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FORM 10-K
United States Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
250 N. Shadeland Avenue, Indianapolis, IN 46219
----------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 317-231-6400
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Class A Common
Stock, without par value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the 3,979,692 shares of the issuer's Class A
Common Stock held by non-affiliates, as of September 25, 1996, was
$73,126,840.50. There is no trading market for the issuer's Class B Common
Stock.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
The number of shares of Class A Common Stock of the Registrant, without par
value, outstanding as of September 25, 1996, was 4,011,358 shares. The number of
shares of Class B Common Stock of the Registrant, without par value, as of such
date was 9,200,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders are
incorporated into Part III.
Exhibit Index on Page 50
Page 1 of _____
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UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX
PART I
Page
Item 1. Business..................................................... 3
Item 2. Properties................................................... 18
Item 3. Legal Proceedings............................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 18
Item 6. Selected Consolidated Financial Data......................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 20
Item 8. Financial Statements and Supplementary Data.................. 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant........... 48
Item 11. Executive Compensation....................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 48
Item 13. Certain Relationships and Related Transactions............... 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................... 48
SIGNATURES............................................................. 49
2
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PART I
Item 1. Business
Note: Certain capitalized terms used but not otherwise defined in this
report are defined in the "Glossary" set forth at the conclusion of "Item I,
Business." Unless otherwise indicated, references to the "Company" through
fiscal 1995 and before the Spin-off refer to the conduct of the business by the
Union Division and Union Acceptance Corporation ("UAC") and Subsidiaries as a
combined business. References to the "Company" following consummation of the
Spin-off by Union Federal Savings Bank of Indianapolis of the Company refer to
UAC and Subsidiaries.
Overview
The Company is a specialized finance company engaged in acquiring and
servicing automobile retail installment sales contracts originated by
dealerships affiliated with major domestic and foreign manufacturers. The
Company focuses its efforts on acquiring loans on late model used and, to a
lesser extent, new automobiles made to purchasers who exhibit a favorable credit
profile ("Prime lending"). The Company also began operating a "Non-prime lending
program" in the fall of 1994, to fund loans to borrowers with adequate credit
quality who would not qualify for the Company's Prime lending program. The
Company's focus, however, remains on Prime lending; Non-prime loan acquisitions
accounted for only 3.5% of all loan acquisitions during fiscal 1996. The
Non-prime lending program operates within the same dealer network as the Prime
lending operations. The Company currently acquires loans in 45 major
metropolitan areas in 25 states from over 2,500 manufacturer-franchised auto
dealerships nationwide.
The Company was incorporated in Indiana in December 1993, as a
subsidiary of Union Federal Savings Bank of Indianapolis ("Union Federal"),
which is a federally-chartered savings bank, and a wholly-owned subsidiary of
Union Holding Company, Inc., an Indiana Corporation. Union Federal entered the
indirect automobile finance business in 1986. On August 7, 1995, the Spin-off of
the Company by Union Federal was consummated concurrently with the Company's
initial public offering of 4,000,000 shares of its Class A Common Stock.
The Company headquarters are located at 250 North Shadeland Avenue,
Indianapolis, Indiana, 46219, and its telephone number is (317) 231-6400. See
"Item 2, Properties."
Market and Competition
Based on the Company's knowledge and research with respect to the
automobile and finance industry, manufacturer-franchised dealers in the United
States sold approximately 16.0 million used automobiles at retail in 1995 at an
average price of $11,600 for a total sales volume of approximately $185.6
billion. Based on its knowledge of the industry, the Company believes that
dealership finance departments typically originate or direct the origination of
approximately 45%, or $83.5 billion in 1995, of the financing of used car loans.
The Company believes that it currently funds less than 1.0% of dealer-directed
used-car financing in the United States.
Competition in the field of financing retail automobile sales is
intense. The auto finance market is highly fragmented and historically has been
serviced by a variety of financial entities including the captive finance
affiliates of major automotive manufacturers, banks, savings associations,
independent finance companies, credit unions and leasing companies. Providers of
retail automobile financing have traditionally competed on the basis of interest
rates charged, the quality of credit accepted, the flexibility of loan terms
offered and the quality of service provided to the dealers and customers. In
seeking to establish itself as one of the principal financing sources at the
dealerships it serves, the Company competes predominantly on the basis of
providing a high level of dealer service (including evening and weekend hours
and quick application response time), offering flexible loan terms, and
developing strong relationships with dealerships. While the Company seeks to
offer rates that are competitive in each of its markets, the Company does not
currently seek to compete by offering the lowest rates or by accepting lower
quality credit (although its Non-prime lending program competes in a lower
credit-quality market segment).
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The Company's competition varies among its geographic markets. In the
Prime lending market segment, the Company has experienced its most intense
competition in the Midwest, particularly in Indiana and Ohio. The Company's
primary competitors for Prime loans are regional banks and the captive finance
affiliates of major automotive manufacturers. Competition in the Non-prime
sector comes predominantly from independent finance companies.
Dealer Marketing and Service
The Company has entered into dealer agreements with over 2,500 retail
automobile dealers in 45 major metropolitan markets in 25 states. The Company's
objective is to enter into dealer agreements with a broad spectrum of large
domestic and foreign automotive manufacturer-franchised dealerships in targeted
major metropolitan areas. The Company believes that manufacturer-franchised
dealerships are most likely to provide the Company with loans that meet the
Company's underwriting standards. No individual dealer nor group of affiliated
dealers accounted for more than 3.0% of the Company's loan purchases during the
fiscal year ended June 30, 1996.
The Company's ability to acquire a high volume of Prime loans depends
to a large extent on its ability to establish and maintain relationships with
dealerships and to induce finance managers to offer customer loan applications
to the Company. The Company's marketing and loan purchasing staff emphasizes
dealer service and conveniently accommodating dealers' needs for customer
financing. The Company believes its loan purchasing operations are structured to
be more responsive to these needs than the operations of its competitors.
The Company believes that by responding rapidly to loan applications it
is more likely to be the first financing source to indicate acceptance of a loan
and, therefore, is more likely to receive the loan for purchase. With that in
mind, the Company has developed the capacity to process a large volume of loan
applications rapidly. The Company's average response time to loan applications
during fiscal 1996 was under 45 minutes. In June 1996, the Company upgraded its
loan application processing system which will further improve application
processing efficiencies. The new system is able to handle larger volumes of
applications while maintaining rapid response times. Although the Company's loan
purchasing process is highly automated, the Company maintains a strong
commitment to personalized dealer service. Sales representatives and credit
buyers are in frequent contact with dealership personnel. Management believes
that this personal contact and follow-through on the part of the Company's
employees builds strong relations and maximizes loan acquisition volume from
individual dealerships. The Company's credit scoring models and centralized
purchasing assure dealers that the Company applies consistent purchasing
standards and is a reliable financing source. The Company's willingness to offer
longer-term loans (with lower monthly payments) and to advance larger amounts
(relative to collateral value) to qualified borrowers, especially on used cars,
also enhances the dealers' ability to offer desired financing terms to
customers. The Company extends loans up to 84 months on new cars and 78 months
on used cars. Over 65% of the loans acquired during the year had terms in excess
of 60 months.
The Company has regional or field sales representatives who give the
Company a presence in local markets. Company sales representatives generally
have auto dealer finance or sales backgrounds and are generally recruited from
within the markets they serve. The Company believes this helps to establish
rapport and credibility with dealership personnel. The sales representatives are
in frequent contact with the Company's dealers and are available to receive and
respond to comments and complaints and to explain new programs and forms. A
portion of the sales representatives' compensation is commissions based on the
volume of loans from their territories that are approved and funded by the
Company, and, in some cases, may be based on new dealer agreements obtained in
new markets. However, the sales representatives have no authority to approve
credit applications.
When approaching a new dealer, the Company sales representatives
explain the Company's programs and describe the ways the dealer can expect more
timely and reliable service from the Company than that provided by other
financing sources. Dealers who decide to establish a relationship with the
Company are provided with a dealer agreement and supplied with copies of the
Company's forms for all loan documentation and forms of drafts (which authorized
dealer personnel submit for payment of the amount of each purchase). Also, many
new dealer agreements include provisions for ACH("Automated Clearing House").
ACH agreements provide for the electronic transfer of funds to individual dealer
accounts for the purchase amount of loans originated by the dealers and
purchased by the Company. The Company is encouraging the use of ACH payment as
4
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opposed to drafts with all of its new dealers, and is making attempts to convert
its existing dealer base to ACH as well. Currently, over 25% of the Company's
dealers have ACH agreements in place. The Company's representatives train dealer
personnel in the proper completion and use of the Company's documentation. The
dealer agreement provides the standard terms upon which the Company purchases
loans from dealers, contains representations and warranties of the dealer and
prescribes the calculation of the Dealer Premium.
Loan Origination and Purchasing
Retail automobile buyers are customarily directed to a dealer's finance
and insurance department to finalize their purchase agreements and to review
potential financing sources and rates available from the dealer. If the customer
elects to pursue financing at the dealership, an application is taken for
submission to the dealer's financing sources. Typically, a dealer submits the
purchaser's application to more than one financing source for review. The
dealership finance manager decides which source will finance the automobile
purchase based upon the rates being offered, the Dealer Premium, the terms for
approval and other factors (such as incentives offered by the lender.) The
Company believes that its rapid response to an application coupled with its
commitment to dealer service, and flexibility in terms enhances the likelihood
that the dealership will direct the loan to the Company, even though the Company
may not offer the lowest rate available. See "Item 1. Business -- Market and
Competition."
Generally, on a monthly basis, the Company quotes rates at which it
will buy loans from dealers (the "Buy Rate"). Buy Rates are based on several
factors including the age of the car and the term of the loan. The Company sets
rates generally with a view to maintaining a predetermined spread above the
relevant treasury security, based on the weighted average expected life of the
loans being acquired. The Company publishes different Buy Rates in different
markets depending on its assessment of competitive conditions. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Centralization of loan purchasing at the Company's Indianapolis
headquarters enables the Company to assure uniform application of underwriting
criteria. It also enables the Company to respond very rapidly to a large volume
of loan applications with a high level of efficiency. Upon receiving
applications by facsimile transmission, certain data are entered into the
Company's computer system and the application is assigned to a credit buyer. The
Company's computer system obtains a credit bureau report, applies the Credit
Scoring model and generates summary credit analysis for the credit buyer. The
credit buyer then analyzes the application data, the summary data, and the
credit bureau report and sends a response by facsimile transmission to the
dealer.
Approximately 65% of the Company's credit buyers have prior business
experience with auto dealerships, many as dealership finance managers. The
Company believes this common experience tends to strengthen their relationships
with dealers and enhances dealers' respect for their credit decisions. The
Company also frequently arranges for its credit buyers to visit dealers and
their finance managers, both to develop dealer rapport and to maintain awareness
of local economic trends. The commission component of a credit buyer's
compensation is based on the volume of applications processed, rapid response
time, and low rates of overriding credit score rejections of loans, without
regard to approval or rejection of the loans.
The Company's computerized Credit Scoring system utilizes a customized
Credit Scoring model developed by an independent firm to evaluate an applicant's
credit profile. The Company continually evaluates its scoring methodologies and
makes adjustments based on its experience. At the end of fiscal 1996, the
Company reevaluated its scorecard model. The scorecard was performing well
within management's expectations; however, through this process the Company was
able to identify several improvements to the existing model. Additional criteria
were identified as strong predictors with respect to credit quality. Management
believes that the upgraded version is more powerful and has greater predictive
value, and as a result, implemented the new version in all of its markets
beginning in July 1996.
The Company's purchasing philosophy generally focuses on acquiring high
quality credits and not solely on generating volume. The quality of the
Company's loan purchasing is due in large part to the experience, training and
judgment of the credit buyers. While the Company employs computerized Credit
Scoring, credit buyers have limited discretion to override the approval
indicated by the Credit Scoring system. In addition, the credit buyers have
5
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limited discretion, in appropriate circumstances and with the approval of a
senior credit buyer, to override the scoring system on the "low side" and accept
a loan with an otherwise insufficient score if the borrower's credit history and
other credentials justify approval. The prior experience of most of the
Company's credit buyers as dealership finance managers is valuable, not only in
assuring sound credit analysis, but also in protecting the Company from attempts
by dealers or their customers to obtain approval of unacceptable credits.
Management monitors and regularly audits credit buyers' decisions. The Company
tracks the delinquency and charge-off rates of all loans purchased by each
individual credit buyer.
Of the 635,057 Prime loan applications received from dealerships in the
year ended June 30, 1996, the Company approved approximately 20.7%
unconditionally and approximately 15.3% with conditions. Of the approved and
conditionally approved loans, approximately 31.1% were ultimately acquired. In
fiscal 1996, the Company acquired approximately $994.8 million in Prime loans.
If the Company approves a loan and is selected to provide the financing,
the automobile buyer enters into a simple-interest retail installment sales
contract with the dealer or a simple-interest installment loan and security
interest contract with the Company, generally on the Company's form (although
the Company acquires some precomputed interest installment sale contracts in
California). The retail sales contract includes an assignment of the loan to the
Company. In Ohio, because of regulatory provisions, the Company enters into the
contract directly with the borrower. In connection with the loan acquisition and
the preparation of Company forms, in many states the Company charges the
borrower a loan origination fee. The use of generic contracts forms has become
more prevalent during fiscal 1996. Dealerships in some markets utilize a generic
state-approved contract (as opposed to the Company's contract form). Most of the
generic forms do not include provisions for origination fees. When the dealer
has completed and mailed the Company's loan documents and taken actions required
to perfect the security interest on the vehicle, authorized dealer personnel may
complete and remit a Company-supplied draft for payment of the amount financed.
Because the Company provides forms of drafts to dealers in advance of particular
loan acquisitions, it assumes the risk that such drafts may be used
fraudulently, with corresponding loss to the Company. Historically, the Company
has not sustained any material losses due to such uses but there is no assurance
that such losses will not occur. For dealers that participate in the ACH
program, ACH system payments are made only after all loan documentation has been
received, and the loan has been recorded on the Company's system. The use of ACH
payments greatly reduces the Company's risk of fraudulent draft use, and also
presents a cash flow benefit as the loans are not funded until they are booked
by the Company. The Company does not utilize dealer drafts in its Non-prime
lending program (the "PAC Program").
Dealers quote loan rates to customers at an average of approximately
1.80% - 2.00% over the Buy Rate. This difference, in most states, represents
compensation to the dealership in the form of a Dealer Premium paid by the
Company, in addition to the amount financed. See "Glossary." The Dealer Premium
is paid to the dealer each month for all loans acquired from the dealer during
the preceding month. In most cases, the dealer is paid the entire Dealer Premium
in advance, and if the loan is prepaid or defaults at any time prior to its
scheduled maturity date, the amount of the premium is prorated and the portion
allocated to the remaining scheduled term is reimbursable to the Company as an
offset against the premiums to be paid with respect to subsequent loans through
the dealer's reserve account. In some cases, the Company may advance only a
portion of the Dealer Premium, with an offset against the dealer only if the
loan is prepaid or defaults within a limited period of time, regardless of the
length of the term. In Ohio, because the Company enters into installment loan
contracts directly with dealers' customers, it pays the dealer a referral fee
based on a percentage of the note amount. From time to time the Company may
adjust its Dealer Premium payment methods based on management's assessment of
the market. The Company does not pay a Dealer Premium to dealers in its PAC
Program, as described below. See "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
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Geographic Expansion
The following table sets forth certain information concerning the
markets in which the Company is operating or has previously operated its Prime
business.
<TABLE>
<CAPTION>
Loans Acquired For The At June 30,1996
Twelve Months Ended -----------------------------
Date June 30, Servicing Number Of
Market Established 1996 1995 Portfolio Dealers
------ ----------- -------- -------- --------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Indiana ................................... Jan-86 $ 38,755 $ 30,148 $ 83,190 107
Dayton/Cincinnati, OH ..................... Apr-88 9,287 20,662 23,729 155
Cleveland, OH ............................. Apr-88 6,744 3,324 15,293 52
Kentucky .................................. Jan-90 --- --- 1,253 Discontinued
Columbus, OH .............................. Sep-90 42,092 36,848 86,096 67
Phoenix, AZ ............................... Jun-91 55,955 45,138 107,675 71
Denver/Colorado Springs, CO ............... Dec-91 31,984 23,124 48,868 70
Kansas City, MO/KS ........................ Jan-92 21,075 16,404 45,800 64
Dallas/Ft. Worth/Lubbock, TX .............. Jun-92 65,862 59,303 118,959 84
Minneapolis, MN ........................... Aug-92 -- -- 3,038 Discontinued
Salt Lake City, UT ........................ Sep-92 -- -- 168 Discontinued
Oklahoma City/Tulsa, OK ................... Oct-92 60,022 62,083 114,166 68
Beaumont/Houston, TX ...................... Dec-92 48,232 48,861 87,765 75
San Antonio/Austin, TX .................... Jan-93 3,460 39,080 70,828 76
Clearwater/Tampa/St. Petersburg, FL ....... Apr-93 35,888 34,542 64,385 64
Charlotte/Gastonia, NC .................... Jul-93 60,999 56,217 89,806 40
Raleigh /Durham/Wilminton, NC ............. Jul-93 23,550 20,445 34,564 35
Winston/Salem/Hickory, NC ................. Jul-93 28,581 28,564 45,624 42
St. Louis, MO ............................. Sep-93 7,128 7,982 16,597 29
Atlanta, GA ............................... Apr-94 20,151 27,932 33,932 61
Richmond, VA .............................. May-94 3,640 2,969 4,836 26
Norfolk/Virginia Beach, VA ................ May-94 51,221 45,449 69,028 64
Greenville, SC ............................ Jul-94 10,032 9,697 14,117 23
Des Moines, IA ............................ Aug-94 5,320 1,812 5,704 6
Chicago, IL ............................... Sep-94 83,877 66,683 104,821 169
Sacramento, CA ............................ Nov-94 17,217 11,723 22,640 68
Council Bluffs/Omaha, IA/NE ............... Nov-94 7,307 1,464 7,217 27
Jacksonville, FL .......................... Dec-94 7,612 4,967 9,498 25
Orlando, FL ............................... Dec-94 5,264 6,082 8,272 21
West Palm Beach, FL ....................... Dec-94 5,967 7,230 9,677 44
Albuquerque/Sante Fe, NM .................. Dec-94 11,492 7,022 13,283 23
Los Angeles/Bakersfield, CA ............... Jan-95 75,597 29,422 83,354 209
Fresno/Modesto/Merced, CA ................. Jan-95 4,676 4,239 6,684 18
San Francisco, CA ......................... Feb-95 12,490 3,282 10,570 99
Milwaukee, WI ............................. Apr-95 16,138 2,588 14,542 62
Green Bay, WI ............................. Apr-95 1,869 --- 1,670 6
Portland/Vancouver, OR/WA ................. Jun-95 11,469 --- 9,228 67
Tallahassee, FL ........................... Jul-95 561 --- 491 6
Columbia, SC .............................. Jul-95 2,948 --- 2,497 8
Seattle, WA ............................... Jul-95 7,414 --- 6,633 62
Quad Cities, IA/IL ........................ Sep-95 3,937 --- 3,349 37
San Diego, CA ............................. Oct-95 19,240 --- 17,060 82
Savannah/Charleston, GA/SC ................ Nov-95 3,025 --- 2,816 33
Bethesda (D.C.)/Alexandria, MD/VA ......... Nov-95 19,882 --- 17,702 72
Baltimore, MD ............................. Jan-96 1,364 --- 1,339 24
Chattanooga/Knoxville/Memphis/Nashville, TN Feb-96 6,704 6,599 39
Detroit/Grand Rapids, MI .................. May-96 2,869 --- 2,859 28
Pittsburgh/Philadelphia, PA ............... May-96 317 --- 316 15
-------- -------- ---------- -----
TOTAL ..................... $994,834 $766,972 $1,548,538 2,523
======== ======== ========== =====
</TABLE>
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The Company intends to continue its strategy of expanding into new
markets. In considering potential markets for expansion, the Company carefully
reviews the regulatory and competitive environment and economic and demographic
factors such as the number of auto registrations and dealerships in the
metropolitan area.
Because the Company is highly centralized, the incremental cost of
entering new markets is relatively low and it can enter new markets quite
rapidly. Alternatively, the Company's centralized operations give it the ability
to vacate a market quickly and without great expense, if competitive or other
factors arise in the market that make it no longer suitable for the Company's
operations. The Company formerly purchased loans in cities in Kentucky,
Minnesota and Utah but subsequently chose to terminate its operations in these
markets. The Company's level of loan acquisitions in particular metropolitan
areas may fluctuate significantly over time depending on competitive conditions
and other factors in those markets.
Non-prime lending program
The Company began operating the Non-prime program in the fall of 1994, to
fund loans to borrowers with adequate credit quality who would not qualify for
the Company's Prime lending program. The Company operates the Non-prime program
under the name "Performance Acceptance Corporation (PAC)."
Non-prime operations, which are centralized at the Company's principal
offices, are substantially similar to the Company's Prime lending operations in
many respects. The Non-prime program, however, features more extensive credit
review and verification. Also, greater emphasis is placed on income and
employment stability, the borrower's ability to afford monthly payments and
loan-to-value ratios and other collateral-based lending standards. The Company
does not offer as prompt a response to Non-prime loan applications as it offers
on Prime program applications to permit it to conduct more extensive credit
checking. None of the Company's credit buyers are responsible for both Prime and
Non-prime loan acquisition in the same market. A loan application rejected for
the Company's Prime lending program must be resubmitted by the dealer to the
Non-prime program to be reconsidered for purchase. The Company's collection and
repossession procedures relating to Non-prime loans provide for more rapid
response to late payments, and include additional arrangements in order to
facilitate repossessions at an earlier stage of delinquency than is customary in
the Prime lending program. The Company, under the name "Performance Acceptance
Corporation," commenced Non-prime loan acquisitions in Indiana and has since
expanded the Program into 21 of the Company's existing major metropolitan
markets at dealerships affiliated with the Company's Prime lending program.
Of the 85,751 loan applications received from dealerships through the
Non-prime program in the year ended June 30, 1996, the Company approved
approximately 6.1% unconditionally and approximately 13.3% with conditions. Of
the approved and conditionally approved loans, approximately 17.3% were
ultimately acquired. In fiscal 1996, the Company acquired approximately $36.0
million in Non-prime loans.
The Company purchases Non-prime loans at face value at an appropriate
interest rate generally in the range of 6.00% to 8.00% above the rate at which
it purchases loans in its Prime lending program. The Company expects that
Non-prime loans will experience higher default rates than those historically
experienced by the Company with respect to its Prime lending operations, but
will also earn higher interest rates. The Company does not, however, pay Dealer
Premiums to dealers in connection with the acquisition of Non-prime loans, which
reduces its cash flow requirements for Non-prime operations. Since September,
1995, Non-prime loan acquisitions have been funded through a separate $50
million Non-prime Warehouse Facility through Performance Funding Corporation
("PFC"), a wholly-owned Company subsidiary. The Company, through its
wholly-owned, special-purpose subsidiary, Performance Securitization Corporation
("PSC"), effected its first securitization of Non-prime loans in March 1996. The
following table describes the composition of the Company's Non-prime lending
servicing portfolio at June 30, 1996:
<PAGE>
<TABLE>
<CAPTION>
Non-Prime Auto Portfolio At June 30, 1996
---------------------------------------------------------------------------
Percent of Weighted
Aggregate Aggregate Aggregate Average Average Weighted
Number of Principal Principal Loan Remaining Average
Loans Balance Balance Balance Term (1) Rate
--------- --------- --------- --------- ---------- ---------
(dollars in thousands, except average balances)
<S> <C> <C> <C> <C> <C> <C>
New auto / van ....... 667 $ 9,943 21.1% $14,907 62.65 18.63%
Used auto / van ...... 3,400 $37,119 78.9% $10,917 55.23 20.11%
----- ------- -----
Total ............. 4,067 $47,062 100.0% $11,572 56.79 19.80%
===== ======= =====
Loans held for sale... 1,243 $15,512 33.0% $12,479 63.28 19.70%
Securitized loans .... 2,824 $31,550 67.0% $11,172 53.61 19.85%
----- ------- -----
Total ............. 4,067 $47,062 100.0% $11,572 56.79 19.80%
===== ======= =====
</TABLE>
- -----------
(1) Terms are shown in months.
Loan Processing and Customer Service
When original loan documents and the dealer's draft (after deposit through
the dealer's bank) arrive at the Company's headquarters, they are processed onto
the Company's servicing system. In the case of a loan submitted under the ACH
program, the original loan documents are received by the Company, and the loan
is processed in much the same way as a loan in which the dealer has completed a
draft. Once the loan is processed, the Company's computer system triggers an ACH
payment to the dealer. The Company's operations computer network interfaces with
its loan approval system to retrieve the information entered when the borrower's
application was received, saving time on data entry with respect to loan
processing. The system transmits new loans daily to the Company's outside data
processing servicer. Twice weekly, this servicer sends data on all new accounts
to the Company's document service agency which generates payment coupon books
and sends them directly to the borrower. Customer payments are sent directly to
a lockbox.
The Company has a separate remote outsourcing agreement with a data
processing servicer. Under the agreement, the data processing service conducts a
wide array of applications in both batch and on-line modes, and it provides
interfacing with a number of Company-developed systems. The service also
provides off-site data storage at its data centers. The Company provides much of
the hardware to facilitate the on-line transmission of data, which is routed
through different data centers to provide redundancy in the event of a power
failure.
The Customer Service Department utilizes an automated voice response
system which allows customers to access standard account information as well as
general information 24 hours a day, seven days a week. This system directs a
total of approximately thirty thousand calls per month. Approximately 40% of the
total calls are handled entirely by the automated system. This system provides
many efficiencies for the Company and is user-friendly and convenient for
customers.
Loan Servicing and Servicing Portfolio
Under the terms of its Warehouse Facilities and securitization
transactions, the Company acts as servicer or subservicer with respect to the
related automobile loans. The Company receives monthly servicing fees; the
contractual fee, typically one percent per annum on the outstanding principal
balance of the securitzed loans, is paid to the Company through the securitized
trusts. The Company services the loan pools by collecting payments due from
borrowers and remitting payments to the pool trustee in accordance with the
terms of the servicing agreement. The Company maintains computerized records
with respect to each loan to record all receipts and disbursements and prepares
related reports. As servicer, the Company is obligated to monitor collections
and collect delinquent accounts and use diligence to obtain current payment of
accounts. In addition to these administrative duties, the Company will be
obligated as servicer or subservicer of securitization trusts to indemnify the
trustee against certain liabilities and replace credit enhancement in the
unlikely event of the termination or removal of a letter of credit. In addition
to servicing securitized loans, the Company also services a portfolio of Union
Federal fixed and variable rate loans on mobile homes, boats and autos, which
portfolio was approximately $3.6 million at June 30, 1996.
9
<PAGE>
At June 30, 1996, the Prime servicing portfolio, including the principal
balance of auto loans held for sale and securitized auto loans, was over $1.5
billion in aggregate principal balance. Approximately 73% of the servicing
portfolio, as of June 30, 1996, represented financing of used vehicles; the
remainder represented financing of new vehicles. The Company's loans consist
primarily of simple-interest contracts which provide for equal monthly payments
(as well as precomputed loans acquired in California). As payments are received
under a simple-interest contract, the interest accrued to date is paid first and
the remaining payment is applied to reduce the unpaid principal balance. In the
case of a liquidation or repossession, amounts recovered are applied first to
the expenses of repossession and then to unpaid principal. The following tables
describe the composition of the Company's Prime lending servicing portfolio at
June 30, 1996.
<TABLE>
<CAPTION>
Prime Auto Portfolio At June 30, 1996
-------------------------------------------------------------------------------------------
Percent of Weighted
Aggregate Aggregate Aggregate Average Average Weighted
Number of Principal Principal Loan Remaining Average
Loans Balance Balance Balance Term (1) Rate
(dollars in thousands, except average balances)
<S> <C> <C> <C> <C> <C> <C>
New auto / van ............. 31,491 $ 413,675 26.7% $ 13,136 58.1 12.26%
Used auto / van ............ 116,231 $1,134,863 73.3% $ 9,764 54.4 13.19%
------- ---------- -----
Total ................... 147,722 $1,548,538 100% $ 10,483 55.4 12.94%
======= ========== =====
Loans held for sale ........ 16,257 $ 228,391 14.7% $ 14,049 69.2 13.24%
Other loans serviced(2)..... 131,465 $1,320,147 85.3% $ 10,042 53.0 12.89%
------- ---------- -----
Total ................... 147,722 $1,548,538 100.0% $ 10,483 55.4 12.94%
======= ========== =====
</TABLE>
- ------------
(1) Terms are shown in months.
(2) Amounts include, prime fixed rate auto loans securitized under trusts as
well as a small portfolio of prime fixed rate auto loans serviced under
agreements with Union Federal (approximately $217,000).
Delinquency, Collection and Repossession
The Company seeks to maintain low levels of delinquency and net
charge-offs first by ensuring and monitoring the integrity of its credit
purchasing. The Company tracks the delinquency rate of all loans approved by
each credit buyer to provide each credit buyer with an incentive to maintain
loan quality. The Company also seeks to limit delinquency and charge-offs
through highly automated and efficient collection and repossession procedures.
The collections area is highly automated and is supported by a separate
computerized collections system provided by the Company's data processing
servicer and an automatic telephone dialing system. Delinquent borrowers are
contacted by phone, mail and/or telegram. Notices to delinquent borrowers are
dispatched automatically by computer when loans are 7 days delinquent. The
collections area operates during regular business hours, weekday evenings, and
on Saturdays. Consistent with the growth of its servicing portfolio, including
its Non-prime program, the Company more than doubled its collection staff during
fiscal 1996.
The Company utilizes an automatic, computer-controlled multiple telephone
line system which dials phone numbers of delinquent borrowers from a file of
records extracted from the Company's database. The system typically generates
500-1,000 calls per hour and allows the Company to prioritize calls based on a
wide variety of factors. Once a call has been placed, the system monitors the
call and transfers the call to a collector if it has reached a live human voice.
The Company provides incentive bonuses to its collections personnel based on the
volume and promptness of payments collected from delinquent borrowers.
After delinquent borrowers fail to respond to the Company or to fulfill
oral commitments made to bring their loans current, the Company repossesses the
automobile securing the loan. Repossessions are effected for the Company by an
independent auto auction company which reconditions the repossessed autos and
sells them for the Company. For cars repossessed in central Indiana, the Company
holds and reconditions the automobiles at an Indianapolis location owned by the
Company. It sells these automobiles through a central Indiana auto auction. A
number of regulatory considerations affect the timing and manner of repossession
and liquidation. See "Item 1.
Business--Regulation."
10
<PAGE>
The decision to repossess is generally made after a loan is at least 90
days but no more than 120 days delinquent, absent extraordinary circumstances,
such as bankruptcy or refusal to pay, requiring earlier action. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Delinquency and Credit Loss Experience."
Financing and Sale of Automobile Loans
Loan Funding. The Company had historically financed the acquisition of
automobile loans through short-term funding made available by Union Federal and
through the securitization of pools of loans. Since the "Spin-off" in August
1995, the Company relies upon external sources to provide financing for its loan
purchases, Dealer Premiums and other ongoing cash requirements. In addition to
the net proceeds of the Company's initial public offering and the Senior and
Senior Subordinated Notes, the Company utilizes a $350 million Prime Warehouse
Facility to provide such funding and a $50 million Non-prime Warehouse Facility
to fund Non-prime loan acquisitions. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources."
Hedging. Because the auto loans purchased by the Company are fixed-rate
loans, the Company bears the risk of interest-rate increases during the period
between the setting of the Buy Rate for the acquisition of loans and their sale
in a securitization transaction. In order to mitigate this risk, the Company
employs a hedging strategy in which it executes short sales of U.S. Treasury
securities having a maturity approximating the average maturity of loans to be
acquired during the relevant period. The Company's hedging strategy is an
integral part of its practice of periodically securitizing loans. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a discussion of hedging risks and related issues.
Securitizations. The Company sells its loans in securitization
transactions to increase the Company's liquidity, to provide for redeployment of
capital and to reduce risks associated with interest rate fluctuations. The
Company applies the net proceeds from securitization transactions to repay
amounts owed to short-term financing sources, thereby making such sources
available for future loan purchases. The Company currently plans to continue
securitizing pools of loans, generally on a quarterly basis. Since 1988, the
Company has securitized approximately $3.5 billion in auto loan receivables in
22 public offerings and one private placement of Asset-backed Securities
summarized below. In each of the public offerings, the senior Asset-backed
Securities have been rated "AAA" or its equivalent by one or more rating
agencies including Standard & Poor's Corporation, Moody's Investors Service and
Fitch Investors Service, Inc. Such ratings are not recommendations of the rating
agencies to invest in the securitizations and may be modified or withdrawn by
them at any time.
11
<PAGE>
Securitization Transactions
<TABLE>
<CAPTION>
Remaining Balance Weighted
Original at June 30, Average Loan Certificate Gross Net
Securitization Amount 1996 Rate Rate Spread (1) Spread (2)
-------------- ------ ---- ---- ---- ---------- ----------
(dollars in thousands)
<C> <C> <C> <C> <C> <C> <C>
1996-C UACSC Auto Trust $310,999 --- 13.26% 6.44% 6.82% 5.11%
1996-B UACSC Auto Trust $245,102 $229,685 12.96% 6.45% 6.51% 5.58%
1996-A UACSC Auto Trust $203,048 $171,842 13.13% 5.40% 7.73% 5.68%
1995-D UACSC Auto Trust $205,550 $162,850 13.74% 5.97% 7.77% 6.04%
1995-C UACSC Auto Trust $236,410 $162,822 14.08% 6.42% 7.65% 6.12%
1995-B UACSC Grantor Trust $220,426 $135,812 13.91% 6.61% 7.30% 4.88%
1995-A UACSC Grantor Trust $173,482 $96,198 13.22% 7.77% 5.45% 3.88%
1994-D UFSB Grantor Trust $114,070 $58,021 12.51% 7.69% 4.82% 3.91%
1994-C UFSB Grantor Trust $150,725 $61,106 12.05% 6.77% 5.28% 4.04%
1994-B UFSB Grantor Trust $142,613 $57,502 10.74% 6.46% 4.28% 3.54%
1994-A UFSB Grantor Trust $119,960 $39,664 9.98% 5.08% 4.90% 3.60%
1993-C UFSB Auto Trust $141,811 $43,596 11.00% 4.88% 6.12% 4.82%
1993-B UFSB Auto Trust $212,719 $53,132 11.50% 4.45% 7.05% 5.31%
1993-A UFSB Grantor Trust $133,091 $23,180 11.49% 4.53% 6.96% 4.96%
1992-C UFSB Grantor Trust $119,280 $14,684 11.64% 5.80% 5.84% 4.48%
1992-B UFSB Grantor Trust $116,266 $9,836 12.39% 4.90% 7.49% 5.49%
1992-A UFSB Grantor Trust $103,619 --- 13.66% 6.70% 6.96% 5.80%
1991-B UFSB Grantor Trust $106,612 --- 13.64% 7.15% 6.49% 4.94%
1991-A UFSB Grantor Trust $150,436 --- 12.52% 8.40% 4.12% 2.25%
1989-B UFSB Grantor Trust $66,469 --- 14.09% Variable 0.00 2.82%
1989-A UFSB Grantor Trust $113,080 --- 13.24% 8.75% 4.49% 1.97%
1988 UFSB Grantor Trust $105,179 --- 12.73% 9.50% 3.23% 1.71%
---------- ----------
Total Prime Securitized Trusts $3,490,947 $1,319,930
1996-1 PSC Grantor Trust (3) $34,488 $31,550 19.87% 6.87% 13.00% 8.79%
---------- ----------
Grand Total...................$3,525,435 $1,351,480
========== ==========
</TABLE>
- ------------
(1) Difference between weighted average loan rate and Certificate Rate.
(2) Difference between weighted average loan rate and Certificate Rate, net of
upfront costs, servicing fees, ongoing letter of credit and trustee fees,
and the hedging gain or loss.
(3) In March 1996, the Company effected its first Non-prime securitization
(1996-1 PSC Grantor Trust)
In securitization transactions, the Company transfers automobile loans to
a newly-formed trust, which issues one or more classes of fixed-rate
Certificates to investors (the "Certificateholders"). Through the 1994-A Grantor
Trust, the Certificates were generally credit-enhanced by a letter of credit
from an independent financial institution. The letter of credit provided
Certificateholders with additional assurance, to the extent of the amount of the
letter of credit, that their receipt of required payments from the pool would
not be adversely affected by loan losses. Typically, the letter of credit was
obtained in the amount, represented as a percentage of the pool, necessary to
obtain the desired investment grade ratings for the Certificates. The Company
has subsequently employed the use of subordinated classes of Certificates as a
credit enhancement device. Additionally, surety bonds have been utilized as
additional credit enhancements in several of the Company's recent
securitizations. These credit enhancement features allow the offered
Certificates to achieve the desired investment grade rating. In future
securitizations, the Company may employ any of the above devices or may employ
alternative credit enhancement devices.
Gains from the sale of loans in securitization transactions have
historically provided a significant portion of the net earnings of the Company
and are likely to continue to represent a significant portion of the Company's
net earnings. If the Company were unable to securitize loans in a financial
reporting period, the Company could incur a significant decline in net earnings
for such period. See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition -- General."
Commencing with the 1995-A Grantor Trust, the Company has effected
securitizations through a wholly-owned special-purpose subsidiary, UAC
Securitization Corporation. Its Non-prime securitization was effected through
Performance Securitization Corporation, also a wholly-owned special purpose
subsidiary. In the future, the Company may pursue alternative structures for
securitizations, such as an owners' trust structure in which the securitization
trust issues both Certificates and debt securities, and the Company will
continue to assess other structured financing alternatives which may enable it
to fund loans and/or deploy its capital with greater efficiency or at lower
cost.
12
<PAGE>
Employees
The Company employs personnel experienced in all areas of loan
acquisition, documentation, collection and administration. Currently, the
Company has 337 full-time employees and 33 part-time employees, including 72
full-time and 7 part-time employees in the operations department, 130 full-time
and 25 part-time employees in the collection department, 57 full-time employees
in loan purchasing and 41 full-time accounting, systems and administrative
employees. In addition, the Company had 38 sales representatives who reside and
work in the Company's loan purchasing market areas at such date. None of the
employees is covered by a collective bargaining agreement.
Regulation
The Company's operations are subject to regulation, supervision, and
licensing under various federal, state and local statutes, ordinances, and
regulations. The Company's business operations are conducted primarily in
Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Maryland, Michigan, Missouri, Nebraska, New Mexico, North Carolina,
Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas,
Virginia, Washington and Wisconsin and, accordingly, the laws and regulations of
such states govern the Company's operations conducted in those states. The
Company is required to be, and is, licensed as a sales finance company in
Arizona, Florida, Illinois, Maryland, Michigan, Missouri, Nebraska, New Mexico,
North Carolina, Pennsylvania and Wisconsin. In Colorado, Indiana, Iowa and
Texas, the Company has either filed the necessary notifications or registered to
accept assignments of installment sale contracts, and in Ohio, the Company is
licensed to make direct loans. As the Company expands its operations into
additional states, it will be required to comply with the laws of those states.
Security Interests in Vehicles. Installment sale contracts such as
those purchased by the Company evidence the credit sale of automobiles, light
trucks and vans by dealers to obligors. The contracts and the installment loan
and security agreements also constitute personal property security agreements
and include grants of security interests in the vehicles under the Uniform
Commercial Code ("UCC"). Perfection of security interests in the vehicles is
generally governed by the motor vehicle registration laws of the state in which
the vehicle is located. In the states in which the Company currently purchases
loans, a security interest in a vehicle is perfected by notation of the secured
party's lien on the vehicle's certificate of title. For loans originally
purchased by Union Federal, it is shown as lienholder on the certificate of
title. UAFC is generally shown as lienholder on the certificates of title for
vehicles securing Prime loans the Company has purchased, while PFC is designated
as lienholder for vehicles securing loans purchased through the Non-prime
program. The Company's loan documents prohibit the sale or transfer of the
financed vehicle without the Company's consent.
As subservicer for securitizations completed by the Union Division, the
Company is obligated to take appropriate steps, at its own expense, to maintain
perfection of security interests in financed vehicles. In securitization
transactions, the Company assigns its security interest in financed vehicles to
the trustee for the securitization trust. Because of administrative
inconvenience and expense, amended certificates of title are not obtained
reflecting the trustee's interest. It is possible that failure to obtain amended
certificates of title could in certain circumstances adversely affect the
Company's ability as servicer to recover the collateral value of the vehicle on
behalf of the securitization trust. Net Excess Servicing Cash Flows from the
securitized pool to the Company could be adversely affected to that extent. The
Company has not, however, experienced any significant problems enforcing liens
on financed vehicles securing loans it has securitized.
Under the laws of most states, including all of the states in which the
Company purchases loans, the perfected security interest in a vehicle continues
for at least four months after a vehicle is moved to a new state. Most states
require surrender of a certificate of title to re-register a vehicle. Since
UAFC, Union Federal or PFC, as the case may be, will have its lien noted on the
certificates of title, in most cases it, as lienholder, will have the
opportunity to re-perfect its security interest in the state of relocation. In
states that do not require a certificate of title for registration of a motor
vehicle, re-registration could defeat perfection. To date, the Company has not
experienced any significant problems enforcing its lien on re-registered
vehicles.
13
<PAGE>
Under the laws of most states, liens for vehicle repairs and unpaid
taxes take priority over a perfected security interest. Liens for repairs or
taxes could arise at any time during the term of a loan without notice to the
Company.
Repossession and Resale. In the event of a default by vehicle
purchasers, a self-help repossession remedy is available under the UCC in all
states in which the Company purchases loans (except Wisconsin) as long as the
repossession can be accomplished without a breach of the peace. In cases where
the obligor objects or raises a defense to repossession, or if otherwise
required by applicable state law, a court order must be obtained from the
appropriate state court.
In the event of default by the obligor, some jurisdictions require that the
obligor be notified of the default and be given an opportunity to cure the
default prior to repossession. Generally, the right of reinstatement may be
exercised on a limited number of occasions in any one-year period. The UCC and
other state laws require the secured party to provide the obligor with
reasonable notice of any sale of the collateral. The obligor generally has the
right to redeem the collateral prior to actual sale by paying the secured party
the unpaid principal balance of the obligation plus reasonable repossession and
related expenses and, in some states, reasonable attorneys' fees.
The proceeds of resale generally are applied first to the expenses of
resale and repossession and then to the satisfaction of the indebtedness. If the
net proceeds do not cover the amount of the indebtedness, a deficiency judgment
may be sought. However, the deficiency judgment would be a personal judgment
against the obligor for the shortfall, and a defaulting obligor normally has
very little capital or sources of income available following repossession.
In addition to the laws limiting or prohibiting deficiency judgments,
equitable limitations and numerous other statutory provisions including federal
bankruptcy laws and related state laws may interfere with or affect the ability
of a lender to realize upon collateral or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing an automobile, or reduce the amount of
the secured indebtedness to the market value of the automobile at the time of
bankruptcy, leaving the party providing financing as a general unsecured
creditor for the remainder of the indebtedness. A bankruptcy court may also
reduce the monthly payments due under a contract or change the rate of interest
and time of repayment of the indebtedness.
Consumer Protection Laws. Numerous federal and state consumer
protection laws and related regulations impose substantial requirements upon
lenders and servicers involved in consumer finance. These laws include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z, state adaptations of the National Consumer
Act and of the Uniform Consumer Credit Code and state motor vehicle retail
installment sales acts, retail installment sales acts, and other similar laws.
Also, state laws impose finance charge ceilings and other restrictions on
consumer transactions and require contract disclosures in addition to those
required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply with their provisions. In some
cases, this liability could affect the Company's ability to enforce automobile
loans it purchases.
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 state statutes, or the common laws in
certain states, has the effect of subjecting a seller (and certain related
lenders and their assignees) in a consumer credit transaction and any assignee
of the seller to all claims and defenses which the obligor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by the obligor under the contract, and the holder of
the contract may also be unable to collect any balance remaining due thereunder
from the obligor. Most of the loans purchased by the Company are subject to the
requirements of the FTC Rule. Accordingly, the Company (or the trust to which a
loan is assigned in a securitization), as holder of the loan, will be subject to
any claims or defenses that the purchaser of the related financed vehicle may
assert against the seller of the vehicle. Such claims are generally limited to a
maximum liability equal to the amounts paid by the obligor on the loan.
14
<PAGE>
The laws of certain states grant to the purchasers of vehicles certain
rights of rescission under so-called "lemon laws". Under such statutes,
purchasers of motor vehicles might be able to seek recoveries from, or assert
defenses against, the Company.
The dealer selling a loan to the Company will warrant that the
completion of each loan document and the sale of the vehicle to the borrower
complies with all requirements of law in all material respects. Accordingly, if
a borrower has a claim against the Company for violation of any law and such
claim materially and adversely affects the Company's interest in a loan, such
violation often constitutes a breach of the dealer's warranties under the dealer
agreement and related assignment and would create an obligation of the dealer to
repurchase the loan unless the breach is cured.
15
<PAGE>
GLOSSARY
Asset-backed Securities - A general reference to securities, such as
Certificates, that are backed by financial assets, such as automobile loans or
leases, credit card or trade receivables, home equity loans or equipment.
Business Transfer - The transfer of certain assets related to the Union Division
from Union Federal to the Company and the assumption of certain related
liabilities by the Company.
Buy Rate - A rate quoted by the Company to dealers, generally on a monthly
basis, at which the Company will buy loans.
Certificates - Asset-backed Securities representing fractional beneficial
interests or indebtedness issued to investors by a trust that purchases a pool
of loans in a Securitization. Such securities are generally fixed-rate
securities payable solely from cash flows from the pooled receivables.
Credit Facilities - Certain external financing arrangements negotiated by the
Company with an independent financial institution consisting of a $350 million
Warehouse facility (the "Prime Warehouse Facility") to fund the Company's Prime
loan acquisitions and a $50 million Non-prime Warehouse facility (the "Non-prime
Facility") to fund loan acquisitions through its Non-prime lending program,
Credit Scoring - The process of utilizing standard models in the loan
acquisition process to evaluate an applicant's credit profile to arrive at an
estimate of the associated credit risk based on statistical evaluation of
several common characteristics that bear on credit worthiness and their
correlation with credit risk.
Dealer Premium - The amount paid to the dealer for the purchase of a loan above
the principal amount financed. In states other than Ohio, the Dealer Premium is
based upon the finance charge that would be paid on the loan if it earned
interest at a rate equal to the difference between the contract rate and the
Company's periodically published buy rate. The difference in rates averages
approximately 2%. Dealer Premiums paid to Ohio dealers in the form of referral
fees are calculated as the product of the principal amount of the loan and a
periodically adjusted referral rate set forth on the Company's rate sheets for
loans with similar terms, note rate and age of collateral. All or a portion of a
Dealer Premium may be paid in advance at the time the loan is acquired, subject
to being charged back against the dealer if that loan prepays or defaults. The
Dealer Premium is generally advanced to the dealer in the month following
purchase of the loan, creating the Dealer Premium asset. An amortized portion of
such advance, depending on the dealer agreement, is recoverable from the dealer
if the loan is prepaid or defaults. When loans are sold, the related Dealer
Premium is expensed and a Dealer Premium rebate asset is established equal to
the estimated amount recoverable from dealers due to prepayments and defaults.
Actual rebate experience is analyzed by the Company on a monthly basis.
Excess Servicing - The present value of Future Servicing Cash Flows to be
distributed to the Company by a Securitization trust as determined in accordance
with Statement of Financial Accounting Standards No. 65 ("SFAS 65"). Excess
Servicing represents the present value of Future Servicing Cash Flows earned on
each trust as determined in accordance with SFAS 65. Future Servicing Cash Flows
represent the difference between the coupon rate on the loans and the
pass-through rate to the investors in the securitized pool in excess of a normal
servicing fee, typically one percent, and any other continuing costs such as
trustee, surety or letter of credit fees. To determine Excess Servicing, the
Future Servicing Cash flows are first estimated using an assumed rate of
prepayment that is intended to be conservative relative to historical experience
and then discounted at a market rate commensurate with the risk associated with
this type of investment. Excess Servicing is then reduced by a credit loss
provision based upon historical experience and deemed adequate to cover net
losses over the life of the trust. The loss provision is calculated using a
discount rate commensurate with a risk-free investment of similar maturity in
accordance with Emerging Issues Task Force announcement 92-2. Excess Servicing
also includes the estimated Dealer Premium Rebates recorded in conjunction with
the securitization. Excess Servicing cashflows reduce the Excess Servicing asset
over the life of the securitization. The discounted portion of Excess Servicing
is accreted to income on a monthly basis. Periodically, the Company reviews the
assumptions utilized in determining Excess Servicing. Should the present value
of Future Servicing Cash Flows prove to be insufficient to recover the
capitalized amount, a charge to servicing income would be made in accordance
with SFAS 65. To date the Company has not recorded any such charges. The Company
assesses the valuation of the Dealer Premium Rebate component of Excess
Servicing monthly. Deficiencies, if any, would be charged against servicing
income. Dealer Premium Rebates received in excess of original estimates are
recognized as servicing income as received. Excess Dealer Premium Rebates
received during fiscal 1996 totaled $2.8 million. Accrued interest through the
date of securitization is also classified as a component of Excess Servicing.
These amounts represent monies that will be returned to the Company through the
securitized trusts.
16
<PAGE>
Future Servicing Cashflows - The difference between the coupon rate paid on
securitized loans and the sum of the yield to Certificate holders of a
securitized loan pool, an annual servicing fee, typically one percent, and other
expenses of the Securitization trust.
Gain on Sales of Loans - The Gain on Sales of Loans is equal to Excess Servicing
less any difference between the aggregate principal balance of loans and the net
proceeds from the securitization and the prepaid Dealer Premium, adjusted by the
gain or loss on related hedging transactions. The securitizations are usually
sold at or close to the principal balance of the loans included therein. The
costs of securitization consist of issuance expenses and the underwriter's
discount.
Non-prime Warehouse Facility - See definition of Credit Facilities, above.
Non-prime lending - The Company's practice of acquiring loans made to borrowers
who generally would not be eligible for credit under Prime lending. Loans are
acquired from automotive dealers under a dealer agreement that provides for the
acquisition of loans at par without provision for payment of any Dealer Premium.
A Non-prime borrower is characterized as a borrower with some credit problems in
his or her past which have subsequently been resolved and who has reestablished
an acceptable payment history. To finance a new or late-model used car, the
Non-prime borrower may not qualify for a loan from a captive finance subsidiary,
but may access credit through non-traditional finance sources.
Pooling - The accumulation of a group of loans to create a package of
receivables for sale through a trust to investors in a Securitization.
Prime lending - The Company's practice of acquiring loans made to borrowers,
generally with high quality credit, through an automotive dealer under a dealer
agreement that provides for the acquisition of loans at par plus the payment of
a Dealer Premium to the dealer. A Prime borrower has a credit history with no or
few minor defaults and can finance a new car purchase through a bank, a captive
finance subsidiary of an automobile manufacturer or an independent finance
company that focuses on Prime credit.
Prime Warehouse Facility - See definition of Credit Facilities, above.
Securitization - The process through which loans and other receivables are
pooled and sold to a trust which issues Certificates to investors.
Senior Notes - Unsecured Senior Notes of the Company in the original aggregate
principal amount of $110 million due 2002, issued by the Company in connection
with the Spin-off and the Company's initial public offering in August 1995.
Senior Subordinated Notes- Unsecured Senior Subordinated Notes of the Company in
the aggregate principal amount of $46 million due 2003, issued April 1996.
Spin-off - The pro rata distribution of the 9,200,000 shares of Class B Common
Stock formerly held by Union Federal to UHC and from UHC to the shareholders of
UHC, immediately prior to consummation of the Company's initial public offering
in August 1995.
Spread Account - A cash collateral account or spread account maintained by the
trustee of a securitization trust into which Future Servicing Cash Flows are
deposited initially, to protect Certificateholders (and any provider of
third-party credit enhancement) against credit losses. The terms of the account,
which vary with each securitization, state a maximum balance, expressed as a
percentage of the current principal balance. Generally, the initial cash
deposit, if required, is funded by the Company from the securitization proceeds
and is expressed as a percentage of the original balance. The initial deposit
amount is typically less than the minimum balance ("floor"). The "floor" amount
required is determined based on the original principal balance. Excess Servicing
cash flows from the pool of loans, net of credit losses, are credited to the
account and retained until the account balance reaches the maximum balance. The
Company accrues these cash flows as servicing income and establishes the Spread
Account on the balance sheet. Once the maximum balance is attained, excess
servicing cash flows and any surplus in the Spread Account are remitted to the
Company. Should the interest and principal collected by the trust be less than
the required payments to the Certificateholders, the shortfall is funded from
the Spread Account and Future Servicing Cash Flows are retained until the
maximum balance is reestablished. Any remaining Spread Account balance is
released to the Company upon termination of the securitization. There is no
recourse to the Company for loan losses beyond the balance in the Spread Account
and Future Servicing Cash Flows from the trust.
Union Division - The indirect automobile lending business conducted as a
division of Union Federal through fiscal 1994.
Warehouse - A method whereby loans are financed by financial institutions on a
short-term basis. In a Warehouse arrangement, loans are accumulated or pooled on
a daily or less frequent basis and assigned or pledged as collateral for
short-term borrowings until they are sold in a Securitization.
17
<PAGE>
Item 2. Properties
The Company's operations are centered in a commercial office building
owned by Waterfield Mortgage Company, Inc. ("Waterfield," a Company affiliate)
in Indianapolis, Indiana. The Company occupies office space of 115,555 square
feet under leases with Waterfield. The Company sublets a portion of the building
to two other tenants (one of which in Union Federal). In addition, the Company
leases a garage of 5,000 square feet for vehicle reconditioning and remarketing,
an office of 500 square feet and a 75-car lot located in Beech Grove, Indiana,
from an independent party. These facilities are used to recondition and sell the
financed vehicles repossessed by the Company in central Indiana.
Item 3. Legal Proceedings
The Company is party to litigation in the ordinary course of business,
generally involving liability claims by borrowers under the consumer protection
laws described above. The Company does not expect any pending proceeding, either
individually or collectively, to have a material adverse effect on the Company
or its results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company commenced its initial public offering of Class A Common Stock
on August 7, 1995 concurrently with the Spin-off by Union Federal of the
Company. Shares of Class A Common Stock are quoted on the Nasdaq Stock Market's
National Market under the symbol "UACA." The following table sets forth the high
and low sales price per share of Class A Common Stock for each quarter in fiscal
1996:
Fiscal Year Ended June 30, 1996 High Low
-------------------------------- ---- ---------
First Quarter 19 1/2 16
Second Quarter 21 1/4 14
Third Quarter 17 11 3/4
Fourth Quarter 16 3/4 13 1/2
As of September 16, 1996, there were 126 holders of record of the
Company's Class A Common Stock and 8 persons holding Class B Common Stock of the
Company of record. The Company estimates that its Class A Common Stock is owned
beneficially by approximately 2,100 persons. There is no market for Class B
Common Stock, and management has no plans to list the Class B Common Stock on
Nasdaq or any exchange.
The Company currently intends to retain earnings for use on the
operation and expansion of its business and therefore does not anticipate paying
cash dividends on Class A Common Stock or Class B Common Stock in the
foreseeable future. The payment of dividends is within the discretion of the
Board of Directors and will depend, among other things, upon earnings, capital
requirements, any financing agreement covenants and the financial condition of
the Company. In addition, provisions of the Senior and Senior Subordinated Notes
limit distributions to shareholders.
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected financial information reflecting
the operations and financial condition of the Company for each year in the five
year period ended June 30, 1996. This data should be read in conjunction with
the Company's consolidated financial statements and related notes thereto and
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition" included herein.
18
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income ........................................... $ 34,160 $ 18,638 $ 14,260 $ 11,378 $ 8,997
Interest expense(1) ....................................... 22,275 12,961 7,769 7,177 7,227
---------- ---------- ---------- ---------- ----------
Net interest margin ..................................... 11,885 5,677 6,491 4,201 1,770
Provision for credit losses ............................... 2,875 1,074 484 436 626
---------- ---------- ---------- ---------- ----------
9,010 4,603 6,007 3,765 1,144
Gain on sales of loans .................................... 30,357 8,684 4,643 5,502 7,293
Servicing fees, net ....................................... 16,926 14,628 11,570 7,149 3,988
Other revenue ............................................. 3,096 2,783 2,735 1,995 1,695
---------- ---------- ---------- ---------- ----------
Total revenues ....................................... 59,389 30,698 24,955 18,411 14,120
Operating expenses ........................................ 23,841 14,913 8,995 7,055 5,331
---------- ---------- ---------- ---------- ----------
Earnings before provision for income taxes .............. 35,548 15,785 15,960 11,356 8,789
Provision for income taxes .............................. 14,406 6,396 6,384 4,542 3,516
---------- ---------- ---------- ---------- ----------
Net earnings ......................................... $ 21,142 $ 9,389 $ 9,576 $ 6,814 $ 5,273
========== ========== ========== ========== ==========
Operating Data:
Prime auto receivables acquired ........................... $ 994,834 $ 766,972 $ 614,627 $ 435,227 $ 252,223
Non-prime auto receivables acquired ....................... 36,030 21,511 -- -- --
Marine receivables acquired ............................... 50 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total receivables acquired (dollars 000's) ........... $1,030,914 $ 788,483 $ 614,627 $ 435,227 $ 252,223
Prime auto receivables acquired ........................... 71,070 58,409 49,307 38,360 25,327
Non-prime auto receivables acquired ....................... 2,870 1,770 -- -- --
Marine receivables acquired ............................... 6 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total receivables acquired (number of loans) ......... 73,946 60,179 49,307 38,360 25,327
Prime auto loans securitized .............................. $ 890,110 $ 658,703 $ 617,103 $ 368,638 $ 210,231
Non-prime auto loans securitized .......................... 34,488 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total auto loans securitized ......................... $ 924,598 $ 658,703 $ 617,103 $ 368,638 $ 210,231
Ratio of operating expenses as a % of
average servicing portfolio ............................. 1.73% 1.49% 1.21% 1.42% 1.47%
Servicing fees, net, as a % of operating
expenses ................................................ 71.0% 98.1% 128.60% 101.30% 74.80%
Prime net losses as a % of avg. servicing portfolio ....... 1.58% 1.36% 0.69% 0.64% 0.85%
Non-prime net losses as a % of avg. servicing portfolio ... 2.37% 2.97% N/A N/A N/A
Prime delinquencies of 30 days or more as a
% of servicing portfolio (at period end) ............. 1.84% 1.40% 1.40% 0.93% 1.16%
Non-prime delinquencies of 30 days or more as a
% of servicing portfolio (at period end) ............. 3.35% 1.25% N/A N/A N/A
<PAGE>
At June 30, 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Balance Sheet Data(2):
Loans, net ................................................ $ 259,290 $ 201,022 $ 96,101 $ 134,678 $ 98,823
Excess servicing .......................................... 83,434 60,662 41,265 31,575 17,970
Spread accounts ........................................... 63,590 57,414 37,333 24,052 17,649
Total assets .............................................. 451,195 349,283 181,516 196,242 139,163
Due to Union Federal ...................................... -- 338,958 177,577 171,896 125,199
Amounts due under warehouse facilities .................... 187,756 -- -- -- --
Long-term debt ............................................ 156,000 -- -- -- --
Total shareholder equity(3) ............................... 78,624 2 2 -- --
Other Data:
Prime auto servicing portfolio ............................ $1,548,538 $1,159,349 $ 843,245 $ 581,858 $ 393,826
Non-prime auto servicing portfolio ........................ 47,062 19,858 -- -- --
Other receivables serviced ................................ 3,470 5,203 -- -- --
---------- ---------- ---------- ---------- ----------
Total servicing portfolio ............................ $1,599,070 $1,184,410 $ 843,245 $ 581,858 $ 393,826
Average Prime auto servicing portfolio .................... 1,343,770 982,875 744,149 496,758 362,991
Average Non-prime auto servicing portfolio ................ 33,124 9,448 -- -- --
Other receivables average servicing portfolio ............. 4,222 6,643 -- -- --
---------- ---------- ---------- ---------- ----------
Total average servicing portfolio .................... $1,381,116 $ 998,966 $ 744,149 $ 496,758 $ 362,991
Number of Prime auto loans serviced (at period end) ....... 147,722 117,837 91,837 71,301 56,403
Number of Non-prime auto loans serviced (at period end) ... 4,067 1,687 -- -- --
Number of Other loans serviced (at period end) ............ 543 836 -- -- --
---------- ---------- ---------- ---------- ----------
Total number of loans serviced (at period end) ....... 152,332 120,360 91,837 71,301 56,403
Number of dealers ......................................... 2,523 1,604 884 831 648
Number of employees (full-time equivalents) ............... 313 215 142 115 93
</TABLE>
- -------------
(1) Interest expense for the years ended June 30, 1992, 1993, 1994 and 1995,
was based upon the average monthly balance "Due to Union Federal" at Union
Federal's all-inclusive cost of funds.
(2) All balance sheet amounts, except the amounts "Due to Union Federal",
represent actual recorded assets and liabilities of the Company's business.
The amount Due to Union Federal includes division funding by Union Federal
as well as inter-company funding.
(3) The consolidated financial statements reflect no allocation of Union
Federal's historical equity. Earnings of the Company are transferred to
Union Federal through the Due to Union Federal account at June 30, 1992,
1993, 1994, and 1995.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Note: Certain capitalized terms used but not otherwise defined in this
report are defined in the "Glossary" set forth at the conclusion of "Item 1.
Business."
General
The Company derives substantially all of its earnings from the
purchase, securitization and servicing of automobile loans originated by
dealerships affiliated with major domestic and foreign manufacturers. To fund
the purchase of loans prior to securitization, the Company utilizes revolving
warehouse credit facilities, discussed in "Liquidity and Capital Resources."
Through securitizations, the Company periodically pools and sells loans to a
trust which issues Certificates to investors representing pro-rata interests in
the loans sold. When the Company sells loans in a securitization, it records a
gain (or loss) on the sale of loans and establishes excess servicing as an
asset. Excess servicing cashflows are received over the life of the related
securitization. See the "Glossary" for definitions of accounting terms
pertaining to securitizations.
The following table illustrates changes in the Company's total loan
acquisition volume and information with respect to Gain on Sales of Loans and
Securitizations during the past eight quarters. More complete quarterly
statements of earnings information is set forth in Note 14 of the Consolidated
Financial Statements.
<TABLE>
<CAPTION>
Selected Quarterly Financial Information
Quarters in the Fiscal Year ended June 30, 1996
-----------------------------------------------------
First Second Third Fourth
--------- --------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans acquired .......... $ 239,794 $ 205,686 $ 256,510 $ 328,924
Gain (loss) on Sales
of Loans ........... 6,724 8,483 7,760 7,390
Servicing portfolio
at period end ...... 1,278,805 1,344,914 1,445,517 1,599,070
Selected
Securitization Data: 1995-C 1995-D 1996-A/1996-1 1996-B
Original amount ......... 236,410 205,550 203,048/34,488 245,102
Weighted avg ............
loan rate .......... 14.08% 13.74% 13.13%/19.87% 12.96%
Certificate rate ........ 6.42% 5.97% 5.40%/6.87% 6.45%
Gross spread (1) ........ 7.65% 7.77% 7.73%/13.00% 6.51%
Net spread (2) .......... 6.12% 6.04% 5.68%/8.79% 5.58%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
First Second Third Fourth
--------- --------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans acquired .......... $ 145,695 $ 154,441 $ 251,596 $ 236,751
Gain (loss) on Sales
of Loans ........... 1,336 1,208 1,181 4,959
Servicing portfolio
at period end ...... 894,559 947,549 1,081,788 1,184,410
Selected
Securitization Data: 1994-C 1994-D(4) 1995-A 1995-B
Original amount ......... $ 142,444 $ 122,351 $ 173,482 $ 220,426
Weighted avg ............
loan rate .......... 12.04% 12.49% 13.22% 13.91%
Certificate rate ........ 6.78% 7.63% 7.77% 6.61%
Gross spread (1) ........ 5.26% 4.86% 5.45% 7.30%
Net spread (2) .......... 4.04% 3.92% 3.88% 4.88%
</TABLE>
- -----------
(1) Difference between weighted average loan rate and Certificate Rate.
(2) Difference between weighted average loan rate and Certificate Rate, net of
upfront costs, servicing fees, ongoing surety bond and trustee fees, and
hedging gains or losses.
(3) Two securitizations were effected in the third quarter of fiscal 1995 -
UACSC 1996-A (Prime) and PSC 1996-1 (Non-prime).
(4) Includes $8.28 million in prefunding under the 1994-C Grantor Trust
transferred in the second quarter of fiscal 1995.
Acquisition Volume. The Company currently acquires loans in 45 major
metropolitan areas in 25 states from over 2,500 manufacturer-franchised auto
dealerships. The Company acquires loans on automobiles made to borrowers who
exhibit a favorable credit profile ("Prime lending") and, since October 1994, to
borrowers with adequate credit quality who would not qualify for a loan under
the Company's Prime lending program ("Non-prime lending"). Loan acquisitions
continue to be stronger than in corresponding periods of prior fiscal years.
Loan acquisition volume remained relatively level between the third quarter of
fiscal 1995 and the third quarter of fiscal 1996, but experienced a large
increase in the fourth quarter of fiscal 1996. Although the Company continued
its market expansion throughout the fiscal year, it has also made some strategic
changes with respect to pricing and underwriting, including an increase in
cut-off scores in several of its existing markets. This strategy was employed in
order to improve the average quality of the contracts being purchased.
Management continues to focus on controlled growth, recognizing that the
underlying credit quality of the portfolio is one of the most important factors
associated with long-term profitability.
20
<PAGE>
The Company's loan acquisitions increased 30.7% to $1,030.9 million for
the year ended June 30, 1996, from $788.5 million in fiscal 1995. The increase
resulted primarily from improved market penetration in many markets as well as
the Company's continued geographic expansion. Additionally, growth in the
Non-prime business contributed to overall loan acquisition growth. Non-prime
loan acquisitions totaled $36.0 million for the year ended June 30, 1996,
compared to $21.5 million fiscal 1995. The Company's servicing portfolio
increased 35.0% to nearly $1.6 billion at June 30, 1996, compared to $1.2
billion at June 30, 1995. Serviced loans increased as a result of the increased
loan acquisition volume in excess of loan repayments. The volume of loans sold
in securitizations increased to $924.6 million for the year ended June 30, 1996,
from $658.7 million for the prior year. The increased volume of loans
securitized is a result of both the increased volume in Prime loan acquisitions
and the securitization of the Non-prime portfolio in the third quarter of fiscal
1996.
Gross and Net Spreads. Market interest rates have been lower in fiscal
1996 as compared to the corresponding periods of fiscal 1995. Market rates
experienced a downward trend beginning in the fourth quarter of fiscal 1995
through the third quarter of fiscal 1996. Rates began to rebound in the third
and fourth quarters of fiscal 1996; however, still lower than those in the prior
year. Because changes in loan rates on automobile loans tend to lag behind
fluctuations in market rates of interest, the decrease in market rates
throughout most of fiscal 1996 resulted in improved net spreads on the Prime
securitizations compared to the same periods of fiscal 1995. Gross spread is
defined as the difference between the weighted average loan rate and the
Certificate rate. Net spread is defined as gross spread less servicing fees,
upfront costs, ongoing credit enhancement fees and trustee fees, and hedging
gains or losses. Prime loan rates also decreased steadily over the first three
quarters. Despite decreasing Prime loan rates, the gross spreads were stronger
in the first three quarters of fiscal 1996 than in corresponding periods of
fiscal 1995 due to the downward-moving market rates. Fourth quarter gross
spreads were adversely affected by a sharp increase in market rates; however,
the Company's hedging strategy preserved the net spread on the fourth quarter
securitization. Although the market (Certificate) rate rose by 105 basis points
from the third to fourth quarter, the net spread decreased only slightly to
5.58% compared to 5.68% in the third quarter. Net spreads have experienced
slight compressions throughout the fiscal year. However, the net spreads are
significantly higher than those in fiscal 1995. The Company realized a net
spread of 8.79% on its first Non-prime securitization effected in March 1996.
Looking ahead, management is currently targeting net spreads of 5.00% to
5.50% on Prime securitizations (assuming a pricing spread for Asset-backed
Certificates over the two-year treasury note of 50 basis points) for fiscal
1997. Management believes that by targeting a spread of 7.00% to 7.50% between
loan rates and the two-year treasury rate that the net spread targets can be
achieved. Although management believes these spreads can be achieved, material
factors affecting the net spreads are difficult to predict and could cause
management's projections to be materially inaccurate. These include current
market conditions with respect to market interest rates and demand for
Asset-backed Securities generally, and for Certificates representing interests
in Securitizations sponsored by the Company. See -- "Discussion of
Forward-Looking Statements," below.
Gain on Sales of Loans. Gain on Sales of Loans continues to be a
significant element of the Company's net earnings. The gain on sales of loans is
affected by several factors, but is primarily affected by the amount of loans
securitized and the net spread. The Company adjusts its pricing frequently and
employs a hedging strategy to help ensure an adequate net spread in the ensuing
securitization, while mitigating the risks of increasing interest rates and the
volatility in net spreads.
21
<PAGE>
Results of Operations
The following table illustrates the Company's financial results for the
past eight fiscal quarters. More complete earnings information can be found in
the Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
Selected Quarterly Financial Information
Quarters in the Fiscal Year ended June 30,
-----------------------------------------------------------------------------------------------
1996 1995
------------------------------------------ -------------------------------------------
First Second Third Fourth First Second Third Fourth
------- ------- ------ ------ -------- ------ ------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest on loans ............ $6,946 $7,232 $6,732 $7,802 $2,476 $2,503 $4,072 $5,651
Interest on spread
accounts and
restricted cash......... 1,370 1,386 1,317 1,375 734 866 1,068 1,268
Interest expense ............. 5,289 5,556 5,359 6,071 2,257 2,590 3,733 4,381
Provision for
credit losses .......... 1,150 300 600 825 0.00 160 304 610
Gain on sales
of loans ............... 6,724 8,483 7,760 7,390 1,336 1,208 1,181 4,959
Servicing fees, net .......... 3,966 2,584 4,796 5,580 3,275 3,193 4,288 3,872
Other revenues ............... 750 724 798 824 650 632 768 733
Operating expenses ........... 4,719 5,602 6,658 6,862 3,230 3,431 3,503 4,749
Net earnings ................. $5,116 $5,246 $5,313 $5,467 $1,774 $1,320 $2,284 $4,011
</TABLE>
Years Ended June 30, 1996 and 1995
Net Interest Margin. Net interest margin increased 95.7% to $9.0
million for the year ended June 30, 1996, compared to $4.6 million for fiscal
1995. Increased Prime loan volume, growth in the Non-prime portfolio, and
modification of the securitization structure during fiscal 1996 contributed to
increased net interest margin.
Interest on Loans. Interest on loans increased 95.3% to $28.7 million
for the year ended June 30, 1996, compared to $14.7 million for last year. The
increase in interest income resulted, in part, from an increase in the average
monthly balance of loans held for sale to $186.6 million for the year ended June
30, 1996, from $127.1 million for fiscal 1995, which was a result of increased
loan acquisitions during the year. The Non-prime portfolio also contributed to
the increase in interest income. The Company carried an average of over $22.2
million in Non-prime receivables held for sale during the year which produced
over $4.4 million in interest income. Further, the current method with respect
to securitization structure has increased the amount of interest income
recognized relative to prior periods. The change in the securitization structure
has significantly impacted both interest income and servicing fees, net. All of
the fiscal 1996 Prime securitizations were structured such that the Company
continued to earn interest income from the cut-off date through the closing date
(approximately 13-22 days), and therefore, earned servicing fees only after the
closing date. In all previous securitizations, the Company began earning
servicing fees beginning on the cut-off date. As a result, the Company reports
more interest income and less servicing fee income, and records a lower gain on
sale. An estimated additional $6.1 million in interest on loans was recognized
during fiscal 1996, due to the new securitization structure. The structure was
altered in accordance with provisions of the agreements evidencing the Prime
Warehouse Facility and the Non-prime Warehouse Facility, which require that the
Company collect and remit interest on loans from cut-off date to closing of a
securitization transaction to the warehouse provider. The Company continues to
pay interest on the amount financed with respect to warehoused loans until
closing.
Interest Earned on Spread Accounts and Restricted Cash. Interest earned
on Spread Accounts and Restricted Cash increased 38.4% to $5.4 million for the
year ended June 30, 1996, compared to $3.9 million for the year ended June 30,
1995. The increase is a result of increased average balances due to additional
securitizations during the year. The average balance of these accounts were
$108.8 million in fiscal 1996, compared to $68.2 million in fiscal 1995.
Earnings on spread accounts relative to the growth in the securitized servicing
portfolio were somewhat decreased as a result of the structuring of the fiscal
1996 securitizations whereby additional credit enhancements were utilized in
lieu of initial spread account deposits. Additionally interest earned on these
accounts were somewhat lower in fiscal 1996 compared to fiscal 1995 as market
rates of interest declined throughout the latter half of fiscal 1995 and the
first half of fiscal 1996.
22
<PAGE>
Interest Expense. Interest expense increased 71.9% to $22.3 million
for the year ended June 30, 1996, from $13.0 million for the year ended June 30,
1995. The increase was a result of both an increased average cost of funds, and
increased average outstanding borrowings. The average cost of funds increased to
7.72% for the year ended June 30, 1996, from 5.60% for the year ended June 30,
1995. The increase in cost of funds is a result of the Company obtaining
alternative financing sources after its Spin-off from Union Federal in August of
1995. Included in current year interest expense is the amortization of upfront
borrowing fees paid in conjunction with the establishment of the Prime and
Non-prime Warehouse Facilities ("Warehouse Facilities"). The agreements provided
for an initial term of one year, and must be renewed annually; therefore, the
total upfront fees paid to establish the Facilities were amortized during fiscal
1996. Upfront fees related to the Warehouse Facilities totaled approximately
$1.5 million. The fees paid to secure the Warehouse Facilities are non-recurring
in nature; the renewal of such agreements do not require the payment of
additional fees. Average outstanding borrowings increased to $288.4 million for
the year ended June 30, 1996, from $231.4 million for the year ended June 30,
1995.
Provision for Credit Losses. Provision for credit losses increased to
$2.9 million for the year ended June 30, 1996, compared to $1.1 million for the
year ended June 30, 1995. A large portion, $1.1 million, of that provision was
related to the newer Non-prime portfolio. The additional provision related to
the Non-prime portfolio is a result of both the time period the Non-prime
portfolio is held prior to securitization, as well as the increased level of
credit risk associated with the Non-prime loans as compared to the Prime loans.
Management believes that the provision represents conservative estimates of
potential losses on loans held for sale.
Gain on Sales of Loans. Gain on Sales of Loans increased 249.6% to $30.4
million for the year ended June 30, 1996, from $8.7 million for fiscal 1995. The
increase in gain was mainly due to improved net spreads as well as increased
volume of Prime loans securitized. The weighted average loan rate on the Prime
securitized loans was 13.48% while the weighted average certificate rate was
6.09%. The weighted average gross and net spreads on the fiscal 1996 loan sales
were 7.38% and 5.85%, respectively, compared to 5.92% and 4.26% fiscal 1995.
These spreads earned the Company a $29.5 million gain in 1996 after net hedging
losses of approximately $2.6 million. The Company securitized $890.1 million in
Prime loans and $34.5 million in Non-prime loans in fiscal 1996, compared to
$658.7 million in Prime loans in fiscal 1995. Additionally, the Company
completed its first Non-prime securitization during the third quarter of 1996.
Approximately $34.5 million in Non-prime automobile receivables were securitized
in a private placement that earned the Company nearly $850,000 after a $112,000
hedging loss. The weighted average loan rate on the Non-prime portfolio
securitized was 19.87% while the weighted average certificate rate was 6.87%.
The gross and net spreads on the sale were 13.00% and 8.79%, respectively.
Servicing Fees, Net. Servicing fees increased 15.7% to $16.9 million
for the year ended June 30, 1996, compared to $14.6 million for the year ended
June 30, 1995. Although the average securitized portfolio has increased
significantly, servicing fees have not. Servicing fees, net as a percentage of
the average securitized servicing portfolio decreased to 1.42% for fiscal 1996,
from 1.71% in fiscal 1995. The decrease in servicing fees relative to the
average securitized portfolio resulted primarily from the modified
securitization structure, as discussed above. Servicing fees on all fiscal 1996
Prime securitizations were not earned until after the closing date of the
securitization transaction. The net effect is that interest on loans was earned
for an additional 13-22 days, and servicing fee income was not earned for 13-22
days for each of the fiscal 1996 Prime securitizations. Additionally, the
Company recognized somewhat smaller gains under this structure. Because
additional interest income was earned on the loans to be securitized, those
loans will generate lower Future Excess Servicing Cashflows after the
securitization. The net present value of these future cash flows is recorded as
an Excess Servicing asset as a component of the gain calculation.
The Company's ratio of servicing fees, net to operating expenses was
71.0% and 98.1% for the years ending June 30, 1996, and 1995, respectively.
Although the securitization structure discussed above impacted this ratio, the
growth of the Non-prime program has also impacted this ratio. Because the
Non-prime receivables had not been securitized until recently (March 1996), the
Company earned no servicing fees on this portfolio. The impact of the additional
costs to acquire and service these loans were offset by increased interest
spreads earned on the Non-prime portfolio. Increased salaries and benefits also
affected this ratio. The Company has added significantly to its collections
staff over the past several quarters in response to and in anticipation of
continued growth in the servicing portfolio. Additional support staff in systems
23
<PAGE>
and accounting have also been added, as well as additional levels of management
needed to support the Company's growth.
Other Revenues. Other revenues increased 11.2% to $3.1 million for the
year ended June 30, 1996, from $2.8 for the year ended June 30, 1995. The
increase for the year resulted primarily from increases in late charge fee
income.
Salaries and Benefits Expense. Salaries and benefits increased 81.0% to
$12.0 million for the year ended June 30, 1996, from $6.6 million for the year
ended June 30, 1995. This increase resulted primarily from increased full-time
equivalent ("FTE") employees. Average FTE's for the year ended June 30, 1996,
were 270 compared to 169 for the year ended June 30, 1995. The Company has
experienced growth in credit, sales and operations, collections, and support.
These increases are in response to, and in anticipation of continued expansion
and loan acquisition growth, as well as a growing servicing portfolio.
Additional levels of management and support staff have been added to ensure
efficiency in operations as the Company's acquisition volume and servicing
portfolio continues to grow. Increases in salary and benefit expense were also
due to increased profitability-based incentives during the year ended June 30,
1996.
Other Expense. Other expense increased 43.0% to $11.9 million for the
year ended June, 1996, from $8.3 million for the year ended June 30, 1995. Other
operating expenses include occupancy and equipment costs, outside and
professional services, loan expenses, promotional expenses, travel, office
supplies and other. Many of these expenses vary directly with increased loan
acquisition volume and the increased size of the servicing portfolio. Both loan
acquisition volume and the servicing portfolio were increased during the year
ended June 30, 1996, compared to the year ended June 30, 1995. Occupancy and
equipment costs were increased as a result of the Company's move to its new
headquarters in fiscal 1996. The employee growth experienced by the Company
required both additional square footage and furniture and equipment. The Company
also updated its phone system in conjunction with the move to its new
headquarters. The Company obtained new equipment through an operating lease, and
implemented a voice messaging system. The Company also replaced its collections
system, incurring a loss on the disposal of the former system. Additionally,
increased telephone usage resulting from an increase in collections staff and
collection hours contributed to increased office expense.
Net Earnings. Net earnings more than doubled to $21.1 million for the
year ended June 30, 1996, compared to $9.4 million for the year ended June 30,
1995.
Years Ended June 30, 1995 and 1994
The Company's total loan acquisition volume increased 28.3% to $788.5
million for the year ended June 30, 1995, from $614.6 million for the year ended
June 30, 1994. The increases resulted primarily from the Company's geographic
expansion. Additionally, the Company generated $21.5 million in Non-prime loan
acquisitions. The Company's total servicing portfolio increased 40.5% to nearly
$1.2 billion at June 30, 1995, from $843.2 million at June 30, 1994. Serviced
loans increased as a result of the increased loan acquisition volume in excess
of loan repayments. The volume of loans sold in securitizations increased to
$658.7 million for the year ended June 30, 1995, from $617.1 million for the
year ended June 30, 1994.
Net Interest Margin. Net interest margin decreased 32.4% to $4.6 million
for the year ended June 30, 1995 from $6.0 million for the year ended June 30,
1994.
Interest on Loans. Interest on loans increased 17.5% to $14.7 million for
the year ended June 30, 1995, from $12.5 million for the year ended June 30,
1994. The increase resulted primarily from an increase in the weighted average
yield on the loans to 11.51% for the year ended June 30, 1995, from 10.14% for
the year ended June 30, 1994.
Interest Expense. Interest expense increased to $13.0 million in fiscal
1995 from $7.8 million in 1994. The increase was attributable to an increase in
the average balance due to Union Federal to $231.4 million in fiscal 1995, from
$174.2 million in fiscal 1994, and an increase in the average cost of funds to
5.60% in fiscal 1995 compared to 4.46% in fiscal 1994.
24
<PAGE>
Gain on Sale of Loans. Gain on Sale of Loans increased 87.0% to $8.7
million for the year ended June 30, 1995, from $4.6 million for the year ended
June 30, 1994. The increase was attributable to increased gross spreads. The
weighted average gross spread for the securitizations during the year ended June
30, 1995, increased to 5.92% from 5.78% for the securitizations during the year
ended June 30, 1994. The volume of loans sold in the year ended June 30, 1995,
increased as compared to the year ended June 30, 1994. Approximately $41.6
million or 6.3% more loans were sold during the year ended June 30, 1995, as
compared to the year ended June 30, 1994.
Servicing Fees. Servicing fees increased 26.4% to $14.6 million for the
year ended June 30, 1995, from $11.6 million for the year ended June 30, 1994.
The increase in servicing fees resulted from an increase in the average
securitized loan balances outstanding to $855.2 million for the year ended June
30, 1995, from $589.0 million for the year ended June 30, 1994.
Other Revenues. Other revenues increased slightly to $2.8 million for the
year ended June 30, 1995, from $2.7 million for the year ended June 30, 1994.
The increase resulted primarily from an increase of $110,000 in late charges.
Salaries and Benefits Expense. Salaries and benefits increased 52.6% to
$6.6 million for the year ended June 30, 1995 from $4.3 million for the year
ended June 30, 1994. This increase resulted primarily from an increase in
average FTE's to 169 for the year ended June 30, 1995 from 111 for the year
ended June 30, 1994.
Other Expense. Other expense increased 78.1% to $8.3 million for the year
ended June 30, 1995, from $4.7 million for the year ended June 30, 1994. The
increase was partially due to an $800,000 non-recurring charge for commitment
fees and legal expenses relating to a secured borrowing facility, which was
being negotiated and was intended to provide funding for the Excess Servicing
and Spread Account assets. The Company was able to obtain financing for such
assets on more favorable terms through the private placement of Senior Notes due
2002 and, as a result, terminated negotiations for such secured credit facility.
The increase was also due to increases in credit report fees, service bureau
expenses and other expenses associated with loan purchasing and servicing.
Net Earnings. Net earnings decreased to $9.4 million for the year ended
June 30, 1995, from $9.6 million for the year ended June 30, 1994.
Delinquency and Credit Loss Experience
Set forth below is certain information concerning the experience of UAC
pertaining to delinquencies, and net losses on the Prime fixed rate retail
automobile, light truck and van receivables serviced by the Company. There can
be no assurance that future delinquency, and net loss experience on the
receivables will be comparable to that set forth below.
<TABLE>
<CAPTION>
Prime Delinquency Experience
At June 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- -------------------------- ---------------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio .......... 147,722 $1,548,538 117,837 $1,159,349 91,837 $ 843,245
Delinquencies
30-59 days .............. 1,602 17,030 1,169 12,097 907 8,389
60-89 days .............. 694 7,629 377 4,124 213 2,118
90 days or more ......... 333 3,811 -- -- 137 1,324
Total delinquencies .......... 2,629 28,470 1,546 16,221 1,257 11,831
Total delinquencies
as a percent of
servicing portfolio....... 1.78% 1.84% 1.31% 1.40% 1.37% 1.40%
</TABLE>
25
<PAGE>
As indicated in the above table, delinquency rates based upon
outstanding loan balances of accounts 30 days past due and over increased to
1.84% at June 30, 1996 from 1.40% at June 30, 1995 for the Prime lending
portfolio. The primary reason for the increase in delinquencies is that the
Company changed the way that it measures and reports delinquencies beginning
with the quarter ended September 30, 1995. Beginning with such quarter, the
Company began to include in the delinquency calculations the accounts of
customers who had filed for personal bankruptcy, but whose cases have not been
resolved. Previously, these accounts were not included in the delinquency
figures, since the Company could not take any action to rectify them until the
bankruptcy court resolved each case. If the historical methods of measuring and
reporting delinquencies had been used, the Company estimates that the June 30,
1996 delinquency rate would have been approximately 1.46%.
Non-prime Delinquency Experience
At June 30,
------------------------------------------------
1996 1995
-------------------- --------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
Servicing portfolio ......... 4,067 $47,062 1,687 $19,858
Delinquencies
30-59 days ............. 94 1,120 18 215
60-89 days ............. 40 455 1 17
90 days or more ........ -- -- 1 17
Total delinquencies ......... 134 $ 1,575 20 $ 249
Total delinquencies
as a percent of
servicing portfolio...... 3.29% 3.35% 1.19% 1.25%
Non-prime portfolio delinquency was 3.35% based on outstanding loan
balances of accounts 30 days past due and over at June 30, 1996, compared to
1.25% at June 30, 1995. The Company began acquiring Non-prime loans in October
1994. The increase is consistent with management's expectations, and the
somewhat greater credit risk associated
The following tables set forth information concerning the Company's
experience pertaining to gross charge-offs, recoveries and net losses for its
servicing portfolio. There is generally no recourse to dealers under any of the
terms of the loans in the servicing portfolio, except to the extent of
representations and warranties made by dealers in connection with such loans.
<TABLE>
<CAPTION>
Prime Credit Loss Experience
For the year ended June 30,
-----------------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ---------------------
Number Number Number
of Loans Amount of Loans Amount of Loans Amount
--------- ---------- -------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing
portfolio ........... 132,363 $1,343,770 104,455 $ 982,875 83,673 $ 744,149
Gross charge-offs ...... 3,663 40,815 3,493 28,628 1,404 12,094
Recoveries ............. 19,543 15,258 6,946
---------- ---------- ----------
Net losses ............. 21,272 13,370 5,148
========== ========== ==========
Gross charge-offs
as a % of avg .......
servicing portfolio . 2.77% 3.04% 3.34% 2.91% 1.68% 1.63%
Recoveries as a %
of gross charge-offs 47.88% 53.30% 57.43%
Net losses as a %
of avg. servicing
portfolio .......... 1.58% 1.36% 0.69%
</TABLE>
26
<PAGE>
As indicated in the table above, credit losses as a percentage of the
average Prime servicing portfolio increased to 1.58% for the year ended June 30,
1996, compared to 1.36% for the year ended June 30, 1995. The primary reason for
the recent rise in credit losses and a contributing factor in the increase in
delinquencies is the loans the Company acquired during 1994 and early 1995 which
have proven to be of lower credit quality than loans the Company acquired prior
to 1994 and after the first quarter of fiscal 1995. The Company has determined
that many of these lower quality loans resulted from "low-side overrides" which
are loans made to customers whose credit scores were below the Company's
minimums, but which were made as a result of the credit analyst's judgment that
the loans were acceptable. The low side override loans have had higher rates of
delinquency and loss. Credit analyst discretion for making low side override
loans has been reduced. The Company also believes that the actual mix of loans
purchased during 1994 may have been of somewhat lower average credit quality as
a result of competitive pricing pressures which permitted higher quality
borrowers to obtain lower cost loans from others. Loans made during this period
are nearing the end of the peak period for delinquencies and credit losses which
the Company believes to be nine to sixteen months from the date of closing.
Non-prime Credit Loss Experience
For the year ended June 30,
----------------------------------------------------
1996 1995
------------------- ------------------------
Number Number
of Loans Amount of Loans Amount
-------- ------ -------- ------
(dollars in thousands)
Avg. servicing
portfolio ........... 2,869 $33,124 797 $ 9,448
Gross charge-offs ...... 136 1,455 27 333
Recoveries ............. 670 146
----- -----
Net losses ............. 785 187
===== =====
Gross charge-offs
as a % of avg .......
servicing portfolio . 4.74 4.39% 5.08% 5.29% (1)
Recoveries as a %
of gross charge-offs 46.07% 43.87%
Net losses as a %
of avg. servicing
portfolio .......... 2.37% 2.97% (1)
- ----------------
(1) Non-prime loans were only outstanding for eight (8) months. Therefore,
the percentages reflect an annualized calculation.
Non-prime credit losses are well within management's expectations.
Non-prime credit loss and delinquency performance is being closely monitored as
this portfolio becomes more seasoned.
Overall, the Company has taken a number of steps to improve its
collection efforts over the last several quarters. It has more than doubled the
staffing level in its collection department since June 30, 1995. It has
installed an improved version of its collection system in its new headquarters,
allowing its collectors to be more productive. For example, the number of
outbound credit collection stations at its headquarters has been increased from
14 to 50. In addition, UAC revised its repossession policy in September 1995 to
repossess accounts by 120 days past due, rather than after 60 days. UAC found
that when it switched, in April 1995, to begin repossessions after 60 days,
losses increased because some vehicles were repossessed from customers that
otherwise had the ability to make payments. Other changes intended to enhance
credit quality include the reduction in low side overrides mentioned above as
well as the increase in cutoff scores in any individual metropolitan area where
credit losses were running at a rate greater than 2.50% over the life of the
loans.
Provisions are made for expected loan losses in conjunction with each
loan sale. The allowance for loan loss is inherent in the excess servicing asset
recorded upon sale. Management believes that the allowance for losses on
securitized loans represents a conservative estimate of potential losses. The
allowance for loan loss as a percentage of outstanding securitized loans was
3.22% and 2.29% at June 30, 1996 and 1995, respectively.
27
<PAGE>
Financial Condition
Loans, Net and Servicing Portfolio. Loans, net includes the principal
balance of loans held for sale, net of unearned discount and allowance for
credit losses, loans in process, and dealer premiums. Loans, net increased to
$259.3 million at June 30, 1996, from $201.0 million at June 30, 1995. This
increase was due primarily to the increase in loans acquired in the fourth
quarter of fiscal 1996 as compared to the fourth quarter of fiscal 1995. Loan
acquisitions were $328.9 million during the fourth quarter of fiscal 1996,
compared to $236.8 million in the fourth quarter of fiscal 1995. Allowance for
credit losses increased nearly $650,000 from June 30, 1995. The Company serviced
$1.4 billion and $992.8 million in securitized loans and the total servicing
portfolio was $1.6 billion and $1.2 billion as of June 30, 1996, and June 30,
1995, respectively.
Excess Servicing. Excess Servicing increased to $83.4 million as of
June 30, 1996, from $60.6 million as of June 30, 1995. This balance increased by
the amounts capitalized upon consummation of the various Prime and Non-prime
securitizations related to the future value of estimated excess cashflows
(including estimated dealer premium rebates). Structuring of the fiscal 1996
Prime securitizations included the sale of "interest only strips" which
generated more cash from the sale, but served to reduce the Excess Servicing
assets recorded in conjunction with the sale. The amounts capitalized were
offset by actual Excess Servicing Cashflows received over the year ended June
30, 1996. Allowance for losses on securitized loans is included as a component
of the Excess Servicing asset. At June, 1996, the allowances related to both
Prime and Non-prime securitized loans totaled $43.5 million or 3.22% of the
total securitized loan portfolio compared to $22.8 million or 2.29% at June 30,
1995. Accrued interest due the Company at the cutoff date on securitized loan
pools is also included as a component of Excess Servicing.
Spread Accounts. Spread Accounts increased to $63.6 million at June 30,
1996, from $57.4 million at June 30, 1995. This balance was increased by the
initial deposit made upon securitization of the UACSC 1995-C Auto Trust and PSC
1996-1 Grantor Trust, and subsequent deposits of Excess Servicing Cashflows, and
has been reduced by any withdrawal of funds from the Spread Accounts.
Withdrawals of spread account funds are made when the balance of the Spread
Accounts are in excess of the requirements stipulated in the servicing
agreement. No initial spread account deposits were made in connection with the
last three Prime transactions as a result of the structuring which utilized
alternative credit enhancements in lieu of initial spread account deposits.
Warehouse Credit Facilities, Senior and Senior Subordinated Notes.
Amounts "Due to Union Federal" represented the Company's share of borrowings
from Union Federal prior to consummation of the Company's initial public
offering on August 7, 1995. The Warehouse Credit Facilities and Senior Notes
constituted the Company's primary funding sources beginning in August of 1995.
The Company issued, in a private placement, $46.0 million in Senior Subordinated
Notes in April 1996. The balance of the Warehouse Credit Facilities and the
Senior and Senior Subordinated Notes was $343.8 million at June 30, 1996,
compared to $339.0 million "Due to Union Federal" at June 30, 1995. The amount
"Due to Union Federal" was paid or otherwise eliminated upon consummation of the
Company's initial public offering. See "Liquidity and Capital Resources."
Liquidity and Capital Resources
Sources and Uses of Cash in Operations. The Company's business requires
significant amounts of cash to support operations. Its primary uses of cash
include (i) purchases and financing of loans, (ii) payment of Dealer Premiums,
(iii) securitization costs including cash held in Spread Accounts and similar
cash collateral accounts under revolving Warehouse Credit Facilities, (iv)
servicer advances of payments on securitized loans pursuant to securitization
trusts, (v) losses on hedging transactions realized in connection with the
closing of securitization transactions where interest rates have declined during
the period covered by the hedge, (vi) operating expenses, (vii) interest expense
and (viii) payment of income taxes. The Company's sources of cash from
operations include (i) standard servicing fees, generally 1.0% per annum of the
Prime securitized portfolio, (ii) Excess Servicing Cash Flows, (iii) Dealer
Premium Rebates, (iv) gains on hedging transactions realized in connection with
the closing of securitization transactions where interest rates have increased
during the periods covered by the hedge, (v) interest income, (vi) sales of
loans in securitization transactions and (vii) sale of interest-only strips. Net
cash used by operating activities decreased to $55.8 million for the year ended
June 30, 1996, from a use of $140.9 million for the year ended June 30, 1995,
28
<PAGE>
which was primarily attributable to an increase in loan sales relative to loans
acquired, and the structuring of the fiscal 1996 securitization transactions.
Proceeds from sale of interest-only strips generated $26.7 million in additional
cash at securitization. Alternative securitization structuring with respect to
initial spread account deposit requirements also contributed to improved
liquidity. Additionally, the Company has been able to defer a portion of the
Gain on sales of loans for tax purposes. The Company realized a $5.3 million
cash benefit by doing so during fiscal 1996.
Dealer premium rebates received in excess of the original estimates are
recorded as servicing fees when received. Excess rebates received during fiscal
1996, were approximately $2.8 million compared to $3.2 million for fiscal 1995.
Hedging. Hedging transactions may represent a source or a use of cash
during a given period depending on the change in interest rates. During fiscal
1996, hedging transactions have required a net use of cash of $2.7 million.
Financing Activities and Warehouse Credit Facilities. Cash flows from
financing activities historically (until August 1995) related entirely to
changes in the level of borrowing from Union Federal. The decrease in cash
provided by financing activities for fiscal 1996, corresponds to the decrease in
borrowings as a result of the Company's Spin-off and initial public offering
whereby the Company paid, or otherwise eliminated, all outstanding amounts due
to its former parent, Union Federal. The offering generated $58.0 million in
proceeds to the Company. Prior to the Company's initial public offering, the
Company was dependent upon financing from Union Federal, which, as a savings
bank, has multiple sources of funds, including federally insured deposits and
Federal Home Loan Bank advances. Such financing is no longer available to the
Company, which has substantial capital requirements to support its ongoing
operations and anticipated growth. The Company's sources of liquidity are
currently funds from operations, securitizations and external financing not
related to Union Federal. Historically, the Company has used the securitization
of loan pools as its primary source of long-term funding, and intends to
continue to do so. Securitization transactions enable the Company to improve its
liquidity, to recognize gains from the sales of the loan pools while maintaining
the servicing rights to the loans, and to control interest rate risk by matching
the repayment of amounts due to investors in the securitizations with the actual
cash flows from the securitized assets.
The Company has borrowing arrangements with an independent financial
institution for the Prime Warehouse Facility of up to $350.0 million and a
similar Non-prime Warehouse Facility of up to $50.0 million. The Prime Warehouse
Facility provides funding for loan acquisitions at a purchase price of 98.0% of
the outstanding principal balance of eligible loans at the time of purchase to
the extent allocable to loans which, upon acquisition, provided for 72 monthly
payments or less. Additional funding is provided for eligible loans with greater
than 72 monthly payments at a purchase price of 96.0% of the outstanding
principal balance. The advance rate may be reduced to as low as 92.0% (72
monthly payments and less) and 86.0% (greater than 72 monthly payments) if
certain financial tests are not met, and/or if a securitization has not been
effected in the preceding sixteen weeks. The Non-prime Warehouse Facility
provides funding for loan acquisitions at a purchase price of 80.0% of the
outstanding principal balance of eligible loans at the time of purchase. The
Company also issued $110.0 million in Senior Notes in connection with the
Spin-off of the Company by Union Federal and the Company's initial public
offering, and completed a private placement of $46.0 million in 9.99% Senior
Subordinated Notes in April 1996. Between securitization transactions, the
Company relies primarily on the revolving Warehouse Credit Facilities to fund
ongoing loan acquisitions (not including Dealer Premiums). In addition to loan
acquisition funding, the Company also requires substantial capital on an ongoing
basis to fund the advances of Dealer Premiums, securitization costs, servicing
obligations and other cash requirements described above. The Company's ability
to borrow under the credit facilities is dependent upon its compliance with the
terms and conditions thereof. The Company's ability to obtain successor
facilities or similar financing will depend on, among other things, the
willingness of financial institutions to participate in funding automobile
financing businesses and the Company's financial condition and results of
operations. Moreover, the Company's growth may be inhibited, at least
temporarily, if the Company is not able to obtain additional funding through
these or other facilities or if it is unable to satisfy the conditions to
borrowing under the credit facilities.
29
<PAGE>
To accommodate its anticipated cash and liquidity requirements for the
near term, the Company determined during the third quarter to seek additional
capital and, toward that end, completed its private placement of Senior
Subordinated Notes in April 1996. The securities carry a seven-year bullet
maturity and were rated BBB- by Fitch Investors Service L.P. The additional debt
will affect the Company's weighted average cost of funds as well as the interest
expense recognized in future periods. The proceeds of the sale of the securities
will be used to enhance liquidity and fund the Company's continued nationwide
expansion. Management believes that the proceeds from the Company's initial
public offering, the Senior Notes, the Senior Subordinated Notes, the other
credit facilities described above, future earnings, and periodic securitization
of loans should provide the necessary capital and liquidity for its operations
during the remainder of calendar 1996.
The period during which its existing capital resources will continue to
be sufficient will, however, be affected by the factors described above
affecting the Company's cash requirements. A number of these factors are
difficult to predict, including particularly the cash-effect of hedging
transactions, the availability of outside credit enhancement in securitizations
or other financing transactions and other factors affecting the net cash
provided by securitizations. Depending on the Company's ongoing cash and
liquidity requirements, market conditions and investor interest, the Company may
seek to issue additional debt or equity securities in the near term. The sale of
additional equity, including Class A Common Stock or preferred stock, would
dilute the interests of current shareholders.
Discussion of Forward-Looking Statements
The above discussions contain forward-looking statements made by the
Company regarding its results of operations, cash flow needs and liquidity, loan
acquisition volume, target spreads and other aspects of its business. Similar
forward-looking statements may be made by the Company from time to time. Such
forward-looking statements are subject to a number of important factors that
cannot be predicted with certainty and which could cause such forward-looking
statements to be materially inaccurate. Among these factors are the following:
Capital Requirements and Availability. The Company requires substantial
amounts of cash to support its business and growth as described above. Its cash
requirements can vary depending on the cash-effect of hedging transactions, the
availability of external credit enhancement in securitizations or other
financing transactions and the other factors that affect the net cash provided
by securitizations (at closing and over time) as well as the percentage of
principal amount of loans acquired for which the Company can obtain Warehouse
financing. The Company's ability to meet these ongoing cash and liquidity
requirements depends on several factors. First is the Company's ability to
effect periodic securitizations of its loan portfolio and the terms of such
securitizations which are dependent on market factors generally, changes in
interest rates, demand for asset-backed securities and the Certificates offered
in the Company's securitizations particularly. Another important factor is the
Company's ability to continue to comply with the terms of its senior and senior
subordinated notes and Warehouse facilities and/or its ability to obtain funding
to replace and/or supplement such facilities should it become necessary to do
so. The Company's ability to obtain successor facilities or similar financing
will depend on, amount other things, the willingness of financial institutions
to participate in funding automobile financing businesses and the Company's
financial condition and results of operations. Moreover, the Company's growth
may be inhibited, at least temporarily, if the Company is not able to obtain
additional funding through these or other facilities or if it is unable to
satisfy the conditions to borrowing under the Credit Facilities.
Loan Acquisition Volume, Spread and Growth. Many factors affect the
Company's loan acquisition volume and spread, which have significant impact on
the Company's earnings. Volume is affected by overall demand for new and used
automobiles in the economy generally, the willingness of automobile dealers to
forward prospective borrowers' loan applications to the Company, as well as the
number of qualified borrowers whose loans are approved and whose loans are
ultimately acquired by the Company. Competition can significantly impact both
acquisition volume and the note rate at which loans are originated. Competition
in the Company's business enerally is intense. The Buy Rate offered by the
Company is a significant competitive factor. A competitor offering a lower Buy
Rate may be more likely to acquire a loan. The continued growth of the Company's
servicing portfolio will depend significantly on the receptivity to the
Company's program of new dealers in existing markets as well as new markets and
the continued stability of the Company's relationships with its existing dealer
network.
30
<PAGE>
Interest Rate Risk. The Company's sources of funds generally have
variable rates of interest and its loan portfolio bears interest at fixed rates.
It therefore bears interest rate risk on loans until they are securitized and
employs a hedging strategy to mitigate this risk. There is no assurance that its
strategy will completely offset changes in interest rates. In particular, such
strategy depends on management's estimates of loan acquisition volume.
Loan Losses and Prepayment Rates. The Company bears the primary risk of
losses due to defaults in its servicing portfolio. Default and loan loss rates
are impacted by general economic factors that affect borrowers' ability to
continue to make timely payments on their indebtedness. Prepayments on loans in
the servicing portfolio reduce the size of the portfolio and reduce the
Company's servicing income. The Gain on Sale of Loans in connection with each
securitization transaction and the amount of Excess Servicing recognized in each
transaction reflect deductions for estimates of future defaults and prepayments.
The carrying value of Excess Servicing may be adjusted periodically to reflect
differences between estimated and actual credit losses and prepayments on past
securitizations. The Company's results of operations could be adversely affected
if default or prepayment rates on securitized loans substantially exceed the
estimated levels.
Regulation. The Company's business is subject to numerous federal and
state consumer protection laws and regulations, which, among other things; (i)
require the Company to obtain and maintain certain licenses and qualifications;
(ii) limit the interest rates, fees and other charges the Company is allowed to
charge; (iii) limit or prescribe certain other terms of the Company's contracts;
(iv) require specified disclosures; and (v) define the Company's rights to
repossess and sell collateral. Changes in existing laws or regulations, or in
the interpretation thereof, or the promulgation of any additional laws or
regulation could have an adverse effect on the Company's business.
Other Matters
The Company completed its move to its new headquarters at 250 North
Shadeland Avenue, Indianapolis, Indiana 46219. It is leasing the building of
approximately 115,000 square feet from Waterfield Mortgage Company, Inc., which
is controlled by Richard D. Waterfield, a Company director and its controlling
shareholder. The Company is also subleasing a portion of the building to Union
Federal.
During June of 1996, the Company began acquiring fixed-rate marine
receivables from dealers in Indiana. The Company has acquired marine receivables
in the past, and currently services a small marine portfolio for Union Federal.
The Union Division had ceased its marine acquisition business in November 1991
to focus its efforts on the expansion of its auto markets and dealer base. With
the success of its nationwide expansion with respect to the auto lending
business, the Company intends to capitalize on its market presence with its
existing employees to establish dealer relationships with local marine
dealerships.
During July of 1996, the Company began servicing receivables under
agreements with individual dealerships. These agreements provide for the
servicing of dealer originated loans for a servicing fee, but do not currently
entail any advances by the Company for the purchase of the vehicle. The Company,
however, may consider partial funding of loans in conjunction with dealer
servicing in the future.
As a part of its ongoing development of its business plan, the Company
is researching the possibilities of engaging in other finance-related businesses
such as leasing, and other non-auto consumer lending. Additionally, the Company
is researching the possibility of expanding its dealer base to include
nationally recognized used rental car outlets which are not
manufacturer-franchised dealerships. Based on this research, the Company may
expand its current operations to include some or all of the above
finance-related businesses. It is management's philosophy to search continually
for new products and markets to grow and expand the Company in order to maximize
profits and shareholder value.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Report
The Board of Directors
Union Acceptance Corporation:
We have audited the accompanying consolidated balance sheets of the Union
Acceptance Corporation and Subsidiaries as of June 30, 1996 and 1995, the
related consolidated statements of earnings and cash flows for each of the years
in the three-year period ended June 30, 1996 and the related consolidated
statement of shareholders' equity for the year ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Union Acceptance
Corporation and Subsidiaries at June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
July 30, 1996
32
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
=================================================================================================================
Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 13,459 9,483
Restricted cash 14,789 8,855
Loans, net 259,290 201,022
Accrued interest receivable 2,127 1,508
Furniture and equipment, net 2,026 1,347
Excess servicing 83,434 60,622
Spread accounts 63,590 57,414
Other assets 12,480 9,032
- -----------------------------------------------------------------------------------------------------------------
Total Assets $451,195 349,283
=================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------
Due to Union Federal -- 338,958
Amounts due under warehouse facilities 187,756 --
Long-term debt 156,000 --
Accrued interest payable 5,820 --
Amounts due to trusts 7,931 5,901
Dealer premiums payable 3,381 3,255
Other payables and accrued expenses 3,326 1,167
Deferred income tax payable 8,357 --
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities 372,571 349,281
- -----------------------------------------------------------------------------------------------------------------
Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------
Preferred Stock, without par value, authorized 10,000,000 shares;
none issued and outstanding -- --
Class A Common Stock, without par value, authorized 30,000,000 shares; 4,011,358
and 1 shares issued and outstanding at June 30, 1996 and
June 30, 1995, respectively 58,180 1
Class B Common Stock, without par value, authorized 20,000,000 shares; 9,200,000
and 1 shares issued and outstanding at June 30, 1996 and
June 30, 1995, respectively -- 1
Retained earnings 20,444 --
- -----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 78,624 2
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $451,195 349,283
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended June 30, 1996, 1995 and 1994
(in thousands, except share data)
<TABLE>
<CAPTION>
====================================================================================================
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on loans $ 28,712 14,702 12,515
Interest on spread accounts and restricted cash 5,448 3,936 1,745
- ----------------------------------------------------------------------------------------------------
Total interest income 34,160 18,638 14,260
Interest expense 22,275 12,961 7,769
- ----------------------------------------------------------------------------------------------------
Net interest margin 11,885 5,677 6,491
Provision for credit losses 2,875 1,074 484
- ----------------------------------------------------------------------------------------------------
Net interest margin after provision 9,010 4,603 6,007
Gain on sales of loans 30,357 8,684 4,643
Servicing fees, net 16,926 14,628 11,570
Other 3,096 2,783 2,735
- ----------------------------------------------------------------------------------------------------
Total revenues 59,389 30,698 24,955
- ----------------------------------------------------------------------------------------------------
Salaries and benefits 11,985 6,622 4,340
Other 11,856 8,291 4,655
- ----------------------------------------------------------------------------------------------------
Total operating expenses 23,841 14,913 8,995
- ----------------------------------------------------------------------------------------------------
Earnings before provision for income taxes 35,548 15,785 15,960
Provision for income taxes 14,406 6,396 6,384
- ----------------------------------------------------------------------------------------------------
Net earnings $ 21,142 9,389 9,576
====================================================================================================
Net earnings per common share $ 1.60 N/A N/A
====================================================================================================
Weighted average number of common shares outstanding 13,209,378 N/A N/A
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
==========================================================================================================
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 21,142 9,389 9,576
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Gain on sales of loans (37,900) (16,935) (7,504)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (50,059) (35,245) (34,264)
Return of excess servicing cashflows 37,871 30,049 26,084
Provision for credit losses 2,875 1,074 484
Spread accounts (6,176) (20,081) (13,281)
Amortization and depreciation 4,395 2,049 1,726
Restricted cash (5,934) (7,734) (755)
Other assets and accrued interest receivable (6,788) (6,745) (1,588)
Amounts due to trusts 2,030 3,761 326
Other payables and accrued expenses 14,281 939 (19,104)
Loan originations in excess of liquidations (982,800) (760,091) (583,036)
Securitization of loans held for sale 924,598 658,703 617,103
Proceeds on sale of interest only strip 26,686 -- 8,623
- ----------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (55,779) (140,867) 4,390
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (1,347) (995) (497)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in Due to Union Federal, including
regulatory equity distribution (337,423) 151,992 (3,895)
Net change in warehouse credit facilities 187,756 -- --
Proceeds from issuance of senior notes 110,000 -- --
Proceeds from issuance of senior subordinated notes 46,000 -- --
Payment of borrowing fees (3,231) (647) --
Net proceeds from issuance of common stock 58,000 -- 2
- ----------------------------------------------------------------------------------------------------------
Net cash provided (used) from financing activities 61,102 151,345 (3,893)
- ----------------------------------------------------------------------------------------------------------
Change in cash 3,976 9,483 --
Cash, beginning of year 9,483 -- --
- ----------------------------------------------------------------------------------------------------------
Cash, end of year $ 13,459 9,483 --
==========================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 10,680 6,396 6,384
==========================================================================================================
Interest paid $ 15,648 12,961 7,769
==========================================================================================================
</TABLE>
35
<PAGE>
See accompanying notes to consolidated financial statements.
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the year ended June 30, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Number of
Common Stock
Shares Outstanding Total
-------------------------- Common Retained Shareholders'
Class A Class B Stock Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 1 1 $ 2 -- 2
Issuance of common
stock through initial
public offering 4,000,000 9,200,000 58,000 -- 58,000
Regulatory equity distributions
related to spin-off (1) (1) (2) (698) (700)
Grant of common stock 11,358 -- 180 -- 180
Net earnings -- -- -- 21,142 21,142
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 4,011,358 9,200,000 $ 58,180 20,444 78,624
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
Basis of Presentation
Union Acceptance Corporation and Subsidiaries ("UAC" or the
"Company"), formerly a Division of Union Federal Savings Bank
of Indianapolis (the "Union Division"), specializes in the
acquisition, sale and servicing of retail installment loans
(primarily automobile loans) acquired from a network of over
2,500 manufacturer-franchised dealerships in 25 states from
whom such loans are regularly purchased. Loans acquired are
subsequently sold to investors through asset-backed
securitization transactions.
In contemplation of a public offering to sell common stock, UAC
was formed as a wholly-owned subsidiary of Union Federal
Savings Bank of Indianapolis ("Union Federal") in December
1993. During 1995, Union Acceptance Funding Corporation, UAC
Securitization Corporation, Performance Funding Corporation and
Performance Securitization Corporation were formed as
wholly-owned subsidiaries of UAC and selected assets and
operations of the Union Division were transferred to UAC. In
August of 1995, the Company completed an initial public
36
<PAGE>
offering simultaneously with a tax free spin-off from its
parent, Union Federal. During 1996, UAC Boat Funding Corp. was
formed as a wholly-owned subsidiary of UAC.
The accompanying consolidated financial statements include the
accounts of UAC and Subsidiaries and the Union Division prior
to the transfer and spin-off. All significant intercompany
accounts and transactions have been eliminated in the
consolidation. The consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles and with those in the general practice of the
consumer finance industry.
The consolidated financial statements reflect no allocation of
Union Federal's historical equity. Earnings of the Company were
transferred to Union Federal through the Due to Union Federal
account prior to the spin-off.
Cash
The Company considers all significant investments with a
maturity of three months or less when purchased to be cash
equivalents.
Restricted Cash
Restricted cash primarily consists of funds held in reserve
accounts in compliance with the terms of the Warehouse Facility
Agreements.
Loans, Net
All loans in the Company's prime and non-prime portfolios are
held for sale through securitizations and include automobile,
light-truck, van, and marine loans including dealer premiums
(on prime loans). Such loans are packaged and sold through
asset-backed securitization transactions and are carried at
their principal amount outstanding (amortized cost), net of
unearned discount. Loan production is hedged periodically to
such time as the next securitization is estimated to occur.
Interest on these loans is accrued and credited to interest
income based upon the daily principal amount outstanding. The
Company provides an allowance for credit losses from the date
of origination to the date of securitization. The allowance is
shown as a reduction to loans.
Accrued Interest Receivable
Accrued interest receivable represents interest earned but not
collected on loans held for sale.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is
determined on accelerated methods over the estimated useful
lives of the respective assets.
Dealer Premiums and Dealer Premium Rebates
Dealer premiums are incentives paid to dealers in connection
with the acquisition of loans. Incentives paid to dealers are
deferred in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases. Unamortized deferred costs are
considered a portion of the basis of the loans held for sale
and are included as a component of the subsequent gain or loss
upon sale of the related loans. A portion of the amounts paid
to dealers for participation are refundable to the Company in
the event of prepayment or default. An estimate for the
refundable amount is established as an asset (dealer premium
rebates) as a component of the gain or loss upon the sale of
the loans. Estimates for dealer premium rebates are based on
the historical experience of the incentive plans. Dealer
premium rebates in excess of original estimates are recorded as
servicing fees, net as received. See "Servicing Fees, Net"
below. Dealer premiums are included in loans, net and dealer
premium rebates are recorded as a component of excess
servicing.
37
<PAGE>
Excess Servicing
Excess servicing is capitalized upon each securitization and
represents the difference between the coupon rate of the loans
sold and the certificate rate to the investors less the
contractual servicing fee, typically one percent, and other
ongoing fees discounted at a market rate. Excess servicing is
reduced by a credit loss provision which is deemed adequate to
cover net losses over the life of the respective
securitization. Credit loss provisions are based on historical
loss rates of previous securitizations and the loan composition
of the securitization. Credit loss provisions are discounted at
rates commensurate with a risk free investment of similar
maturity. Excess servicing includes accrued interest due UAC
but not yet collected through date of sale on securitized loans
and estimated dealer premium rebates.
Excess servicing is reduced by the excess cash flows as
received over the life of the securitization. The Company
records a discount related to excess servicing at sale which is
accreted to income over the expected life of the securitized
pool. Prepayment assumptions are utilized to project future
cash flows based on historical experience. Prepayment
assumptions and credit loss provisions are periodically
reviewed with deficiencies, if any, in the present value of the
future cash flows, using the original discount rate, charged to
operations through servicing fees, net.
Spread Accounts
These accounts are intended to protect the securitization
investors and any letter of credit provider or credit enhancer
against credit losses. The initial deposit, if required, and
net excess servicing cash flows earned are retained for each
securitization until the spread account balance increases to a
specified percentage of the pool balance. Funds in excess of
specified percentages are remitted to the Company over the
remaining life of the securitization. Should the spread account
be insufficient to cover losses, each trust is further
supported by additional credit enhancements. Selected trusts
are secured by either a letter of credit or surety bond
provided by a financial institution. Other trusts have been
formed with a "senior-sub structure" whereby the senior
certificate holders are protected against losses by having
their interests senior to the subordinate certificate holders'
interests. Subordinated certificate holders assume a slightly
greater risk, but earn a higher yield on the certificates. For
each trust, there is no recourse to the Company beyond the
balance in the spread account or the trust's future earnings.
Income Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that
includes the enactment date. Tax expense has been computed
assuming the Company was a stand-alone entity (prior to
spin-off).
Amounts Due to Trusts
Amounts due to trusts represent monies collected but not paid
to the trustee for principal and interest remittances as well
as recovery payments in respect of securitized loans. All
amounts collected by the Company are remitted to the trustee
within two business days, and subsequently distributed by the
trustee to the investors, the servicer, and credit enhancers on
a monthly basis.
Gain on Sales of Loans
Gain on sales of loans represent the difference between the
sale proceeds less the principal balance of the loans; less
dealer premiums after reduction for future dealer premium
rebates, and expenses of sale; plus the present value of
expected cash flows related to the excess spread, net of a
credit loss provision and hedging gains and losses. Gains are
credited to operations at the closing of each securitization.
The Company retains the servicing rights on the loans sold.
38
<PAGE>
Servicing Fees, Net
Servicing fees, net include the contractual fee, typically one
percent, earned from each trust plus the accretion of
discounted excess servicing, plus excess dealer premium
rebates, less any valuation adjustments. See Dealer Premiums
and Dealer Premium Rebates, above.
Hedging
Loan production is hedged periodically to such time as the next
securitization is estimated to occur. Securitizations of the
prime portfolio occur approximately every three months. The
primary hedging vehicle is a short sale of the two-year
Treasury Note. At such time as a securitization is committed,
the hedge is covered by the purchase of a like volume of
two-year Treasury Notes. Gains or losses on the hedge are
recognized concurrently with the gain or loss at
securitization.
Incentive Stock Plan
In connection with the initial public offering, the Company
adopted an incentive stock plan (the "Plan") which permits the
issuance of 500,000 shares of Class A Common Stock to directors
and key employees. Under the terms of the Plan, 275,000 options
were granted at an issue price of $16 per share upon
consummation of the Company's initial public offering. Such
options vest equally over a 5-year period commencing on the
date of the initial public offering. Options may be granted
with the exercise prices at the fair market value at the date
of grant, except that non-qualified options may be granted with
the exercise prices not less than 85% of the fair market value
at the date of grant. During 1996, no stock options were
exercisable or exercised, and at June 30, 1996, there were
277,575 shares under option at an average exercise price of
$16.04 per share. The Plan provides for automatic annual grants
of shares to each non-employee director with a value of
$15,000. To date 11,358 shares of common stock have been
granted to non-employee directors at the fair market value on
the date of grant in accordance with the Plan.
Earnings Per Share
The initial public offering was completed on August 7, 1995.
Earnings per share for the year ended June 30, 1996, were
computed by dividing net earnings by the average common shares
outstanding during the period. Shares outstanding from August
7, 1995, through September 30, 1995, were assumed to be
outstanding for the entire three months ended September 30,
1995. The effect of unexercised stock options on earnings per
share is anti-dilutive and has not been included in the
calculation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities 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.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996
presentation.
39
<PAGE>
(2) Loans, Net
Loans, net are as follows (in thousands, except average loan
balance) at:
June 30,
-----------------------
1996 1995
- --------------------------------------------------------------------------------
Principal balance of prime loans held for sale, net
of unearned discount $ 228,391 166,581
Principal balance of non-prime loans held for sale 15,512 19,858
Principal balance of marine loans held for sale 50 --
Loans in process 5,363 6,904
Dealer premiums 11,073 8,132
Allowance for credit losses (1,099) (453)
- --------------------------------------------------------------------------------
$ 259,290 201,022
================================================================================
Weighted average interest rate (prime) 13.24% 14.12%
Weighted average interest rate (non-prime) 19.70 20.02
Average loan balance (prime) $ 14,049 11,246
Average loan balance (non-prime) 12,479 11,771
================================================================================
Allowance for credit losses on loans held for sale (in thousands, prime
and non-prime):
Year ended June 30,
----------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Balance at the beginning of the period $ 453 171 125
Charge-offs (4,556) (2,605) (1,019)
Recoveries 2,327 1,813 581
Provision for credit losses 2,875 1,074 484
- --------------------------------------------------------------------------------
Balance at the end of the period $ 1,099 453 171
================================================================================
40
<PAGE>
The geographic concentration of loans serviced are as follows:
Percent of Total
June 30,
------------------------
State 1996 1995
- --------------------------------------------------------------------------------
Texas 18.2% 19.9%
North Carolina 11.2 9.8
California 8.8 3.8
Ohio 8.0 11.6
Oklahoma 7.2 9.2
Arizona 6.9 9.1
Illinois 6.7 4.9
Florida 6.1 6.2
Indiana 5.8 8.0
Virginia 5.5 3.6
Colorado 3.2 3.8
Missouri 3.0 4.2
Georgia 2.2 2.2
South Carolina 1.2 0.7
Wisconsin 1.0 0.2
Kansas 0.9 1.3
Iowa 0.9 0.2
New Mexico 0.8 0.5
Washington 0.5 0.0
Oregon 0.5 0.0
Maryland 0.4 0.0
Tennessee 0.4 0.0
Minnesota 0.2 0.5
Michigan 0.2 0.0
Kentucky 0.1 0.3
Nebraska 0.1 0.0
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
Loans serviced are as follows (in thousands) at:
June 30,
-------------------------
1996 1995
- --------------------------------------------------------------------------------
Loans held for sale
Prime (net of unearned discount) $ 228,391 166,581
Non-prime 15,512 19,858
Marine 50 --
- --------------------------------------------------------------------------------
243,953 186,439
Securitized loans
Prime 1,319,930 992,768
Non-prime 31,550 --
- --------------------------------------------------------------------------------
1,351,480 992,768
Other loans serviced 3,637 5,203
- --------------------------------------------------------------------------------
$1,599,070 1,184,410
================================================================================
41
<PAGE>
(2) Loans, Net (continued)
Notional amounts and unrealized gains/(losses) related to
outstanding hedges follow (in thousands) at:
<TABLE>
<CAPTION>
June 30,
-----------------------
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts outstanding $ 415,000 293,500
Unrealized gains/(losses) on hedging transactions (711) (1,918)
</TABLE>
Notional amounts of $340 million, $55 million and $20 million
were closed or expected to be closed in August 1996, November
1996 and December 1996, respectively, for amounts outstanding
at June 30, 1996, and $252 million and $42 million in August
1995 and November 1995, respectively, for the amount
outstanding at June 30, 1995.
Hedging realized gains/(losses) follow (in thousands):
Year ended June 30,
------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Realized gains/(losses) $ (2,733) (5,515) 477
================================================================================
(3) Furniture and Equipment
Furniture and equipment are as follows (in thousands) at:
June 30,
-----------------------
1996 1995
- --------------------------------------------------------------------------------
Furniture and equipment $ 3,858 3,086
Accumulated depreciation (1,832) (1,739)
- --------------------------------------------------------------------------------
$ 2,026 1,347
- --------------------------------------------------------------------------------
(4) Excess Servicing
Excess servicing is as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Estimated value of excess servicing cash flows,
net of estimated prepayments $ 112,564 76,274
Allowance for estimated credit losses on securitized loans (43,516) (22,766)
Discount to present value (9,535) (6,680)
- --------------------------------------------------------------------------------------------
59,513 46,828
Accrued interest on securitized loans 10,454 6,207
Estimated dealer premium rebates 13,467 7,587
- --------------------------------------------------------------------------------------------
$ 83,434 60,622
============================================================================================
Outstanding balance of loans serviced
through securitized trusts $ 1,351,480 992,768
Allowance for estimated credit losses as a
percentage of securitized loans serviced 3.22% 2.29%
- --------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
(4) Excess Servicing (continued)
Excess servicing activity is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 60,622 41,265 31,575
Amounts capitalized (including estimated
dealer rebates) 56,436 47,693 34,193
Change in accrued interest on securitized loans 4,247 1,713 1,581
Return of excess cash flows, net of present value effect (37,871) (30,049) (26,084)
- -------------------------------------------------------------------------------------------------
Balance at end of period $ 83,434 60,622 41,265
=================================================================================================
</TABLE>
(5) Spread Accounts
The weighted average yield on spread accounts was 5.32% and 6.07% at
June 30, 1996 and 1995, respectively.
(6) Other Assets
Other assets are as follows (in thousands) at:
June 30,
--------------------
1996 1995
- --------------------------------------------------------------------------------
Accrued servicing fees $ 5,131 4,644
Deferred borrowing fees 2,173 647
Repossessed assets 1,716 1,301
Other 3,460 2,440
- --------------------------------------------------------------------------------
$12,480 9,032
================================================================================
(7) Due to Union Federal and Interest Expense
Interest expense for the periods presented was calculated using Union
Federal's cost of funds rate applied to the monthly average outstanding
balance of amounts due to Union Federal.
Information related to the amount due to Union Federal is as follows (in
thousands):
Year ended June 30,
-----------------------
1995 1994
- --------------------------------------------------------------------------------
Average balance due to Union Federal $ 231,446 174,193
Maximum amount outstanding 394,616 266,086
================================================================================
June 30,
-----------------------
1995 1994
- --------------------------------------------------------------------------------
Average cost of funds for the year ended: 5.60% 4.46%
Cost of funds at: 6.33% 4.76%
================================================================================
43
<PAGE>
(8) Amounts Due Under Warehouse Facilities
At June 30, 1996, the Company, through its wholly-owned
special-purpose subsidiaries, had borrowing arrangements with a
financial institution which provided for two Warehouse
Facilities with an aggregate borrowing capacity of $400
million. Borrowings under these facilities are collateralized
by certain loans held for sale. There are separate Facilities
for the funding of prime and non-prime loan acquisitions.
Outstanding borrowings at June 30, 1996 for the two facilities
were approximately $188,000,000. The weighted average cost of
funds for the year ended June 30, 1996 was 7.21%.
The cost of funds includes a variable interest rate on the
outstanding commercial paper, fees on the used and unused
portions of the Facilities, and the amortization of prepaid
(upfront) warehouse fees. The largest portion of the cost of
funds related to the Warehouse Facilities is the variable rate
interest on the commercial paper issued by the financing
conduit. The weighted average commercial paper rate on
outstanding issues at June 30, 1996 was 5.40%. Upfront
warehouse fees are non-recurring costs related to the initial
set-up of the Facilities. These initial fees totaled
approximately $1.5 million, and were fully amortized during
fiscal 1996. The Warehouse Facilities Agreements specify a term
of one year and are renewable annually. Both the prime and
non-prime Warehouse Facilities have been renewed for an
additional year, and expire in June and July 1997,
respectively.
(9) Long-term Debt
In connection with the Company's initial public offering, the
Company issued, in a private placement, $110 million principal
amount of 8.53% Senior Notes due 2002.
Interest on the Senior Notes is payable semi-annually on
February 1 and August 1 of each year, commencing February 1,
1996. The Senior Notes are redeemable, in whole or in part, at
the option of the Company, in a principal amount not less than
$1 million, together with accrued and unpaid interest to the
date of redemption and a yield-maintenance premium as defined
in the note agreement.
In April 1996, the Company issued $46 million in a private
placement 9.99% Senior Subordinated Notes due 2003.
Interest on the Senior Subordinated Notes is payable quarterly
on March 30, June 30, September 30 and December 30 of each
year, commencing June 30, 1996. The Senior Subordinated Notes
are redeemable, in whole or in part, at the option of the
Company, in a principal amount not less than $1 million,
together with accrued and unpaid interest to the date of
redemption and a yield-maintenance premium as defined in the
note agreement.
44
<PAGE>
(10) Other Revenue and Expenses
Other revenue and expenses follow (in thousands):
Year ended June 30,
-------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Other revenues:
Late charges $ 1,922 1,447 1,337
Origination fees 1,072 1,210 1,263
Other 102 126 135
- --------------------------------------------------------------------------------
$ 3,096 2,783 2,735
================================================================================
Other expenses:
Outside services 2,515 1,492 949
Office, telephone and postage 2,207 1,158 729
Loan processing 2,202 1,841 1,029
Occupancy 891 396 321
Equipment 839 511 474
Other 3,202 2,893 1,153
- --------------------------------------------------------------------------------
$11,856 8,291 4,655
- --------------------------------------------------------------------------------
(11) Income Taxes
The composition of income taxes follows (in thousands):
Year ended June 30,
----------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Current expense $ 9,096 6,458 25,512
Deferred expense (benefit) 5,310 (62) (19,128)
- --------------------------------------------------------------------------------
$14,406 6,396 6,384
================================================================================
The effective tax rate for the year ended June 30, 1996, is
40.5%. Income taxes were allocated using statutory federal and
state rates which resulted in effective income tax rate of
40.5% and 40.0% for the years ended June 30, 1995 and 1994,
respectively.
Year ended June 30,
---------------------
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $ 445 --
Allowance for excess servicing losses 912 --
- --------------------------------------------------------------------------------
1,357 --
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Excess servicing 5,349 --
Mark to market - excess servicing 4,365 --
- --------------------------------------------------------------------------------
9,714 --
- --------------------------------------------------------------------------------
Deferred income tax payable $8,357 --
================================================================================
45
<PAGE>
The Company settled net deferred tax liabilities with Union
Federal for amounts claimed on Union Federal's fiscal 1995 tax
return during fiscal 1996. Net deferred tax liabilities assumed
by the Company were $3,047.
(12) Estimated Fair Value of Financial Instruments
Loans held for sale - Cost approximates fair value as loans are
sold shortly after origination.
Accrued interest receivable - Cost approximates fair value.
Excess servicing - Cost approximates fair value. Amount
determined based upon discounting future cash flows at market
rates using historical prepayment speeds and loss provisions.
Spread accounts - Cost approximates fair value as the interest
rate earned is at a variable rate.
Repossessed assets - Cost approximates fair market value.
All liabilities, except long-term debt - Cost approximates fair
value.
Long-term debt - Carrying amount of $156,000,000 at June 30,
1996 has been calculated to have a fair value of $151,000,000
by discounting the scheduled loan payments to maturity using
rates that are believed to be currently available for debt of
similar terms and maturities.
(13) Commitments and Contingencies
Future minimum payments under noncancelable operating leases on
premises and equipment with terms of one year or more as of
June 30, 1996 are as follows:
1997 $1,216,702
1998 1,217,049
1999 1,130,911
2000 976,833
2001 911,321
Thereafter 1,670,755
- --------------------------------------------------------------------------------
Total $ 7,123,571
================================================================================
These agreements include, in certain cases, various renewal
options and contingent rental agreements. Rental expense for
premises and equipment amounted to $645,494 for the year ended
June 30, 1996. The premises' lease is with a company owned by
the majority shareholders of UAC.
The Company is also involved as a party to certain immaterial
legal proceedings incidental to its business. Management of the
Company believes that the outcome of such proceedings will not
have a material effect upon its business or financial
condition.
46
<PAGE>
(14) Quarterly Financial Information (unaudited)
Quarterly financial information is as follows (in thousands,
except share data):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
- ------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1996
<S> <C> <C> <C> <C> <C>
Interest on loans $ 6,946 7,232 6,732 7,802 28,712
Interest on spread accounts and restricted cash 1,370 1,386 1,317 1,375 5,448
Interest expense 5,289 5,556 5,359 6,071 22,275
Provision for credit losses on loans held for sale 1,150 300 600 825 2,875
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision 1,877 2,762 2,090 2,281 9,010
Gain on sales of loans 6,724 8,483 7,760 7,390 30,357
Servicing fees, net 3,966 2,584 4,796 5,580 16,926
Other revenues 750 724 798 824 3,096
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 13,317 14,553 15,444 16,075 59,389
Salaries and benefits 2,321 3,059 3,232 3,373 11,985
Other expenses 2,398 2,543 3,426 3,48 911,856
- ------------------------------------------------------------------------------------------------------------------------
Operating expenses 4,719 5,602 6,658 6,862 23,841
Provision for income taxes 3,482 3,705 3,473 3,746 14,406
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,116 5,246 5,313 5,467 21,142
========================================================================================================================
Earnings per share $ .39 .40 .40 .41 1.60
Weighted average common shares outstanding 13,205,622 13,209,173 13,211,358 13,211,358 13,209,378
========================================================================================================================
Year ended June 30, 1995
Interest on loans $ 2,476 2,503 4,072 5,651 14,702
Interest on spread accounts and restricted cash 734 866 1,068 1,268 3,936
Interest expense 2,257 2,590 3,733 4,381 12,961
Provision for credit losses on loans held for sale _ 160 304 610 1,074
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision 953 619 1,103 1,928 4,603
Gain on sales of loans 1,336 1,208 1,181 4,959 8,684
Servicing fees, net 3,275 3,193 4,288 3,872 14,628
Other revenues 650 632 768 733 2,783
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 6,214 5,652 7,340 11,492 30,698
Salaries and benefits 1,372 1,499 1,805 1,946 6,622
Other expenses 1,858 1,932 1,698 2,803 8,291
- ------------------------------------------------------------------------------------------------------------------------
Operating expenses 3,230 3,431 3,503 4,749 14,913
Provision for income taxes 2,210 901 1,553 2,732 6,396
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,774 1,320 2,284 4,011 9,389
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is
incorporated by re ference to pages 3 and 5 of the Company's 1996 Proxy
Statement for its 1996 Annual Shareholder Meeting (the "1996 Proxy Statement").
Item 11. Executive Compensation
Only the information required by this item to be included with this
report is incorporated by reference to pages 7 and 8 of the 1996 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
pages 2 and 3 of the 1996 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
pages 9 and 10 of the 1996 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) List the following documents filed as part of the report:
Financial Statements -- Included Under Item 8:
Report of KPMG Peat Marwick, LLP, Independent Auditors
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Earnings for the Years Ended
June 30, 1996, 1995, 1994
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1995, 1994
Consolidated Statement of Shareholders' Equity for the Year
Ended June 30, 1996
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter
ended June 30, 1996
(c) The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit Index on pages 50 and 52.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
UNION ACCEPTANCE CORPORATION
September 27, 1996 By: /S/ John M. Stainbrook
-------------------------
John M. Stainbrook
President
Pursuant to the requirements of the Securities and Exchange Act of
1934, as amended, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
(1) Principal Executive Officer: )
)
/s/ John M. Stainbrook President )
------------------------------------ )
John M. Stainbrook )
)
(2) Principal Financial/ )
Accounting Officer: )
)
Vice President, )
/s/ Rick A. Brown Treasurer and )
----------------------------------- Chief Financial )
Officer )
)
(3) A Majority of the )
Board of Directors: )
)
/s/ Howard L. Chapman Director )
----------------------------------- )
Howard L. Chapman )
)
/s/ John M. Davis Director ) September 27, 1996
John M. Davis )
)
/s/ Fred M. Fehsenfeld Director )
----------------------------------- )
Fred M. Fehsenfeld )
)
Director )
----------------------------------- )
Donald A. Sherman )
)
/s/ John M. Stainbrook Director )
----------------------------------- )
John M. Stainbrook )
)
/s/ Jerry D. Von Deylen Director )
----------------------------------- )
Jerry D. Von Deylen )
)
Director )
----------------------------------- )
Richard D. Waterfield )
)
/s/ Thomas M. West Director )
----------------------------------- )
Thomas M. West
49
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page (Ex. No.
Cross Reference)
- -------------------------------------------------------------------------------
3.1 Registrant's Articles of Incorporation, as amended and *
restated.
3.2 Registrant's Code of By-Laws, as amended and restated. *
3.3 Form of Share Certificate for Class A Common Stock. *
4.1 Articles V and VI of the Registrant's Articles of
Incorporation respecting the terms * of shares of Common
Stock, are incorporated by reference to the Registrant's
Articles of Incorporation filed hereunder as Exhibit 3.1
4.2 Article III - "Shareholder Meetings," Article VI - *
"Certificates for Shares," Article VII - "Corporate Books
and Records - Section 3" and Article X - "Control Share
Acquisitions Statute" of the Registrant's Code of By-Laws
are incorporated by reference to the Registrant's Restated
Code of By-Laws filed herewith as Exhibit 3.2.
4.3 Transfer and Administration Agreement among Enterprise *
Funding Corporation, Union Acceptance Funding Corporation
and Union Acceptance Corporation, dated as of June 27, 1995.
4.3(a) Amendment No. 1 to Transfer and Administration Agreement ***
dated September 8, 1995
4.3(b) Amendment No. 2 to Transfer and Administration Agreement ***
dated September 29, 1995
4.3(c) Letter Agreement regarding Transfer and Administration ____
Agreement dated November 13, 1995
4.3(d) Amendment No. 3 to Transfer and Administration Agreement ____
dated March 1, 1996
4.3(e) Letter Agreement regarding Transfer and Administration ____
Agreement dated May 30, 1996
4.3(f) Amendment No. 4 to Transfer and Administration Agreement ____
dated September 5, 1996
4.4 Note Purchase Agreement between Union Acceptance Corporation **
and certain lenders dated as of August 7, 1995.
4.4(a) Amendment No. 1 to Note Purchase Agreement dated November ****
22, 1995
4.5 Transfer and Administration Agreement among Enterprise *
Funding Corporation, Performance Funding Corporation and
Union Acceptance Corporation, dated as of July 24, 1995.
4.5(a) Amendment No. 1 to Transfer and Administration Agreement ****
dated September 8, 1995
4.5(b) Letter Agreement regarding Transfer and Administration ____
Agreement dated October 12, 1995
4.5(c) Amendment No. 2 to Transfer and Administration Agreement ____
dated May 10, 1996
4.5(d) Letter Agreement regarding Transfer and Administration ____
Agreement dated July 11, 1996
4.5(e) Letter Agreement regarding Transfer and Administration ____
Agreement dated August 20, 1996
4.6 Note Purchase Agreement dated as of April 3, 1996 among *****(4.1)
Union Acceptance Corporation and several
purchasers of Senior Subordinated Notes due 2003
9(a) Voting Trust Agreement among Richard D. Waterfield, as *
trustee, and certain existing shareholders of Union
Holding Company, Inc., dated June 10, 1994.
9(b) First Amendment to Voting Trust Agreement dated June 1, *
1995.
10.1 Interim Assignment and Assumption Agreement by and among *
Union Federal Savings Bank of Indianapolis, Union
Acceptance Corporation and Union Acceptance Funding
Corporation dated June 29, 1994.
10.2 Plan of Business Transfer, Financing and Distribution by and *
among Union Acceptance Corporation, Union Federal Savings
Bank of Indianapolis and Union Holding Company, Inc. as of
June 29, 1994.
10.2 (a) First Amendment to Plan of Business Transfer dated as of *
December 31, 1994.
10.2 (b) Second Amendment to Plan of Business Transfer dated as *
of June 1, 1995.
10.2 (c) General Instrument of Transfer, Assignment and *
Assumption Agreement dated as of January 1, 1995 between
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation.
10.3 Lease Agreement by and between Union Federal Savings Bank of *
Indianapolis and Union Acceptance Corporation dated December
8, 1994.
50
<PAGE>
10.4 Lease Agreement by and between Union Federal Savings Bank of *
Indianapolis and Union Acceptance Funding Corporation
dated December 8, 1994.
10.5 Remittance Processing Agreement by and between Union Federal
Savings Bank of Indianapolis and Union Acceptance *
Corporation dated June 29, 1994.
10.6 Mail and Printing Services Agreement by and between Union *
Federal Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.7 Telephone Equipment Lease Agreement by and between Union *
Federal Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.8 Telecommunications Agreement by and between Union Federal *
Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.9 Communications Equipment and Software License by and between *
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.10 Software License and Maintenance Agreement by and between *
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.11 Loan Servicing Agreement by and between Union Federal *
Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.12 General Subservicing Agreement by and between Union Federal *
Savings Bank of Indianapolis and Union Acceptance
Corporation dated as of January 1, 1995.
10.13 Loan Collection Agreement by and between Union Federal *
Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.14 Letter respecting Terms of Bank Accounts from Union Federal *
Savings Bank of Indianapolis to Union Acceptance
Corporation dated May 25, 1994.
10.15 Supplement to Account Agreement Re: Drafts by and between *
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.16 Tax Allocation Agreement by and between Union Holding *
Company, Inc. and its subsidiaries dated February 1, 1991,
as amended.
10.17 Sale and Purchase Agreement by and between Union Acceptance *
Corporation and Union Acceptance Funding Corporation dated
as of April 1, 1994.
10.18 Form of Remote Outsourcing Agreement by and between *
Systematics Financial Services, Inc. and Union Acceptance
Corporation.
10.18(a) Letter Agreement by and among Systematics Financial *
Services, Inc., Union Federal Savings Bank of Indianapolis
and Union Acceptance Corporation dated July 13, 1994
respecting Provision of Data Processing Services.
10.18(b) Memorandum respecting Billing Procedure in connection with *
Remote Outsourcing Agreement from Systematics System
Financial Services, Inc. to Union Federal Savings Bank of
Indianapolis and Union Acceptance Corporation dated October
25, 1994.
10.19 Union Acceptance Corporation Annual Bonus Plan For Senior *(10.23)
Officers.
51
<PAGE>
10.20 Union Acceptance Corporation Incentive Stock Plan. *(10.24)
10.21 Letter respecting Access to Records from Union Acceptance *(10.25)
Corporation to Union Federal Savings Bank of
Indianapolis dated September 13, 1994.
10.22 Letter Agreement by and between Union Federal Savings Bank *(10.26)
of Indianapolis and Union Acceptance Corporation
dated December 14, 1994 amending and initiating terms of
certain Inter-Company Agreements.
10.23 Letter respecting terms and conditions of bank accounts from *(10.27)
Union Federal Savings Bank of Indianapolis to Union
Acceptance Corporation dated December 16, 1994.
10.24 Lease Agreement between Waterfield Mortgage Company, ****
Incorporated, and Union Acceptance Corporation dated as
of November 1, 1995
10.25 Purchase Agreement among Union Acceptance Funding *****
Corporation, Union (10.1) Acceptance Corporation and
Union Federal Savings Bank of Indianapolis dated as of
January 18, 1996
10.26 Sublease Agreement between Union Acceptance Corporation and _____
Union Federal Savings Bank of Indianapolis dated as of
August 1, 1996
21 Subsidiaries of the Registrant _____
23 Consent of KPMG Peat Marwick LLP. _____
27 Financial Data Schedule _____
- --------------------
* Incorporated by reference to the exhibit bearing the
corresponding exhibit number (or the exhibit number
indicated above in the right hand column) to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-82254).
** Incorporated by reference to the exhibit bearing the
corresponding exhibit number (or the exhibit number
indicated above in the right hand column) to Registrant's
Form 10-K for the year ended June 30, 1995.
*** Incorporated by reference to the exhibit bearing the
corresponding exhibit number (or the exhibit number
indicated above in the right hand column) to Registrant's
Form 10-Q for the quarter ended September 30, 1995.
**** Incorporated by reference to the exhibit bearing the
corresponding exhibit number (or the exhibit number
indicated above in the right hand column) to Registrant's
Form 10-Q for the quarter ended December 31, 1995.
***** Incorporated by reference to the exhibit bearing the
corresponding exhibit number (or the exhibit number
indicated above in the right hand column) to Registrant's
Form 10-Q for the quarter ended March 31, 1996.
52
Exhibit 4.3(c)
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
November 13, 1995
Ms. Cindy Whitaker
Union Acceptance Funding Corporation
45 North Pennsylvania Street, Lower Level
Indianapolis, Indiana 46204
Dear Cindy:
This letter is to confirm our agreement to amend the Transfer and Administration
Agreement between Union Acceptance Corporation (the "Collection Agent"), Union
Acceptance Funding Corporation (the "Transferor") and Enterprise Funding
Corporation (the "Company") dated June 27, 1995 and as amended to date. This
letter agreement shall
be effective November 17, 1995.
The Transfer and Administration Agreement shall be amended as follows:
In Section 1.1, the final clause of the definition of "Net Receivable
Balance" shall be amended to read "then the percentage specified in
clause (i) above shall be 10% or a greater percentage as agreed upon by
the Transferor, the Collection Agent, and the Company on the date that
either event specified in clause (A) or clause (B) above is announced
and to be effective as of the closing date of such Securitized Pool."
The Transferor hereby represents and warrants that the representations and
warranties of the Transferor set forth in Section 3.1 of the Transfer and
Administration Agreement are true and correct as of the date hereof (except
those representations and warranties set forth therein which specifically relate
to an earlier date).
All other terms and conditions of the Agreement not amended by this letter
agreement shall remain unchanged and in full force and effect.
<PAGE>
If this letter correctly sets forth our agreement, please sign the enclosed
duplicate original and return to Michelle M. Heath, NationsBank Investment
Banking, NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina
28255 by November 17th, 1995.
Sincerely,
ENTERPRISE FUNDING CORPORATION
By: /s/ Thomas S. Dunstan
Name: Thomas S. Dunstan
Title: Vice President
Accepted and Agreed:
UNION ACCEPTANCE FUNDING CORPORATION
as Transferor
By: /s/ Cynthia F. Whitaker
Name: Cynthia F. Whitaker
Title: Vice President and Secretary
Date:
UNION ACCEPTANCE CORPORATION
as Collection Agent
By: /s/ John M. Stainbrook
Name: John M. Stainbrook
Title: President
Date:
-2-
Exhibit 4.3(d)
AMENDMENT NUMBER 3 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 3 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of March 1, 1996 between UNION ACCEPTANCE FUNDING
CORPORATION, a Delaware corporation, as transferor (in such capacity, the
"Transferor"), UNION ACCEPTANCE CORPORATION, an Indiana corporation, as
collection agent (in such capacity, the "Collection Agent"), and ENTERPRISE
FUNDING CORPORATION, a Delaware corporation (the "Company") amending that
certain Transfer and Administration Agreement dated as of June 27, 1995, as
amended as of September 8, 1995 and September 29, 1995 (the "Transfer and
Administration Agreement").
WHEREAS, the Transferor and the Company have agreed to make certain
amendments to the Transfer and Administration Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. Defined Terms. As used in this Amendment and except as
otherwise provided in this Section 1, capitalized terms shall have the same
meanings assigned thereto in the Transfer and Administration Agreement:
SECTION 2. Amendment to Definition of Net Receivables Balance. The
percentage appearing in clause (i) of the definition of "Net Receivables
Balance" (i.e., 25%) is hereby deleted and replaced with "35%".
SECTION 3. Amendment to Definition of Transfer Percentage. The
percentage appearing in clause (y) of the definition of "Transfer Percentage" in
respect of Contracts which upon origination provided for more than 72 monthly
payments (i.e. 90%) is hereby deleted and replaced with "86%".
SECTION 4. Exhibit A. Exhibit A attached to Amendment Number 2 dated as
of September 29, 1995 was intended by the parties to have been added at such
time to the Transfer and Administration Agreement as Exhibit A thereto. Such
Exhibit A is hereby replaced in its entirety with Exhibit A attached hereto, and
such exhibit is hereby added to the Transfer and Administration Agreement as
Exhibit A thereto.
SECTION 5. Amendment to Section 2.2(b). Section 2.2(b) of the.Transfer
and Administration Agreement ("Subsequent Transfers") is hereby deleted in its
entirety and replaced with the following text (solely for convenience of
reference, the revised language in this subsection is italicized):
"(b) Subsequent Transfers. On any Business Day occurring
after the Initial Transfer under Section 2.2(a) and prior to the
Termination Date, the
<PAGE>
Transferor may request a release of funds from the Prefunding Account
in an amount not to exceed the Transfer Price on such day of any
Receivable with respect to which the Transferor has requested funding
hereunder, provided, that no funds shall be released from the
Prefunding Account to the extent that (i) after giving effect to such
release the Net Investment (less amounts on deposit in the Prefunding
Account) shall exceed the sum of (x) 98% of the Net Receivables Balance
(to the extent allocable to Contracts which upon origination provided
for 72 monthly payments or less) and (y) 92% of the Net Receivables
Balance (to the extent allocable to Contracts which upon origination
provided for more than 72 monthly payments), (ii) the Transferor shall
not have made any deposit into the Yield Supplement Account required
pursuant to Section 2.15, or (iii) the Collection Agent is not in
compliance with Section 5.3 hereof."
SECTION 6. Amendment to Section 2.13(a). Section 2.13(a) of the
Transfer and Administration Agreement ("Prefunding Account; Prefunding Interest
Reserve Account; Interest Reserve Deposits, Interest Reserve Advances;
Reimbursements") is hereby deleted in its entirety and replaced with the
following text (solely for convenience of reference, the revised language in
this subsection is italicized):
"(a) On the Business Day prior to each Prefunding Date, the
Transferor shall provide the Company and the Administrative Agent with
a written notice in substantially the form of Exhibit O (a "Prefunding
Notice") setting forth the Transferor's reasonable best estimate of the
aggregate amount of Receivables projected to be acquired or originated
by UAC and purchased by the Transferor pursuant to the Sale and
Purchase Agreement during the period from the second succeeding
Business Day to and including the next succeeding Prefunding Date. The
Company agrees that on the related Prefunding Date, provided that (i)
no Potential Termination Event has occurred, (ii) the Transferor shall
have made the Interest Reserve Deposit to the Prefunding Interest
Reserve Account as required by Section 2.13(c) on such day, (iii) after
giving effect to any such deposit the Net Investment would not exceed
the Maximum Net Investment, (iv) after giving effect to such deposit,
the Net Investment (less amounts on deposit in the Prefunding Account)
shall not exceed the sum of (x) 98%; of the Net Receivables Balance (to
the extent allocable to Contracts which upon origination provided for
72 monthly payments or less) and (y) 92% of the Net Receivables Balance
(to the extent allocable to Contracts which upon origination provided
for more than 72 monthly payments), (v) the Collection Agent shall be
in compliance with the requirements of Section 5.3 in respect of such
Prefunding Date, and (vi) the Company shall be able to obtain funds
therefor in the commercial paper market, the Company shall deposit in
the Prefunding Account an amount equal to the product of (i) the
percentage then being applied pursuant to the definition of "Transfer
Price" and (ii) the aggregate
-2-
<PAGE>
amount of Receivables so projected to be acquired or originated (such
product, the "Prefunding Deposit")."
SECTION 7. Amendment to Section 2.14(a). Section 2.14(a) of the
Transfer and Administration Agreement ("Prefunding Account and Prefunding
Interest Reserve Account Withdrawals") is hereby deleted in its entirety and
replaced with the following text (solely for convenience of reference, the
revised language in this subsection is italicized):
"(a) On each Business Day during any Prefunding Period during
which Incremental Transfers are to occur, upon receipt by the
Administrative Agent and the Collateral Agent not later than 11:00 a.m.
New York City time of written certification in substantially the form
of Exhibit N (a "Withdrawal Notice") from the Transferor setting forth,
among other things, the amount requested to be released from the
Prefunding Account and certifying that (i) after giving effect to the
payment of the Transfer Price with respect to such additional
Receivables, the Net Investment (minus amounts on deposit in the
Prefunding Account) shall not exceed the sum of (i) 98% of the Net
Receivables Balance (to the extent allocable to Contracts which upon
origination provided for 72 monthly payments or less) and (y) 92% of
the Net Receivables Balance (to the extent allocable to Contracts which
upon origination provided for more than 72 monthly payments), (ii) the
Transferor shall have made any deposit into the Yield Supplement
Account required pursuant to Section 2.15 in connection with such
Receivables, if any, (iii) the Collection Agent shall be in compliance
with the requirements of Section 5.3 in respect of such Prefunding
Date, and (iv) that the amount to be released from the Prefunding
Account does not exceed the aggregate Transfer Price in respect of such
Receivables, the Collateral Agent shall release to the Transferor the
amount requested by the Collection Agent."
SECTION 5. Amendment to Section 3.1(m). Effective as of the date
hereof, Section 3.1(m) of the Transfer and Administration Agreement ("Coverage;
Amount of Receivables") is hereby deleted in its entirety and replaced with the
following text (solely for convenience of reference, the revised language in
this subsection is italicized):
"(m) Coverage; Amount of Receivables. The Net Investment
(minus amounts on deposit in the Prefunding Account) does not exceed
the sum of (i) 98% of the Net Receivables Balance (to the extent
allocable to Contracts which upon origination provided for 72 monthly
payments or less) and (y) 92% of the Net Receivables Balance (to the
extent allocable to Contracts which upon origination provided for more
than 72 monthly payments). As of May 31, 1995, the aggregate
Outstanding Balance of the Receivables in existence was $77,140,973.81
and the aggregate Outstanding Balance of all Eligible Receivables was
$75,350,988.50.
-3-
<PAGE>
SECTION 9. Amendment to Section 7.1(k). Section 7.1(k) of the Transfer
and Administration Agreement ("Termination Events") is hereby deleted in its
entirety and replaced with the following (solely for convenience of reference,
the revised language in this subsection is italicized):
"(k) (i) the Net Investment minus amounts on deposit in the
Prefunding Account shall at any time exceed the Net Receivables
Balance, or (ii) the Net Investment minus amounts on deposit in the
Prefunding Account shall at any time exceed the sum of (x) 98% of the
Net Receivables Balance (to the extent allocable to Contracts which
upon origination provided for 72 monthly payments or less) and (y) 92%
of the Net Receivables Balance (to the extent allocable to Contracts
which upon origination provided for more than 72 monthly payments) for
a period of two (2) or more consecutive days; or"
SECTION 10. Limited Scope. This amendment is specific to the
circumstances described above and does not imply any future amendment or waiver
of rights allocated to the Company, the Transferor, Union Acceptance
Corporation, the Collection Agent, the Administrative Agent or the Collateral
Agent under the Transfer and Administration Agreement.
SECTION 11. Governing Law. THIS AMENDMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
SECTION 12. Severability: Counterparts. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 13. Ratification. Except as expressly affected by the
provisions hereof, the Transfer and Administration Agreement as amended shall
remain in full force and effect in accordance with its terms and ratified and
confirmed by the parties hereto. On and after the date hereof, each reference in
the Transfer and Administration Agreement to "this Agreement", "hereunder",
"herein" or words of like import shall mean and be a reference to the Transfer
and Administration Agreement as amended by this Amendment.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 3 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ John R. Bulger
Name: John R. Bulger
Title: Vice President
UNION ACCEPTANCE FUNDING
CORPORATION, as Transferor
By: /s/ Cynthia F. Whitaker
Name: Cynthia F. Whitaker
Title: Vice President and Secretary
UNION ACCEPTANCE CORPORATION,
as Collection Agent
By: /s/ John M. Stainbrook
Name: John M. Stainbrook
Title: President
-5-
<PAGE>
Exhibit A
Actual Loss Percentage Transfer Percentage
Per Contract
Number of Monthly
Payments
72 or less +72
Less than 93.0% 98% 92%
93.0% to 95.9% 96% 90%
96.0% to 97.9% 94% 88%
98.0% to 100% 92% 86%
More than 100% 0%
-6-
Exhibit 4.3(e)
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
May 30, 1996
Ms. Cindy Whitaker
Union Acceptance Funding Corporation
45 North Pennsylvania Street, Lower Level
Indianapolis, Indiana 46204
Dear Cindy:
This letter is to confirm our agreement to amend the Transfer and Administration
Agreement between Union Acceptance Corporation (the "Collection Agent"), Union
Acceptance Funding Corporation (the "Transferor") and Enterprise Funding
Corporation (the "Company") dated June 27, 1995 and as amended to date.
The Transfer and Administration Agreement shall be amended as follows:
In Section 1.1, the definition of "Termination Date" shall be amended
so that "June 25, 1996" contained in clause (v) of the definition shall
read "June 25, 1997".
The Transferor hereby represents and warrants that the representations and
warranties of the Transferor set forth in Section 3.1 of the Transfer and
Administration Agreement are true and correct as of the date hereof (except
those representations and warranties set forth therein which specifically relate
to an earlier date).
All other terms and conditions of the Agreement not amended by this letter
agreement shall remain unchanged and in full force and effect.
<PAGE>
If this letter correctly sets forth our agreement, please sign the enclosed
duplicate originals and return to Suzy Edmiston, NationsBank Investment Banking,
NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by May
31, 1996.
Sincerely,
ENTERPRISE FUNDING CORPORATION
By: /s/K. Carter Harris
Name: K. Carter Harris
Title: Vice President
Accepted and Agreed:
UNION ACCEPTANCE FUNDING UNION ACCEPTANCE CORPORATION
CORPORATION, as Transferor as Collection Agent
By: /s/Cynthia F. Whitaker By: /s/John M. Stainbrook
Name: Cynthia F. Whitaker Name: John M. Stainbrook
Title: Vice President and Secretary Title: President
Date: Date:
-2-
Exhibit 4.3(f)
AMENDMENT NUMBER 4 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 4 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of September 5, 1996 between UNION ACCEPTANCE FUNDING
CORPORATION, a Delaware corporation, as transferor (in such capacity, the
"Transferor"), UNION ACCEPTANCE CORPORATION, an Indiana corporation, as
collection agent (in such capacity, the "Collection Agent"), and ENTERPRISE
FUNDING CORPORATION, a Delaware corporation (the "Company") amending that
certain Transfer and Administration Agreement dated as of June 27, 1995, as
amended as of September 8, 1995, September 29, 1995 and March 1, 1996 (the
"Transfer and Administration Agreement").
WHEREAS, the Transferor and the Company have agreed to make certain
amendments to the Transfer and Administration Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. Defined Terms. As used in this Amendment and except as
otherwise provided in this Section 1, capitalized terms shall have the same
meanings assigned thereto in the Transfer and Administration Agreement:
SECTION 2. Amendment to Definition of Net Receivables Balance. The
percentage appearing in clause (i) of the definition of "Net Receivables
Balance" (i.e., 35%) is hereby deleted and replaced with "60%".
SECTION 3. Amendment to Definition of Transfer Percentage. The
percentage appearing in clause (y) of the definition of "Transfer Percentage" in
respect of Contracts which upon origination provided for more than 72 monthly
payments (i.e. 86%) is hereby deleted and replaced with "84%".
SECTION 4. Exhibit A. Exhibit A to the Transfer and Administration
Agreement is hereby replaced in its entirety with Exhibit A attached hereto.
SECTION 5. Amendment to Section 2.2(b) Section 2.2(b) of the Transfer
and Administration Agreement ("Subsequent Transfers") is hereby deleted in its
entirety and replaced with the following text (solely for convenience of
reference, the revised language in this subsection is italicized):
"(b) Subsequent Transfers. On any Business Day occurring after
the Initial Transfer under Section 2.2(a) and prior to the Termination
Date, the Transferor may request a release of funds from the Prefunding
Account in an
-3-
<PAGE>
amount not to exceed the Transfer Price on such day of any Receivable
with respect to which the Transferor has requested funding hereunder,
provided, that no funds shall be released from the Prefunding Account
to the extent that (i) after giving effect to such release the Net
Investment (less amounts on deposit in the Prefunding Account) shall
exceed the sum of (x) 98% of the Net Receivables Balance (to the extent
allocable to Contracts which upon origination provided for 72 monthly
payments or less) and (y) 90% of the Net Receivables Balance (to the
extent allocable to Contracts which upon origination provided for more
than 72 monthly payments), (ii) the Transferor shall not have made any
deposit into the Yield Supplement Account required pursuant to Section
2.15, or (iii) the Collection Agent is not in compliance with Section
5.3 hereof."
SECTION 6. Amendment to Section 2.13(a) Section 2.13(a) of the Transfer
and Administration Agreement ("Prefunding Account; Prefunding Interest Reserve
Account; Interest Reserve Deposits; Interest Reserve Advances; Reimbursements")
is hereby deleted in its entirety and replaced with the following text (solely
for convenience of reference, the revised language in this subsection is
italicized):
"(a) On the Business Day prior to each Prefunding Date, the
Transferor shall provide the Company and the Administrative Agent with
a written notice in substantially the form of Exhibit O (a "Prefunding
Notice") setting forth the Transferor's reasonable best estimate of the
aggregate amount of Receivables projected to be acquired or originated
by UAC and purchased by the Transferor pursuant to the Sale and
Purchase Agreement during the period from the second succeeding
Business Day to and including the next succeeding Prefunding Date. The
Company agrees that on the related Prefunding Date, provided that (i)
no Potential Termination Event has occurred, (ii) the Transferor shall
have made the Interest Reserve Deposit to the Prefunding Interest
Reserve Account as required by Section 2.13(c) on such day, (iii) after
giving effect to any such deposit the Net Investment would not exceed
the Maximum Net Investment, (iv) after giving effect to such deposit,
the Net Investment (less amounts on deposit in the Prefunding Account)
shall not exceed the sum of (x) 98% of the Net Receivables Balance (to
the extent allocable to Contracts which upon origination provided for
72 monthly payments or less) and (y) 90% of the Net Receivables Balance
(to the extent allocable to Contracts which upon origination provided
for more than 72 monthly payments), (v) the Collection Agent shall be
in compliance with the requirements of Section 5.3 in respect of such
Prefunding Date, and (vi) the Company shall be able to obtain funds
therefor in the commercial paper market, the Company shall deposit in
the Prefunding Account an amount equal to the product of (i) the
percentage then being applied pursuant to the definition of "Transfer
Price" and (ii) the aggregate amount of Receiv-
-4-
<PAGE>
ables so projected to be acquired or originated (such product, the
"Prefunding Deposit")."
SECTION 7. Amendment to Section 2.14(a) Section 2.14(a) of the Transfer
and Administration Agreement ("Prefunding Account and Prefunding Interest
Reserve Account Withdrawals") is hereby deleted in its entirety and replaced
with the following text (solely for convenience of reference, the revised
language in this subsection is italicized):
"(a) On each Business Day during any Prefunding Period during
which Incremental Transfers are to occur, upon receipt by the
Administrative Agent and the Collateral Agent not later than 11:00 a.m.
New York City time of written certification in substantially the form
of Exhibit N (a "Withdrawal Notice") from the Transferor setting forth,
among other things, the amount requested to be released from the
Prefunding Account and certifying that (i) after giving effect to the
payment of the Transfer Price with respect to such additional
Receivables, the Net Investment (minus amounts on deposit in the
Prefunding Account) shall not exceed the sum of (x) 98% of the Net
Receivables Balance (to the extent allocable to Contracts which upon
origination provided for 72 monthly payments or less) and (y) 90% of
the Net Receivables Balance (to the extent allocable to Contracts which
upon origination provided for more than 72 monthly payments), (ii) the
Transferor shall have made any deposit into the Yield Supplement
Account required pursuant to Section 2.15 in connection with such
Receivables, if any, (iii) the Collection Agent shall be in compliance
with the requirements of Section 5.3 in respect of such Prefunding
Date, and (iv) that the amount to be released from the Prefunding
Account does not exceed the aggregate Transfer Price in respect of such
Receivables, the Collateral Agent shall release to the Transferor the
amount requested by the Collection Agent."
SECTION 8. Amendment to Section 3.1(m). Effective as of the date
hereof, Section 3.1(m) of the Transfer and Administration Agreement ("Coverage;
Amount of Receivables") is hereby deleted in its entirety and replaced with the
following text (solely for convenience of reference, the revised language in
this subsection is italicized):
"(m) Coverage; Amount of Receivables. The Net Investment
(minus amounts on deposit in the Prefunding Account) does not exceed
the sum of (x) 98% of the Net Receivables Balance (to the extent
allocable to Contracts which upon origination provided for 72 monthly
payments or less) and (y) 90% of the Net Receivables Balance (to the
extent allocable to Contracts which upon origination provided for more
than 72 monthly payments). As of May 31, 1995, the aggregate
Outstanding Balance of the Receivables in existence was $77,140,973.81
and the aggregate Outstanding Balance of all Eligible Receivables was
$75,350,988.50.
-5-
<PAGE>
SECTION 9. Amendment to Section 7.1(k). Section 7.1(k) of the Transfer
and Administration Agreement ("Termination Events") is hereby deleted in its
entirety and replaced with the following (solely for convenience of reference,
the revised language in this subsection is italicized):
"(k) (i) the Net Investment minus amounts on deposit in the
Prefunding Account shall at any time exceed the Net Receivables
Balance, or (ii) the Net Investment minus amounts on deposit in the
Prefunding Account shall at any time exceed the sum of (x) 98% of the
Net Receivables Balance (to the extent allocable to Contracts which
upon origination provided for 72 monthly payments or less) and (y) 90%
of the Net Receivables Balance (to the extent allocable to Contracts
which upon origination provided for more than 72 monthly payments) for
a period of two (2) or more consecutive days; or"
SECTION 10. Limited Scope. This amendment is specific to the
circumstances described above and does not imply any future amendment or waiver
of rights allocated to the Company, the Transferor, Union Acceptance
Corporation, the Collection Agent, the Administrative Agent or the Collateral
Agent under the Transfer and Administration Agreement.
SECTION 11. Governing Law. THIS AMENDMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
SECTION 12. Severability; Counterparts. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 13. Ratification. Except as expressly affected by the
provisions hereof, the Transfer and Administration Agreement as amended shall
remain in full force and effect in accordance with its terms and ratified and
confirmed by the parties hereto. On and after the date hereof, each reference in
the Transfer and Administration Agreement to "this Agreement", "hereunder",
"herein" or words of like import shall mean and be a reference to the Transfer
and Administration Agreement as amended by this Amendment.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 4 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stuart Cutler
Name: Stuart Cutler
Title: Vice President
UNION ACCEPTANCE FUNDING
CORPORATION, as Transferor
By: /s/ Rich A. Brown
Name: Rich A. Brown
Title: Vice President
UNION ACCEPTANCE CORPORATION,
as Collection Agent
By: /s/ John Stainbrook
Name: John Stainbrook
Title: President
-7-
<PAGE>
Exhibit A
Actual Loss Percentage Transfer Percentage
Per Contract
Number of Monthly
Payments
72 or less +72
Less than 93.0% 98% 90%
93.0% to 95.9% 96% 88%
96.0% to 97.9% 94% 86%
98.0% to 100% 92% 84%
More than 100% 0%
-8-
Exhibit 4.5(b)
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
October 12, 1995
Ms. Cindy Whitaker
Performance Funding Corporation
45 North Pennsylvania Street, Lower Level
Indianapolis, Indiana 46204
Dear Cindy:
This letter is to confirm our agreement to amend the Transfer and Administration
Agreement between Union Acceptance Corporation (the "Collection Agent"),
Performance Funding Corporation (the "Transferor") and Enterprise Funding
Corporation (the "Company") dated July 24, 1995 and as amended to date. This
letter agreement shall be
effective as of today.
The Transfer and Administration Agreement shall be amended as follows:
In Section 7.1(q), the reference to "in any period of six consecutive
calendar months" shall be amended to read "prior to March 31, 1996 and
thereafter within any period of six consecutive calendar months
following the date of the preceding Take-Out".
The Transferor hereby represents and warrants that the representations and
warranties of the Transferor set forth in Section 3.1 of the Transfer and
Administration Agreement are true and correct as of the date hereof (except
those representations and warranties set forth therein which specifically relate
to an earlier date).
All other terms and conditions of the Agreement not amended by this letter
agreement shall remain unchanged and in full force and effect.
<PAGE>
If this letter correctly sets forth our agreement, please sign the enclosed
duplicate original and return to Michelle M. Heath, NationsBank Investment
Banking, NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina
28255 by October 20, 1995.
Sincerely,
ENTERPRISE FUNDING CORPORATION
By: /s/ Thomas S. Dunstan
Name: Thomas S. Dunstan
Title: Vice President
Accepted and Agreed:
UNION ACCEPTANCE CORPORATION
By: /s/ John M. Stainbrook
Name: John M. Stainbrook
Title: President
Date:
PERFORMANCE FUNDING CORPORATION
By: /s/ Cynthia F. Whitaker
Name: Cynthia F. Whitaker
Title: Vice President and Secretary
Date:
-2-
Exhibit 4.5(c)
AMENDMENT NUMBER 2 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 2 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of May 10, 1996 between PERFORMANCE FUNDING CORPORATION,
a Delaware corporation, as transferor (in such capacity, the "Transferor"),
UNION ACCEPTANCE CORPORATION, an Indiana corporation, in its individual capacity
and as collection agent (in such capacity, the "Collection Agent"), and
ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "Company") amending
that certain Transfer and Administration Agreement dated as of July 24, 1995
among the parties hereto, as amended by Amendment No. 1 dated as of September 8.
1995 (the "Transfer and Administration Agreement").
WHEREAS, the Transferor and the Company have agreed to make
certain amendments to the Transfer and Administration Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. Defined Terms. As used in this Amendment, capitalized term
shall have the same meanings assigned thereto in the Transfer and Administration
Agreement.
SECTION 2. Amendment to Definition of "Net Receivables Balance". The
definition of "Net Receivables Balance" is hereby deleted in its entirety and
replaced with the following (solely for convenience of reference, the revised
provision in this definition is italicized):
"Net Receivables Balance" means at any time the Outstanding
Balance of the Eligible Receivables at such time reduced by the sum of
(i) the amount by which the aggregate Outstanding Balance of Eligible
Receivables the Contracts related to which upon origination provide for
more than 60 monthly payments exceeds 80% of the aggregate Outstanding
Balance of Eligible Receivables, plus (ii) the amount by which the
aggregate Outstanding Balance of Eligible Receivables originated by any
one dealer exceeds 3% of the Outstanding Balance of Eligible
Receivables (except that the aggregate Outstanding Balance of Eligible
Receivables originated by Ricart Ford may exceed 3% but not exceed 5%
of the Outstanding Balance of Eligible Receivables), plus (iii) the
aggregate Outstanding Balance of all Eligible Receivables which are
Defaulted Receivables."
SECTION 3. Limited Scope. This amendment is specific to the
circumstances described above and does not imply any future amendment or waiver
of rights allocated to the Company, the Transferor, Union Acceptance
Corporation, the Collection Agent, the
<PAGE>
Administrative Agent or the Collateral Agent under the Transfer and
Administration Agreement.
SECTION 4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
SECTION 5. Severability. Counterparts. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when Taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 6. Ratification. Except as expressly affected by the provisions
hereof, the Transfer and Administration Agreement as amended shall remain in
full force and effect in accordance with its terms and ratified and confirmed by
the parties hereto. On and after the date hereof, each reference in the Transfer
and Administration Agreement to "this Agreement", "hereunder", "herein" or words
of like import shall mean and be a reference to the Transfer and Administration
Agreement as amended by this Amendment.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 2 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stuart Cutler
Name: Stuart Cutler
Title: Vice President
PERFORMANCE FUNDING CORPORATION,
as Transferor
By: /s/ Cynthia F. Whitaker
Name: Cynthia F. Whitaker
Title: Vice President
UNION ACCEPTANCE CORPORATION,
as Collection Agent
By: /s/ John M. Stainbrook
Name: John M. Stainbrook
Title: President
-3-
Exhibit 4.5(d)
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
July 11, 1995
Ms. Cindy Whitaker
Performance Funding Corporation
45 North Pennsylvania Street, Lower Level
Indianapolis, Indiana 46204
Dear Cindy:
This letter is to confirm our agreement to amend the Transfer and Administration
Agreement ("TAA") between Union Acceptance Corporation (the "Collection Agent"),
Performance Funding Corporation (the "Transferor") and Enterprise Funding
Corporation (the "Company") dated July 24, 1995 and as amended to date. The TAA
shall be amended as follows:
In Section 1.1, the definition of "Termination Date" shall be amended
so that "July 18, 1996" contained in clause (v) of the definition shall
read "July 18, 1997".
The Transferor hereby represents and warrants that the representations and
warranties of the Transferor set forth in Section 3.1 of the Transfer and
Administration Agreement are true and correct as of the date hereof (except
those representations and warranties set forth therein which specifically relate
to an earlier date), All other terms and conditions of the Agreement not amended
by this letter agreement shall remain unchanged and in full force and effect.
<PAGE>
If this letter correctly sets forth our agreement, please sign the enclosed
duplicate originals and return to Suzy Edmiston, NationsBank Investment Banking,
NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by
July 16, 1996.
Sincerely,
ENTERPRISE, FUNDING CORPORATION
By: /s/ K. Carter Harris
Name: K. Carter Harris
Title: Vice President
Accepted and Agreed:
PERFORMANCE FUNDING UNION ACCEPTANCE CORPORATION
CORPORATION, as Transferor as Collection Agent
By: /s/Rick A. Brown By: /s/John M. Stainbrook
Name: Rick A. Brown Name: John M. Stainbrook
Title: Treasurer Title: President
Date: Date:
-2-
Exhibit 4.5(e)
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
August 20, 1996
Ms. Melanie Otto
Performance Funding Corporation
250 North Shadeland Avenue
Indianapolis, Indiana 46219
Dear Melanie:
This letter is to confirm our agreement to amend the Transfer and Administration
Agreement (the "Agreement") between Union Acceptance Corporation (the
"Collection Agent), Performance Funding Corporation (the "Transferor") and
Enterprise Funding Corporation (the "Company") dated July 24, 1995 and as
amended to date. The Agreement shall be amended as follows and shall be
effective as of today:
In Section 7.1(q) (as amended on October 12, 1995), the reference to
"prior to March 31, 1996 and thereafter within any period of six
consecutive calendar months following the date of the preceding
Take-Out" shall be amended to read "after March 31, 1996 and prior to
December 31, 1996, and thereafter within any.period of six consecutive
calendar months following the date of the preceding Take-Out".
The Transferor hereby represents and warrants that the representations and
warranties of the Transferor set forth in Section 31 of the Transfer and
Administration Agreement are true and correct as of the date hereof (except
those representations and warranties set forth therein which specifically relate
to an earlier date).
All other terms and conditions of the Agreement not amended by this letter
agreement shall remain unchanged and in full force and effect.
<PAGE>
If this letter correctly sets forth our agreement, please sign the enclosed
duplicate original and return to Suzy Edmiston, NationsBank Investment Banking,
NationsBank Corporate Center, 10th Floor. Charlotte. North Carolina 282,55 by
August 30, 1996.
Sincerely,
ENTERPRISE CORPORATION
By: /s/ Stuart L. Cutler
Name: Stuart L. Cutler
Title: Vice President
Accepted and Agreed:
UNION ACCEPTANCE CORPORATION PERFORMANCE FUNDING
CORPORATION
By: /s/ John M. Stainbrook By: /s/ Rick A. Brown
Name: John M. Stainbrook Name: Rick A. Brown
Title: President Title: Vice President
-2-
SUBLEASE
BY AND BETWEEN
UNION ACCEPTANCE CORPORATION, AN INDIANA CORPORATION
LANDLORD
AND
UNION FEDERAL SAVINGS BANK OF INDIANAPOLIS,
A FEDERAL SAVINGS BANK
TENANT
DATED
August 1, 1996
<PAGE>
TABLE OF CONTENTS
PARAGRAPH PAGE
PARAGRAPH 1: TERMS AND DEFINITIONS.......................................1
PARAGRAPH 2: EXHIBITS...........................................2
PARAGRAPH 3: CONSENT............................................2
PARAGRAPH 4: COMMENCEMENT AND POSSESSION........................2
PARAGRAPH 6: RENT...............................................2
PARAGRAPH 7: HOLDOVER TENANCY...................................3
PARAGRAPH 8: TENANT'S ALTERATIONS...............................3
PARAGRAPH 9: CERTAIN IMPROVEMENTS: .............................4
PARAGRAPH 10: PROJECT SERVICES..................................4
PARAGRAPH 11: INTERRUPTION OF SERVICES..........................5
PARAGRAPH 12: USE OF LEASED PREMISES............................5
PARAGRAPH 13: SIGNS AND GRAPHICS................................6
PARAGRAPH 14: ENVIRONMENTAL PROVISIONS..........................6
PARAGRAPH 15: INSURANCE AND WAIVER OF SUBROGATION...............7
PARAGRAPH 16: REPAIRS...........................................8
PARAGRAPH 17: ENCUMBRANCES; ASSIGNMENT AND SUBLETTING...........9
PARAGRAPH 18: ADDITIONAL RIGHTS RESERVED
TO THE LANDLORD...............................10
PARAGRAPH 19: LANDLORD'S REPRESENTATIONS.......................10
PARAGRAPH 20: CASUALTY AND UNTENANTABILITY.....................10
-i-
<PAGE>
PARAGRAPH 21: CONDEMNATION.....................................11
PARAGRAPH 22: WAIVER OF CERTAIN CLAIMS.........................11
PARAGRAPH 23: LIMITATION OF LANDLORD'S LIABILITY...............12
PARAGRAPH 24: TENANT'S DEFAULT.................................12
PARAGRAPH 25: REMEDIES OF LANDLORD.............................12
PARAGRAPH 26: ADVANCES AND INTEREST............................14
PARAGRAPH 27: [RESERVED].......................................14
PARAGRAPH 28: SURRENDER OF LEASED PREMISES.....................14
PARAGRAPH 29: INDEMNIFICATION..................................14
PARAGRAPH 30: SEVERABILITY.....................................15
PARAGRAPH 31: WAIVER...........................................15
PARAGRAPH 32: ESTOPPEL.........................................15
PARAGRAPH 33: SUBORDINATION, ATTORNMENT
AND NONDISTURBANCE............................16
PARAGRAPH 34: QUIET ENJOYMENT..................................16
PARAGRAPH 35: ATTORNEYS' FEES..................................16
PARAGRAPH 36: FORCE MAJEURE....................................16
PARAGRAPH 37: APPLICABLE LAW...................................17
PARAGRAPH 38: BINDING EFFECT; GENDER...........................17
PARAGRAPH 39: TIME.............................................17
PARAGRAPH 40: WAIVER OF JURY TRIAL.............................17
PARAGRAPH 41: HEADINGS.........................................17
PARAGRAPH 42: BROKERS..........................................17
-ii-
<PAGE>
PARAGRAPH 43: ENTIRE AGREEMENT.................................17
PARAGRAPH 44: NOTICES..........................................18
PARAGRAPH 45: RECORDATION......................................18
PARAGRAPH 46: OPTION TO RENEW..................................18
-iii-
<PAGE>
SUBLEASE OF PREMISES
This Sublease of Premises (the "Sublease") is made between UNION
ACCEPTANCE CORPORATION, an Indiana corporation ("Landlord"), and UNION FEDERAL
SAVINGS BANK OF INDIANAPOLIS, a Federal savings bank ("Tenant"). Landlord leases
to Tenant and Tenant leases from Landlord the Leased Premises, subject to the
following terms and conditions:
PARAGRAPH 1: TERMS AND DEFINITIONS: The following terms and definitions shall
be applied uniformly throughout the Lease:
A. Building shall mean the structure and all real property underlying
such structure and contiguous thereto held under common ownership which is
described on Exhibit A and more generally located at 250 North Shadeland Avenue,
Indianapolis, Indiana.
B. Leased Premises shall mean portions of the ground floor of the
Building, as described in Exhibit B.
C. Lease Commencement Date shall mean August 1, 1996.
D. Tenant's Rentable Square Footage shall mean 1,534 square feet of
office space.
E. Lease Expiration Date shall mean April 30, 2003, or the expiration
date of any renewal period.
F. Term shall mean the period commencing with Lease Commencement Date
and ending with the Lease Expiration Date.
G. Base Rent shall mean $2,556.67 per month for the Term.
H. Permitted Purpose shall mean branch banking center and storage.
I. Authorized Number of Parking Spaces shall mean 25 spaces at no cost
to Tenant.
J. Landlord's Notice Address: Union Acceptance Corporation, 250 North
Shadeland Avenue, Indianapolis, Indiana 46219 - Attention: President - Fax:
(317) 231- 7926.
K. Tenant's Mailing Address: Union Federal Savings Bank of
Indianapolis, 45 North Pennsylvania Street, Indianapolis, Indiana 46204 -
Attention: Lonnie Frauhiger - Fax: (317) 269-4780.
<PAGE>
L. Master Lease shall mean that certain Lease and Agreement dated as of
November 1, 1995, by and between Landlord and Waterfield Mortgage Company,
Incorporated.
PARAGRAPH 2: EXHIBITS: The exhibits listed below are attached and incorporated
into this Sublease by reference. The terms of schedules, exhibits, and
typewritten addenda, if any, attached to this Sublease shall control over any
inconsistent provisions in this Sublease.
Exhibits:
A. Legal description of Building
B. Schematic floor plan
C. Cleaning services
D. Tenant estoppel certification
E. Subordination, Non-Disturbance and Attornment Agreement
F. Signage specifications
PARAGRAPH 3: CONSENT: Notwithstanding any other provision of this Sublease, all
consents and approvals to be given by Landlord or Tenant, as the case may be,
shall not be unreasonably or arbitrarily withheld, and shall be timely made.
PARAGRAPH 4: COMMENCEMENT AND POSSESSION: Subject to the terms and conditions
herein, the Term, the Rent (as hereinafter defined) and the possession of the
Leased Premises by Tenant shall commence on the Lease Commencement Date.
Tenant's occupancy of the Leased Premises shall not be construed to relieve
Landlord of its responsibility to remedy, correct, replace, reconstruct or
repair any deviation, deficiency, or defect in the work or in the materials or
equipment furnished by Landlord without cost to Tenant.
PARAGRAPH 5: SUBORDINATION TO MASTER LEASE: This Sublease is subject in all
respects to the terms and conditions of the Master Lease relating to the
Property. Tenant covenants and agrees with Landlord that it will observe and
perform each of the covenants and agreements, and shall abide and be bound by
each of the terms and provisions of the Master Lease (except the covenants for
the payment of rent, real estate taxes and insurance premiums thereunder) and
shall take no action, or fail to take any action, that would constitute a
default by the Landlord thereunder. Tenant acknowledges that it has received a
copy of the Master Lease. In the event of a conflict between the terms and
conditions of the Master Lease and (i) the rights of Tenant or (ii) the
obligations of Landlord hereunder, the Master Lease shall prevail. Tenant shall
have no greater rights under this Sublease with respect to the Property than
Landlord has as lessee under the Master Lease.
PARAGRAPH 6: RENT: Beginning on the Lease Commencement Date, Tenant shall pay
each monthly installment of Base Rent in advance on or before the first calendar
day of
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each month. Monthly installments for any fractional calendar month, at the
beginning or end of the Term, shall be prorated based on the number of days in
the month. Base Rent together with all other amounts payable by Tenant to
Landlord under this Sublease, shall be sometimes referred to collectively as
"Rent". Tenant shall pay all Rent to: Landlord at the address prescribed above
for notices, Attention: Rick A. Brown, Treasurer, or as may be hereafter
specified by Landlord. If Tenant fails to make any payment of Rent within five
(5) days after the payment is due, then Tenant shall pay a late charge of four
percent (4%) of the amount of the payment per month from the date when due. Such
late charge shall constitute Rent, and shall be paid with the next monthly
installment of Rent coming due. Such late charge shall be in addition to, and
not in lieu of, all other rights and remedies provided to Landlord in this
Sublease.
PARAGRAPH 7: HOLDOVER TENANCY: If Tenant shall holdover without permission after
the expiration of the Term, Tenant shall be deemed to occupy the Leased Premises
as a tenant from month-to-month, which tenancy may be terminated by thirty (30)
days written notice. During such tenancy, Tenant agrees to pay to Landlord an
amount equal to one hundred fifty percent (150%) of the monthly Base Rent in
effect during the last month of the Term and to be bound by all of the terms,
conditions and covenants herein specified or the holdover shall be deemed a
default under Paragraph 24 of this Sublease. Landlord may exercise all of its
rights and remedies as a result of Tenant's failure to deliver possession of the
Leased Premises to Landlord when required under this Sublease for the period of
such holdover.
PARAGRAPH 8: TENANT'S ALTERATIONS: Other than as set forth in Paragraph 9,
Tenant shall not make any alterations, additions or improvements (collectively
referred to as "Tenant's Alterations") in or to the Leased Premises without
first obtaining the written consent of Landlord, which consent may be withheld
at Landlord's discretion. All Tenant's Alterations shall be done in accordance
with all laws, ordinances, and rules and regulations of any federal, state,
county, municipal, or other public authority having jurisdiction over the Leased
Premises. Tenant shall use qualified contractors approved by Landlord and all
work must be done in a good and workmanlike manner and conform with the standard
of the Building. Tenant may, at its option, remove any Tenant's Alterations
prior to its return of possession of the Leased Premises to Landlord pursuant to
the terms of this Sublease, so long as Tenant restores the Leased Premises to
its original condition prior to the installation of such Tenant's Alterations,
subject to ordinary wear and tear and damage by fire and other insured casualty
excepted. As of the Lease Commencement Date, there are no Tenant Alterations
that Tenant will remove prior to its return of possession of the Leased
Premises, except those listed on Schedule 1 hereto.
Any mechanic's lien filed against the Leased Premises or the Building
for work claimed to have been done or materials claimed to have been furnished
to Tenant shall be discharged by Tenant within thirty (30) days from the date of
receipt of notice of the lien. For the purposes hereof, the bonding of such lien
by a reputable casualty or insurance company reasonably satisfactory to Landlord
shall be deemed the equivalent of a discharge
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of any such lien. Should any action, suit, or proceeding be brought upon any
such lien for the enforcement or foreclosure of the same, Tenant shall defend
Landlord therein, by counsel reasonably satisfactory to Landlord, and pay any
damages and satisfy and discharge any judgment entered therein against Landlord.
Tenant shall indemnify and hold Landlord harmless from any injury,
damage, cost or loss sustained by persons or property as a result of any defect
in the design, material or workmanship of Tenant Alterations.
PARAGRAPH 9: CERTAIN IMPROVEMENTS: Landlord acknowledges that Tenant has, with
Landlord's consent, constructed improvements to the Leased Premises and adjacent
areas to meet the Tenant's requirements, including the construction of a
drive-up teller facility and additional parking area. Landlord acknowledges that
such improvements have been constructed in compliance with Paragraph 8. Landlord
and tenant agree that Tenant's costs to construct such improvements was
$316,045, of which $203,640 has been or will be reimbursed by Landlord to Tenant
at or about the time this Sublease is executed by the parties hereto. Neither
Landlord nor Tenant owes the other any additional funds in respect of such
improvements.
PARAGRAPH 10: PROJECT SERVICES: Landlord shall furnish Project Services, as
defined herein, in the manner generally provided in first class office buildings
in the local metropolitan area, including, but not limited to:
A. Utility Services: Electricity; hot and cold water; sewer; refuse and
rubbish removal; lighting, and bulb, tube, lamp and ballast replacement; and
heating, ventilation and air conditioning. Should Tenant, in Landlord's
reasonable judgment, use additional, unusual or excessive Utility Services,
Landlord reserves the right to charge Tenant for the portion of Utility Services
which is unusual or excessive, in Landlord's reasonable discretion.
B. Maintenance Services: Maintenance of all interior and exterior areas
including parking areas and the roof. Services include, but are not limited to,
lighting, landscaping, cleaning, painting, window washing, and snow plowing.
C. Janitorial Services: Listed on Exhibit C ("Cleaning Services").
D. Elevator Service: During normal business hours (if the Building
contains an elevator or elevators for the use of Tenant). There shall also be at
least one elevator available twenty-four hours a day.
The services described in paragraphs A. through D. above shall be
collectively referred to as "Project Services." The costs of Project Services
shall be part of Base Rent. Unless otherwise indicated, Project Services shall
be furnished 7:00 a.m. to 7:00 p.m., Monday through Friday, and until 1:00 p.m.
on Saturdays, excluding the following holidays: New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and
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Christmas Day. If requested by Tenant with twenty-four (24) hours prior notice,
Landlord will make available any Project Services for an additional hourly fee
agreed to by Landlord and Tenant.
PARAGRAPH 11: INTERRUPTION OF SERVICES: Notwithstanding any other provisions of
this Sublease, if any of the Project Services to be provided by Landlord are
suspended or interrupted for any reason other than the default, willful acts,
negligence or recklessness of Tenant or its agents, employees, visitors,
customers or invitees for a period of more than two (2) consecutive business
days, Rent due hereunder shall abate equitably in direct proportion to the
amount of the Leased Premises that are unusable by Tenant, until such time as
Project Services are restored to the Leased Premises.
PARAGRAPH 12: USE OF LEASED PREMISES: Tenant agrees to:
A. Use the Leased Premises for the Permitted Purpose and for no other
purpose.
B. Use the Leased Premises in compliance with all laws, ordinances,
regulations or rules applicable to the Leased Premises and all requirements of
the carriers of insurance covering the Building. However, so long as it uses the
Leased Premises for the Permitted Purpose, Tenant shall not be obligated to make
any changes to the Leased Premises due to laws, ordinances, regulations or
rules, unless such changes are required as a result of Tenant's Alterations.
C. Not do or permit anything to be done in or about the Leased
Premises, or bring or keep anything in the Leased Premises that may increase
Landlord's fire and extended coverage insurance premium, damage the Building or
the Leased Premises, constitute waste, constitute an immoral purpose, be a
nuisance, public or private, or menace or other disturbance to tenants of
adjoining premises or anyone else.
D. Observe, perform and abide by such reasonable rules and regulations
for the use and occupation of the Leased Premises promulgated by Landlord from
time to time.
E. Maintain and supply its own security personnel and equipment. Due to
the nature of Tenant's use as a banking center, it is expressly agreed that
Landlord shall not be liable for loss to Tenant, its agents, employees,
customers and visitors arising out of robbery, theft, burglary, or damage or
injury to persons or property caused by persons gaining access to the Leased
Premises, provided that such access was not gained as a result of the
negligence, intentional act or willful misconduct of Landlord, its agents or
employees. Tenant agrees to indemnify, release and hold harmless Landlord from
any claim, loss, cost, damage, cause of action, award or other expense
(including reasonable attorneys' fees) arising out of or related to such claims,
provided that such claim did not arise as a result of the negligence,
intentional act or willful misconduct of Landlord, its agents or employees.
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PARAGRAPH 13: SIGNS AND GRAPHICS: Except as agreed to in Exhibit F, Tenant shall
not place or permit any lettering, sign, advertisement, notice or object on the
windows or doors or on the outside of the perimeter walls of the Leased
Premises, unless Landlord has given prior written consent. Any sign or lettering
not approved by Landlord may be removed by Landlord and the cost of such removal
and any necessary repair shall be paid for by Tenant.
PARAGRAPH 14: ENVIRONMENTAL PROVISIONS:
A. "Hazardous Materials" include substances (i) which require
remediation under any Environmental Laws; or (ii) which are or become defined as
a "hazardous waste," "hazardous substance," "pollutant" or "contaminant" under
any Environmental Laws; or (iii) which are toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic or mutagenic; or (iv) which
contain petroleum hydrocarbons, polychlorinated biphenyls, asbestos, asbestos
containing materials or urea formaldehyde.
B. "Environmental Laws" mean all applicable present and future
statutes, regulations, rules, ordinances, codes, permits or orders of all
governmental agencies, departments, commissions, boards, bureaus, or
instrumentalities of the United States, states and their political subdivisions
and all applicable judicial, administrative and regulatory decrees and judgments
relating to the protection of public health or safety or of the environment.
C. "Environmental Damages" means all claims, judgments, losses,
penalties, fines, liabilities, encumbrances, liens, costs and reasonable
expenses of investigation, defense or good faith settlement resulting from
violations of Environmental Laws, and including, without limitation: (i) damages
for personal injury and injury to property or natural resources; (ii) reasonable
fees and disbursements of attorneys, consultants, contractors, experts and
laboratories; and (iii) costs of any cleanup, remediation, removal, response,
abatement, containment, closure, restoration or monitoring work required by any
Environmental Law and other costs reasonably necessary to restore full economic
use of the Leased Premises.
D. Tenant agrees to indemnify, defend, reimburse and hold Landlord
harmless against any Environmental Damages incurred by Landlord arising from
Tenant's breach of subparagraph E below or for any cause of action, claim, loss,
damage, or expense incurred by Landlord due to the act or omission of Tenant
which results in a breach of the environmental indemnification contained in
Section 7(c) of the Master Lease. The obligations of Tenant in this paragraph
shall survive the termination of this Sublease and the discharge of all other
obligations owed by the parties to each other under this Sublease.
Notwithstanding anything else contained herein to the contrary, Landlord's
indemnity does not apply to any damages to Tenant arising out of a condition
which was present on the Lease Commencement Date.
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E. Landlord and Tenant shall (i) comply with all Environmental Laws;
(ii) not cause or permit any Hazardous Materials to be treated, stored, disposed
of, generated, or used in the Leased Premises, provided, however, that Landlord
and Tenant may each store, use or dispose of products customarily found in
offices and used in connection with operation and maintenance of property if
each complies with all Environmental Laws and does not contaminate the Leased
Premises or environment; and (iii) promptly after receipt, deliver to the other
party a copy of any communication concerning any past or present, actual or
potential violation of Environmental Laws or liability of either party for
Environmental Damages.
PARAGRAPH 15: INSURANCE AND WAIVER OF SUBROGATION: Landlord agrees that
throughout the Term it will insure the Building (but not the contents of the
Leased Premises and excluding any property which Tenant is obligated to insure
hereunder) for its full replacement cost against loss due to fire and other
casualties included in standard extended coverage (all risk) insurance. In
addition, Landlord will maintain public liability insurance.
Throughout the Term, Tenant will, at its own expense, maintain:
(a) comprehensive general liability insurance with respect to the
Leased Premises and Tenant's activities in the Leased Premises and the Building,
providing bodily injury and property damage coverage, in amounts no less than:
A. $1,000,000 with respect to bodily injury or death to any one person;
B. $1,000,000 with respect to property damage or other loss arising out
of any one occurrence.
C. $2,000,000 with respect to bodily injury, death or property damage
arising out of any one occurrence;
Tenant shall be required to increase its insurance limits from time to time as
may reasonably be required by Landlord consistent with coverage on properties
similarly constructed, occupied and maintained. Such liability insurance shall
be primary and not contributing to any insurance available to Landlord and
Landlord's insurance shall be in excess thereto. In no event shall the limits of
such insurance be considered as limiting the liability of Tenant under this
Lease.
(b) During any construction activity undertaken pursuant to Paragraphs
8 and 9 hereof, Tenant shall also maintain Builders Risk insurance insuring
perils covered by the causes of loss - special form (all risk) for the value of
the Improvements and for the value of any further alterations and/or additions
made to the Leased Premises.
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(c) Workers' compensation insurance in accordance with statutory law
and employers' liability insurance with a limit of not less than $500,000 per
employee and $500,000 per occurrence.
(d) Such other insurance as Landlord may, from time to time, reasonably
require, or which may, from time to time, be required under the Master Lease so
long as such other insurance is customarily required to be carried on similar
properties.
The policies required to be maintained by Tenant shall be with
companies having a rating of not less than A with a financial class of at least
X in the most current issue of Best's Insurance Reports. Insurers shall be
licensed to do business in the State of Indiana and domiciled in the USA. Any
deductible amounts under any insurance policies required hereunder shall not
exceed $1,000. Certificates of insurance shall be delivered to Landlord prior to
the commencement date and annually thereafter at least thirty (30) days prior to
the expiration date of the old policy. Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms hereof
in a blanket policy, provided such blanket policy expressly affords coverage to
the Leased Premises and to Landlord as required by this Sublease. Tenant agrees
that Landlord and Waterfield Mortgage Company, Incorporated and any Permitted
Beneficiaries (as defined in the Master Lease) will be additional insureds under
the applicable policies. Tenant's policies of insurance shall provide that they
may not be cancelled or modified without at least a thirty (30) days advance
notice to Landlord.
Tenant and Landlord release each other and waive any right of recovery
against each other for loss or damage to the waiving party or its respective
property, which occurs in or about the Leased Premises, whether due to the
negligence of either party, its agents, employees, officers, contractors,
licensees, invitees or otherwise, to the extent that such loss or damage is
insured against under the terms of standard fire and extended coverage insurance
policies but only to the extent of such proceeds. Tenant and Landlord agree that
all policies of insurance obtained by either of them in connection with the
Leased Premises shall contain appropriate waiver of subrogation clauses.
Landlord shall also be entitled to recover as damages for the uninsured amount
of any loss, to the extent of any deficiency in the insurance policies limits
and damages, and costs and expenses of suit suffered or incurred by reason of or
damage to, or destruction of the Leased Premises, occurring during any period
when the Tenant may have self-insured or failed or neglected to obtain the
required insurance.
PARAGRAPH 16: REPAIRS: Tenant shall be responsible for and shall indemnify and
hold Landlord harmless for any damages to the Building or the Leased Premises
caused by the negligence or willful acts of its agents, employees, customers,
invitees or occupants. Any such damages shall be repaired by Tenant to the
satisfaction of Landlord or Landlord shall have the right to make such repairs
itself and charge the cost thereof to Tenant as additional Rent. Subject to
Tenant's obligations set forth in the preceding sentence, Landlord shall, at its
expense, maintain and keep in repair the Building and Leased
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Premises including both exterior, interior, parking lots, driveways, sidewalks,
drive-up teller canopy and all structural parts, fixtures, wiring, plumbing,
heating, water pipes, plastering and flooring therein, except installed
equipment and fixtures provided by Tenant including those listed on Schedule 1
hereto. Without limiting the foregoing, Landlord agrees to keep heating plant,
electrical and water connections and facilities and air conditioning in first
class operating condition and available for continuous use.
If Landlord shall fail to initiate repairs to the Leased Premises or to
other portions of the Building which directly affect the Leased Premises as
required by this Paragraph 16 within 30 days of receipt of written notice from
Tenant, Tenant may make such repairs and offset the reasonable cost of same
against future rental payments owed to Landlord hereunder, unless the repairs
are of a type which cannot be repaired within 30 days and Landlord has
undertaken to make such repairs in the first 30 days following such notice.
PARAGRAPH 17: ENCUMBRANCES; ASSIGNMENT AND SUBLETTING: Neither this Sublease nor
the Term hereby demised shall be mortgaged, pledged or hypothecated by Tenant,
nor shall Tenant mortgage, pledge or otherwise encumber its interest in this
Sublease or the rents payable hereunder. Any mortgage, pledge, or encumbrance in
violation of this Section 17 shall be void.
Tenant shall not assign, sublet or encumber, in whole or in part, all
or any part of the Leased Premises, without the prior written consent of
Landlord. Tenant may, however, without consent of Landlord but with notice to
Landlord, assign or sublet the Leased Premises to its parent, subsidiary or
affiliate. Tenant shall, at the time Tenant requests consent of Landlord,
deliver to Landlord such information in writing as Landlord may reasonably
require respecting the proposed assignee or subtenant including, without
limitation, the name, address, nature of business, ownership, financial
responsibility and standing of such proposed assignee or subtenant and the terms
of the proposed assignment or subletting, and Landlord shall have fifteen (15)
days after receipt of all required information to elect one of the following:
(a) consent to such proposed assignment or sublease; (b) refuse such consent; or
(c) elect to terminate this Sublease, or, in the case of a partial sublease,
terminate this Sublease as to the portion of the Leased Premises proposed to be
sublet. If Landlord elects to exercise its right to terminate this Sublease or a
portion hereof under a proposed assignment or subletting, Tenant shall have the
right within ten (10) days following receipt of written notice of Landlord's
election to withdraw its request for Landlord's consent, in which event
Landlord's termination notice shall be null and void, and the Lease shall remain
in full force and effect. No assigning or subletting by Tenant shall relieve
Tenant of any obligation under this Sublease, including Tenant's obligation to
pay Rent. Any purported assignment or subletting contrary to the provisions
hereof without consent shall be void. The consent by Landlord to any assignment
or subletting shall not constitute a waiver of the necessity for such consent to
any subsequent assignment or subletting.
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If for any assignment or sublease, Tenant receives rent or other
consideration in excess of the Rent in this Sublease, or in the case of the
sublease of a portion of the Leased Premises, in excess of such Rent fairly
allocable to such portion, Tenant shall pay to Landlord within ten (10) days
after its receipt, as Rent, fifty percent (50%) of the excess of each such
payment less Tenant's cost for (i) brokerage commissions then customary in the
market; (ii) reasonable marketing expenses; and (iii) reasonable alterations
(tenant improvements) approved in advance by Landlord.
Landlord may sell, assign or transfer its interest in this Sublease to
any party at any time upon receipt of Tenant's written consent, which consent
will not be unreasonably withheld, provided, however, that Landlord may at any
time sell, assign or transfer its interest herein to any wholly owned subsidiary
of Landlord or to Waterfield Mortgage Company, Incorporated without the consent
of Tenant.
PARAGRAPH 18: ADDITIONAL RIGHTS RESERVED TO THE LANDLORD: Without
notice and without liability to Tenant or without effecting an eviction or
disturbance of Tenant's use or possession, Landlord shall have the right to (a)
grant utility easements or other easements in, or replat, subdivide or make
other changes in the legal status of the land underlying or contiguous with the
Building as Landlord shall deem appropriate in its sole discretion, provided
such changes do not substantially interfere with Tenant's use of the Leased
Premises for the Permitted Purpose; (b) enter the Leased Premises at reasonable
times and upon reasonable notice and at any time in the event of an emergency to
inspect or repair the Leased Premises or the Building and to perform any acts
related to the safety, protection, reletting, sale or improvement of the Leased
Premises or the Building or to enter the Leased Premises to perform janitorial
services; (c) change the name or street address of the Building; (d) install and
maintain signs on and in the Building; and (e) make such rules and regulations
as, in the sole judgment of Landlord, may be needed from time to time for the
safety of the tenants, the care and cleanliness of the Leased Premises and the
Building and the preservation of good order therein, so long as such rules and
regulations are equitably enforced against all other tenants.
PARAGRAPH 19: LANDLORD'S REPRESENTATIONS: Landlord represents that the
heating and air conditioning systems, plumbing, hot water heater, electrical
systems, and any other systems equipment, fixture or property presently existing
or to be installed in the Leased Premises by Landlord (specifically excluding
the Improvements and Tenant's Alterations) will be in compliance with all local
building codes, in good working order and that the roof will be free from leaks
upon Lease Commencement Date.
PARAGRAPH 20: CASUALTY AND UNTENANTABILITY: If the Leased Premises or the
Building is damaged or destroyed by fire or any other casualty, cause, or
condition, or if the common areas in the Building are damaged to such an extent
as to substantially interfere with Tenant's use of the Leased Premises, and that
damage or destruction cannot be repaired within One Hundred Eighty (180) days,
Landlord or Tenant may, by written notice
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to the other party given within thirty (30) days after such damage, terminate
this Sublease. The termination shall be effective as of the date of such damage.
Unless this Sublease is terminated as provided above and to the extent
insurance proceeds are made available to Landlord pursuant to the Master Lease,
Landlord shall proceed with due diligence to restore, repair and replace the
Leased Premises and Building to the same condition as they were in as of the
Lease Commencement Date, subject to compliance with all existing codes at the
time of reconstruction and from and after the date of such damage to the date of
completion of the repairs, replacements and restorations, a just proportion of
the Rent shall abate according to the extent the full use and enjoyment of the
Leased Premises are rendered impracticable by reason of such damage. Landlord
shall be under no duty to restore any of Tenant's Alterations.
Notwithstanding any other provision of this Sublease, should the Leased
Premises or any portion thereof be rendered untenantable for any reason, except
for the negligence or intentional acts of Tenant, and the untenantability
continues for a period of more than One Hundred Eighty (180) days, Tenant shall
have the right to declare the Lease null and void. This declaration of nullity
shall not affect any other rights Tenant may have pursuant to the terms of the
Lease.
PARAGRAPH 21: CONDEMNATION: If a material portion of the Leased Premises or
access to the Leased Premises is taken by the power of eminent domain and if the
remainder is inadequate for carrying out the Permitted Purpose and appropriate
accommodations cannot be made, then both Landlord and Tenant shall have the
option to cancel this Sublease as of the effective date of condemnation. Tenant
hereby irrevocably assigns to Landlord any award or payment to which Tenant may
be or become entitled with respect to the taking of the Leased Premises or any
part thereof (except as to Tenant's trade fixtures, personal property and moving
expenses), by condemnation or other eminent domain proceedings pursuant to any
law, general or special, or by reason of the temporary taking of the use or
occupancy of the Leased Premises or any part thereof, by any governmental
authority, whether the same shall be paid or payable in respect of Tenant's
leasehold interest hereunder or otherwise. If the parties elect not to terminate
the Lease as provided above, then: (i) there shall be an equitable adjustment of
Rent for the balance of the Term, in direct proportion to the amount of the
Leased Premises so taken; and (ii) Landlord shall repair any damage to the
Leased Premises caused by such taking to the extent condemnation proceeds are
made available to Landlord pursuant to the Master Lease for such purpose.
PARAGRAPH 22: WAIVER OF CERTAIN CLAIMS: Tenant, to the extent permitted by law,
waives all claims it may have against Landlord and against Landlord's agents and
employees for any damages sustained by Tenant or by any occupant of the Leased
Premises, or by any other person, resulting from any cause arising at any time
unless such damages are wholly unrelated to this Sublease and to Tenant's
occupancy and use of the Leased
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Premises, or are caused by the negligence, willful misconduct or breach of this
Sublease by Landlord, its agents, employees and contractors.
PARAGRAPH 23: LIMITATION OF LANDLORD'S LIABILITY: The obligations of Landlord
under this Sublease do not constitute personal obligations of the individual
partners, shareholders, directors, officers, employees or agents of Landlord,
and Tenant shall look solely to Landlord's interest in the Building, if any, and
to no other assets of Landlord for satisfaction of any liability in respect of
this Sublease. Tenant will not seek recourse against the individual partners,
shareholders, directors, officers, employees or agents of Landlord or any of
their personal assets for such satisfaction.
PARAGRAPH 24: TENANT'S DEFAULT: It shall be a "Tenant's Default" if Tenant shall
(a) fail to pay any monthly installment of Base Rent, or any other sum payable
hereunder within five (5) days after written notification that such sum is past
due; (b) violate or fail to perform any of the other covenants or agreements
herein made by Tenant, and such violation or failure shall continue for fifteen
(15) days after written notice thereof to Tenant by Landlord, except that if
within the fifteen (15) day period Tenant commences and thereafter proceeds
diligently to remedy the violation or failure within a reasonable period of time
not to exceed ninety (90) days from the receipt of notice, then Tenant shall not
be in default hereunder; (c) make or have made (or if any guarantor shall make
or have made) any false or misleading representation, warranty or covenant
herein or in any notice, certificate, demand, request or other instrument
delivered in connection herewith; (d) make a general assignment for the benefit
of its creditors or file a petition for bankruptcy or other reorganization,
liquidation, dissolution or similar relief; (e) fail to have dismissed within
sixty (60) days of filing a proceeding filed against Tenant seeking any relief
mentioned in (d) above; or (f) have a trustee, receiver or liquidator appointed
for Tenant or a substantial part of its property.
PARAGRAPH 25: REMEDIES OF LANDLORD: Upon the occurrence of a Tenant's Default,
Landlord may, at its option, in addition to any other remedy or right it has
hereunder, at law or at equity:
(a) Re-enter the Leased Premises, without demand or notice,
and resume possession by an action in law or equity or by force or
otherwise and without being liable in trespass or for any damages and
without terminating this Lease. Landlord may remove all persons and
property from the Leased Premises and such property may be removed and
stored at the cost of Tenant.
(b) Terminate this Lease at any time upon the date specified
in a notice to Tenant. Tenant's liability for damages shall survive
such termination. Upon termination such damages recoverable by Landlord
from Tenant shall, at Landlord's option, be either an amount equal to
"Liquidated Damages" or an amount equal to "Indemnity Payments".
-12-
<PAGE>
"Liquidated Damages" means an amount equal to the excess of
the rentals provided for in this Lease that would have been payable
hereunder by Tenant, had this Lease not so terminated, for the period
commencing with such termination and ending with the date set for the
expiration of the original term granted ("Unexpired Term"), over the
reasonable rental value of the Leased Premises for the Unexpired Term.
"Indemnity Payments" means an amount equal to the rent and
other payments provided for in this Lease that would have become due
and owing hereunder from time to time during the Unexpired Term plus
the cost and expenses paid or incurred by Landlord from time to time in
connection with:
(1) Obtaining possession of the Leased Premises;
(2) Removal and storage of Tenant's or other
occupant's property;
(3) Care, maintenance and repair of the Leased
Premises while vacant;
(4) Reletting the whole or any part of the Leased
Premises while vacant;
(5) Making all repairs, alterations and improvements
required to be made by Tenant hereunder and of performing all
covenants of Tenant relating to the condition of the Leased
Premises,
less the rent and other payments, if any, actually collected and
allocable to the Leased Premises or to the portions thereof relet by
Landlord. Tenant shall on demand make Indemnity Payments monthly and
Landlord may sue for all Indemnity Payments as they accrue.
(c) Without terminating this Lease, relet the Leased Premises
without the same being deemed an acceptance of a surrender of this
Lease nor a waiver of Landlord's rights or remedies and Landlord shall
be entitled to Indemnity Payments from Tenant. Any reletting by
Landlord may be for a period equal to or less than, or extending beyond
the remainder of, the original term, for the whole or any part of the
Leased Premises, separately or with other premises, for any sum, to any
lessee, and for any use Landlord deems appropriate.
B. Upon the occurrence of any of the following:
(a) The filing of a voluntary petition in bankruptcy
by Tenant;
-13-
<PAGE>
(b) The filing of a petition or answer by Tenant seeking a
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or other relief of the same or different kind under any
provision of the Bankruptcy Act;
(c) An adjudication of Tenant as a bankrupt or insolvent; or
(d) The appointment of a trustee, receiver, guardian,
conservator or liquidator of Tenant with respect to all or
substantially all of its property;
this Lease shall terminate ipso facto as of such occurrence and the Leased
Premises shall be surrendered as required by Paragraph 28. Tenant's liability
for damages shall survive such termination and Landlord shall be entitled to
recover an amount equal to Liquidated Damages or an amount equal to the maximum
allowed by any statute or rule of law governing the proceedings in which such
amount is sought, whichever is less.
The remedies granted to Landlord herein shall be cumulative and shall
not exclude any other remedy allowed by law or in equity, except as provided
herein, and shall not prevent the enforcement of any claim Landlord may have
against Tenant.
PARAGRAPH 26: ADVANCES AND INTEREST: If Landlord in curing Tenant's Default or
otherwise pursuant hereto is compelled to pay or elects to pay any sum of money
or do any acts which will require the payment of any sum of money for or on
behalf of Tenant (including any amounts incurred in obtaining any insurance
coverages which Tenant has failed to obtain in accordance with Section 15
hereof), the sum so paid or incurred shall be reimbursed by Tenant upon demand
by Landlord and shall constitute Rent. All sums as to which Tenant is in default
of payment shall bear interest at the rate of ten percent (10%) per annum until
paid.
PARAGRAPH 27: [RESERVED].
PARAGRAPH 28: SURRENDER OF LEASED PREMISES: Upon the Lease Expiration Date or
other termination of this Sublease, Tenant shall surrender the Leased Premises
to Landlord in good condition, normal wear and tear and damage by fire or other
insured casualty excepted. Tenant shall have the right, but not the obligation,
to remove all fixtures, (excluding Tenant's Alterations and any Improvements)
installed or paid for by Tenant so long as Tenant restores the Leased Premises
to its original condition prior to the installation of such fixtures or
improvements, subject to ordinary wear and tear and damage by fire or other
insured casualty. All Tenant's Alterations and the Improvements, except those
listed on Schedule 1 hereto, shall become the property of Landlord upon the
expiration or sooner termination of the Lease.
PARAGRAPH 29: INDEMNIFICATION. (a) Tenant shall hold Landlord harmless and
indemnified against any liability (including all reasonable expenses and
attorneys' fees incurred by or imposed on Landlord in connection therewith) for
injury or death to any
-14-
<PAGE>
person or damage to any property in or upon the Leased Premises and any loading
and service areas allocated to the use of Tenant, including the person and
property of Tenant and its employees and all persons in the Leased Premises or
the Building at his or their invitation, provided that such liability does not
arise as a result of the negligence, intentional act or willful misconduct of
Landlord, its agents or employees. Tenant shall also indemnify Landlord from all
liabilities (including all reasonable expenses and attorneys' fees incurred by
or imposed on Landlord in connection therewith) to the public and to other
tenants in the Building arising from any acts or omissions of Tenant.
(b) Landlord shall hold Tenant harmless and indemnified against any
liability (including all reasonable expenses and attorneys' fees incurred by or
imposed on Tenant in connection therewith) for injury or death to any person or
damage to any property in or upon the Building except the Leased Premises and
except also any loading and service areas available for the use of Tenant,
including the person and property of Landlord and its employees and all persons
in any part of the Building other than the Leased Premises at his or their
invitation, provided that such liability does not arise as a result of the
negligence, intentional acts or willful misconduct of Tenant, its agents or
employees.
PARAGRAPH 30: SEVERABILITY: The parties intend this Sublease to be legally valid
and enforceable in accordance with all of its terms to the fullest extent
permitted by law. If any term hereof shall be invalid or unenforceable, the
parties agree that such term shall be stricken from this Sublease to the extent
unenforceable, the same as if it never had been contained herein. Such
invalidity or unenforceability shall not extend to any other term of this
Sublease, and the remaining terms hereof shall continue in effect to the fullest
extent permitted by law.
PARAGRAPH 31: WAIVER: The waiver of either party hereto of any breach of any
term, covenant or condition herein contained shall not be deemed to be a waiver
of any subsequent breach of the same or any other term, covenant or condition
herein contained. The subsequent acceptance of Rent hereunder by Landlord shall
not be deemed to be a waiver of any preceding breach by Tenant of any term,
covenant or condition of this Sublease, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such rent. The subsequent
payment of Rent hereunder by Tenant shall not be deemed to be a waiver of any
preceding breach by Landlord of any term, covenant or condition of this
Sublease, regardless of Tenant's knowledge of such preceding breach at the time
of payment of such Rent. No covenant, term or condition of this Sublease shall
be deemed to have been waived by either party, unless such waiver is
acknowledged in writing by such party.
PARAGRAPH 32: ESTOPPEL: Tenant shall, within thirty (30) days after written
request from Landlord, execute and deliver to Landlord in the form attached as
Exhibit D a written statement certifying that the Lease is unmodified and in
full force and effect, or that the Lease is in full force and effect as modified
and listing the instruments of modification; the
-15-
<PAGE>
dates to which the rents and charges have been paid; and, to the best of
Tenant's knowledge, whether or not Landlord is in default hereunder and, if so,
specifying the nature of the default, and such other factual matters as may be
reasonably requested by Landlord.
PARAGRAPH 33: SUBORDINATION, ATTORNMENT AND NONDISTURBANCE:
Tenant covenants and agrees that this Sublease is subject and subordinate to any
mortgage which may now or hereafter encumber the Leased Premises or the
Building, and to all renewals, modifications, consolidations, replacements and
extensions thereof. This clause shall be self operative and no further
instrument of subordination need be requested by any mortgagee ("Lender").
However, Tenant will execute, if requested by Landlord or Lender, the
Subordination, Non-Disturbance and Attornment Agreement attached hereto as
Exhibit E. In the event of the enforcement by the Lender of the remedies
provided for by law or by such mortgage and the mortgagee has elected not to
terminate the Lease by way of foreclosure, Tenant will become the Tenant of, and
attorn to, such successor in interest without change in the terms or other
provisions of this Sublease. Notwithstanding any other provision contained
herein, this paragraph shall not result in an interference with Tenant's
Permitted Use and occupancy of the Leased Premises or Tenant's rights hereunder.
Tenant agrees to give to Lender, by registered mail, a copy of any
notice of default served upon landlord by Tenant. Tenant agrees that Lender
shall have the same time frame given to Landlord under the Sublease to cure any
default not cured by Landlord. Lender's cure shall commence after time frames
provided in the Sublease for Landlord's cure have passed. If such default cannot
be cured by Lender within the time periods prescribed in the Lease, Lender shall
have such additional time as may be necessary to cure the default if Lender has
commenced and is diligently pursuing the remedies necessary to cure such
default, in which event such right, if any, as Tenant might otherwise have to
terminate the Lease shall not be exercised while such remedies are being so
diligently pursued.
PARAGRAPH 34: QUIET ENJOYMENT: If and so long as Tenant pays all Rent and keeps
and performs each and every term, covenant and condition herein contained on the
part of Tenant to be kept and performed, Tenant shall quietly enjoy the Leased
Premises without hindrance by Landlord.
PARAGRAPH 35: ATTORNEYS' FEES: If the services of an attorney are required by
any party to secure the performance under the Lease or otherwise upon the breach
or default of the other party to the Lease, each party shall be responsible for
its own legal fees. If a judicial remedy is necessary to enforce or interpret
any provision of the Lease, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and other expenses, in addition to any other relief to
which such prevailing party may be entitled.
PARAGRAPH 36: FORCE MAJEURE: If either party hereto shall be delayed or hindered
in or prevented from the performance of any act required hereunder by reason of
strikes, lockouts, labor troubles, inability to procure materials, failure of
power, restrictive governmental laws or regulations, riots, insurrection, war or
other reason of a like nature
-16-
<PAGE>
beyond the reasonable control of, and not attributable to negligence or
foreseeable events, the party delayed in performing work or doing acts required
under the terms of this Sublease, then performance of such act shall be excused
for the period of the delay and the period for the performance of such act shall
be extended for a period equivalent to the period of such delay.
PARAGRAPH 37: APPLICABLE LAW: This Sublease shall be construed according to the
laws of the State of Indiana.
PARAGRAPH 38: BINDING EFFECT; GENDER: This Sublease shall be binding upon and
inure to the benefit of the parties and their successors and assigns. It is
understood and agreed that the terms "Landlord" and "Tenant" and verbs and
pronouns in the singular number are uniformly used throughout this Sublease
regardless of gender, number or fact of incorporation of the parties hereto.
PARAGRAPH 39: TIME: Time is of the essence of this Sublease.
PARAGRAPH 40: WAIVER OF JURY TRIAL: Landlord and Tenant each hereby waives all
right to trial by jury in any claim, action, proceeding or counterclaim by
either party against the other on any matters arising out of or in any way
connected with this Sublease, the relationship of Landlord and Tenant and/or
Tenant's use or occupancy of the Leased Premises.
PARAGRAPH 41: HEADINGS: The headings in this Sublease are included for
convenience only and shall not be taken into consideration in any construction
or interpretation of this Sublease or any of its provisions.
PARAGRAPH 42: BROKERS: Landlord and Tenant each represent to the other that each
has not had any dealing with any broker, agent or finder in connection with this
Sublease except those set forth in Paragraph 1(L), if any, whose compensation
shall be paid by Landlord, and Landlord and Tenant each agrees to hold the other
harmless from and indemnify the other against any cost, expense, or liability
for any compensation, commission, fee charge or damages, including reasonable
attorneys' fees, as a result of any claim of any other broker, agent or finder
claiming under or through the indemnifying party with respect to this Sublease
or the negotiation of this Sublease.
PARAGRAPH 43: ENTIRE AGREEMENT: This Sublease and the exhibits and addenda
attached set forth all the covenants, promises, agreements, representations,
conditions, statements and understandings between Landlord and Tenant concerning
the Leased Premises and the Building. This Sublease shall not be amended or
modified except in writing signed by both parties. Failure to exercise any right
in one or more instances shall not be construed as a waiver of the right to
strict performance or as an amendment to this Sublease.
-17-
<PAGE>
PARAGRAPH 44: NOTICES: Any notice or demand provided for or given pursuant to
this Sublease shall be in writing and served on the parties at the addresses
listed in Paragraph 1(M) and Paragraph 1(N). Any notice shall be either (a)
personally delivered to the addressed set forth above, in which case it shall be
deemed delivered on the date of delivery to the addressee; or (b) sent by
registered or certified mail/return receipt requested, in which case it shall be
deemed delivered three (3) business days after deposited in the U.S. Mail; (c)
sent by a nationally recognized overnight courier, in which case it shall be
deemed delivered one (1) business day after deposit with such courier; or (d)
sent by telecommunication ("Fax") in which case it shall be deemed delivered on
the day sent, provided an original is received by the addressee by a nationally
recognized overnight courier within one (1) business day of the Fax. The
addresses and Fax numbers listed in Paragraphs 1(M) and 1(N) may be changed by
written notice to the other parties, provided, however, that no notice of a
change of address or Fax number shall be effective until date of delivery of
such notice. Copies of notice are for informational purposes only and a failure
to give or receive copies of any notice shall not be deemed a failure to give
notice.
PARAGRAPH 45: RECORDATION: Both Landlord and Tenant shall have the right but not
the obligation to record a memorandum of lease in a recordable form setting
forth the interest of the parties, the description of the leasehold interest,
the term of the Lease including any options and other matters mutually
agreeable. It is agreed that the memorandum of lease shall contain no
information or representation concerning the Rent or other financial obligations
or conditions of the Lease. If the disclosure of any such financial information
is required in order to record the memorandum of lease, then neither Landlord
nor Tenant shall have the right to record such a memorandum. The memorandum of
lease shall be prepared by and the costs of recordation shall be paid by the
party requesting the recordation thereof.
PARAGRAPH 46: OPTION TO RENEW: Tenant shall have the option to renew and extend
the Lease Expiration Date for two additional periods of five years, only if and
to the extent the Master Lease is or will be in effect for such additional
period(s). To exercise the renewal option(s), Tenant shall deliver written
notice at least twelve months prior to the respective Lease Expiration Date(s),
as extended in the case of the first renewal period. All terms and conditions
herein shall apply to the renewal periods, except that the Base Rent for the
first renewal period shall be $3,068.00 and the Base Rent for the second renewal
period shall be $3,579.33.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
-18-
<PAGE>
LANDLORD: TENANT:
UNION ACCEPTANCE CORPORATION UNION FEDERAL SAVINGS BANK OF
INDIANAPOLIS
By: /s/ John M. Stainbrook By: /s/ Lonnie Frauhiger
------------------------ ----------------------
(Signature) (Signature)
Its: President Its: Senior Vice President
(Title) (Title)
-19-
Exhibit 21
Subsidiaries of the Registrant
Subsidiary State of Incorporation
Performance Funding Corporation Delaware
Performance Securitization Corporation Delaware
UAC Boat Funding Corp. Delaware
UAC Securitization Corporation Delaware
Union Acceptance Funding Corporation Delaware
Exhibit 23
LETTERHEAD OF KPMG PEAT MARWICK LLP
The Board of Directors
Union Acceptance Corporation:
We consent to incorporation by reference in the Registration Statement (No.
333-09717) on Form S-8 of Union Acceptance Corporation of our report dated July
30, 1996, relating to the consolidated balance sheets of the Union Acceptance
Corporation and Subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of earnings and cash flows for each of the years in the
three-year period ended June 30, 1996, and the related consolidated statement of
shareholders' equity for the year ended June 30, 1996, which report appears in
the June 30, 1996 Annual Report on Form 10-K of Union Acceptance Corporation.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED JUNE
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000927790
<NAME> Union Acceptance Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1996
<PERIOD-START> Jun-29-1995
<PERIOD-END> Jun-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 91,838
<SECURITIES> 0
<RECEIVABLES> 262,516
<ALLOWANCES> (1,099)
<INVENTORY> 0
<CURRENT-ASSETS> 353,255
<PP&E> 3,858
<DEPRECIATION> (1,832)
<TOTAL-ASSETS> 451,195
<CURRENT-LIABILITIES> 20,458
<BONDS> 352,113
<COMMON> 58,180
0
0
<OTHER-SE> 20,444
<TOTAL-LIABILITY-AND-EQUITY> 451,195
<SALES> 0
<TOTAL-REVENUES> 84,539
<CGS> 0
<TOTAL-COSTS> 23,841
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,875
<INTEREST-EXPENSE> 22,275
<INCOME-PRETAX> 35,548
<INCOME-TAX> 14,406
<INCOME-CONTINUING> 21,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,142
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</TABLE>
