herein and in the Agreement. Interest
Distributions and Principal Distributions on each Distribution Date and on the
Final Distribution Date will be made to Holders in whose names the Definitive
Certificates were registered at the close of business on the related Record
Date. Distributions will be made by check mailed to the address of such Holder
as it appears on the certificate register. The final payment of any Certificate
(whether Definitive Certificates or the Certificate registered in the name of
DTC's nominee), however, will be made only upon presentation and surrender of
such Certificate at the office or agency specified in the notice of final
distribution to Certificateholders. The Trustee will provide such notice to
registered Certificateholders not later than the fifteenth day of the month of
such final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be the
Trustee. No service charge will be imposed for any registration of transfer or
exchange, but the Transfer Agent and Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
SALE AND ASSIGNMENT OF THE CONTRACTS
At the time of issuance of the Certificates, the Seller will sell and
assign to the Trustee, without recourse, the Seller's entire interest in the
Contracts and the proceeds thereof, including its security interests in the
Financed Vehicles. Each Contract will be identified in a schedule appearing as
an exhibit to the Agreement. The Trustee will, concurrently with such sale and
assignment, execute, authenticate and deliver the definitive certificates
representing the Certificates to the Underwriters against payment to the Seller
of the net purchase price of the sale of the Certificates. Pursuant to the
Purchase Agreement, prior to sale of the Contracts to the Trustee and the
issuance of the Certificates, Onyx will sell and assign to the Seller Onyx's
entire interest in the Contracts.
Pursuant to the Agreement, the Seller will represent to the Trustee and the
Trust for the benefit of holders of the Certificates and the Insurer that: (i)
each Contract contains customary and enforceable provisions such that the rights
and remedies of the holder thereof shall be adequate for realization against the
collateral of the benefits of the security; (ii) each Contract and the sale of
the related Financed Vehicle complied at the time it was made in all material
respects with all requirements of applicable federal, state, and local laws, and
regulations thereunder, including usury laws, the Federal Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal
Trade Commission Act, the Fair Debt Collection Practices Act, the Fair Credit
Billing Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's
Regulations B and Z, the Soldiers' and Sailors' Civil Relief Act of 1940, state
adaptations of the National Consumer Act and of the Uniform Consumer Credit
Code, and any other consumer credit, equal opportunity and disclosure laws
applicable to such Contract and sale; (iii) each Contract constitutes the legal,
valid, and binding payment obligation in writing of the Obligor, enforceable by
the holder thereof in all respects in accordance with its terms, subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization, liquidation
and other similar laws and equitable principles relating to or affecting the
enforcement of creditors' rights; (iv) as of the Closing Date, each Contract was
secured by a validly perfected first priority security interest in the Financed
Vehicle in favor of the Seller as secured party or all necessary action with
respect to such Contract has been taken to perfect a first priority security
interest in the related Financed Vehicle in favor of the Seller as secured
party, which security interest is assignable and has been so assigned by the
Seller to the Trust; (v) as of the Closing Date, the Seller had good and
marketable title to and was the sole owner of each Contract, free of liens,
claims, encumbrances and rights of others; (vi) as of the Closing Date, there
are no rights of rescission, offset, counterclaim, or defense, and the Seller
has no knowledge of the same being asserted or threatened, with respect to any
Contract; (vii) as of the Closing Date, the Seller had no knowledge of any liens
or claims that have been filed, including liens for work, labor, materials or
unpaid taxes relating to a Financed Vehicle, that would be liens prior to, or
equal or coordinate with, the lien granted by the Contract; (viii) except for
payment defaults continuing for a period of not more
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than 30 days as of the Cut-Off Date, the Seller has no knowledge that a default,
breach, violation, or event permitting acceleration under the terms of any
Contract exists, and the Seller has no knowledge that a continuing condition
that with notice or lapse of time would constitute a default, breach, violation
or event permitting acceleration under the terms of any Contract exists, and the
Seller has not waived any of the foregoing; (ix) each Contract requires that the
Obligor thereunder obtain comprehensive and collision insurance covering the
Financed Vehicle; (x) each Contract was acquired from a dealer with whom Onyx
ordinarily does business (except for Contracts purchased or originated by a
subsidiary of Onyx); (xi) no adverse selection procedures were utilized in
selecting the Contracts; (xii) scheduled payments under each Contract have been
applied in accordance with the method for allocating principal and interest set
forth in the Contract (either the Rule of 78's or the Simple Interest Method);
and (xiii) there is only one original of each Contract and such original is
being held by the Trustee as custodian on behalf of the Trust and Insurer. As of
the last day of the Collection Period following the Collection Period (or, if
the Seller elects, the last day of such Collection Period) during which the
Seller becomes aware or receives written notice from the Trustee or the Servicer
that a Contract does not meet any of the criteria in the Agreement and such
failure materially and adversely affects the interests of the Certificateholders
or the Insurer in a Contract, the Seller, unless it cures the failed criterion,
will repurchase the Contract from the Trustee at a price equal to the Scheduled
Balance thereof plus accrued interest (the "Repurchase Amount"). The repurchase
obligation will constitute the sole remedy available to the Certificateholders
or the Trustee for the failure of a Contract to meet any of the criteria set
forth in the Agreement.
THE COLLECTION ACCOUNT AND ELIGIBLE INVESTMENTS
The Servicer will cause all collections made on the Contracts during a
Collection Period to be deposited in or credited to an account (the "Collection
Account") established by the Servicer under the Agreement. Funds in the
Collection Account will be invested in Eligible Investments by the Trustee
acting at the direction of the Insurer. "Eligible Investments" are: (a) direct
obligations issued or fully guaranteed by the United States or any agency or
instrumentality of the United States whose obligations are backed by the full
faith and credit of the United States and, to the extent, at the time of the
investment, acceptable to the Insurer and each Rating Agency 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 and "Aa2" or better by 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
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Company for the benefit of the Obligors and the Certificateholders as their
interests may appear (the "Payahead Account") and shall be held in such account
until passed through in accordance with the original schedule of payments for
the related Contract or until the amount of such partial prepayment equals the
amount the Obligor would be required to pay in order to prepay the Contract in
full. The Payahead Account will be an Eligible Account. Amounts on deposit in
the Payahead Account will be invested in Eligible Investments with maturity
dates such that on each Distribution Date Monthly P&I for each Rule of 78's
Contract with respect to which a partial prepayment had been made will be
available to be passed through to Certificateholders. The Payahead Account will
not be part of the Trust and the Trustee will not have a security interest in
the Payahead Account. Earnings on Eligible Investments credited to the Payahead
Account will be paid to the Servicer. Full Prepayments during any Collection
Period will be deposited directly into the Collection Account for distribution
to Certificateholders on the Distribution Date next succeeding such Collection
Period.
PAYMENTS ON CONTRACTS
All collections on the Contracts will be deposited in or credited to the
Collection Account within two Business Days of the receipt by the Servicer of
payments from Obligors. Such collections will include: Full Prepayments and
partial prepayments (pending transfer of Payaheads on Rule of 78's Contracts to
the Payahead Account), Net Liquidation Proceeds and Net Insurance Proceeds, any
amounts deposited by Onyx or the Seller in the Collection Account to purchase
Contracts because of certain material defects in documents related to the
Contracts or certain breaches in representations or warranties regarding the
Contracts made by Onyx or the Seller in the Agreement that materially and
adversely affect the interests of the Certificateholders or the Insurer, any
amounts deposited by the Servicer in the Collection Account to purchase
Contracts as to which the Servicer has breached certain servicing covenants, and
any amounts deposited by the Servicer in the Collection Account as a result of
such entity exercising its right under certain circumstances to purchase all or
a portion of the Contracts. "Net Liquidation Proceeds" are proceeds received by
the Servicer (net of Liquidation Expenses) upon liquidation of any Defaulted
Contract. "Liquidation Expenses" are the reasonable out-of-pocket expenses
(exclusive of overhead expenses) incurred by the Servicer in realizing upon a
Defaulted Contract which are not recoverable under any insurance policy. "Net
Insurance Proceeds" are proceeds paid by any insurer under a comprehensive and
collision or vendor's single interest insurance policy related to a Contract
(other than funds used for the repair of the related Financed Vehicle or
otherwise released to the related Obligor in accordance with normal servicing
procedures) and proceeds from the Blanket Insurance Policy, after reimbursement
to the Servicer of expenses recoverable under such policy. Partial prepayments
of Rule of 78's Contracts are initially deposited in the Collection Account and
are transferred to the Payahead Account on the Servicer Report Date.
DISTRIBUTIONS
Subject to the last sentence of this paragraph, distributions on the
Certificates will be made on each Distribution Date by the Paying Agent out of
net collections on the Contracts (exclusive of amounts representing payments 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 amount of such net
collections, and amounts payable from the Payahead Account will be applied,
first, to the Servicer in payment of the Servicing Fee, second, to payment of
the Interest Distribution and the Principal Distribution to the
Certificateholders on such Distribution Date in accordance with the Agreement,
third, to the Insurer, the premium for the Financial Guarantee Insurance Policy,
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 Financial Guarantee Insurance Policy, to
satisfy obligations owing to the Insurer or to reserve against the possibility
of future draws, amounts remaining shall be released to the beneficiaries of the
spread account trust. Any amounts distributed pursuant to clause fourth above
will not be available to make distributions to the Certificateholders on the
current or any future Distribution Date. Under the Financial Guarantee Insurance
Policy, 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
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the net collections on Contracts and amounts payable from the Payahead 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.
In addition, on the Final Distribution Date, to the extent the amount on deposit
and available in the Collection Account, including amounts payable from the
Payahead Account, is less than all remaining unpaid interest and principal on
the Certificates, the Insurer is obligated to pay under the Financial Guarantee
Insurance Policy or cause to be paid the amount of such shortfall. 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 or the applicable Onyx subsidiary 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 will be assigned to the Trust pursuant to the Agreement.
SERVICER REPORTS TO THE TRUSTEE AND THE INSURER
The Servicer will perform certain monitoring and reporting functions for
the Trustee and the Insurer, including the preparation and delivery on the
Servicer Report Date to the Trustee and the Insurer of a statement (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 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, on any Distribution Date as
of which the Pool Balance (after giving effect to the Principal Distribution
otherwise to be made on such Distribution Date) has declined to 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 on
each Distribution Date an amount equal to the product of one-
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twelfth of 1.00% per annum (the "Servicing Fee Rate") multiplied by the Pool
Balance as of the end of the Collection Period preceding the related Collection
Period. As additional compensation, the Servicer or its designee shall be
entitled to retain all late payment charges, extension fees and similar items
paid in respect of the Contracts. The Servicer or its designee will also receive
as servicing compensation reinvestment earnings on Eligible Investments and the
amount, if any, by which the outstanding principal balance based on the Rule of
78's of a Contract that is subject to a Full Prepayment exceeds the Scheduled
Balance of such Contract. The Servicer shall pay all expenses incurred by it in
connection with its servicing activities under the Agreement and shall not be
entitled to reimbursement of such expenses except to the extent they constitute
Liquidation Expenses or expenses recoverable under an applicable insurance
policy.
WAIVERS AND EXTENSIONS
The Agreement requires the Servicer to use its best efforts to collect all
payments called for under the terms and provisions of the Contracts. The
Servicer, consistent with the foregoing, may in its discretion (i) waive any
late payment charges in connection with delinquent payments on a Contract, (ii)
waive prepayment charges and (iii) grant up to three extensions of thirty (30)
days or less in order to work out a default or an impending default. The
maturity date of a Contract, however, may not be extended more than ninety (90)
days past the originally scheduled maturity date, and in no event beyond the
Final Distribution Date.
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 Underwriters have made any
independent investigation of such information.
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company (the "Company"). The Company is not obligated to
pay the debts of or claims against the Insurer. The Insurer is domiciled in the
State of New York and licensed to do business in and subject to regulation under
the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of
the United States and the Territory of Guam. The Insurer has two European
branches, one in the Republic of France and the other in the Kingdom of Spain.
New York has laws prescribing minimum capital requirements, limiting classes and
concentrations of investments and requiring the approval of policy rates and
forms. State laws also regulate the amount of both the aggregate and individual
risks that may be insured, the payment of dividends by the Insurer, changes in
control and transactions among affiliates. Additionally, the Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
Effective February 17, 1998, the Company acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks, as well as its unearned premiums and
contingency reserves, to the Insurer and the Insurer has reinsured CMAC's net
outstanding exposure. The Company is not obligated to pay the debts of or claims
against CMAC.
As of December 31, 1996 the Insurer had admitted assets of $4.4 billion
(audited), total liabilities of $3.0 billion (audited), and total capital and
surplus of $1.4 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of Septem-
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ber 30, 1997, the Insurer had admitted assets of $5.1 billion (unaudited), total
liabilities of $3.4 billion (unaudited), and total capital and surplus of $1.7
billion (unaudited) determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities.
Furthermore, copies of the Insurer's year end financial statements prepared
in accordance with statutory accounting practices are available without charge
from the Insurer. A copy of the Annual Report on Form 10-K of the Company is
available from the Insurer or the Securities and Exchange Commission. The
address of the Insurer is 113 King Street, Armonk, New York 10504. The telephone
number of the Insurer is (914) 273-4545.
The Financial Guarantee Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
Moody's rates the claims paying ability of the Insurer "Aaa." Standard &
Poor's rates the claims paying ability of the Insurer "AAA." Fitch IBCA, Inc.
(formerly known as Fitch Investors Service, L.P.) rates the claims paying
ability of the Insurer "AAA." Each such rating of the Insurer should be
evaluated independently. The ratings reflect the respective rating agency's
current assessment of the creditworthiness of the Insurer and its ability to pay
claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the
Certificates. The Insurer does not guaranty the market price of the Certificates
nor does it guaranty that the ratings on the Certificates will not be revised or
withdrawn.
Audited financial statements of the Insurer as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996 are
included in this Prospectus beginning at F-1. Unaudited financial statements of
the Insurer for the nine-month periods ended September 30, 1996 and September
30, 1997 are included in this Prospectus beginning at F-27. Such financial
statements have been prepared on the basis of generally accepted accounting
principles. Copies of the Insurer's 1996 year-end audited financial statements
prepared in accordance with statutory accounting practices are available from
the Insurer. The address of the Insurer is 113 King Street, Armonk, New York
10504.
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;
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(iv) the premiums payable to the Insurer and the amount to be
deposited in the spread account;
(v) the aggregate Servicing Fee paid to the Servicer with respect to
the Contracts for the related Collection Period;
(vi) the number of, and aggregate amount of monthly principal and
interest payments due on, the Contracts which are delinquent as
of the end of the related Collection Period presented on a
30-day, 60-day and 90-day basis;
(vii) the amount available in the Collection Account for payment of
the Certificate distribution amount and the Servicing Fee and
the amount, if any, required from the Insurer pursuant to the
Financial Guarantee Insurance Policy to pay any shortfall;
(viii) the aggregate amount of Liquidation Proceeds received for
Defaulted Contracts;
(ix) the net credit losses for the Collection Period;
(x) the number and net outstanding balance of Contracts for which
the Financed Vehicle has been repossessed;
(xi) the Pool Balance; and
(xii) the amount in the Collection Account available for such
Distribution Date.
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, 1998, the Trustee and the Paying Agent shall furnish to each person
who on any Record Date during such calendar year shall have been a registered
Certificateholder a statement containing the sum of the amounts described in
(i), (ii) and (viii) above and such other information in respect of the
Certificates as may be reasonably necessary for such Certificateholder's
preparation of federal income tax returns. See "Certain Federal Income Tax
Consequences."
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that a firm of independent public accountants
will furnish to the Trustee and the Insurer, on or before each March 15 after
the end of each fiscal year of the Servicer, beginning with the fiscal year
ended December 31, 1998, 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, 1998, 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
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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 or the Payahead
Account any amount required to be so deposited or credited, which failure
continues unremedied for three Business Days after written notice from the
Trustee or the Insurer is received by the Servicer or discovery by the Servicer;
(ii) any failure by the Servicer to deliver to the Insurer or the Trustee
certain reports required by the Agreement by the Servicer Report 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.
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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 of 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 Financial Guarantee Insurance
Policy or is subject to any insolvency proceeding, the Insurer shall not have
the right to terminate the Servicer, or to control or direct the actions of the
Seller, the Servicer or the Trustee pursuant to the terms of the Agreement, nor
shall the consent of the Insurer be required with respect to any action (or
waiver of a right to take action) to be taken by the Seller, the Servicer or the
Trustee; provided, that the consent of the Insurer shall be required at all
times with respect to any amendment of the Agreement.
AMENDMENT
The Agreement may be amended by the Seller, the Servicer and the Trustee,
without the consent of the Certificateholders but with the consent of the
Insurer, to cure any ambiguity, correct or supplement any provision therein
which may be inconsistent with any other provision therein, or make any other
provisions with respect to matters or questions arising under such Agreement
which are not inconsistent with the provisions of the Agreement; provided that
such action will not materially and adversely affect the interest of any
Certificateholder. Any such amendment shall not be deemed to materially and
adversely affect the interests of any Certificateholder if the person requesting
the amendment obtains a letter from each Rating Agency to the effect that the
amendment would not result in a downgrading or withdrawal of the ratings then
assigned to the Certificates by such Rating Agency, without regard to the
Financial Guarantee Insurance Policy.
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
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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) the termination of the Financial Guarantee
Insurance Policy in accordance with its terms and the surrender of the Financial
Guarantee Insurance Policy 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 on any Distribution Date as of which the Pool Balance (after giving effect
to the Principal Distribution otherwise to be made on such Distribution Date)
has declined to 10% or less of the Original Pool Balance at a price equal to the
Aggregate Scheduled Balance of such Contracts on the date of repurchase 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 will not make any representations as to the validity or
sufficiency of the Agreement, the Certificates, or any Contracts or related
documents, or the investment of any monies by the Servicer before such monies
are deposited in or credited to the Collection Account. The Trustee has not
examined the Contracts. If no Event of Default has occurred, the Trustee will be
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 Financial Guarantee Insurance Policy if required to make distributions to
the Certificateholders.
Bankers Trust Company will be 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.
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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.
SECURITY INTERESTS IN THE FINANCED VEHICLES
All Financed Vehicles were either 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 51.92% 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 will warrant to the Trust in the Agreement that Onyx or a subsidiary of
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 such
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 or a subsidiary of 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
or a subsidiary 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 or a subsidiary of 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
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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 or a subsidiary of Onyx, absent clerical errors or fraud, would
receive notice of surrender of the certificate of title if its lien is noted
thereon. Each subsidiary of Onyx named as the secured party on a certificate of
title will agree to promptly forward to Onyx any such notice received by such
subsidiary. 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 or its
subsidiary's 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 the security interest of Onyx or its subsidiary in the Financed
Vehicle.
Under the law of California and most other states, liens for unpaid taxes,
storage of and repairs performed on a motor vehicle take priority even over a
perfected security interest. Under the laws of certain states, however, certain
liens for storage of and repairs performed on a motor vehicle do not take
priority over a perfected security interest. The Internal Revenue Code of 1986,
as amended, also grants priority to certain federal tax liens over the lien of a
secured party. The Seller will represent in the Agreement that as of the initial
issuance of the Certificates no such state or federal liens exist with respect
to any Financed Vehicle securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Servicer in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN FINANCED VEHICLES
The Servicer, on behalf of the Trust, may take action itself to enforce the
security interest in Financed Vehicles with respect to Defaulted Contracts by
repossession and resale of such Financed Vehicles. 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.
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Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws, may limit or delay the ability of the creditor to repossess
and resell collateral or enforce a deficiency judgment.
In the event that deficiency judgments are not satisfied, are satisfied at
a discount or are discharged, in whole or in part, in bankruptcy proceedings,
including proceedings under Chapters 7 or 13 of the United States Bankruptcy
Code, the loss will be borne by the Trust.
OTHER MATTERS
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(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.
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 Financed Vehicle as of the Closing Date. See "The Certificates
and the Agreement -- Sale and Assignment of the Contracts." Accordingly, if any
defect exists in the perfection of the security interest in any Financed Vehicle
as of the Closing Date and such defect adversely affects the Trust's interest in
the related Contract, such defect would constitute a breach of a warranty under
the Agreement and would create an obligation of the Seller to repurchase such
Contract unless the breach is cured. Additionally, in the Agreement the Servicer
will make certain representations, warranties and affirmative covenants
regarding, among other things, the maintenance of the security interest in each
Financed Vehicle, the breach of which would create an obligation of the Servicer
to purchase any affected Contract from the Trust unless the breach is cured.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated Federal income tax
consequences of the purchase, ownership, and disposition of Certificates. This
summary is based upon laws, regulations, rulings, and decisions currently in
effect, all of which are subject to change (which change may be retroactive).
The discussion does not deal with all Federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules. In
addition, this summary is generally limited to investors who will hold the
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
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own tax advisors to determine the Federal, state, local, and other tax
consequences of the purchase, ownership, and disposition of the Certificates.
Prospective investors should note that no rulings have been or will be sought
from the Internal Revenue Service (the "IRS") with respect to any of the Federal
income tax consequences discussed below, and no assurance can be given that the
IRS will not take contrary positions.
BECAUSE MANY OF THE ISSUES DISCUSSED HEREIN ARE COMPLEX AND THEIR
RESOLUTION IS UNCERTAIN, INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS TO
DETERMINE THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES.
FEDERAL INCOME TAX STATUS OF THE TRUST
In the opinion of Andrews & Kurth L.L.P., special tax counsel to the
Seller, the Trust will be classified as a grantor trust and not as an
association taxable as a corporation for Federal income tax purposes.
Accordingly, subject to the discussion below, each Certificate Owner will be
subject to Federal income taxation as if it owned directly its interest in each
asset owned by the Trust and paid directly its share of reasonable expenses paid
by the Trust.
TREATMENT OF CERTIFICATE OWNERS' INTEREST IN TRUST ASSETS
Each Certificate Owner could be considered to own either (i) an undivided
interest in a single debt obligation held by the Trust and having a principal
amount equal to the total stated principal amount of the Contracts and an
interest rate equal to the Pass-Through Rate or (ii) an interest in each of the
Contracts 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 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) 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 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 if such Contract had been
amortized from origination under an actuarial method (such amount, the "Cut-Off
Date Actuarial Balance").
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The Trustee and the Servicer intend to account for interest and principal
on the Rule of 78's Contracts using the actuarial method, but based on the
Cut-Off Date Scheduled Balance rather than the Cut-Off Date Actuarial Balance.
As described above, the remaining payments due on a Rule of 78's Contract are
not sufficient to amortize the Cut-Off Date Scheduled Balance of such Contract
at a yield equal to its APR. Accordingly, in order to amortize the Cut-Off Date
Scheduled Balance over the remaining term of the Rule of 78's Contract using the
actuarial method of accounting, the Servicer will recompute the effective yield
of such Contract based on the remaining payments due and the Cut-Off Date
Scheduled Balance (such yield, stated as a per annum rate, the "Recomputed
Yield") and will allocate each payment of Monthly P&I between principal and
interest on each Contract beginning with the Cut-Off Date Scheduled Balance by
applying the Recomputed Yield instead of the APR.
The proper tax method for accounting for the Rule of 78's Contracts is
uncertain. As described above, the Servicer and the Trustee intend to report
income to the 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 7.13% calculated using the
actuarial method (each, a "Stripped Contract") equal to the difference between
(x) the Recomputed
41
<PAGE> 42
Yield of the Contract and (y) 7.13%. 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 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.
42
<PAGE> 43
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 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
7.13%.
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 7.13% (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. However, the Taxpayer
Relief Act of 1997 contains a provision that requires the use of a Prepayment
Assumption to accrue OID with respect to "any pool of debt instruments the yield
on which may be affected by reason of prepayments (or to the extent provided in
regulation, by reason of other events)." This provision may require use of a
Prepayment Assumption with respect to computation of OID, if any, on the
Contracts. 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 as described above 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.
43
<PAGE> 44
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 7.13%) would
reduce a Certificate Owner's tax basis. Application of the OID rules,
particularly if a prepayment assumption is required and the Contracts are not
aggregated, would be complex and could significantly affect the timing of
inclusion of income on a Certificate.
The Trustee intends to account for OID, if any, reportable by holders of
Certificates by reference to the price paid for a Certificate by an initial
purchaser, although the amount of OID will differ for subsequent purchasers.
Such subsequent purchasers should consult their tax advisors regarding the
proper calculation of OID on the interest in Contracts represented by a
Certificate.
Market Discount. Contracts, other than the Stripped Contracts, will not be
treated as stripped bonds. However, to the extent that the portion of the
purchase price allocated to a Certificate Owner's undivided interest in a
Contract other than a Stripped Contract is less than the "stated redemption
price at maturity", such Contract could have market discount. The market
discount on such a Contract will be considered to be zero if it is less than a
statutorily defined de minimis amount.
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.
If a Contract with unamortized premium is prepaid, any loss will constitute an
ordinary loss if the Contract was issued by a natural person before June 4,
1997, and otherwise will constitute a capital loss.
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.
44
<PAGE> 45
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.
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
45
<PAGE> 46
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 administrative exemptions to Merrill Lynch, Pierce,
Fenner & Smith Incorporated (Prohibited Transaction Exemption 90-29, as
amended), and to Salomon Brothers Inc (Prohibited Transaction Exemption 89-89)
(collectively, the "Exemptions"), 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 Exemptions. The
receivables covered by the Exemptions include motor vehicle installment loans
such as the Contracts. The Exemptions will apply to the acquisition, holding and
resale of the Certificates purchased by a Plan from the Underwriters, provided
that all conditions of the Exemptions (certain of which are described below) are
met.
Among the conditions that must be satisfied for the Exemptions 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;
(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 Underwriters 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; and
(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.
The Exemptions provide 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 Exemptions do not apply to Plans sponsored by the Seller, the
Underwriters, the Trustee, the Servicer, the Insurer, any Obligor with respect
to Contracts included in the Trust constituting more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or any affiliate of
such parties (the "Restricted Group").
As of the date hereof, no Obligor with respect to Contracts included in the
Trust constitutes more than 5% of the aggregate unamortized principal balance of
the assets of the Trust. Because the Certificates are the
46
<PAGE> 47
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.
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.
47
<PAGE> 48
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated March 9, 1998 (the "Underwriting Agreement") between the Seller and the
Underwriters named below (the "Underwriters"), the Seller has agreed to sell to
each of the Underwriters, and each of the Underwriters has severally agreed to
purchase, the principal amount of the Certificates set forth opposite its name
in the table below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER CERTIFICATES
----------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... $138,000,000
Salomon Brothers Inc........................................ $ 35,000,000
------------
Total.................................................. $173,000,000
============
</TABLE>
The Seller has been advised by the Underwriters that they propose 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 0.20% of the principal amount thereof. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of 0.15% 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 Underwriters
are obligated to purchase and pay for all of the Certificates if any
Certificates are purchased. The Underwriters currently intend, but are not
obligated, to make a market in the Certificates.
During and after the offering, the Underwriters 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
Underwriters 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 by reclaimed by the Underwriters if such Certificates are
repurchased by the Underwriters 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 Underwriters against
certain liabilities, including liabilities under applicable securities laws, or
contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
Certain matters with respect to the legality of the Certificates and with
respect to the federal income tax matters discussed under "Certain Federal
Income Tax Consequences" will be passed upon for the Seller by Andrews & Kurth
L.L.P., Dallas, Texas. Certain legal matters with respect to the Certificates
will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York. Certain legal matters relating to the Financial
Guarantee Insurance Policy will be passed upon for the Insurer by Shaw Pittman
Potts & Trowbridge, New York, New York.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
subsidiaries 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 Coopers & Lybrand, 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.
48
<PAGE> 49
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
Aggregate Scheduled Balance................................. 4, 24
Aggregate Scheduled Balance Decline......................... 4, 24
Agreement................................................... 3
APR......................................................... 17
Auto Finance Centers........................................ 12
Bankruptcy Code............................................. 22
Blanket Insurance Policy.................................... 13
Business Day................................................ 4
Cede........................................................ 7
Certificate Owner........................................... 7, 24
Certificateholder........................................... 26
Certificates................................................ 1, 3
Closing Date................................................ 8
CMAC........................................................ 31
Code........................................................ 39
Collection Account.......................................... 28
Collection Period........................................... 4, 24
Commission.................................................. 2
Company..................................................... 31
Contract Due Period......................................... 42
Contracts................................................... 1, 3
Cut-Off Date................................................ 1
Cut-Off Date Actuarial Balance.............................. 40
Cut-Off Date Scheduled Balance.............................. 3, 17, 40
Dealers..................................................... 6
Defaulted Contract.......................................... 5, 25
Definitive Certificates..................................... 26
Distribution Date........................................... 1, 4
Distribution Date Statement................................. 30
Disqualified Persons........................................ 45
DOL......................................................... 45
Due Date.................................................... 13
DTC......................................................... 1, 7
Eligibility Requirements.................................... 18
Eligible Investments........................................ 28
ERISA....................................................... 7, 45
Exchange Act................................................ 2
Exemptions.................................................. 46
Events of Default........................................... 34
Final Distribution Date..................................... 1, 4
Final Regulations........................................... 45
Financed Vehicles........................................... 1, 3
Financial Guarantee Insurance Policy........................ 1, 4, 5
FTC Rule.................................................... 39
Full Prepayment............................................. 21
Holders..................................................... 27
Indirect Participants....................................... 26
Insolvency Laws............................................. 9
Insurance Agreement......................................... 5
Insurer..................................................... 1, 4
Interest Distribution....................................... 1, 4, 24
IRS......................................................... 40
</TABLE>
49
<PAGE> 50
<TABLE>
<S> <C>
Liquidated Contract......................................... 5, 25
Liquidation Expenses........................................ 29
Monthly P&I................................................. 5, 25
Moody's..................................................... 7
Motor Vehicle Contracts..................................... 11
Net Insurance Proceeds...................................... 29
Net Liquidation Proceeds.................................... 29
Obligor..................................................... 9
OCS......................................................... 13
OID......................................................... 40
OID Regulations............................................. 43
Onyx........................................................ 1, 3, 23
Origination Actuarial Method................................ 41
Original Pool Balance....................................... 7
Participants................................................ 24
Parties in Interest......................................... 45
Pass-Through Rate........................................... 4
Payaheads................................................... 6, 28
Payahead Account............................................ 29
Paying Agent................................................ 26
Plan........................................................ 45
Plan Asset Regulation....................................... 45
Pool Balance................................................ 4, 24
Pool Factor................................................. 21
Prepayment Assumption....................................... 40
Principal Distribution...................................... 1, 4, 24
Purchase Agreement.......................................... 22
Purchase Price.............................................. 43
Recomputed Actuarial Method................................. 18, 41
Recomputed Principal Balance................................ 41
Recomputed Yield............................................ 18, 41
Record Date................................................. 24
Rees-Levering Act........................................... 38
Repurchase Amount........................................... 28
Restricted Group............................................ 46
Retained Strip.............................................. 41
Rule of 78's Contracts...................................... 6, 17
Scheduled Balance........................................... 5, 24
Section 1286 Regulations.................................... 43
Seller...................................................... 1, 3
Servicer.................................................... 1, 3
Servicer Report Date........................................ 6
Servicing Fee............................................... 5
Servicing Fee Rate.......................................... 5, 30
Simple Interest Contracts................................... 6, 17
Simple Interest Method...................................... 17
Standard & Poor's........................................... 7
Stripped Contract........................................... 41
</TABLE>
50
<PAGE> 51
<TABLE>
Total Accrual Election. 41
<S> <C>
Trust....................................................... 1, 3, 11
Trust Property.............................................. 3
Trustee..................................................... 3, 11
UCC......................................................... 8, 37
Underwriters................................................ 48
Underwriting Agreement...................................... 48
</TABLE>
51
<PAGE> 52
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
and for the years ended
December 31, 1996, 1995 and 1994
F-1
<PAGE> 53
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the 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 consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND
New York, New York
February 3, 1997.
F-2
<PAGE> 54
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $4,001,562 and $3,428,986) $4,149,700 $3,652,621
Short-term investments, at amortized cost
(which approximates fair value) 169,889 198,035
Other investments 14,851 14,064
---------- ----------
TOTAL INVESTMENTS 4,334,440 3,864,720
Cash and cash equivalents 3,288 2,135
Securities purchased under agreements to resell 108,900 ---
Accrued investment income 65,194 60,247
Deferred acquisition costs 147,750 140,348
Prepaid reinsurance premiums 216,846 200,887
Goodwill (less accumulated amortization of
$42,262 and $37,366) 100,718 105,614
Property and equipment, at cost (less accumulated
depreciation of $14,782 and $12,137) 47,176 41,169
Receivable for investments sold 975 5,729
Other assets 40,871 42,145
---------- ----------
TOTAL ASSETS $5,066,158 $4,462,994
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $1,785,875 $1,616,315
Loss and loss adjustment expense reserves 59,314 42,505
Securities sold under agreements to repurchase 108,900 ---
Deferred income taxes 195,704 212,925
Payable for investments purchased 48,811 10,695
Other liabilities 63,683 54,682
---------- ----------
TOTAL LIABILITIES 2,262,287 1,937,122
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,041,876 1,021,584
Retained earnings 1,651,315 1,341,855
Cumulative translation adjustment (1,188) 2,704
Unrealized appreciation of investments,
net of deferred income tax provision
of $52,175 and $78,372 96,868 144,729
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,803,871 2,525,872
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $5,066,158 $4,462,994
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE> 55
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Gross premiums written $ 462,444 $ 349,812 $ 361,523
Ceded premiums (54,852) (45,050) (49,281)
--------- --------- ---------
Net premiums written 407,592 304,762 312,242
Increase in deferred premium revenue (154,111) (88,365) (93,226)
--------- --------- ---------
Premiums earned (net of ceded
premiums of $38,893,
$30,655 and $33,340) 253,481 216,397 219,016
Net investment income 247,286 219,834 193,966
Net realized gains 11,740 7,777 10,335
Other 3,163 2,168 1,539
--------- --------- ---------
Total revenues 515,670 446,176 424,856
--------- --------- ---------
Expenses:
Losses and loss adjustment 15,334 10,639 8,093
Policy acquisition costs, net 24,660 21,283 21,845
Operating 46,654 41,812 41,044
--------- --------- ---------
Total expenses 86,648 73,734 70,982
--------- --------- ---------
Income before income taxes 429,022 372,442 353,874
Provision for income taxes 90,562 81,748 77,125
--------- --------- ---------
Net income $ 338,460 $ 290,694 $ 276,749
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE> 56
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1996, 1995 and 1994 (In
thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Cumulative Appreciation
------------------- Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
-------- ------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 100,000 $15,000 $ 943,794 $ 895,312 $(1,203) $ 4,840
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- ------- ---------- ---------- ----------- --------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- ------- ---------- ---------- ----------- --------------
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 15,129 --- --- ---
------- ------- ---------- ---------- ----------- --------------
Balance, December 31, 1995 100,000 15,000 1,021,584 1,341,855 2,704 144,729
------- ------- ---------- ---------- ----------- --------------
Net income --- --- --- 338,460 --- ---
Change in foreign currency translation --- --- --- --- (3,892) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $26,197 --- --- --- --- --- (47,861)
Dividends declared (per
common share $290.00) --- --- --- (29,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 20,292 --- --- ---
======= ======= ========== ========== =========== ==============
Balance, December 31, 1996 100,000 $15,000 $1,041,876 $1,651,315 $(1,188) $96,868
======= ======= ========== ========== =========== ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE> 57
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------
1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 338,460 $290,694 $ 276,749
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,947) (4,900) (3,833)
Increase in deferred acquisition costs (7,402) (7,300) (12,564)
Increase in prepaid reinsurance premiums (15,959) (14,395) (15,941)
Increase in deferred premium revenue 170,070 104,104 109,167
Increase in loss and loss adjustment
expense reserves 16,809 2,357 6,413
Depreciation 2,952 2,676 1,607
Amortization of goodwill 4,896 4,929 4,961
Amortization of bond (discount) premium, net (7,526) (2,426) 621
Net realized gains on sale of investments (11,740) (7,778) (10,335)
Deferred income taxes 8,982 11,391 19,082
Other, net 26,687 29,080 (8,469)
---------- --------- ----------
Total adjustments to net income 182,822 117,738 90,709
---------- --------- ----------
Net cash provided by operating activities 521,282 408,432 367,458
---------- --------- ----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,519,213) (897,128) (1,060,033)
Sale of fixed-maturity securities, net of
receivable for investments sold 873,823 473,352 515,548
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 158,087 83,448 128,274
Sale (purchase) of short-term investments, net 4,676 (32,281) 3,547
Sale (purchase) of other investments, net 468 (692) 87,456
Capital expenditures, net of disposals (8,970) (4,228) (3,665)
---------- -------- ----------
Net cash used by investing activities (491,129) (377,529) (328,873)
---------- -------- ----------
Cash flows from financing activities:
Capital contribution from MBIA Inc. --- 52,800 ---
Dividends paid (29,000) (82,900) (38,000)
---------- -------- ----------
Net cash used by financing activities (29,000) 30,100) (38,000)
---------- -------- ----------
Net increase in cash and cash equivalents 1,153 803 585
Cash and cash equivalents - beginning of year 2,135 1,332 747
---------- -------- ----------
Cash and cash equivalents - end of year $ 3,288 $ 2,135 $ 1,332
========== ========== ==========
Supplemental cash flow disclosures:
Income taxes paid $ 63,018 $ 50,790 $ 53,569
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE> 58
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through a series of transactions during December 1986, became the successor
to the business of the Municipal Bond Insurance Association (the Association), a
voluntary unincorporated association of insurers writing municipal bond and note
insurance as agent for the member insurance companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of
Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently
renamed MBIA Insurance Corp. of Illinois (MBIA Illinois).
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. (IMC). IMC, which commenced operations in August 1993, provides
guaranteed investment agreements to states, municipalities and municipal
authorities that are guaranteed as to principal and interest. MBIA Corp. insures
IMC's outstanding investment agreement liabilities.
F-7
<PAGE> 59
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp.
which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides
fixed-income investment management services for MBIA Inc., its municipal cash
management service businesses and public pension funds. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to CMC; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp. and its
wholly owned subsidiaries. All significant intercompany balances have been
eliminated. Certain amounts have been reclassified in prior years' financial
statements to conform to the current presentation.
INVESTMENTS
MBIA Corp.'s entire investment portfolio is considered available-for-sale and is
reported in the financial statements at fair value, with unrealized gains and
losses, net of deferred taxes, reflected as a separate component of
shareholder's equity.
Bond discounts and premiums are amortized using the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value, and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
F-8
<PAGE> 60
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other investments include MBIA Corp.'s interest in a limited partnership
and a mutual fund which invests principally in marketable equity securities.
MBIA Corp. records dividends from these investments as a component of investment
income. In addition, MBIA Corp. records its share of the unrealized gains and
losses on these investments, net of applicable deferred income taxes, as a
separate component of shareholder's equity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are accounted for as collateralized transactions and
are recorded at principal or contract value. It is MBIA Corp.'s policy to take
possession of securities purchased under agreements to resell.
MBIA Corp. minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and requiring additional collateral to be
deposited with MBIA Corp. when deemed necessary.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in underwriting and policy
issuance functions, certain rating agency fees, state premium taxes and certain
other underwriting expenses, reduced by ceding commission income on premiums
ceded to reinsurers. Policy acquisition costs are deferred and amortized over
the period in which the related premiums are earned.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the
F-9
<PAGE> 61
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
portion which is credited to a new policy in those cases where MBIA Corp.
insures the refunding issue, is earned at that time, since there is no longer
risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion
of premiums written that is applicable to the unexpired risk of insured bonds
and notes.
GOODWILL
Goodwill represents the excess of the cost of acquisitions over the tangible net
assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters, furniture,
fixtures and equipment, which are recorded at cost and are depreciated on the
straight-line method over their estimated service lives ranging from 2 to 31
years. Maintenance and repairs are charged to expenses as incurred.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses (LAE) are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement, on the obligations it has insured.
To the extent that specific insured issues are identified as currently or
likely to be in default, the present value of expected payments, including loss
and LAE associated with these issues, net of expected recoveries, is allocated
within the total loss reserve as case-specific reserves. Management of MBIA
Corp. periodically evaluates its estimates for losses and LAE and any resulting
adjustments are reflected in current earnings. Management believes that the
reserves are adequate to cover the ultimate net cost of claims, but the reserves
are necessarily based on estimates, and there can be no assurance that the
ultimate liability will not exceed such estimates.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
F-10
<PAGE> 62
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided with respect to the temporary
differences between the tax bases of assets and liabilities and the reported
amounts in the financial statements that will result in deductibles or taxable
amounts in future years when the reported amount of the asset or liability is
recovered or settled. Such temporary differences relate principally to premium
revenue recognition, deferred acquisition costs and the contingency reserve.
The Internal Revenue Code permits companies writing financial guarantee
insurance to deduct from taxable income amounts added to the statutory
contingency reserve, subject to certain limitations. The tax benefits obtained
from such deductions must be invested in non-interest bearing U.S. Government
tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as
payments of federal income taxes. The amounts deducted must be restored to
taxable income when the contingency reserve is released, at which time MBIA
Corp. may present the tax and loss bonds for redemption to satisfy the
additional tax liability.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired rather than over
the period of the risk;
o acquisition costs are charged to operations as incurred rather than
deferred and amortized as the related premiums are earned;
F-11
<PAGE> 63
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o a contingency reserve is computed on the basis of statutory requirements,
and reserves for losses and LAE are established, at present value, for
specific insured issues which are identified as currently or likely to be
in default. Under GAAP, reserves are established based on MBIA Corp.'s
reasonable estimate of the identified and unidentified losses and LAE on
the insured obligations it has written;
o federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries:
<TABLE>
<CAPTION>
As of December 31
- ---------------------------------------------------------------------------
In thousands 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP shareholder's equity $2,803,871 $2,525,872 $2,055,503
Premium revenue recognition (368,762) (328,450) (296,524)
Deferral of acquisition costs (147,750) (140,348) (133,048)
Unrealized (gains) losses (148,138) (223,635) 71,932
Contingency reserve (892,793) (743,510) (620,988)
Loss and loss adjustment
expense reserves 39,065 28,024 18,181
Deferred income taxes 195,704 205,425 90,328
Tax and loss bonds 103,008 70,771 50,471
Goodwill (100,718) (105,614) (110,543)
Other (16,465) (14,397) (15,274)
- ---------------------------------------------------------------------------
Statutory capital and surplus $1,467,022 $1,274,138 $1,110,038
- ---------------------------------------------------------------------------
</TABLE>
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1996, 1995 and
1994 was $316.6 million, $278.3 million and $224.9 million, respectively.
F-12
<PAGE> 64
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $44.4 million, $34.0 million and $53.0 million for 1996,
1995 and 1994, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital through maintenance of
high-quality investments with adequate liquidity. MBIA Corp.'s investment
policies limit the amount of credit exposure to any one issuer. The
fixed-maturity portfolio is comprised of high-quality (average rating Double-A)
taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996
Taxable bonds
United States
Treasury and
Government Agency $ 6,585 $ 171 $ (10) $ 6,746
Corporate and other
obligations 767,472 13,978 (7,272) 774,178
Mortgage-backed 472,295 12,185 (4,003) 480,477
Tax-exempt bonds
State and municipal
obligations 2,925,099 137,389 (4,300) 3,058,188
- -----------------------------------------------------------------------------
Total $4,171,451 $163,723 $(15,585) $4,319,589
- -----------------------------------------------------------------------------
</TABLE>
F-13
<PAGE> 65
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995
Taxable bonds
United States
Treasury and
Government Agency $ 6,742 $ 354 $ --- $ 7,096
Corporate and
other obligations 592,604 30,536 (212) 622,928
Mortgage-backed 389,943 21,403 (932) 410,414
Tax-exempt bonds
State and
municipal
obligations 2,637,732 175,081 (2,595) 2,810,218
- --------------------------------------------------------------------------
Total $3,627,021 $227,374 $(3,739) $3,850,656
- --------------------------------------------------------------------------
</TABLE>
Fixed-maturity investments carried at fair value of $7.8 million and $8.2
million as of December 31, 1996 and 1995, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1996. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair
In thousands Cost Value
- --------------------------------------------------------------------
<S> <C> <C>
Maturity
Within 1 year $ 158,786 $ 158,768
Beyond 1 year but within 5 years 535,176 561,478
Beyond 5 years but within 10 years 1,218,877 1,263,126
Beyond 10 years but within 15 years 828,646 867,813
Beyond 15 years but within 20 years 807,952 836,153
Beyond 20 years 149,719 151,774
- --------------------------------------------------------------------
3,699,156 3,839,112
Mortgage-backed 472,295 480,477
- --------------------------------------------------------------------
Total fixed-maturities and
short-term investments $4,171,451 $4,319,589
- --------------------------------------------------------------------
</TABLE>
F-14
<PAGE> 66
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENT INCOME AND GAINS AND LOSSES
Investment income consists of:
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------
In thousands 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturities $245,109 $216,653 $193,729
Short-term investments 4,961 6,008 3,003
Other investments 61 17 12
- ----------------------------------------------------------------------
Gross investment income 250,131 222,678 196,744
Investment expenses 2,845 2,844 2,778
- ----------------------------------------------------------------------
Net investment income 247,286 219,834 193,966
Net realized gains (losses):
Fixed-maturities:
Gains 16,760 9,941 9,635
Losses (5,353) (2,537) (8,851)
- ----------------------------------------------------------------------
Net 11,407 7,404 784
- ----------------------------------------------------------------------
Other investments:
Gains 333 382 9,551
Losses --- (9) ---
- ----------------------------------------------------------------------
Net 333 373 9,551
- ----------------------------------------------------------------------
Total realized gains 11,740 7,777 10,335
- ----------------------------------------------------------------------
Total investment income $259,026 $227,611 $204,301
- ----------------------------------------------------------------------
</TABLE>
Net unrealized gains consist of:
As of December 31
---------------------------------------------------
In thousands 1996 1995
---------------------------------------------------
Fixed-maturities:
Gains $163,723 $227,374
Losses (15,585) (3,739)
---------------------------------------------------
Net 148,138 223,635
Other investments:
Gains 934 287
Losses (29) (821)
---------------------------------------------------
Net 905 (534)
---------------------------------------------------
Total 149,043 223,101
Deferred income taxes 52,175 78,372
---------------------------------------------------
Unrealized gains, net $ 96,868 $144,729
---------------------------------------------------
The deferred taxes relate primarily to unrealized gains and losses on MBIA
Corp.'s fixed-maturity investments, which are reflected in shareholder's equity.
F-15
<PAGE> 67
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------
In thousands 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturities $(75,497) $295,567 $(289,327)
Other investments 1,439 508 (8,488)
- ----------------------------------------------------------------------
Total (74,058) 296,075 (297,815)
Deferred income taxes (26,197) 103,706 (27,940)
- ----------------------------------------------------------------------
Unrealized gains (losses), net $(47,861) $192,369 $(269,875)
- ----------------------------------------------------------------------
</TABLE>
7. INCOME TAXES
The provision for income taxes is composed of:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------
In thousands 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Current $81,580 $70,357 $58,043
Deferred 8,982 11,391 19,082
- ---------------------------------------------------------------------
Total $90,562 $81,748 $77,125
- ---------------------------------------------------------------------
</TABLE>
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------
In thousands 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed on pre-tax
financial income at statutory rates 35.0 % 35.0 % 35.0 %
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (12.1) (12.5) (12.0)
Amortization of goodwill 0.4 0.5 0.5
Other (2.2) (1.1) (1.7)
- --------------------------------------------------------------------------
Provision for income taxes 21.1 % 21.9 % 21.8 %
- --------------------------------------------------------------------------
</TABLE>
MBIA Corp. recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on tax assets and
F-16
<PAGE> 68
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1996 and 1995 are presented below:
In thousands 1996 1995
- ------------------------------------------------------------------
Deferred tax assets
Tax and loss bonds $102,222 $ 71,183
Alternative minimum tax credit carryforward 58,068 39,072
Loss and loss adjustment expense reserve 13,673 9,809
Other 3,305 954
- ------------------------------------------------------------------
Total gross deferred tax assets 177,268 121,018
- ------------------------------------------------------------------
Deferred tax liabilities
Contingency reserve 186,173 131,174
Deferred premium revenue 76,526 64,709
Deferred acquisition costs 51,713 49,122
Unrealized gains 52,175 78,372
Contingent commissions 491 7,158
Other 5,894 3,408
- ------------------------------------------------------------------
Total gross deferred tax liabilities 372,972 333,943
- ------------------------------------------------------------------
Net deferred tax liability $195,704 $212,925
- ------------------------------------------------------------------
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Corp. had $118 million available for the
payment of dividends as of December 31, 1996. In 1996, 1995 and 1994, MBIA Corp.
declared and paid dividends of $29 million, $83 million and $38 million,
respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus)
F-17
<PAGE> 69
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
at the end of the preceding calendar year, or the net income of the preceding
calendar year without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Illinois had $10 million available for the
payment of dividends as of December 31, 1996.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies that rate the bonds insured by
MBIA Corp. and its subsidiaries have various requirements relating to the
maintenance of certain minimum ratios of statutory capital and reserves to net
insurance in force. MBIA Corp. and its subsidiaries were in compliance with
these requirements as of December 31, 1996.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $725 million
with a group of major banks to provide loans to MBIA Corp. if it incurs
cumulative losses (net of any recoveries) from September 30, 1996 in excess of
the greater of $500 million or 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term expiring on
September 30, 2003 and contains an annual renewal provision subject to approval
by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$300 million. At December 31, 1996, MBIA Inc. had $29.1 million outstanding
under these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional commitments
to guarantee timely payment on the bonds and notes to
F-18
<PAGE> 70
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
bondholders. The creditworthiness of each insured issue is evaluated prior to
the issuance of insurance and each insured issue must comply with MBIA Corp.'s
underwriting guidelines. Further, the payments to be made by the issuer on the
bonds or notes may be backed by a pledge of revenues, reserve funds, letters of
credit, investment contracts or collateral in the form of mortgages or other
assets. The right to such money or collateral would typically become MBIA
Corp.'s upon the payment of a claim by MBIA Corp.
As of December 31, 1996, insurance in force, net of cessions to reinsurers,
had a range of maturity of 1-42 years. The distribution of net insurance in
force by geographic location and type of bond, including $3.3 billion and $2.7
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1996 and 1995, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------------
$ in billions 1996 1995
- --------------------------------------------- --------------------------------
Net Number % of Net Net Number % of Net
Geographic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- --------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
California $ 60.7 3,378 14.6% $ 51.2 3,122 14.8%
New York 33.7 5,057 8.1 30.1 4,846 8.7
Florida 29.6 1,632 7.1 26.9 1,684 7.7
Texas 21.9 2,052 5.3 20.4 2,031 5.9
Pennsylvania 21.2 2,216 5.1 19.7 2,143 5.7
New Jersey 18.8 1,863 4.6 16.4 1,730 4.7
Illinois 18.5 1,145 4.5 15.0 1,090 4.3
Ohio 11.1 1,032 2.7 9.1 1,017 2.6
Massachusetts 10.9 1,100 2.6 9.3 1,070 2.7
Michigan 9.5 1,021 2.3 7.9 1,012 2.3
- -------------------------------------------- ----------------------------
Subtotal 235.9 20,496 56.9 206.0 19,745 59.4
Other states 170.1 11,502 41.1 135.6 11,147 39.1
- -------------------------------------------- ----------------------------
Total domestic 406.0 31,998 98.0 341.6 30,892 98.5
International 8.4 169 2.0 5.1 53 1.5
- -------------------------------------------- ----------------------------
Total $414.4 32,167 100.0% $346.7 30,945 100.0%
- -------------------------------------------- ----------------------------
</TABLE>
F-19
<PAGE> 71
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------------
$ in billions 1996 1995
- --------------------------------------------- --------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- --------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Municipal:
General
obligation $110.5 11,763 26.7% $ 91.6 11,445 26.4%
Utilities 67.9 4,799 16.4 60.3 4,931 17.4
Health care 54.0 2,386 13.0 51.9 2,458 15.0
Transportation 30.3 1,520 7.3 25.5 1,562 7.4
Special
revenue 28.9 1,543 7.0 24.4 1,445 7.0
Industrial
development
and
pollution
control
revenue 18.1 931 4.4 17.2 924 5.0
Higher
education 17.8 1,309 4.3 15.2 1,261 4.4
Housing 17.7 2,455 4.3 15.8 2,671 4.5
Other 3.8 169 0.9 7.3 134 2.1
- --------------------------------------------- -----------------------------
Total
municipal 349.0 26,875 84.3 309.2 26,831 89.2
- --------------------------------------------- -----------------------------
Structured
finance* 38.6 349 9.3 20.2 256 5.8
Other 18.4 4,774 4.4 12.2 3,805 3.5
- --------------------------------------------- -----------------------------
Total
domestic 406.0 31,998 98.0 341.6 30,892 98.5
- --------------------------------------------- -----------------------------
International
Infrastructure 3.6 121 0.9 1.6 34 0.5
Structured
finance* 2.1 22 0.5 1.6 8 0.5
Other 2.7 26 0.6 1.9 11 0.5
- --------------------------------------------- -----------------------------
Total
international 8.4 169 2.0 5.1 53 1.5
- --------------------------------------------- -----------------------------
Total $414.4 32,167 100.0% $346.7 30,945 100.0%
- --------------------------------------------- -----------------------------
</TABLE>
* Asset-/mortgage-backed
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp. and its subsidiaries were $57.6 billion and $50.1 billion, at
December 31, 1996 and 1995, respectively. The distribution of ceded
F-20
<PAGE> 72
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
insurance in force by geographic location and type of bond is set forth in the
following tables:
<TABLE>
<CAPTION>
As of December 31
-------------------------------------------------
In billions 1996 1995
- ---------------------------------------------- ----------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ---------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
Domestic
California $ 9.4 16.2% $ 8.8 17.5%
New York 6.2 10.7 5.7 11.4
New Jersey 3.3 5.7 3.1 6.1
Texas 2.9 5.1 2.8 5.6
Pennsylvania 2.9 5.1 2.7 5.4
Illinois 2.6 4.5 2.2 4.5
Florida 2.4 4.1 2.3 4.6
Washington 1.9 3.2 1.4 2.7
District of Columbia 1.5 2.7 1.5 3.0
Massachusetts 1.4 2.5 1.1 2.1
Ohio 1.3 2.3 1.0 2.0
Puerto Rico 1.2 2.1 1.3 2.6
- ---------------------------------------------- ----------------------
Subtotal 37.0 64.2 33.9 67.5
Other states 16.9 29.4 14.4 28.8
- ---------------------------------------------- ----------------------
Total domestic 53.9 93.6 48.3 96.3
International 3.7 6.4 1.8 3.7
- ---------------------------------------------- ----------------------
Total $57.6 100.0% $50.1 100.0%
- ---------------------------------------------- ----------------------
</TABLE>
F-21
<PAGE> 73
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-------------------------------------------------
In billions 1996 1995
- ---------------------------------------------- ----------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ---------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
Domestic
Municipal:
General obligation $14.4 24.9% $11.7 23.3%
Utilities 10.2 17.7 9.0 18.0
Transportation 6.4 11.1 5.5 11.0
Health care 6.3 11.0 6.6 13.1
Special revenue 3.4 5.9 3.2 6.4
Industrial
development and
pollution control
revenue 3.2 5.6 3.0 6.0
Housing 1.6 2.7 1.4 2.8
Higher education 1.5 2.6 1.2 2.4
Other 1.0 1.7 2.4 4.8
- ---------------------------------------------- ------------------
Total municipal 48.0 83.2 44.0 87.8
Structured finance* 4.5 7.9 3.6 7.2
Other 1.4 2.5 0.7 1.3
- ---------------------------------------------- ------------------
Total domestic 53.9 93.6 48.3 96.3
- ---------------------------------------------- ------------------
International
Infrastructure 1.6 2.7 0.7 1.4
Structured finance* 1.1 1.9 0.2 0.5
Other 1.0 1.8 0.9 1.8
- ---------------------------------------------- ------------------
Total international 3.7 6.4 1.8 3.7
- ---------------------------------------------- ------------------
Total $57.6 100.0% $50.1 100.0%
- ---------------------------------------------- ------------------
</TABLE>
* Asset-/mortgage-backed
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1996, 1995 and 1994 was $3.4 million,
$3.2 million and $3.0 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.5 million, $1.4 million
F-22
<PAGE> 74
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and $1.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The 401(k) plan amounts are invested in common stock of MBIA Inc.
Amounts relating to the above plans that exceed limitations established by
Federal regulations are contributed to a non-qualified deferred compensation
plan. Of the above amounts for the pension and profit sharing plans, $3.0
million, $2.7 million and $2.6 million for the years ended December 31, 1996,
1995 and 1994, respectively, are included in policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock. During 1996 and 1995, the
amounts amortized were $164,000 and $9,000, respectively, of which $102,000 and
$5,000 are included in policy acquisition costs.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 required MBIA Inc. to adopt, at its election,
either 1) the provisions in SFAS 123 which require the recognition of
compensation expense for employee stock-based compensation plans, or 2) the
provisions in SFAS 123 which require the pro forma disclosure of net income and
earnings per share as if the recognition provisions of SFAS 123 had been
adopted. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective
January 1, 1996 and continues to account for its employee stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no
impact on MBIA Corp.'s financial position or results of operations. Had
compensation cost for the MBIA Inc. stock option program been recognized based
on the fair value at the grant date consistent with the recognition provisions
of SFAS 123, the impact on MBIA Corp.'s net income would not have been material.
However, since the options vest over five years and additional awards could be
made in future years, the effects of applying SFAS 123 in 1996 are not likely to
be representative of the effects on reported net income for future years.
F-23
<PAGE> 75
13. RELATED PARTY TRANSACTIONS
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association, one of which is a former
principal shareholder of MBIA Inc., which had their Standard & Poor's
Corporation claims-paying rating downgraded from Triple-A on their previously
issued Association policies. In the event that they do not meet their
Association policy payment obligations, MBIA Corp. will pay the required amounts
directly to the paying agent instead of to the former Association member as was
previously required. The aggregate amount payable by MBIA Corp. on these surety
bonds is limited to $340 million. These surety bonds remain outstanding as of
December 31, 1996.
MBIA Corp. had investment management and advisory agreements with an
affiliate of a former principal shareholder of MBIA Inc., which provided for
payment of fees on assets under management. Total related expenses for the years
ended December 31, 1995 and 1994 amounted to $2.5 million and $2.6 million,
respectively. These agreements were terminated on January 1, 1996 at which time
CMC assumed full management of MBIA Corp.'s consolidated investment portfolios.
Total fees paid to CMC on assets under management for the years ended December
31, 1996 and 1995 amounted to $2.8 million and $0.1 million, respectively.
MBIA Corp. has various insurance coverages provided by a former principal
shareholder of MBIA Inc., the cost of which totaled $2.1 million, $1.9 million
and $1.9 million, respectively, for the years ended December 31, 1996, 1995 and
1994.
Included in other assets at December 31, 1996 and 1995 is $2.0 million and
$1.1 million of net receivables from MBIA Inc. and other subsidiaries.
As of December 31, 1996, MBIA Corp. held securities subject to agreements
to resell of $108.9 million, and transferred securities subject to agreements to
repurchase of $108.9 million with IMC and MBIA Inc. These agreements have a term
of less than one year. The interest expense paid and income received relating to
these agreements for the year ended December 31, 1996 was $2.3 million and $2.4
million, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market
F-24
<PAGE> 76
information and appropriate valuation methodologies. However, in certain cases
considerable judgment is necessarily required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amount MBIA Corp. could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities is based
upon quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which approximates fair value.
OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in a limited
partnership and a mutual fund that invests principally in marketable equity
securities. The fair value of these investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated
based upon the quoted market prices of the transactions' underlying collateral.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims.
F-25
<PAGE> 77
Therefore, the carrying amount is a reasonable estimate of the fair value of
the reserve.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated
based upon the quoted market prices of the transactions' underlying collateral.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream discounted at 9%.
<TABLE>
<CAPTION>
As of December 31, 1996 As of December 31, 1995
----------------------- -----------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- -------------------------------------------------- -----------------------
<S> <C> <C> <C> <C>
Assets:
Fixed-maturity securities $4,149,700 $4,149,700 $3,652,621 $3,652,621
Short-term investments 169,889 169,889 198,035 198,035
Other investments 14,851 14,851 14,064 14,064
Cash and cash equivalents 3,288 3,288 2,135 2,135
Securities purchased under
agreements to resell 108,900 124,471 --- ---
Prepaid reinsurance
premiums 216,846 189,631 200,887 174,444
Receivable for
investments sold 975 975 5,729 5,729
Liabilities:
Deferred premium
revenue 1,785,875 1,545,976 1,616,315 1,395,159
Loss and loss adjustment
expense reserves 59,314 59,314 42,505 42,505
Securities sold under
agreements to repurchase 108,900 115,838 --- ---
Payable for investments
purchased 48,811 48,811 10,695 10,695
Off-balance-sheet instruments:
Installment premiums --- 287,969 --- 235,371
</TABLE>
F-26
<PAGE> 78
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
F-27
<PAGE> 79
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
PAGE
----
Consolidated Balance Sheets -
September 30, 1997 (Unaudited) and December 31, 1996 (Audited) F-29
Consolidated Statements of Income -
Three months and nine months ended September 30, 1997
and 1996 (Unaudited) F-30
Consolidated Statement of Changes in Shareholder's Equity -
Nine months ended September 30, 1997 (Unaudited) F-31
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996 (Unaudited) F-32
Notes to Consolidated Financial Statements (Unaudited) F-33
F-28
<PAGE> 80
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $4,513,710 and $4,001,562) $4,725,555 $4,149,700
Short-term investments, at amortized cost
(which approximates fair value) 207,356 169,889
Other investments 16,209 14,851
---------- ----------
TOTAL INVESTMENTS 4,949,120 4,334,440
Cash and cash equivalents 3,962 3,288
Securities purchased under agreements to resell 168,120 108,900
Accrued investment income 73,615 65,194
Deferred acquisition costs 153,487 147,750
Prepaid reinsurance premiums 230,559 216,846
Goodwill (less accumulated amortization
of $45,929 and $42,262) 97,051 100,718
Property and equipment, at cost (less accumulated
depreciation of $17,260 and $14,782) 51,173 47,176
Receivable for investments sold 45,948 975
Other assets 45,697 40,871
---------- ----------
TOTAL ASSETS $5,818,732 $5,066,158
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $1,913,605 $1,785,875
Loss and loss adjustment expense reserves 73,246 59,314
Securities sold under agreements to repurchase 168,120 108,900
Deferred income taxes 232,800 195,704
Payable for investments purchased 69,705 48,811
Other liabilities 136,693 63,683
---------- ----------
TOTAL LIABILITIES 2,594,169 2,262,287
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,134,709 1,041,876
Retained earnings 1,943,413 1,651,315
Cumulative translation adjustment (7,866) (1,188)
Unrealized appreciation of investments,
net of deferred income tax provision
of $75,107 and $52,175 139,307 96,868
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 3,224,563 2,803,871
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $5,818,732 $5,066,158
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-29
<PAGE> 81
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
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:
Gross premiums written $124,858 $ 80,353 $ 382,602 $ 335,807
Ceded premiums (16,204) (9,036) (45,017) (35,665)
-------- -------- --------- ---------
Net premiums written 108,654 71,317 337,585 300,142
Increase in deferred premium revenue (33,959) (6,336) (117,303) (111,889)
-------- -------- --------- ---------
Premiums earned (net of ceded
premiums of $10,039, $10,285,
$31,304 and $29,187) 74,695 64,981 220,282 188,253
Net investment income 72,283 62,935 206,201 183,339
Net realized gains 6,119 3,115 12,974 9,702
Other 321 724 1,014 2,047
-------- -------- --------- ---------
Total revenues 153,418 131,755 440,471 383,341
-------- -------- --------- ---------
Expenses:
Losses and loss adjustment 4,892 2,888 13,150 10,354
Policy acquisition costs, net 7,037 6,404 20,612 18,294
Operating 12,984 12,551 36,813 34,625
-------- -------- --------- ---------
Total expenses 24,913 21,843 70,575 63,273
-------- -------- --------- ---------
Income before income taxes 128,505 109,912 369,896 320,068
Provision for income taxes 27,183 22,026 77,798 67,311
-------- -------- --------- ---------
Net income $101,322 $ 87,886 $ 292,098 $ 252,757
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-30
<PAGE> 82
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the nine months ended September 30, 1997
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------- Paid-in Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
-------- -------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 100,000 $15,000 $1,041,876 $1,651,315 ($1,188) $ 96,868
Net income --- --- --- 292,098 --- ---
Change in foreign
currency translation --- --- --- --- (6,678) ---
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of ($22,932) --- --- --- --- --- 42,439
Capital contribution from
MBIA Inc. --- --- 80,000 --- --- ---
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 12,833 --- --- ---
------- ------- ---------- ---------- ------- --------
Balance, September 30, 1997 100,000 $15,000 $1,134,709 $1,943,413 ($7,866) $139,307
======= ======= ========== ========== ======= ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-31
<PAGE> 83
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 292,098 $ 252,757
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (8,421) (5,839)
Increase in deferred acquisition costs (5,737) (4,589)
Increase in prepaid reinsurance premiums (13,713) (6,478)
Increase in deferred premium revenue 131,016 118,367
Increase in loss and loss adjustment expense reserves 13,932 9,136
Depreciation 2,904 2,179
Amortization of goodwill 3,667 3,672
Amortization of bond discount, net (7,391) (5,510)
Net realized gains on sale of investments (12,974) (9,702)
Deferred income taxes 14,296 10,325
Other, net 70,962 16,606
----------- -----------
Total adjustments to net income 188,541 128,167
----------- -----------
Net cash provided by operating activities 480,639 380,924
----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,606,108) (1,047,429)
Sale of fixed-maturity securities, net of
receivable for investments sold 917,679 589,812
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 126,478 106,439
Sale (purchase) of short-term investments, net 8,345 (12,693)
Sale of other investments, net 565 361
Capital expenditures, net of disposals (6,924) (3,851)
----------- -----------
Net cash used by investing activities (559,965) (367,361)
----------- -----------
Cash flows from financing activities:
Capital contributions from MBIA Inc. 80,000 ---
Dividends paid --- (13,000)
----------- -----------
Net cash provided (used) by financing activities 80,000 (13,000)
----------- -----------
Net increase in cash and cash equivalents 674 563
Cash and cash equivalents - beginning of period 3,288 2,135
----------- -----------
Cash and cash equivalents - end of period $ 3,962 $ 2,698
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 58,968 $ 50,678
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-32
<PAGE> 84
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
- -------------------------
The accompanying consolidated financial statements are unaudited and include the
accounts of MBIA Insurance Corporation and its Subsidiaries (the "Company"). The
statements do not include all of the information and disclosures required by
generally accepted accounting principles. These statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1996. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards but in the opinion of
management such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to summarize fairly the Company's
financial position and results of operations. 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 year ending December 31, 1997. The December 31, 1996
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
have been eliminated. Certain amounts have been reclassified in prior years'
financial statements to conform to the current presentation.
2. Dividends Declared
- ----------------------
No dividends were declared by the Company during the nine months ended September
30, 1997.
F-33
<PAGE> 85
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR THE
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF A TIME SUBSEQUENT TO THE DATE OF SUCH
INFORMATION. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Reports to Certificateholders........... 2
Summary................................. 3
Risk Factors............................ 8
The Trust............................... 11
The Onyx Portfolio of Motor Vehicle
Contracts............................. 11
The Contracts........................... 17
Maturity and Prepayment Assumptions..... 21
Yield Considerations.................... 21
Pool Factor............................. 21
Use of Proceeds......................... 22
The Seller.............................. 22
The Servicer............................ 23
The Certificates and the Agreement...... 23
Description of the Insurer.............. 31
Additional Provisions of the
Agreement............................. 32
Certain Legal Aspects of the
Contracts............................. 37
Certain Federal Income Tax
Consequences.......................... 39
ERISA Considerations.................... 45
Underwriting............................ 48
Legal Matters........................... 48
Experts................................. 48
Financial Statements of Insurer......... F-1
- ----------------------------------------------
UNTIL JUNE 7, 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>
======================================================
$173,000,000
ONYX ACCEPTANCE
GRANTOR TRUST 1998-1
5.95% AUTO LOAN
PASS-THROUGH CERTIFICATES,
SERIES 1998-1
[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.
SALOMON SMITH BARNEY
MARCH 9, 1998
======================================================
