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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, 1997
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
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. ( )
The aggregate market value of the 3,974,413 shares of the issuer's Class A
Common Stock held by non-affiliates, as of August 28, 1997, was $38,998,928.
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 August 28, 1997, was 4,016,788 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 1997 Annual Meeting of Shareholders are
incorporated into Part III.
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<PAGE>
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............................ 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 20
Item 8. Financial Statements and Supplementary Data..................... 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 55
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 55
Item 11. Executive Compensation.......................................... 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................... 55
Item 13. Certain Relationships and
Related Transactions............................................ 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................. 55
SIGNATURES ................................................................ 56
<PAGE>
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 currently acquires loans in 29 states
from over 3,200 manufacturer-franchised auto dealerships nationwide. The Company
also operates a "Non-prime lending program" funding loans to borrowers with
adequate credit quality who would not qualify for the Company's prime lending
program. The Non-prime lending program operates within the same dealer network
as the prime lending operations. In June 1996, the Company began acquiring loans
under the "Marine lending program", and currently serves over 190 marine
dealers. The customer profile for the Marine lending program is similar to the
Company's Prime lending program. The Company's focus is on the prime auto
lending market. Non-prime and marine loan acquisitions accounted for 4.1% of
total loan acquisitions during fiscal 1997.
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. 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's headquarters are located at 250 North Shadeland Avenue,
Indianapolis, Indiana, 46219, and the 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 19.0 million used automobiles at retail in calendar
1996 at an average price of $11,600 for a total sales volume of approximately
$220.4 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 $99.2 billion in 1996, of the financing of
used car loans. The Company believes that it currently funds approximately 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).
The Company's competition varies among its geographic markets. In the
Prime lending market segment, the Company has experienced its most intense
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<PAGE>
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 3,200 retail
automobile dealers in 29 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
2.00% of the Company's loan purchases during the fiscal year ended June 30,
1997.
The Company's ability to acquire 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 1997 was under 1 hour. 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 flexibility in offering longer loan
terms to qualified borrowers enhances the dealers' ability to offer desired
financing terms to customers.
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, most
new dealer agreements include provisions for ACH ("Automated Clearing House")
fund transfers. 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 opposed to drafts with all of its new dealers, and is making attempts
to convert its existing dealer base to the ACH program. Currently, over 51% 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 60% of the Company's origination department, including,
sales and credit employees, 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 account representatives to visit dealers and their
finance managers, both to develop dealer rapport and to maintain awareness of
local economic trends. The Company has a two-tiered underwriting structure
whereby an account representative reviews the loan application, obtains
additional information as necessary, prepares documentation, verifies employment
and income ratios, and makes a preliminary credit recommendation. The account
representative has no lending authority; although he may, in certain
circumstances, decline a loan application without the approval of the credit
analyst. A credit analyst with lending authority will then review the loan
package and make the final credit decision. The commission component of credit
analysts compensation is based on the average credit score and the weighted
average net yield on loans originated during the period.
The Company utilizes a computerized credit scoring system to evaluate
an applicant's credit profile. The Company continually evaluates its scoring
methodologies and makes adjustments based on its experience. In July 1996, the
Company implemented an upgraded version of its customized credit scoring model
developed by an independent firm. In February 1997, the Company analyzed seven
months of originations and compared the predictive ability of actual loss
experience between the customized credit scoring model and a new scorecard
model. In March 1997, the Company implemented the new scorecard model as it
appeared to be more predictive in rank-ordering risk than the customized credit
scoring model.
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 analysts. While the Company employs computerized Credit
Scoring, credit analysts have discretion to override the approval indicated by
the Credit Scoring system. In addition, the credit analysts have discretion, in
appropriate circumstances, 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 employees as dealership finance managers is valuable, not
5
<PAGE>
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 analyst.
Of the prime loan applications received from dealerships in the year
ended June 30, 1997, the Company approved approximately 19.7% unconditionally
and approximately 11.6% with conditions. Of the approved and conditionally
approved loans, approximately 37.3% were ultimately acquired. In fiscal 1997,
the Company acquired approximately $1.1 billion 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. The Company also acquires some pre-computed
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.
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. The use of generic contract forms has
become more prevalent during fiscal 1997. For dealers that participate in the
ACH program, ACH 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. For non-ACH dealers, 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. 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
1.50% - 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 generally 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 also pays a Dealer Premium in conjunction
with loan acquisitions under its Marine lending program. The Company does not
pay a Dealer Premium to dealers in its PAC Program. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Liquidity and Capital Resources."
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<PAGE>
Geographic Concentration
The following table sets forth certain information concerning the
states in which the Company is operating or has previously operated its Prime
business.
<TABLE>
<CAPTION>
Loans Acquired For The
Twelve Months Ended At June 30,1997
June 30, --------------------------------------
Date Re-entry ----------------------------------- Servicing Number Of Number Of
State Established Date 1997 1996 1995 Portfolio Metro Areas Dealers
- ----- ----------- ---- ---- ---- ---- --------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Indiana .......... Jan-86 $ 40,858 $ 38,755 $ 30,148 $ 80,739 1 175
Ohio ............. Apr-88 69,928 58,123 60,834 133,012 3 246
Kentucky ......... Jan-90 Oct-96 4,701 -- -- 4,417 1 35
Arizona .......... Jun-91 40,452 55,955 45,138 95,232 1 85
Colorado ......... Dec-91 17,861 31,984 23,124 40,897 1 83
Kansas ........... Jan-92 8,591 11,559 3,918 15,320 1 31
Missouri ......... Jan-92 25,034 16,643 20,468 48,447 1 79
Texas ............ Jun-92 140,576 153,174 148,930 294,263 3 296
Minnesota ........ Aug-92 Apr-97 1,167 -- -- 2,361 1 22
Utah ............. Sep-92 Jun-97 -- -- -- 68 1 1
Oklahoma ......... Oct-92 50,459 60,022 62,083 108,796 1 73
Florida .......... Apr-93 81,815 55,292 52,821 127,325 5 204
North Carolina ... Jul-93 105,920 113,131 105,226 199,710 3 172
Georgia .......... Apr-94 28,610 20,981 27,932 47,781 2 109
Virginia ......... May-94 70,134 68,688 48,418 114,591 2 167
South Carolina ... Jul-94 35,353 15,175 9,697 42,024 2 71
Iowa ............. Aug-94 23,672 13,673 3,276 29,036 2 78
Illinois ......... Sep-94 78,508 85,716 66,683 133,509 2 227
California ....... Nov-94 134,702 129,220 48,666 202,739 5 523
Nebraska ......... Nov-94 2,528 1,053 -- 2,949 1 20
New Mexico ....... Dec-94 9,058 11,492 7,022 15,711 1 27
Wisconsin ........ Apr-95 14,316 18,007 2,588 22,400 2 73
Oregon ........... Jun-95 5,116 9,861 -- 8,525 1 41
Washington ....... Jun-95 9,257 9,022 -- 12,369 1 56
Maryland ......... Nov-95 25,699 7,418 -- 26,793 2 82
Tennessee ........ Feb-96 21,770 6,704 -- 23,275 1 67
Michigan ......... May-96 23,181 2,869 -- 21,835 1 76
Pennsylvania ..... May-96 4,606 317 -- 4,214 1 51
Nevada ........... Jan-97 2,192 -- -- 1,934 1 34
---------------------------------------------------------------------------
TOTAL.......... $1,076,064 $ 994,834 $ 766,972 $1,860,272 50 3,204
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</TABLE>
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's level of loan acquisitions in particular metropolitan
areas may fluctuate significantly over time depending on competitive conditions
and other factors in those markets.
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<PAGE>
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. Since August 1995, Prime loan acquisitions have been
funded through a $350 million Warehouse Facility through Union Acceptance
Funding Corporation ("UAFC"), a wholly-owned company subsidiary. The Company
receives monthly servicing fees; the contractual fee, typically one percent per
annum on the outstanding principal balance of the securitized 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. The following tables describe
the composition of the Company's Prime lending servicing portfolio at June 30,
1997.
<TABLE>
<CAPTION>
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 .......... 33,814 $ 457,099 24.6% $13,518 59.4 12.53%
Used auto / van ......... 139,879 $1,403,173 75.4% $10,031 55.1 13.39%
------- ---------- -----
Total ................ 173,693 $1,860,272 100.0% $10,710 56.1 13.18%
======= ========== =====
Loans held for sale ..... 7,192 $ 90,331 4.9% $12,560 70.0 13.09%
Other loans serviced(2) . 166,501 $1,769,941 95.1% $10,630 55.4 13.18%
------- ---------- -----
Total ................ 173,693 $1,860,272 100.0% $10,710 56.1 13.18%
======= ========== =====
</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
$38,000)
8
<PAGE>
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 $2.3 million at June 30, 1997.
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. At June 30, 1997, the Company was servicing approximately $217,000
in loans under these agreements.
At June 30, 1997, the Prime servicing portfolio, including the
principal balance of auto loans held for sale and securitized auto loans, was
over $1.8 billion in aggregate principal balance. Approximately 75.4% of the
servicing portfolio, as of June 30, 1997, 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 pre-computed 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.
Non-prime lending program
The Company began operating the 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 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 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. 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 markets at dealerships affiliated with the Company's
Prime lending program.
The following table describes the composition of the Company's Non-prime lending
servicing portfolio at June 30, 1997:
<TABLE>
<CAPTION>
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 .... 880 $12,395 18.2% $14,085 57.11 18.48%
Used auto / van ... 5,176 $55,894 81.8% $10,799 53.05 19.87%
Total .......... 6,056 $68,289 100.0% $11,276 53.79 19.62%
Loans held for sale 1,628 $19,829 29.0% $12,180 61.24 19.47%
Securitized loans . 4,428 $48,460 71.0% $10,944 50.74 19.68%
Total .......... 6,056 $68,289 100.0% $11,276 53.79 19.62%
</TABLE>
- --------------------------------------------------------------------------------
(1) Terms are shown in months.
9
<PAGE>
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's Non-prime loans
experience higher default rates than those historically experienced by the
Company with respect to its Prime lending operations, but 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 the third quarter of fiscal 1996, and
completed its second Non-prime securitization during the second quarter of
fiscal 1997.
Of the loan applications received from dealerships through the
Non-prime program in the year ended June 30, 1997, the Company approved
approximately 5.3% unconditionally and approximately 11.5% with conditions. Of
the approved and conditionally approved loans, approximately 19.4% were
ultimately acquired. In fiscal 1997, the Company acquired approximately $39.6
million in Non-prime loans.
Marine lending program
The Company began the Marine program in June of 1996, to fund boat and
personal watercraft loans to borrowers who are classified as low risk. Through
the Marine lending program, the Company has entered into agreements with over
190 dealers and is currently providing financing to individuals in 14 states.
The standards for the Marine lending are substantially similar to UAC's
high quality lending operation. Marine lending does, however, utilize more
extensive credit review and verification. As a consequence, Marine lending does
not offer as prompt a response time to loan applications as offered to UAC
customers to permit more extensive credit checking. The Company believes that
its response time compares favorably to competitors in this market segment.
Of the loan applications received from dealers through the Marine
program in the year ended June 30, 1997, the Company approved approximately
21.3% unconditionally and approximately 9.0% with conditions. Of the approved
and conditionally approved loans, approximately 31.9% were ultimately acquired.
In fiscal 1997, the Company acquired approximately $6.6 million in Marine loans.
Marine dealers quote loan rates to customers at an average of
approximately 1.50% to 2.00% over the Buy Rate. This difference, in most states,
represents compensation to the dealers in the form of a Dealer Premium. The
Company currently offers two programs to Marine dealers. The first program is a
buy rate retention program. This program pays the dealer as much as 90% of the
spread for short-term financing, and as little as 30% for long-term financing
with the remaining portion eligible to be paid on an "as earned" basis after the
48th month. There are no charge-backs after 120 days on this program. The second
program pays the dealer a percentage of the amount financed based on the rate
the customer is charged and the term. The dealer has the potential for
charge-backs, based on a straight-line calculation, of either 180 or 360 days
depending on the percentage of reserve paid.
Since April 1997, Marine loan acquisitions have been funded through a
separate $50 million Marine Warehouse Facility through Union Acceptance Boat
Funding Corporation ("UABFC"), a wholly-owned Company subsidiary. Marine lending
follows UAC's strategy in booking quality boat and personal watercraft loans.
The following table describes the composition of the Company's Marine lending
service portfolio at June 30, 1997:
10
<PAGE>
<TABLE>
<CAPTION>
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 boat / jet ski.... 359 $ 5,262 84.5% $14,658 144.5 11.22%
Used boat / jet ski... 113 $ 965 15.5% $ 8,534 115.1 12.15%
--- ------- -----
Total ............. 472 $ 6,227 100.0% $13,192 139.9 11.36%
=== ======= =====
Loans held for sale... 472 $ 6,227 100.0% $13,192 139.9 11.36%
=== ======= =====
</TABLE>
- --------------------------------------------------------------------------------
(1) Terms are shown in months.
11
<PAGE>
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, telegram, and in special circumstances, personal
visits. Notices to delinquent borrowers are dispatched automatically by computer
when loans are 10 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
increased its collection staff by nearly 60.0% during fiscal 1997. See
"Employees" on page 14.
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
750-1,000 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.
Collectors will handle approximately 400 calls per day. 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 a
contracted repossession agent. The repossession agent transfers most of the
autos to an independent auto auction company which reconditions the repossessed
autos and sells them for the Company. Some autos repossessed in central Indiana
that are determined to be eligible for retail sales are reconditioned and sold
at an Indianapolis location owned by the Company. The Company is implementing
plans to expand its capacity to sell repossessed autos at retail by opening an
expanded used car outlet near its principal offices, featuring a new car
franchise. A number of regulatory considerations affect the timing and manner of
repossession and liquidation. See "Item 1. Business--Regulation."
The decision to repossess and charge-off 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 Loans
Loan Funding. The Company relies upon external sources to provide
financing for its loan purchases, Dealer Premiums and other ongoing cash
requirements. The Company utilizes a $350 million Prime Warehouse Facility to
provide funding for its Prime loan acquisitions, a $50 million Non-prime
Warehouse Facility to fund Non-prime loan acquisitions, and a $50 million Marine
Warehouse Facility to fund boat and personal watercraft loans. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
Hedging. Because the 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
12
<PAGE>
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. Management
continually evaluates alternative financing sources and, in the future, may
consider funding its loan acquisitions through a permanent warehouse facility or
some other source or combination of sources. Since 1988, the Company has
securitized approximately $4.4 billion in auto loan receivables in 25 public
offerings and completed two private placements 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.
Securitization Transactions
<TABLE>
<CAPTION>
Remaining Balance Weighted
Original at June 30, Average Loan Certificate Gross Net
Securitization Amount 1997 Rate Rate Spread (1) Spread (2)
-------------- ------ ---- ---- ---- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
UACSC 1997-B Auto Trust $ 295,759 $ 285,528 13.21% 6.57% 6.64% 5.15%
UACSC 1997-A Auto Trust $ 293,348 $ 254,111 13.29% 6.33% 6.96% 5.43%
UACSC 1996-D Auto Trust $ 283,085 $ 222,597 13.53% 6.14% 7.39% 5.37%
UACSC 1996-C Auto Trust $ 310,999 $ 221,758 13.26% 6.44% 6.82% 5.11%
UACSC 1996-B Auto Trust $ 245,102 $ 158,409 12.96% 6.45% 6.51% 5.58%
UACSC 1996-A Auto Trust $ 203,048 $ 111,445 13.13% 5.40% 7.73% 5.68%
UACSC 1995-D Auto Trust $ 205,550 $ 106,514 13.74% 5.97% 7.77% 6.04%
UACSC 1995-C Auto Trust $ 236,410 $ 102,796 14.08% 6.42% 7.65% 6.12%
UACSC 1995-B Grantor Trust $ 220,426 $ 82,574 13.91% 6.61% 7.30% 4.88%
UACSC 1995-A Grantor Trust $ 173,482 $ 58,696 13.22% 7.77% 5.45% 3.88%
UFSB 1994-D Grantor Trust $ 114,070 $ 34,300 12.51% 7.69% 4.82% 3.91%
UFSB 1994-C Grantor Trust $ 150,725 $ 34,070 12.05% 6.77% 5.28% 4.04%
UFSB 1994-B Grantor Trust $ 142,613 $ 30,603 10.74% 6.46% 4.28% 3.54%
UFSB 1994-A Grantor Trust $ 119,960 $ 19,771 9.98% 5.08% 4.90% 3.60%
UFSB 1993-C Auto Trust $ 141,811 $ 21,918 11.00% 4.88% 6.12% 4.82%
UFSB 1993-B Auto Trust $ 212,719 $ 24,813 11.50% 4.45% 7.05% 5.31%
UFSB 1993-A Grantor Trust $ 133,091 $ - 11.49% 4.53% 6.96% 4.96%
UFSB 1992-C Grantor Trust $ 119,280 $ - 11.64% 5.80% 5.84% 4.48%
UFSB 1992-B Grantor Trust $ 116,266 $ - 12.39% 4.90% 7.49% 5.49%
UFSB 1992-A Grantor Trust $ 103,619 $ - 13.66% 6.70% 6.96% 5.80%
UFSB 1991-B Grantor Trust $ 106,612 $ - 13.64% 7.15% 6.49% 4.94%
UFSB 1991-A Grantor Trust $ 150,436 $ - 12.52% 8.40% 4.12% 2.25%
UFSB 1989-B Grantor Trust $ 66,469 $ - 14.09% Variable - 2.82%
UFSB 1989-A Grantor Trust $ 113,080 $ - 13.24% 8.75% 4.49% 1.97%
UFSB 1988 Grantor Trust $ 105,179 $ - 12.73% 9.50% 3.23% 1.71%
---------------- ------------
Total Prime Securitized Trusts $ 4,363,139 $ 1,769,903
PSC 1996-2 Grantor Trust $ 31,108 $ 26,776 19.65% 6.40% 13.25% 9.00%
PSC 1996-1 Grantor Trust $ 34,488 $ 21,684 19.87% 6.87% 13.00% 8.79%
---------------- ------------
Total Non-Prime
Securitized Trusts $ 65,596 $ 48,460
================ ============
Grand Total.............. $ 4,428,735 $ 1,818,363
================ ============
</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 credit enhancements and trustee
fees, and the hedging gain or loss.
================================================================================
13
<PAGE>
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
subsequently employed the use of subordinated classes of Certificates as a
credit enhancement device. Surety bonds have been utilized as additional credit
enhancements in the Company's Prime securitizations since the UACSC 1995-D Auto
Trust. 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 or elected not to securitize loans in a
financial reporting period, net earnings would likely be lower relative to
periods in which securitizations occurred. 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 securitizations were 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.
Employees
The Company employs personnel experienced in all areas of loan
acquisition, documentation, collection and administration. Currently, the
Company has 396 full-time employees and 20 part-time employees, including 70
full-time and 4 part-time employees in the operations department, 171 full-time
and 15 part-time employees in the collection department, 75 full-time employees
in loan purchasing, 21 full-time and 1 part-time employee in the accounting
department and 23 full-time systems and administrative employees. In addition,
the Company had 35 sales representatives who reside and work in the Company's
loan purchasing market areas at such date, and 1 employee in retail operations.
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, Kentucky, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New
Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
Tennessee, Texas, Utah, 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, Texas and Utah, 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.
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon sellers, holders 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 Debt
14
<PAGE>
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, state "lemon" laws, 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 the
installment sale contracts 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 purchasers of installment sales
contracts and even some direct lenders in consumer credit transactions to all
claims and defenses which the obligor in the transaction could assert against
the seller of the goods. The installment sale contracts purchased by the Company
and direct loans made by it are generally subject to the provisions of the FTC
Rule. Accordingly, the Company (or the trust to which a contract is assigned in
a securitization), as holder of the contracts or as the direct lender, will be
subject to any claims or defenses that the purchaser of the related financed
vehicle may assert against the seller of the vehicle. Liability under the FTC
Rule is limited to the amounts paid by the obligor under the contract, but the
holder of the contract may also be unable to collect any balance remaining due
thereunder from the obligor.
The dealer selling an installment sale contract to the Company will
generally warrant that the completion of each installment sale contract 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 an installment sale contract, 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 contract unless the breach is cured.
All states in which the Company operates have adopted a version of the
Uniform Commercial Code ("UCC"). Except where limited by other state laws, the
UCC governs the Company's rights upon the obligor's default. Generally, the UCC
allows the secured party to conduct a self-help repossession, then sell the
collateral and collect any deficiency if the proceeds of sale are insufficient
to pay off the outstanding obligation. The UCC requires the secured party to
provide the obligor with reasonable notice of any sale of the collateral, as
well as an opportunity to redeem the collateral prior to sale. Other state laws
may expand an obligor's rights, for example by providing the obligor an
opportunity to cure default prior to repossession, or by eliminating the secured
party's right to collect a deficiency balance. In addition, federal bankruptcy
laws and related state laws may interfere with or affect the ability of a
secured party to realize upon collateral or enforce a deficiency judgment.
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, a $50 million Non-prime Warehouse facility (the "Non-prime
Warehouse Facility") to fund loan acquisitions through its Non-prime lending
program and a $50 million Marine Warehouse facility (the "Marine Warehouse
Facility") to fund loan acquisitions through its Marine lending program. Upon
renewal of the Marine Warehouse Facility in April 1998, the Company may opt to
increase the borrowing capacity to $75 million.
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
between 1.50% - 2.00%. Dealer Premiums paid to Ohio dealers is generally 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. The
unamortized portion of such advance, depending on the dealer agreement, is
recoverable from the dealer if the loan is prepaid or defaults. Dealer premiums
are included in the carrying amount of loans prior to securitization.
Excess Servicing - Excess Servicing represents the Company's retained interest
in loans sold. Excess Servicing is determined by the allocation of the carrying
amount of loans sold based on the relative fair market value of loans sold and
expected Future Servicing Cashflows discounted at current market rates for like
securities. An allowance for estimated credit losses is established using
information from scoring models and historical loss statistics which is applied
based on the composition of the portfolio to be securitized. Market discount
rates are based on current market conditions, and prepayment assumptions are
based on historical experience. The Company's contractual servicing fee
approximates adequate compensation. Accrued interest through the date of
securitization, which will be returned to the Company through the trust, is also
classified under the provisions of SFAS 125 as Excess Servicing. Excess
Servicing is reduced by actual servicing cash flows as received over the life of
the securitization. Excess Servicing is classified as available-for-sale and is
carried at market based upon the application of current assumptions to the
remaining expected cash flows. Unrealized gains and losses are excluded from
earnings and are reported net of related income taxes as a separate component of
shareholders' equity until realized. Excess Servicing is reviewed periodically
for permanent impairment with impairment, if any, charged to operations.
Future Servicing Cashflows - Future Servicing Cashflows are the projected cash
flows resulting from the difference between the weighted average coupon rate of
the loans sold and the Certificate Rate paid to investors in the securitized
trusts, less an allowance for estimated credit losses, the Company's contractual
servicing fee of 1% (on prime), and ongoing trust and credit enhancement fees,
plus estimated dealer premium rebates.
Gain on Sales of Loans - Gain on sales of loans represents the difference
between the sales proceeds and the carrying amount of loans after reduction for
amounts allocated to Excess Servicing, less expenses of the sale and hedging
gains or losses.
16
<PAGE>
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.
Marine Warehouse Facility - See definition of Credit Facilities, above.
Marine lending - The Company's practice of acquiring loans made to borrowers,
generally with high quality credit, through a boat or personal watercraft dealer
agreement that provides for the acquisition of loans at a par plus the payment
of a Dealer Premium to the dealer. Borrowers generally have a credit history
with no or few minor defaults and can finance their purchase through a bank, or
an independent finance company that focuses on Prime credit.
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 of $110 million and $65
million issued August 1995 and March 1997 respectively.
Senior Subordinated Notes- Unsecured Senior Subordinated Notes of the Company in
the aggregate principal amount of $46 million 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 the shareholders of its holding company,
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, generally
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. 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
re-marketing, an office of 500 square feet and a 75-car lot located in Beech
Grove, Indiana, from an independent party. These facilities are currently used
to recondition and sell the financed vehicles repossessed by the Company in
central Indiana. In July 1997, the Company purchased a 6.5 acre (60,000 square
foot) facility near its principal offices in Indianapolis at which it intends to
establish a used car retail operation to expand its reconditioning and
remarketing operations with respect to repossessed vehicles. The facility is
expected to commence operations in January 1998.
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
1997 and 1996:
Fiscal Year Ended June 30, 1997 1996
--------------------------- ---- ----
High Low High Low
First Quarter 19 1/4 12 1/4 19 1/2 16
Second Quarter 19 3/4 16 1/4 21 1/4 14
Third Quarter 22 1/2 13 1/4 17 11 3/4
Fourth Quarter 14 5/8 7 1/2 16 3/4 13 1/2
As of August 28, 1997, there were 122 holders of record of the
Company's Class A Common Stock and 8 persons holding Class B Common Stock of the
Company of record. 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.
18
<PAGE>
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, 1997. 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.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income .............................................. $ 40,644 $ 34,160 $ 18,638 $ 14,260 $ 11,378
Interest expense(1) .......................................... 25,688 22,275 12,961 7,769 7,177
------------------------------------------------------------------
Net interest margin ........................................ 14,956 11,885 5,677 6,491 4,201
Provision for credit losses .................................. 4,188 2,875 1,074 484 436
------------------------------------------------------------------
Net interest margin after provision ........................ 10,768 9,010 4,603 6,007 3,765
Gain on sales of loans, net .................................. 2,613 30,357 8,684 4,643 5,502
Servicing fees, net .......................................... 25,337 16,926 14,628 11,570 7,149
Other revenue ................................................ 3,819 3,096 2,783 2,735 1,995
------------------------------------------------------------------
Total revenues .......................................... 42,537 59,389 30,698 24,955 18,411
Operating expenses ........................................... 29,941 23,841 14,913 8,995 7,055
------------------------------------------------------------------
Earnings before provision for income taxes ................. 12,596 35,548 15,785 15,960 11,356
Provision for income taxes ................................. 5,195 14,406 6,396 6,384 4,542
------------------------------------------------------------------
Net earnings ............................................ $ 7,401 $ 21,142 $ 9,389 $ 9,576 $ 6,814
==================================================================
Operating Data:
Prime auto receivables acquired .............................. 1,076,064 $ 994,834 $ 766,972 $ 614,627 $ 435,227
Non-prime auto receivables acquired .......................... 39,610 36,030 21,511 -- --
Marine receivables acquired .................................. 6,590 50 -- -- --
------------------------------------------------------------------
Total receivables acquired (dollars) .................... $1,122,264 $1,030,914 $ 788,483 $ 614,627 $ 435,227
Prime auto receivables acquired .............................. 75,844 71,070 58,409 49,307 38,360
Non-prime auto receivables acquired .......................... 3,050 2,870 1,770 -- --
Marine receivables acquired .................................. 496 6 -- -- --
------------------------------------------------------------------
Total receivables acquired (number of loans) ............ 79,390 73,946 60,179 49,307 38,360
Prime auto loans securitized ................................. 1,183,190 $ 890,110 $ 658,703 $ 617,103 $ 368,638
Non-prime auto loans securitized ............................. 31,108 34,488 -- -- --
------------------------------------------------------------------
Total auto loans securitized ............................ $1,214,298 $ 924,598 $ 658,703 $ 617,103 $ 368,638
Ratio of operating expenses as a % of
average servicing portfolio ................................ 1.64% 1.73% 1.49% 1.21% 1.42%
Servicing fees, net, as a % of operating
expenses ................................................... 84.6% 71.0% 98.1% 128.6% 101.3%
Prime credit losses as a % of avg. servicing portfolio ....... 2.40% 1.58% 1.36% 0.69% 0.64%
Non-prime credit losses as a % of avg. servicing portfolio.... 5.18% 2.37% 2.97% N/A N/A
Marine credit losses as a % of avg. servicing portfolio ...... 0.25% N/A N/A N/A N/A
Prime delinquencies of 30 days or more as a
% of servicing portfolio ................................ 2.96% 1.84% 1.40% 1.40% 0.93%
Non-prime delinquencies of 30 days or more as a
% of servicing portfolio ................................ 6.18% 3.35% 1.25% N/A N/A
Marine deliquencies of 30 days or more as a
% of servicing portfolio ................................ 0.10% N/A N/A N/A N/A
</TABLE>
19
<PAGE>
Item 6. Selected Consolidated Financial Data (Continued)
<TABLE>
<CAPTION>
At June 30, 1997 1996 1995 1994 1993
-----------------------------------------------------------
(Dollars in thousands)
Balance Sheet Data(2):
<S> <C> <C> <C> <C> <C>
Loans, net .................................... $ 121,381 $ 259,290 $ 201,022 $ 96,101 $ 134,678
Excess servicing .............................. 98,841 83,434 60,662 41,265 31,575
Spread accounts ............................... 71,744 63,590 57,414 37,333 24,052
Total assets .................................. 392,166 451,195 349,283 181,516 196,242
Due to Union Federal .......................... -- -- 338,958 177,577 171,896
Amounts due under warehouse facilities ........ 44,455 187,756 -- -- --
Long-term debt ................................ 221,000 156,000 -- -- --
Total shareholder equity(3) .................. 86,115 78,624 2 2 --
Other Data:
Prime auto servicing portfolio ................ $1,860,272 $1,548,538 $1,159,349 $ 843,245 $ 581,858
Non-prime auto servicing portfolio ............ 68,289 47,062 19,858 -- --
Marine servicing portfolio .................... 6,227 50 -- -- --
Other receivables serviced .................... 2,488 3,420 5,203 -- --
--------------------------------------------------------------
Total servicing portfolio ................ $1,937,276 $1,599,070 $1,184,410 $ 843,245 $ 581,858
Average Prime auto servicing portfolio ........ 1,759,666 1,343,770 982,875 744,149 496,758
Average Non-prime auto servicing portfolio .... 63,305 33,124 9,448 -- --
Average Marine servicing portfolio ............ 2,357 NM -- -- --
Other receivables average servicing portfolio.. 2,799 4,222 6,643 -- --
--------------------------------------------------------------
Total average servicing portfolio ........ $1,828,127 $1,381,116 $ 998,966 $ 744,149 $ 496,758
Number of Prime auto loans
serviced (at period end) ............ 173,693 147,722 117,837 91,837 71,301
Number of Non-prime auto
loans serviced (at period end) ........... 6,056 4,067 1,687 -- --
Number of Marine loans
serviced (at period end) ................. 472 6 -- -- --
Number of Other loans
serviced (at period end) ................. 402 537 836 -- --
--------------------------------------------------------------
Total number of loans
serviced (at period end) ............ 180,623 152,332 120,360 91,837 71,301
Number of dealers ............................. 3,204 2,523 1,604 884 831
Number of employees
(full-time equivalents) .................. 387 313 215 142 115
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest expense for the years ended June 30, 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, 1993,
1994, and 1995.
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 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" under "Item 1. Business" for definitions of accounting terms
pertaining to securitizations.
20
<PAGE>
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>
For Quarters in the Fiscal Years Ended June 30,
------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------------------------------
First Second (3) Third Fourth First Second Third (3) Fourth
-------- ---------- ------ ------ ----- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans acquired............ $296,601 $307,420 $279,847 $238,396 $239,794 $ 205,686 $ 256,510 $ 328,924
Gain (loss) on Sales
of Loans............. 6,875 7,790 8,283 (20,335)(4) 6,724 8,483 7,760 7,390
Servicing portfolio
at period end......... 1,709,917 1,835,662 1,910,455 1,937,276 1,278,805 1,344,914 1,445,517 1,599,070
Selected
Securitization Data: 1996-C 1996-D/1996-2 1997-A 1997-B 1995-C 1995-D 1996-A/1996-1 1996-B
- -------------------- ------ ------------- ------ ------ ------ ------ ------------- ------
Original amount ........... 310,099 283,085/31,102 93,348 295,758 236,410 205,550 203,048/34,482 45,102
Weighted avg. loan rate ... 13.26% 13.53%/19.65% 13.29% 13.21% 14.08% 13.74% 13.13%/19.87 12.96%
Weighted avg ..............
remaining maturity (mos.) 67.41 67.75/62.70 71.35 69.18 64.82 67.62 66.01/56.90 69.15
Certificate rate .......... 6.44% 6.14%/6.40% 6.33% 6.57% 6.42% 5.97% 5.40%/6.87% 6.45%
Gross spread (1) .......... 6.82% 7.39%/13.25% 6.96% 6.64% 7.65% 7.77% 7.73%/13.00% 6.51%
Net spread (2) ............ 5.11% 5.37%/ 9.00% 5.43% 5.15% 6.12% 6.04% 5.68%/8.79% 5.58%
</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 during the presented quarters -- one
public securitization (prime securitization) and one private placement
(non-prime securitization)
(4) Includes a $27.0 million pre-tax charge to increase allowance for estimated
credit losses. The gain on the 1997-B transaction was $6.7 million.
Acquisition Volume. The Company currently acquires loans in 51
metropolitan areas in 29 states from over 3,200 manufacturer-franchised auto
dealerships. The Company primarily acquires loans on automobiles made to
borrowers who exhibit a favorable credit profile ("Prime lending"). The Company
also offers a Non-prime lending program to borrowers with adequate credit
quality, but who would not qualify for a loan under the Company's Prime lending
program ("Non-prime lending"). Over the past year, the Company has also
developed a Marine lending program to fund loans to borrowers for boats and
personal watercraft. The Company's focus is on the prime automobile lending
market; only 4.1% of total loan acquisitions represented loans made to borrowers
under the Non-prime and Marine programs. The Company continued its geographic
expansion during the year by entering several new areas in Arizona, Colorado,
Florida, Georgia, Illinois, Ohio, North Carolina, South Carolina, and Texas, and
also extended operations into the state of Nevada. Additionally, the Company
re-entered markets in Kentucky, Minnesota and Utah.
The Company's total loan acquisitions increased 8.9% to $1,122.3
million for the year ended June 30, 1997, from $1,030.9 million in fiscal 1996.
The increase resulted primarily from the expansion into and the development of
new markets that were established in fiscal 1996 and 1997. Additionally, growth
in the Marine and Non-prime programs contributed to overall loan acquisition
growth. Marine loan acquisitions totaled $6.6 million for the year ended June
30, 1997, compared to $50,000 for fiscal 1996. Non-prime loan acquisitions
totaled $39.6 million for the year ended June 30, 1997, compared to $36.0
million in fiscal 1996. The Company made some strategic decisions with regard to
pricing and underwriting with a view to improving the overall credit quality of
the portfolio over the long-term. These changes coupled with intense competition
in the consumer-finance markets resulted in lower loan acquisition volume in the
third and fourth quarters of fiscal 1997. Because of the competitive environment
and tightened credit standards, the Company's loan acquisition growth in the
first quarter of fiscal 1998 was not substantial. The Company's servicing
portfolio increased 21.2% to nearly $2.0 billion at June 30, 1997, compared to
21
<PAGE>
approximately $1.6 billion at June 30, 1996. Serviced loans increased as a
result of increased loan acquisition volume in excess of loan repayments and
gross charge-offs. The volume of loans sold in securitizations increased to $1.2
billion for the year ended June 30, 1997, from $924.6 million for the prior
year. The increased volume of loans securitized is a combination of the
increased volume in Prime loan acquisitions, and the timing of the fiscal 1997
fourth quarter securitization which included four months of loan volume compared
to only three months in the fourth quarter of fiscal 1996. 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.
Delinquency and Credit Loss Experience
There has been a general deterioration in the consumer credit markets
over the past year despite relatively good economic conditions. Management
believes that this decline comes as a result of higher consumer debt levels and
the consumer's increased readiness to declare bankruptcy. The Company has
experienced increased delinquency as well as increased credit losses. UAC's
prime servicing portfolio has continued to suffer deterioration since June 30,
1997, in delinquency and credit losses, especially among loans originated in
1995. Management is making improvements in both the underwriting and collection
processes to address credit quality. The Company has tightened its credit
standards and is utilizing new computerized scoring tools to re-score existing
portfolios which enhance the Company's ability to identify areas for improvement
on the underwriting side. The collection staff increased by nearly 60% since
June 30, 1996. The new scoring tools also allow the collection efforts to be
focused in the most effective manner.
Set forth below is certain information concerning the experience of UAC
pertaining to delinquencies, and credit 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 credit loss experience on the
receivables will be comparable to that set forth below. See "Discussion of
Forward-Looking Statements".
Prime Delinquency Experience
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1997 1996
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
<S> <C> <C> <C> <C>
Servicing portfolio .......... 173,693 $1,860,272 147,722 $1,548,538
Delinquencies
30-59 days .............. 2,487 27,373 1,602 17,030
60-89 days .............. 1,646 18,931 694 7,629
90 days or more ......... 723 8,826 333 3,811
Total delinquencies .......... 4,856 55,130 2,629 28,470
Total delinquencies
as a percent of
servicing portfolio....... 2.80% 2.96% 1.78% 1.84%
</TABLE>
As indicated in the above table, delinquency rates based upon
outstanding loan balances of accounts 30 days past due and over increased to
2.96% at June 30, 1997, from 1.84% at June 30, 1996, for the Prime lending
portfolio. The increased delinquency from a year ago is a product of changes in
consumer credit trends as discussed above, and, to a lesser extent, the
tightening of the Company's deferral policy (effective in February 1997) which
applied more stringent standards for the deferment of delinquent accounts. This
tightening served to increase delinquency and accelerate credit losses in the
third and fourth quarters of fiscal 1997.
22
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -----------------------
Number Number Number
of Loans Amount of Loans Amount of Loan Amount
(Dollars in thousands)
Avg. servicing
<S> <C> <C> <C> <C> <C> <C>
portfolio ............. 164,858 $1,759,666 132,363 $1,343,770 104,455 $ 982,875
Gross charge-offs ........ 6,280 70,830 3,663 40,815 3,493 28,628
Recoveries ............... 28,511 19,543 15,258
------ ---------- ----------
Net credit losses ....... 42,319 $ 21,272 $ 13,370
====== ========== ==========
Gross charge-offs
as a % of avg
servicing portfolio ... 3.81% 4.03% 2.77% 3.04% 3.34% 2.91%
Recoveries as a %
of gross charge-offs.. 40.25% 47.88% 53.30%
Net credit losses as a %
of avg. servicing
portfolio ............ 2.40% 1.58% 1.36%
</TABLE>
As indicated in the table above, credit losses on the prime auto
portfolio totaled $42.3 million for the fiscal year ended June 30, 1997, or
2.40% as a percentage of the average servicing portfolio, compared to $21.3
million or 1.58% for the fiscal year ended June 30, 1996. Increased credit
losses are a result of higher gross charge-off rates, as well as a decline in
recovery rates. Although recovery rates are down compared to last fiscal year,
there was a slight improvement in the fourth quarter of fiscal 1997 over the
third quarter.
The allowance for estimated credit losses inherent in loans sold is
included as an element of the fair market value of excess servicing cashflows
used to allocate the carrying amount of loans sold. In view of the consumer
credit trends discussed above, the Company recorded a charge of $27.0 million
pre-tax in late fiscal 1997 to increase the allowance for estimated credit
losses. After giving effect of this charge, management believes that the
allowance for estimated credit losses on securitized loans represents a
conservative estimate of potential credit losses. The allowance for estimated
credit loss as a percentage of outstanding securitized loans was 4.35% and 3.22%
at June 30, 1997 and 1996, respectively.
Set forth below is information pertaining to delinquency and credit
loss information on the Company's Non-prime portfolio. There can be no assurance
that future delinquency and credit loss experience on the receivables will be
comparable to that set forth below. See "Discussion of Forward-Looking
Statements".
Non-prime Delinquency Experience
At June 30,
----------------------------------------
1997 1996
------------------ ------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
Servicing portfolio ....... 6,056 $68,289 4,067 $47,062
Delinquencies
30-59 days ........... 236 2,807 94 1,120
60-89 days ........... 123 1,412 40 455
90 days or more ...... -- -- -- --
Total delinquencies ....... 359 $ 4,219 134 $ 1,575
Total delinquencies
as a percent of
servicing portfolio.... 5.93% 6.18% 3.29% 3.35%
23
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended June 30,
--------------------------------------------------------------------
1997 1996 1995
----------------- --------------------- ----------------------
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 ............ 5,491 $63,305 2,869 $33,124 797 $ 9,448
Gross charge-offs ....... 379 $ 4,698 136 1,455 27 333
Recoveries .............. 1,420 670 146
------- ------- -------
Net credit losses ....... 3,278 785 187
======= ======= =======
Gross charge-offs
as a % of avg
servicing portfolio .. 6.90% 7.42% 4.74% 4.39% 5.08% 5.29%(1)
Recoveries as a %
of gross charge-offs. 30.23% 46.07% 43.87%
Net credit losses as a %
of avg. servicing
portfolio ........... 5.18% 2.37% 2.97%(1)
</TABLE>
- --------------------------------------------------------------------------------
(1) Non-prime loans were only outstanding for eight (8) months during
fiscal 1995. Therefore, the percentages reflect an annualized
calculation.
Non-prime portfolio delinquency was 6.18% based on outstanding loan balances of
accounts 30 days past due and over at June 30, 1997, compared to 3.35% at June
30, 1996. Credit losses during fiscal 1997 totaled $3.3 million or 5.18% as a
percentage of the average Non-prime servicing portfolio compared to 2.37% in
fiscal 1996. The Company began acquiring Non-prime loans in October 1994.
Management expects fluctuations in delinquency and credit loss rates on the
Non-prime portfolio as it becomes more seasoned. The Non-prime delinquency and
credit loss statistics are in line with management's expectations, and the
somewhat greater credit risk associated with a non-prime product. Additional
credit risk associated with the Non-prime product is considered in pricing and
underwriting.
Marine Delinquency and Credit Loss
Delinquency related to the newer Marine portfolio was minimal (.10%) as
the portfolio has not matured. The Company began acquiring the Marine (prime)
loans in June 1996. The credit loss is .25% of the average marine servicing
portfolio. Management expects increases in marine delinquency and credit losses
as the portfolio becomes seasoned.
24
<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>
1996 1997
----------------------------------------- ------------------------------------------
First Second Third Fourth First Second Third Fourth
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest on loans ...... $ 9,233 $ 9,096 $ 7,685 $ 8,126 $ 6,946 $ 7,232 $ 6,732 $ 7,802
Interest on spread
accounts and
restricted cash .. 1,510 1,545 1,654 1,795 1,370 1,386 1,317 1,375
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income 10,743 10,641 9,339 9,921 8,316 8,618 8,049 9,177
Interest expense ....... 6,410 6,265 6,118 6,895 5,289 5,556 5,359 6,071
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin ..... 4,333 4,376 3,221 3,026 3,027 3,062 2,690 3,106
Provision for
credit losses .... 855 993 1,180 1,160 1,150 300 600 825
-------- -------- -------- -------- -------- -------- -------- --------
Net interest margin . 3,478 3,383 2,041 1,866 1,877 2,762 2,090 2,281
Gain (loss) on sales
of loans, net .... 6,875 7,790 8,283 (20,335) 6,724 8,483 7,760 7,390
Servicing fees, net .... 5,826 6,258 6,860 6,393 3,966 2,584 4,796 5,580
Other revenues ......... 934 910 1,011 964 750 724 798 824
Operating expenses ..... 7,146 7,832 7,545 7,418 4,719 5,602 6,658 6,862
Net earnings/(loss) .... $ 5,918 $ 6,193 $ 6,309 $(11,019) $ 5,116 $ 5,246 $ 5,313 $ 5,467
</TABLE>
Years Ended June 30, 1997 and 1996
Net earnings decreased to $7.4 million or $0.56 per share for the year
ended June 30, 1997, compared to $21.1 million or $1.60 per share for the year
ended June 30, 1996. The decrease in net earnings is primarily a result of a
fourth quarter after-tax charge of $16.1 million ($27.0 million pre-tax) for the
impairment of excess servicing related to an increase in the allowance for
estimated credit losses on the securitized portfolio. The charge was taken based
on current trends with respect to credit loss and delinquency, and their effects
on the valuation of the excess servicing assets. Exclusive of the charge, net
earnings would have been $23.5 million or $1.78 per share.
Net Interest Margin After Provision increased 19.5% to $10.8 million
for the year ended June 30, 1997, compared to $9.0 million for fiscal 1996. The
increased interest margin as compared to prior year is a result of a combination
of factors, but is primarily due to an increase in the average loans held for
sale balance, and a decrease in the cost of funds on the average outstanding
borrowings.
Interest on loans increased 18.9% to $34.1 million for the year ended
June 30, 1997, compared to $28.7 million for last year. The increase in interest
income resulted from an increase in the average outstanding balance of loans
held for sale to $228.3 million for the year ended June 30, 1997, from $186.6
million for fiscal 1996, which was a result of increased loan acquisitions
during the year and the timing of the fourth quarter securitization. The 1997
fourth quarter securitization was effected in June instead of May (as compared
to previous years); therefore, an additional one month of interest was earned by
the Company. Interest earned on the Non-prime and Marine portfolios were
approximately $3.8 million and $255,000, respectively.
Interest earned on Spread Accounts and Restricted Cash increased 19.4%
to $6.5 million for the year ended June 30, 1997, compared to $5.4 million for
the year ended June 30, 1996. The increase is a result of increased average
balances on cash collection and spread accounts. The average balance of these
accounts was $127.4 million in fiscal 1997, compared to $110.3 million in fiscal
1996. The increased restricted cash balances result from the increased size of
the securitized servicing portfolio. Cash collection accounts represent customer
25
<PAGE>
payments held in trust until disbursement by the trustee. Interest is earned by
the Company on these funds prior to distribution of such funds to investors and
Servicer. Average securitized loan balances were $1,445.4 million during the
current fiscal year, compared to $1,179.4 million in fiscal 1996. Spread account
balances represent a credit enhancement on the securitized pools; the spread
account requirements are affected by the size of the securitized servicing
portfolio as well as loss and delinquency trends which may trigger higher spread
requirements. The average interest yield on the spread accounts and restricted
cash accounts improved approximately 15 basis points which contributed to the
increase as well.
Interest expense increased 15.3% to $25.7 million for the year ended
June 30, 1997, from $22.3 million for the year ended June 30, 1996. The increase
was primarily a result of an increase in the average outstanding borrowings to
$347.7 million for the year ended June 30, 1997, from $288.4 million for the
year ended June 30, 1996. The average cost of funds actually decreased to 7.39%
for the year ended June 30, 1997, from 7.72% for the year ended June 30, 1996.
Cost of funds in the prior year included interest expense in the form of
amortization of upfront borrowing fees paid in conjunction with the
establishment of the Prime and Non-prime Warehouse Facilities. The agreements
provided for an initial term of one year to be renewed annually; therefore, the
total upfront fees paid to establish the Facilities were amortized during fiscal
1996. Upfront fees paid in fiscal 1996 related to the Warehouse Facilities
totaled approximately $1.5 million. The renewal of the Warehouse Facilities do
not require payment of additional fees. Interest rates on the Warehouse
Facilities are variable in nature and are affected by changes in market rates of
interest.
Provision for estimated credit losses increased to $4.2 million for the
year ended June 30, 1997, compared to $2.9 million for the year ended June 30,
1996. Increased provisions were made in response to, and in anticipation of,
increased losses and delinquency trends being experienced by the Company and the
industry in general. Management believes that the provision represents
conservative estimates of potential credit losses on loans held for sale.
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. Gain on sales of loans decreased to $2.6 million for the year ended
June 30, 1997. The decrease in gains recognized by the Company in the current
fiscal year is due to a fourth quarter pre-tax charge of $27.0 million for the
impairment of excess servicing assets primarily related to the increase in
allowance for estimated credit losses related to its securitized portfolio.
Exclusive of the charge, gains recorded in conjunction with the fiscal 1997
securitization transactions were $29.6 million compared to $30.4 million in
fiscal 1996. Although the volume of loans securitized increased 31.3% to
$1,214.3 million for the year ending June 30, 1997, compared to $924.6 million
in fiscal 1996, the weighted average net spread on the securitization
transactions decreased to 5.36% in fiscal 1997, compared to 5.96% in fiscal
1996. Additionally, the allowance for estimated credit losses established at the
time of the sale was 3.87% (excluding the charge) as a percentage of total loans
securitized in fiscal 1997, compared to 3.57% in fiscal 1996. Credit loss
assumptions on the prime transactions were 3.25% throughout most of fiscal 1997;
however, the Company began providing for losses at 3.50% on prime
securitizations in the fourth quarter of fiscal 1997. Allowance for estimated
credit losses were established at 3.00% for the majority of fiscal 1996.
Allowance for estimated credit losses have historically been made at 10.00% on
the non-prime securitizations.
Gross and Net Spreads. Market interest rates were higher in fiscal 1997
as compared to the corresponding periods of fiscal 1996. Market rates
experienced an upward trend beginning in the fourth quarter of fiscal 1996, but
demonstrated relatively small fluctuations throughout fiscal 1997. Because
changes in loan rates on automobile loans tend to lag behind fluctuations in
market rates of interest, spreads are adversely affected in a rising rate
environment. The increased market rates in fiscal 1997 had the effect of
reducing gross and net spreads on Prime securitizations compared to fiscal 1996.
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.
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
1998. 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
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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,".
Servicing Fees, Net is comprised of fees earned by the Company as
Servicer of the securitized loan portfolio (typically 1% per annum), the
scheduled accretion of discount established on the excess servicing asset at the
time of securitization, and rebates received in excess of original estimates
recorded inherent in the gain calculation. Servicing fees, net increased 49.7%
to $25.3 million for the year ended June 30, 1997, compared to $16.9 million for
the year ended June 30, 1996. Servicing fees, net as a percentage of the average
securitized servicing portfolio increased to 1.75% for fiscal 1997, from 1.42%
in fiscal 1996. The increase in servicing fees, net is primarily a result of a
22.6% increase in the average securitized loan balances in fiscal 1997 to $1.4
billion, compared to $1.2 billion in fiscal 1996. Servicing fees are also
impacted by the timing of excess servicing cashflows and excess rebates. Excess
rebates received during the current year were $2.3 million, compared to $2.8
million in the prior year. The Company's rebate receivable was marked to market
as a component of the excess servicing asset in accordance with SFAS 125 during
the fourth quarter of fiscal 1997; the Company does not expect to receive excess
rebates in fiscal 1998.
Other Revenues increased 23.4% to $3.8 million for the year ended June
30, 1997, from $3.1 million for the year ended June 30, 1996. The increase in
the current year resulted primarily from increases in late charge fee income to
$2.6 million from $1.9 million in the prior year.
Salaries and Benefits Expense increased 26.1% to $15.1 million for the
year ended June 30, 1997, from $12.0 million for the year ended June 30, 1996.
This increase resulted primarily from an increase in full-time equivalent
("FTE") employees. Average FTE's for the year ended June 30, 1997, were 333
compared to 270 for the year ended June 30, 1996. 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 annual merit
increases for the Company's existing employees.
Other Operating Expense includes occupancy and equipment costs, outside
and professional services, loan expenses, promotional expenses, travel, office
supplies and other. Other operating expense increased 25.1% to $14.8 million for
the year ended June 30, 1997, from $11.9 million for the year ended June 30,
1996. 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,
1997, compared to the year ended June 30, 1996. Occupancy expense increased
reflecting a full twelve months of rent expense in fiscal 1997 at the Company's
new headquarters, compared to only six months in fiscal 1996. Equipment expense
was also impacted by a full year of expense from its collections and telephone
systems implemented at the Company's new headquarters in January 1996.
Years Ended June 30, 1996 and 1995
Net earnings more than doubled to $21.1 million or $1.60 per share for
the year ended June 30, 1996, compared to $9.4 million for the year ended June
30, 1995.
Net Interest Margin After Provision 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 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
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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 implemented in fiscal 1996 increased the amount of
interest income recognized relative to prior periods. The change in the
securitization structure 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
cutoff 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
cutoff 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 Warehouse Facility Agreements which require that the Company
collect and remit interest on loans from cutoff 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 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 was $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.
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 was a result of the Company obtaining alternative
financing sources after its Spin-off from its parent in August of 1995. Included
in fiscal 1996 interest expense is the amortization of upfront borrowing fees
paid in conjunction with the establishment of the Prime and Non-prime 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 paid in fiscal 1996
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 does 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 estimated 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
was a result of both the time period the Non-prime portfolio was 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.
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% in 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.
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Servicing Fees, Net 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 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 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 also impacted this ratio. Because the Non-prime
receivables had not been securitized until 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 and accounting have
also been added, as well as additional levels of management needed to support
the Company's growth.
Other Revenues increased 11.2% to $3.1 million for the year ended June
30, 1996, from $2.8 million 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 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 experienced growth in credit,
sales and operations, collections, and support. These increases were 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 were 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 increased 43.0% to $11.9 million for the year ended June
30, 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.
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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 prepaid dealer premiums. Loans, net
decreased to $121.4 million at June 30, 1997, from $259.3 million at June 30,
1996. This decrease was due primarily to the decrease in loan acquisitions in
the fourth quarter of fiscal 1997, compared to the fourth quarter of fiscal
1996, and the timing of the securitization of loans in June 1997, as compared to
May 1996. Loan acquisitions were $238.4 million during the fourth quarter of
fiscal 1997, compared to $328.9 million in the fourth quarter of fiscal 1996.
Allowance for credit losses on loans held for sale decreased $319,000 from June
30, 1996. The Company serviced $1.8 billion and $1.4 billion in securitized
loans and the total servicing portfolio was $1.9 billion and $1.6 billion as of
June 30, 1997, and June 30, 1996, respectively.
Excess Servicing increased to $98.8 million at June 30, 1997, from
$83.4 million at June 30, 1996. This balance increased by the amounts
capitalized upon consummation of the various Prime and Non-prime securitizations
(including estimated dealer premium rebates). The amounts capitalized were
offset by actual Excess Servicing Cashflows received during the year ended June
30, 1997. The increase in excess servicing was offset by the effect of the $27.0
million adjustment recorded during the fourth quarter of fiscal 1997. Allowance
for estimated credit losses on securitized loans is included as a component of
the Excess Servicing asset. At June 30, 1997, the allowances related to both
Prime and Non-prime securitized loans totaled $79.0 million or 4.35% of the
total securitized loan portfolio, compared to $43.5 million or 3.22% at June 30,
1996. Accrued interest due the Company at the cutoff date on securitized loan
pools is also included as a component of Excess Servicing.
Spread Accounts increased to $71.7 million at June 30, 1997, from $63.6
million at June 30, 1996. These balances were increased by the deposits of
Excess Servicing Cashflows and have 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 Prime securitizations as a result of the structuring which
utilized alternative credit enhancements in lieu of initial spread account
deposits.
Amounts due under Warehouse Facilities and Long-term Debt. Beginning in
August 1995, after the Spin-off from its parent, the Revolving Warehouse Credit
Facilities and Senior Notes constituted the Company's primary funding sources.
The Company issued in a private placement $46.0 million in Senior Subordinated
Notes in April 1996 and $65.0 million in Senior Notes in March 1997. The balance
of the Revolving Warehouse Credit Facilities and the Senior and Senior
Subordinated Notes was $265.5 million at June 30, 1997, compared to $343.8
million at June 30, 1996.
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) payment of
income taxes; and (viii) interest expense. 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 Cashflows; (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) proceeds from sale of
interest-only strips in conjunction with securitization transactions. Net cash
provided by operating activities increased to $126.0 million for the year ended
June 30, 1997, from a use of $55.8 million for the year ended June 30, 1996,
which was primarily attributable to an increase in loans securitized relative to
loans acquired and an increase in proceeds from the sale of interest-only
strips. Proceeds from the sale of interest-only strips generated $31.8 million
in cash for the period ended June 30, 1997, compared to $26.7 million for the
period ended June 30, 1996. Additionally, the Company continues to defer a
portion of the Gain on Sales of Loans for tax purposes. The Company realized a
$11.1 million cash benefit by doing so during fiscal 1997.
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Hedging transactions may represent a source or a use of cash during a
given period depending on changes in interest rates. During fiscal 1997, hedging
transactions have required a net use of cash of $6.3 million, compared to $2.8
million used during fiscal 1996.
Financing Activities and Credit Facilities. Net cash used by financing
activities for fiscal 1997 was $79.7 million, compared to a source of $61.1
million in the prior year. The decrease was a result of the Company's ability to
pay down its revolving credit facilities due to increased cash from operations.
The Company's sources of liquidity are currently funds from operations,
securitizations and external financing sources. 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, although management regularly
considers alternative funding mechanisms with a view to optimizing profitability
and cash flows. 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. Additionally, the
Company has a Marine Warehouse Facility of up to $50.0 million that was
established in April 1997. The Prime Warehouse Facility provides funding for
loan acquisitions at a purchase price of up to 100.0% 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 92.0% of the outstanding principal
balance. The advance rate is adjusted monthly based upon actual loss statistics
in order to maintain the necessary enhancement level. The Non-prime Warehouse
Facility provides funding for loan acquisitions at a purchase price of 87.0% of
the outstanding principal balance of eligible loans at the time of purchase. The
Marine Warehouse Facility provides funding for loan acquisitions at a purchase
price of 85.0% for any boat loan and 65.0% for personal watercraft loans with 49
- - 60 scheduled monthly payments. Additionally funding is provided for eligible
loans with less than 49 monthly payments at a purchase price of 80.0%. 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 Senior
Subordinated Notes in April 1996 and $65 million in Senior Notes in March 1997,
as discussed below. 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 for
borrowing under the Credit Facilities.
To accommodate its anticipated cash and liquidity requirements for the
near term, the Company determined during the third quarter to seek additional
capital. The Company completed a private placement of $65.0 million of Senior
Notes with an effective rate of 7.80% in March 1997. The securities have a 5 1/2
year average life and are due in December 2002. The securities 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 fiscal 1998.
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, particularly including the cash-effect of hedging
transactions, the availability of outside credit enhancement in securitizations
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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
origination 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, 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 borrow 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 net 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 impact significantly both
acquisition volume and the note rate at which loans are originated. Generally,
competition in the Company's business 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.
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
loss due to defaults in its servicing portfolio. Default and credit 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 Sales 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.
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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
As a part of the 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 continually search
for new products and markets to grow and expand the Company in order to maximize
profits and shareholder value.
Impact of Current Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 provides computation, presentation, and disclosure requirements
for earnings per share. The current presentation of primary and fully diluted
earnings per share will be replaced with basic and diluted earnings per share.
The Statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997, and earlier application is not
permitted. Basic earnings per share under SFAS 128 excludes dilutive securities.
Because unexercised stock options do not have a dilutive effect on the Company's
earnings per share calculation, management expects that the new basic earnings
per share will not be significantly different than primary earnings per share.
In connection with SFAS 128, the FASB also issued SFAS No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"). While SFAS 128 applies only
to public companies, SFAS 129 is applicable to both public and nonpublic
companies. This statement is not expected to have a material impact on
disclosures made by the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all nonowner changes in
shareholders' equity. This Statement is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Statement will
require new disclosures by the Company, but is not expected to have a material
impact on the financial statements or the results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which introduces new guidance
on segment reporting. The Statement is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. The Statement is
not expected to have a material impact on the financial condition or results of
operations of the Company.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data
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, 1997 and 1996, the
related consolidated statements of earnings and cash flows for each of the years
in the three-year period ended June 30, 1997 and the related consolidated
statement of shareholders' equity for the years ended June 30, 1997 and 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 as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standard No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, on January 1, 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
July 30, 1997
Indianapolis, IN
34
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
===================================================================================================================
Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 58,801 13,459
Restricted cash 16,657 14,789
Loans, net 121,381 259,290
Accrued interest receivable 1,232 2,127
Furniture and equipment, net 2,150 2,026
Excess servicing 98,841 83,434
Spread accounts 71,744 63,590
Other assets 21,360 12,480
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 392,166 451,195
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Liabilities
- -------------------------------------------------------------------------------------------------------------------
Amounts due under warehouse facilities 44,455 187,756
Long-term debt 221,000 156,000
Accrued interest payable 5,793 5,820
Amounts due to trusts 16,067 7,931
Dealer premiums payable 1,372 3,381
Other payables and accrued expenses 2,318 3,326
Deferred income tax payable 15,046 8,357
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 306,051 372,571
- -------------------------------------------------------------------------------------------------------------------
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; 4,016,788
and 4,011,358 shares issued and outstanding at June 30, 1997
and June 30, 1996, respectively 58,270 58,180
Class B Common Stock, without par value, authorized 20,000,000 shares; 9,200,000
shares issued and outstanding at June 30, 1997 and
June 30, 1996, respectively - -
Retained earnings 27,845 20,444
- -------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 86,115 78,624
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 392,166 451,195
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended June 30, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
===================================================================================================================
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on loans $ 34,140 28,712 14,702
Interest on spread accounts and restricted cash 6,504 5,448 3,936
- -------------------------------------------------------------------------------------------------------------------
Total interest income 40,644 34,160 18,638
Interest expense 25,688 22,275 12,961
- -------------------------------------------------------------------------------------------------------------------
Net interest margin 14,956 11,885 5,677
Provision for estimated credit losses 4,188 2,875 1,074
- -------------------------------------------------------------------------------------------------------------------
Net interest margin after provision 10,768 9,010 4,603
Gain on sales of loans, net 2,613 30,357 8,684
Servicing fees, net 25,337 16,926 14,628
Other 3,819 3,096 2,783
- -------------------------------------------------------------------------------------------------------------------
Total revenues 42,537 59,389 30,698
- -------------------------------------------------------------------------------------------------------------------
Salaries and benefits 15,112 11,985 6,622
Other 14,829 11,856 8,291
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 29,941 23,841 14,913
- -------------------------------------------------------------------------------------------------------------------
Earnings before provision for income taxes 12,596 35,548 15,785
Provision for income taxes 5,195 14,406 6,396
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ 7,401 21,142 9,389
===================================================================================================================
Net earnings per common share $ 0.56 1.60 NM
===================================================================================================================
Weighted average number of common shares outstanding 13,215,112 13,209,378 NM
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
===================================================================================================================
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 7,401 21,142 9,389
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Loan originations in excess of liquidations (1,087,065) (982,800) (760,091)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (53,461) (50,059) (35,245)
Securitization of loans held for sale 1,214,298 924,598 658,703
Gain on sales of loans (40,977) (37,900) (16,935)
Proceeds on sale of interest only strip 31,773 26,686 -
Return of excess servicing cash flows 24,626 37,871 30,049
Impairment of excess servicing 27,000 - -
Provision for estimated credit losses 4,188 2,875 1,074
Amortization and depreciation 3,754 4,395 2,049
Spread accounts (8,154) (6,176) (20,081)
Restricted cash (1,868) (5,934) (7,734)
Other assets and accrued interest receivable (3,590) (6,788) (6,745)
Amounts due to trusts 8,136 2,030 3,761
Other payables and accrued expenses (99) 14,281 939
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 125,962 (55,779) (140,867)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (967) (1,347) (995)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in warehouse credit facilities (143,301) 187,756 -
Proceeds from issuance of senior notes 65,000 110,000 -
Proceeds from issuance of senior subordinated notes - 46,000 -
Payment of borrowing fees (1,352) (3,231) (647)
Net proceeds from issuance of common stock - 58,000 -
Net change in Due to Union Federal, including
regulatory equity distribution - (337,423) 151,992
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) from financing activities (79,653) 61,102 151,345
- -------------------------------------------------------------------------------------------------------------------
Change in cash 45,342 3,976 9,483
Cash, beginning of year 13,459 9,483 -
- -------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 58,801 13,459 9,483
===================================================================================================================
Supplemental disclosures of cash flow information:
- -------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 4,288 10,680 6,396
===================================================================================================================
Interest paid $ 26,475 15,648 12,961
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended June 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
===================================================================================================================
Number of
Common Stock Total
Shares Outstanding Common Retained Shareholders'
Class A Class B Stock Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <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)
Grants 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
Grants of common stock 5,430 - 90 - 90
Net earnings - - - 7,401 7,401
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 4,016,788 9,200,000 $ 58,270 27,845 86,115
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
(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
prime retail installment loans (primarily automobile loans) acquired from
a network of over 3,200 manufacturer-franchised dealerships in 29 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 fiscal 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 offering
simultaneously with a tax free spin-off from its parent, Union Federal.
During fiscal 1996, UAC Boat Funding Corp. was formed as a wholly-owned
subsidiary of UAC. In fiscal 1997, UAC Finance Corporation was formed as
a wholly-owned subsidiary of UAC.
The accompanying consolidated financial statements include the accounts
of UAC 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 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.
39
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Loans, Net
All loans in the Company's prime and non-prime portfolios are held for
sale 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) which approximates the
lower of cost or market, net of unearned discount. 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.
Loans, net includes dealer premiums which are incentives paid to dealers
in connection with the acquisition of loans. Dealer premiums are deferred
in accordance with Statement of Financial Accounting Standards No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases. A portion of the
dealer premiums are refundable to the Company in the event of loan
prepayment or default.
Accrued Interest Receivable
Accrued interest receivable represents interest earned but not collected
on loans held for sale.
Furniture and Equipment, Net
Furniture and equipment are recorded at cost. Depreciation is determined
on accelerated methods over the estimated useful lives of the respective
assets.
Excess Servicing
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 125"). SFAS 125 provides accounting
and reporting standards for transfers and servicing of financial assets
and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are
secured borrowings. The financial components approach focuses on the
assets and liabilities that exist after the transfer. The pronouncement
prescribes the methodology for recognition of gain or loss upon the sales
of loans as well as the valuation of excess servicing. SFAS 125 is
effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Retroactive application is not permitted.
The Company adopted SFAS 125 on January 1, 1997. During fiscal 1997,
implementation of SFAS 125 did not have a material impact on the
Company's consolidated financial statements.
40
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Excess servicing is the Company's retained interest in loans sold. Excess
servicing is determined by allocating the carrying amount of loans sold
based on the relative fair market value of loans sold and the expected
future cash flows discounted at current market rates. The expected
discounted future servicing cash flows is the projected difference
between the weighted average coupon rate of the loans sold and the
certificate rate to investors less the Company's contractual servicing
fee (typically 1%), an allowance for estimated credit losses and other
trust and credit enhancement fees, plus dealer premium rebates. Allowance
for estimated credit losses is based on current scoring models,
historical loss rates and the loan composition of the securitization.
Allowance for estimated credit losses is deemed adequate for credit
losses over the life of the respective securitizations. Market discount
rates are based on current market conditions and prepayment assumptions
are based on historical experience. The Company's contractual servicing
fee approximates adequate compensation. Accrued interest through the date
of securitization, which will be returned to the Company through the
securitization trust is also classified as excess servicing. Excess
servicing is reduced by excess cash flows as received over the life of
the securitization.
Excess servicing is classified as an available-for-sale security and is
carried at its market value based on the application of current
assumptions to the remaining cash flows. Unrealized gains and losses are
reported net of related income taxes as a separate component of
shareholders' equity until realized. Excess servicing is reviewed
periodically for other than temporary impairment with impairment, if any,
charged to operations through gain on sales of loans, net.
Gain on Sales of Loans, Net
Gain on sales of loans, net represents the difference between the sales
proceeds and the carrying amount of loans after reduction for amounts
allocated to excess servicing, less expenses of the sale 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.
Spread Accounts
Spread 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. Spread
account requirements vary with each securitization's delinquency and loss
experience. 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 subordinated class of certificates
whereby the senior certificateholders are protected against losses by
having their interests senior to the subordinate certificateholders'
interests. Subordinated certificateholders assume a higher risk of loss,
but earn a higher yield on their certificates. For each trust, there is
no recourse against the Company beyond the balance in the spread account
and the trust's future earnings.
41
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Common Stock
In election of directors, the holders of Class B Common Stock are
entitled to five votes per share and Class A Common Stock are entitled to
one vote per share. On all matters other than the election of directors,
holders of Class B and A have one vote per share and vote as a single
class.
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 rate 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, servicer, and
credit enhancers on a monthly basis.
Servicing Fees, Net
Servicing fees, net include the contractual fee, typically 1% per annum,
earned from each trust plus the accretion of discounted excess servicing,
plus excess dealer premium rebates.
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 Treasury Notes having a maturity approximating
the average maturity of the loan production during the relevant period.
At such time as a securitization is committed, the hedge is covered by
the purchase of a like volume of Treasury Notes. Gains or losses on the
hedge are recognized concurrently with the gain or loss at
securitization.
Earnings Per Share
The initial public offering was completed on August 7, 1995. Earnings per
share for the year ended June 30, 1997 and 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 has not been included in the calculation because they are not
dilutive.
42
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
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.
(2) Loans, Net
Loans, net are as follows (in thousands, except average loan balance) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Principal balance of prime loans held for sale,
net of unearned discount $ 90,331 228,391
Principal balance of non-prime loans held for sale,
net of unearned discount 19,829 15,512
Principal balance of marine loans held for sale 6,227 50
Loans in process 1,189 5,363
Dealer premiums 4,585 11,073
Allowance for credit losses (780) (1,099)
- -------------------------------------------------------------------------------------------------------------------
$ 121,381 259,290
===================================================================================================================
Weighted average interest rate (prime) 13.09% 13.24%
Weighted average interest rate (non-prime) 19.47 19.70
Weighted average interest rate (marine) 11.36 14.68
Average loan balance (prime) $ 12,560 14,049
Average loan balance (non-prime) 12,180 12,479
Average loan balance (marine) 13,192 8,304
</TABLE>
Allowance for estimated credit losses on loans held for sale (in
thousands):
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of the period $ 1,099 453 171
Charge-offs (7,361) (4,556) (2,605)
Recoveries 2,854 2,327 1,813
Provision for estimated credit losses 4,188 2,875 1,074
Balance at the end of the period $ 780 1,099 453
===================================================================================================================
</TABLE>
43
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The geographic concentration of loans serviced are as follows:
Percent of Total
June 30,
State 1997 1996
- --------------------------------------------------------------------------------
Texas 16.4% 18.2%
North Carolina 11.0 11.2
California 10.5 8.8
Ohio 7.2 8.0
Illinois 7.1 6.7
Florida 7.0 6.1
Virginia 6.2 5.5
Oklahoma 5.7 7.2
Arizona 5.1 6.9
Indiana 4.7 5.8
Georgia 2.5 2.2
Missouri 2.5 3.0
Colorado 2.2 3.2
South Carolina 2.2 1.2
Iowa 1.5 0.9
Maryland 1.4 0.4
Tennessee 1.2 0.4
Wisconsin 1.2 1.0
Michigan 1.1 0.2
Kansas 0.8 0.9
New Mexico 0.8 0.8
Washington 0.6 0.5
Oregon 0.4 0.5
Kentucky 0.2 0.1
Pennsylvania 0.2 -
Minnesota 0.1 0.2
Nebraska 0.1 0.1
Nevada 0.1 -
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
44
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Loans serviced are as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Loans held for sale
<S> <C> <C>
Prime (net of unearned discount) $ 90,331 228,391
Non-prime (net of unearned discount) 19,829 15,512
Marine 6,227 50
- -------------------------------------------------------------------------------------------------------------------
116,387 243,953
Securitized loans
Prime 1,769,903 1,319,930
Non-prime 48,460 31,550
- -------------------------------------------------------------------------------------------------------------------
1,818,363 1,351,480
Other loans serviced 2,526 3,637
- -------------------------------------------------------------------------------------------------------------------
$ 1,937,276 1,599,070
===================================================================================================================
</TABLE>
Notional amounts and unrealized losses related to outstanding hedges
follow (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts outstanding $ 204,000 415,000
Unrealized losses on hedging transactions 909 711
=================================================================================================
</TABLE>
Notional amounts of $180 million, $18 million and $6 million were
expected to be closed in September 1997, December 1997 and March 1998,
respectively, for the amounts outstanding at June 30, 1997, and $340
million, $55 million and $20 million were closed in August 1996, November
1996 and December 1996, respectively, for amounts outstanding at June 30,
1996.
Hedging realized losses were approximately $6,293,000, $2,733,000 and
$5,515,000 during fiscal 1997, 1996 and 1995, respectively.
45
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) Furniture and Equipment, Net
Furniture and equipment, net are as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture, equipment and leasehold improvements $ 4,724 3,858
Accumulated depreciation (2,574) (1,832)
- -------------------------------------------------------------------------------------------------------------------
$ 2,150 2,026
===================================================================================================================
</TABLE>
(4) Excess Servicing
The carrying amount of excess servicing is as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Estimated value of excess servicing cash flows,
<S> <C> <C>
net of estimated prepayments $ 148,788 112,564
Estimated dealer premium rebates 28,175 13,467
Allowance for estimated credit losses on securitized loans (79,013) (43,516)
Discount to present value (11,916) (9,535)
- -------------------------------------------------------------------------------------------------------------------
86,034 72,980
Accrued interest on securitized loans 12,807 10,454
- -------------------------------------------------------------------------------------------------------------------
$ 98,841 83,434
==================================================================================================================
Outstanding balance of loans serviced
through securitized trusts $ 1,818,363 1,351,480
-
Allowance for estimated credit losses as a
percentage of securitized loans serviced 4.35% 3.22%
</TABLE>
46
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Excess servicing activity is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 83,434 60,622 41,265
Amounts capitalized (including estimated
dealer rebates) 64,681 56,436 47,693
Change in accrued interest on securitized loans 2,353 4,247 1,713
Return of excess cash flows, net of present value effect (24,627) (37,871) (30,049)
- -------------------------------------------------------------------------------------------------------------------
Impairment of excess servicing asset (27,000) - -
Balance at end of period $ 98,841 83,434 60,622
==================================================================================================================
</TABLE>
Because of current trends with respect to credit loss and delinquency,
and their effects on the valuation of the excess servicing asset, the
Company recorded a pre-tax charge of $27 million for the impairment of
the excess servicing asset in accordance with the provisions of SFAS 125
during the fourth quarter of fiscal 1997. The carrying value of excess
servicing approximated its fair value as of June 30, 1997 and 1996.
(5) Spread Accounts
The weighted average yield on spread accounts was 4.97% and 5.32% at June
30, 1997 and 1996, respectively.
(6) Other Assets
Other assets are as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income tax receivable $ 7,427 1,584
Repossessed assets 5,048 1,716
Deferred borrowing fees 3,078 2,173
Accrued servicing fees 2,511 5,131
Advances of delinquent interest 1,056 506
Other 2,240 1,370
- -------------------------------------------------------------------------------------------------------------------
$ 21,360 12,480
===================================================================================================================
</TABLE>
47
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) Amounts Due Under Warehouse Facilities
At June 30, 1997, the Company, through its wholly-owned special-purpose
subsidiaries, had borrowing arrangements with a financial institution
which provided for three revolving Warehouse Facilities (the
"Facilities") with an aggregate borrowing capacity of $450 million.
Borrowings under these facilities are collateralized by certain loans
held for sale. There are separate Facilities for the funding of prime
auto, non-prime auto, and marine loan acquisitions. Outstanding
borrowings of the Facilities at June 30, 1997 and 1996 were
approximately $44,455,000 and $187,756,000, respectively. The weighted
average cost of funds of the Facilities for the years ended June 30,
1997 and 1996 was 5.42% and 6.19%, respectively.
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 warehouse fees. The largest
portion of the cost of funds related to the 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, 1997 and 1996 was 5.66% and 5.40%, respectively. Upfront warehouse
fees are non-recurring costs related to the initial set-up of the
Facilities. The Facilities agreements specify a term of one year and are
renewable annually. Both the prime auto and non-prime auto Facilities
have been renewed for an additional year, and expire in June and July
1998, respectively. The marine Facility expires April 1998.
(8) 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, and commenced on
February 1, 1996, with annual principal reductions commencing on August
1, 1998. 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 of
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, and commenced on 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.
48
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
In March 1997, the Company issued, in a private placement, $50 million
Series A 7.75% Senior Notes due 2002 and $15 million Series B 7.97%
Senior Notes due 2002. Interest on the Senior Notes is payable
semi-annually on March 15 and September 15 of each year, commencing
September 15, 1997, with a principal reduction occurring on March 15,
2002. 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.
Scheduled contractual maturities of long-term debt at June 30, 1997
follows (in thousands):
1998 $ -
1999 22,000
2000 22,000
2001 22,000
2002 43,667
2003 111,333
- ----------------------------------------------------------------------------
$ 221,000
============================================================================
(9) Other Revenue and Expenses
Other revenue and expenses follow (in thousands):
Year ended June 30,
1997 1996 1995
- --------------------------------------------------------------------------------
Other revenues:
Late charges $ 2,618 1,922 1,447
Origination fees 1,019 1,072 1,210
Other 182 102 126
- --------------------------------------------------------------------------------
$ 3,819 3,096 2,783
================================================================================
Other expenses:
Loan expenses 2,948 2,202 1,841
Outside services 2,767 2,515 1,492
Office, telephone and postage 2,626 2,207 1,158
Occupancy 1,433 891 396
Equipment 1,013 839 511
Other 4,042 3,202 2,893
- --------------------------------------------------------------------------------
$ 14,829 11,856 8,291
================================================================================
49
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) Income Taxes
The composition of income taxes follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current expense (benefit) $ (1,494) 9,096 6,458
Deferred expense (benefit) 6,689 5,310 (62)
- -------------------------------------------------------------------------------------------------------------------
$ 5,195 14,406 6,396
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The effective income tax rate for the year ended June 30, 1997, is 40.5%.
Income taxes were allocated using statutory federal and state rates which
resulted in effective income tax rate of approximately 40.5% for the
years ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Year ended June 30,
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for estimated credit losses $ 316 445
Mark to market and allowance for
excess servicing losses 1,160 912
- -----------------------------------------------------------------------------------------
1,476 1,357
- -----------------------------------------------------------------------------------------
Deferred tax liabilities:
Excess servicing 16,522 5,349
Mark to market - excess servicing - 4,365
- -----------------------------------------------------------------------------------------
16,522 9,714
- -----------------------------------------------------------------------------------------
Deferred income tax payable $ 15,046 8,357
=========================================================================================
</TABLE>
(11) 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 - In 1997, amount carried at fair value in accordance
with SFAS 125. During 1996, cost approximated fair value 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.
50
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Repossessed assets - Cost approximates fair market value.
All liabilities, except long-term debt - Cost approximates fair value.
Long-term debt - Carrying amount of $221,000,000 and $156,000,000 at June
30, 1997 and 1996, respectively, has been calculated to have a fair value
of approximately $221,000,000 and $152,000,000, respectively, by
discounting the scheduled loan payments to maturity using rates that are
believed to be currently available for debt of similar terms and
maturities.
(12) 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, 1997 are as
follows (in thousands):
1998 $ 1,236
1999 1,150
2000 985
2001 911
2002 911
Thereafter 759
- --------------------------------------------------------------------------------
Total $ 5,952
================================================================================
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense for premises and equipment
amounted to approximately $1,640,000 and $645,000 for the years ended
June 30, 1997 and 1996, respectively. A majority of the rental expense
relates to the lease of the Company's principal offices 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, based
on the advice of outside counsel, believes that the outcome of such
proceedings will not have a material effect upon its business or
financial condition.
(13) Stock-Based Compensation
The Company has one stock-based compensation plan, which is described
below. The Company applies APB Opinion No. 25, Accounting for Stock
Issued to Employees and related Interpretations in accounting for these
plans. Had compensation cost been determined based on the fair value at
the grant date for awards under those plans consistent with the method of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except share data):
51
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
June 30,
For the Years Ended: 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $ 7,401 21,142
Pro forma 6,018 19,449
Earnings per share:
As reported .56 1.60
Pro forma .46 1.47
================================================================================
The effects of applying SFAS 123 in this Pro Forma disclosure are not
indicative of future amounts. The Statement does not apply to awards
prior to fiscal 1996, and additional awards in the future are expected.
The Union Acceptance Corporation 1994 Incentive Stock Plan ("Incentive
Stock Plan") is the Company's long-term incentive plan for directors,
executive officers and other key employees. The Incentive Stock Plan
authorizes the Company's Compensation Committee to award executive
officers and other key employees incentive and non-qualified stock
options and restricted shares of Class A Common Stock. A total of 500,000
shares of Class A Common Stock have been reserved for issuance under the
Incentive Stock Plan, of which options for 271,875 shares of Class A
Common Stock were granted at an issue price of $16 per share to senior
officers upon consummation of the Company's initial public offering of
the Class A Common Stock.
Options or other grants to be received by executive officers or other
employees in the future are within the discretion of the Company's
Compensation Committee and are not determinable. Stock options granted
under the Incentive Stock Plan are exercisable at such times (not after
ten years and one day from the date of the grant) and at such exercise
prices (not less than 85% of the fair market value of the Class A Common
Stock at date of grant) as the Committee determines and will, except in
limited circumstances, terminate if the grantee's employment terminates
prior to exercise. The outstanding options' maximum term is ten years.
Such options vest over a period of five years, with one-fifth becoming
exercisable on each anniversary of the option grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options pricing model with the following weighted
average assumptions used for grants in 1997 and 1996; dividend yield of
0.0% for both years; expected volatility of 100% for both years; weighted
average risk-free interest rates of 6.55% and 6.41% for 1997 and 1996
grants, respectively; and expected lives of ten years for both years.
52
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
A summary of the status of the Company's stock option plans as of June
30, 1997 and 1996 changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of
year 276,915 $ 16.03 - $ 0.00
Options granted 39,750 16.00 280,600 16.04
Options exercised - 0.00 - 0.00
Options canceled 2,180 17.48 3,685 16.31
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 314,485 $ 16.02 276,915 $ 16.03
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $ 14.71 $ 14.79
====================================================================================================================
</TABLE>
The following table summarizes information about fixed stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted average Weighted Weighted
Range of number remaining Average Number average
exercise outstanding contractual exercise exercisable exercise
prices at 6/30/97 date price at 6/30/97 price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.00 - 16.00 311,125 8.25 $ 16.00 54,375 $ 16.00
$17.88 - 17.88 3,360 8.25 17.88 672 17.88
- -------------------------------------------------------------------------------------------------------------------
314,485 8.25 $ 16.02 55,047 $ 16.03
===================================================================================================================
</TABLE>
In addition to the options outstanding at June 30, 1997, there were
168,727 shares of Class A Common Stock available for future grants or
awards.
The Incentive Stock Plan also provides that each director of the Company
who is not also an executive officer is automatically granted shares of
Class A Common Stock with a fair market value of $15,000 following each
annual meeting of shareholders. Shares so granted have a six-month period
of restriction during which they may not be transferred. Shares granted
under this section of the Incentive Stock Plan totaled 5,430 and 11,358
in fiscal 1997 and 1996, respectively, and compensation cost charged
against income was $90,000 and $180,000 in 1997 and 1996, respectively.
53
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(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, 1997
<S> <C> <C> <C> <C> <C>
Interest on loans $ 9,233 9,096 7,685 8,126 34,140
Interest on spread accounts and restricted cash 1,510 1,545 1,654 1,795 6,504
Interest expense (6,410) (6,265) (6,118) (6,895) (25,688)
Provision for estimated credit losses on
- ------------------------------------------------------------------------------------------------------------------
loans held for sale (855) (993) (1,180) (1,160) (4,188)
- ------------------------------------------------------------------------------------------------------------------
Net interest margin after provision 3,478 3,383 2,041 1,866 10,768
Gain on sales of loans 6,875 7,790 8,283 (20,335) 2,613
Servicing fees, net 5,826 6,258 6,860 6,393 25,337
Other revenues 934 910 1,011 964 3,819
- ------------------------------------------------------------------------------------------------------------------
Total revenues 17,113 18,341 18,195 (11,112) 42,537
- ------------------------------------------------------------------------------------------------------------------
Salaries and benefits 3,632 3,900 4,065 3,515 15,112
Other expenses 3,514 3,932 3,480 3,903 14,829
- ------------------------------------------------------------------------------------------------------------------
Operating expenses 7,146 7,832 7,545 7,418 29,941
- ------------------------------------------------------------------------------------------------------------------
Provision for income taxes 4,049 4,316 4,341 (7,511) 5,195
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 5,918 6,193 6,309 (11,019) 7,401
==================================================================================================================
Earnings (loss) per common share $ 0.45 0.47 0.48 (0.83) 0.56
==================================================================================================================
Weighted average common shares outstanding 13,211,358 13,215,515 13,216,788 13,216,788 13,215,112
==================================================================================================================
Year ended June 30, 1996
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 estimated 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 3,489 11,856
- ------------------------------------------------------------------------------------------------------------------
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 common share $ 0.39 0.40 0.40 0.41 1.60
==================================================================================================================
Weighted average common shares outstanding 13,205,622 13,209,173 13,211,358 13,211,358 13,209,378
==================================================================================================================
</TABLE>
54
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
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 reference to pages 3 through 5 of the Company's 1997 Proxy
Statement for its 1997 Annual Shareholder Meeting (the "1997 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 8 and 9 of the 1997 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 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
page 11 of the 1997 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, 1997 and 1996
Consolidated Statements of Earnings for the Years Ended
June 30, 1997, 1996, 1995
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1996, 1995
Consolidated Statement of Shareholders' Equity for the Years
Ended June 30, 1997 and 1996
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter
ended June 30, 1997
(c) The exhibits filed herewith or incorporated by reference
herein are set forth following the signature page which
appears on page 56.
55
<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 12, 1997 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 )
------------------------- )
Rick A. Brown Financial Officer )
)
(3) A Majority of the
Board of Directors: )
)
/s/ Howard L. Chapman Director )
------------------------- )
Howard L. Chapman )
)
/s/ John M. Davis Director ) September 12, 1997
------------------------- )
John M. Davis )
)
/s/ Fred M. Fehsenfeld Director )
------------------------- )
Fred M. Fehsenfeld )
)
/s/ Donald A. Sherman Director )
------------------------- )
Donald A. Sherman )
)
/s/ John M. Stainbrook Director )
------------------------- )
John M. Stainbrook )
)
/s/ Jerry D. Von Deylen Director )
------------------------- )
Jerry D. Von Deylen )
)
/s/ Richard D. Waterfield Director )
------------------------- )
Richard D. Waterfield )
)
/s/ Thomas M. West Director )
------------------------- )
Thomas M. West )
)
56
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page (Ex. No.
Cross Reference)(1)
- -------------------------------------------------------------------------------
3.1 Registrant's Articles of Incorporation, as amended S-1, 3.1
and restated.
3.2 Registrant's Code of By-Laws, as amended and S-1, 3.2
restated.
3.3 Form of Share Certificate for Class A Common Stock. S-1, 3.3
4.1 Articles V and VI of the Registrant's Articles of S-1, 4.1
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 - S-1, 4.2
"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 S-1, 4.3
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 10Q 9/95
Agreement dated September 8, 1995 4.3(a)
4.3(b) Amendment No. 2 to Transfer and Administration 10Q 9/95
Agreement dated September 29, 1995 4.3(b)
4.3(c) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated November 13, 1995 4.3(c)
4.3(d) Amendment No. 3 to Transfer and Administration 10K 1996
Agreement dated March 1, 1996 4.3(d)
4.3(e) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated May 30, 1996 4.3(e)
4.3(f) Amendment No. 4 to Transfer and Administration 10K 1996
Agreement dated September 5, 1996 4.3(f)
4.3(g) Amendment No. 5 to Transfer and Administration ____
Agreement dated October 31, 1996
4.3(i) Amendment No. 6 to Transfer and Administration 10Q 12/96
Agreement dated December 23, 1996 4.1
4.3(h) Amendment No. 7 to Transfer and Administration ____
Agreement dated March 31, 1997
4.3(j) Letter Agreement No. 3 with respect to Transfer and ____
Administration Agreement, dated April 28, 1997
4.4 Note Purchase Agreement between Union Acceptance 10K 1995
Corporation and certain lenders dated as of August 7, 4.4
1995.
4.4(a) Amendment No. 1 to Note Purchase Agreement dated 10Q 12/95
November 22, 1995 4.4(a)
4.5 Transfer and Administration Agreement among S-1, 4.5
Enterprise Funding Corporation, Performance Funding
Corporation and Union Acceptance Corporation, dated
as of July 24, 1995.
57
<PAGE>
4.5(a) Amendment No. 1 to Transfer and Administration 10Q 12/95
Agreement dated September 8, 1995 4.5(a)
4.5(b) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated October 12, 1995 4.5(b)
4.5(c) Amendment No. 2 to Transfer and Administration 10K 1996
Agreement dated May 10, 1996 4.5(c)
4.5(d) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated July 11, 1996 4.5(d)
4.5(e) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated August 20, 1996 4.5(e)
4.5(f) Amendment No. 3 to Transfer and Administration 10Q 12/96
Agreement, dated December 23, 1996 4.2
4.5(g) Letter Agreement No. 4 to Transfer and ____
Administration Agreement dated April 25, 1997
4.5(h) Amendment No. 5 to Transfer and Administration ____
Agreement dated June 6, 1997
4.5(i) Letter Agreement with regard to Transfer and ____
Administration Agreement dated June 24, 1997
4.5(j) Amendment No. 6 to Transfer and Administration Agreement ____
dated as of July 29, 1997
4.6 Note Purchase Agreement dated as of April 3, 1996 10Q 3/96
among Union Acceptance Corporation and several 4.1
purchasers of Senior Subordinated Notes due 2003
4.7 Note Purchase Agreement, dated March 24, 1997, among 10Q 3/97
Union Acceptance Corporation and certain purchasers 10.1
of Senior Notes, due 2002.
4.8(a) Note Purchase Agreement, dated April 3, 1997 among ____
UAC Boat Funding Corp., Enterpirse Funding
Corporation and NationsBank, N.A.
4.8(b) Security Agreement, dated April 3, 1997, among UAC Boat ____
Funding Corp., Enterpirse Funding Corp., et. al.
9(a) Voting Trust Agreement among Richard D. Waterfield, S-1, 9(a)
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 S-1, 9(b)
1, 1995.
10.1 Remittance Processing Agreement by and between Union S-1, 10.5
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.2 Mail and Printing Services Agreement by and between S-1, 10.6
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.3 Telephone Equipment Lease Agreement by and between S-1, 10.7
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.4 Telecommunications Agreement by and between Union S-1, 10.8
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.5 Communications Equipment and Software License by and S-1, 10.9
between Union Federal Savings Bank of Indianapolis
and Union Acceptance Corporation dated June 29, 1994.
58
<PAGE>
10.6 Software License and Maintenance Agreement by and S-1, 10.10
between Union Federal Savings Bank of Indianapolis
and Union Acceptance Corporation dated June 29, 1994.
10.7 Loan Servicing Agreement by and between Union Federal S-1, 10.11
Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.8 General Subservicing Agreement by and between Union S-1, 10.12
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated as of January 1, 1995.
10.9 Loan Collection Agreement by and between Union S-1, 10.13
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.10 Letter respecting Terms of Bank Accounts from Union S-1, 10.14
Federal Savings Bank of Indianapolis to Union
Acceptance Corporation dated May 25, 1994.
10.11 Supplement to Account Agreement Re: Drafts by and S-1, 10.15
between Union Federal Savings Bank of Indianapolis
and Union Acceptance Corporation dated June 29, 1994.
10.12 Tax Allocation Agreement by and between Union Holding S-1, 10.16
Company, Inc. and its subsidiaries dated February 1,
1991, as amended.
10.13 Form of Remote Outsourcing Agreement by and between S-1, 10.18
Systematics Financial Services, Inc. and Union
Acceptance Corporation.
10.13(a) Letter Agreement by and among Systematics Financial S-1, 10.18(a)
Services, Inc., Union Federal Savings Bank of
Indianapolis and Union Acceptance Corporation dated
July 13, 1994 respecting Provision of Data Processing
Services.
10.13(b) Memorandum respecting Billing Procedure in connection S-1, 10.18(b)
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.
10.14 Union Acceptance Corporation Annual Bonus Plan For S-1, 10.23
Senior Officers.
59
<PAGE>
10.15 Union Acceptance Corporation Incentive Stock Plan. S-1, 10.24
10.16 Letter respecting Access to Records from Union S-1, 10.25
Acceptance Corporation to Union Federal Savings Bank
of Indianapolis dated September 13, 1994.
10.17 Letter Agreement by and between Union Federal S-1, 10.26
Savings Bank of Indianapolis and Union Acceptance
Corporation dated December 14, 1994 amending and
initiating terms of certain Inter-Company
Agreements.
10.18 Letter respecting terms and conditions of bank S-1, 10.27
accounts from Union Federal Savings Bank of
Indianapolis to Union Acceptance Corporation dated
December 16, 1994.
10.19 Lease Agreement between Waterfield Mortgage Company, 10Q 12/95
Incorporated, and Union Acceptance Corporation dated 10.19
as of November 1, 1995
10.20 Purchase Agreement among Union Acceptance Funding 10Q 3/96
Corporation, Union Acceptance Corporation and Union 10.1
Federal Savings Bank of Indianapolis dated as of
January 18, 1996
10.21 Sublease Agreement between Union Acceptance 10K 1996
Corporation and Union Federal Savings Bank of 10.26
Indianapolis dated as of August 1, 1996
21 Subsidiaries of the Registrant _____
23 Consent of KPMG Peat Marwick LLP. _____
27 Financial Data Schedule _____
- --------------------
(1) Exhibits set forth above that are not included with this filing are
incorporated by reference to the Registrant's previously filed registration
statement or reports (and the indicated exhibit number) as indicated in the
right hand column above, as follows:
S-1 -- Refers to Registrant's Registration Statement on Form S-1 (Reg. No.
33-82254
10K 1995 -- Refers to Registrant's Form 10-K for the year ended June 30,
1995
10K 1996 -- Refers to Registrant's Form 10-K for the year ended June 30,
1996
10Q (month/year) -- Refers to Registrant's Form 10-Q for the quarter ended
at the end of such month in such calendar year
60
AMENDMENT NUMBER 5 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 5 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of October 31, 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, March 1, 1996 and September
5, 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:
(a) The definition of Securitized Pool is hereby deleted in its
entirety and replaced with the following text (solely for convenience of
reference, the revised language has been italicized):
"Securitized Pool" shall mean each pool of receivables
directly or indirectly transferred by UAFC or UAC to a securitization
vehicle in a structured finance transaction involving prime automobile
installment sales contracts and installment notes and security
agreements, similar to the Contracts, beginning with and including the
pool of receivables securitized in connection with the UACSC 2995-D
Auto Trust.
SECTION 2. Exhibit A. Exhibit A to the Transfer and Administration
Agreement is hereby replaced in its entirety with Exhibit A attached hereto.
SECTION 3. Amendment to Sections 2.16(c) and 2.17(a). In connection
with the agreement of the undersigned to revise the minimum amount of funds
required to remain on deposit in the Reserve Account under certain
circumstances, Sections 2.16 ("Reserve Account.-Withdrawals: Releases") and 2.17
("Optional Repurchase) are hereby amended as follows:
(a) Subsection (iii) of Section 2.16(c) of the Transfer and
Administration Agreement is hereby deleted in its entirety and replaced with the
following text (solely for convenience of reference, the revised language is
italicized):
"(iii) In the event that on the date of any Take-Out pursuant
to Section 2.17(a), the amount on deposit in the Reserve Account
exceeds 2.75% of the
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<PAGE>
Maximum Net Investment, the Collateral Agent shall release to the
Transferor an amount equal to the excess of the amount on deposit in
the Reserve Account over the product of 2.75% and the Maximum Net
Investment."
(b) The first complete paragraph of subsection (a) of Section 2.17(a)
of the Transfer and Administration Agreement is hereby deleted in its entirety
and replaced with the following text (solely for convenience of reference, the
revised language is italicized):
"(a) On any Business Day, the Transferor shall have the right
to require the Company or the Liquidity Provider, as applicable, to
assign to the Transferor all of its right, title and interest in and to
the Contracts and the related Receivables (excluding any Contracts and
related Receivables booked on and after the cut-off date applicable to
the structured finance transaction established by or on behalf of the
Transferor or an affiliate, to which the reassigned Contracts and
related Receivables will be subject) on the terms and conditions sei
forth herein. It shall be a condition precedent to any such assignment
that (i) the Transferor shall pay to the Company's account an amount
equal to the amount necessary to cause the Net Investment to be equal
to the product of (x) the Net Receivables Balance (allocated between
Contracts which upon origination provided for 72 monthly payments or
less and Contracts which upon origination provided for more than 72
monthly payments) calculated after giving effect to the proposed
reassignment and (y) with respect to each such group of Contracts, the
Transfer Percentage then in effect, (ii) the amount to be paid pursuant
to clause (i) above shall (x) not be greater than the principal
component of the Company's maturing Commercial Paper which was issued
to fund such portion of the Net Investment or the principal component
subject to the funding period utilized by the Liquidity Provider to
fund such portion of the Net Investment, as applicable and (y) be at
least $5,000,000, (iii) the Transferor shall deposit to the Collection
Account an amount equal to the sum of (x) all unreimbursed Servicer
Advances and (y) all interest costs associated with the Company's
Commercial Paper issued to fund its interest in the Contracts and
related Receivables proposed to be reassigned or all interest costs
associated with any funding periods utilized by the Liquidity Provider
with respect to its interest in such Contracts and related Receivables,
as applicable, as well as all Carrying Costs accrued through the date
of the maturity of such Commercial Paper or funding period, (iv) the
Transferor shall have given the Administrative Agent at least thirty
(30) days prior written notice of its intention to reacquire such
Contracts and Receivables, and (v) after giving effect to such
reassignment the amount on deposit in the Reserve Account shall be at
least 2.75% of the Maximum Net Investment. It is the intention of the
parties that the Transferor shall pay to the Company's account and the
Collection Account, as applicable, such amounts as are required under
this Section on the closing date of such structured finance transaction
(which closing date will generally also be the Business Day preceding
the maturity date of the Company's Commercial Paper issued
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<PAGE>
to fund its interest in the Contracts and related Receivables proposed
to be reassigned)."
SECTION 4. Amendment to Section 7.1(n). In connection with the
agreement of the undersigned to revise the requirements of the Transfer and
Administration Agreement relating to the minimum weighted average annual
percentage rate of the portfolio of Contracts, Section 7.1 ("Termination
Events") is hereby amended as follows:
(a) Section 7.1(n) of the Transfer and Administration Agreement is
hereby deleted in its entirety and replaced with the following text (solely for
convenience of reference, the revised language is italicized):
"(n) the weighted average annual percentage rate set forth in
the Contracts shall at any time be less than the sum of (i) the Base
Rate at such time, plus (ii) the percentage used to calculate the
Servicing Fee, plus (iii) 2.00%."
SECTION 5. 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 6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. 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 8. 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]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 5 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stewart L. Cutler
--------------------------------------
Name: Stewart L. Cutler
Title: Vice President
UNION ACCEPTANCE FUNDING CORPORATION
as Transferor
By: /s/ Melanie S. Otto
--------------------------------------
Name: Melanie S. Otto
Title: Assistant Secretary
UNION ACCEPTANCE CORPORATION
as Collection Agent
By: /s/ John M. Stainbrook
--------------------------------------
Name: John M. Stainbrook
Title: President
-4-
<PAGE>
Exhibit A
Actual Loss Percentage Transfer Percentage
Per Contract
Number of Monthly
Payments
72 or less +72
Less than 9.30% 98% 90%
93.0% to 95.9% 96% 88%
96.0% to 97.9% 94% 86%
98.0% to 100% 92% 84%
100.0% to 105.9% 90% 82%
106.0% to 110.0% 88% 80%
More than 110% 0% 0%
- ------------------
Note: Solely for convenience of reference, the revisions to the previous form of
Exhibit A have been italicized.
-5-
AMENDMENT NUMBER 7 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 7 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of March 31, 1997 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, March 1, 1996, September 5,
1996, October 31, 1996 and December 23, 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:
(a) Section 1.1 of the Transfer and Administration Agreement is hereby
amended by the addition of the following definition in the appropriate
alphabetic location:
"Actual Aggregate Securitized Pool Loss Amount" shall mean,
calculated as of the most recent Settlement Period, the sum of the
Actual Net Losses to Date for all Securitized Pools.
"Aggregate Securitized Pool Maximum Expected Loss Amount"
shall mean, calculated as of the most recent Settlement Period, the sum
of the Securitized Pool Maximum Expected Loss Amounts for all
Securitized Pools.
"Cut-off Date" shall mean, for each UAC Pool, the Cut-Off-Date
as defined in the prospectus supplement relating to such UAC Pool.
"Enhancement Calculation Side Letter" shall mean that certain
letter dated as of March 31, 1997 among the Transferor, the Collection
Agent and the Company describing the means by which the Liquidated Pool
Life Percentage and Exhibit D will be amended when each UAC Pool
becomes a Liquidated Pool.
"Expected Loss Projection Percentage" shall mean (i) the Loss
Percentage multiplied by (ii) 4.0%.
-1-
<PAGE>
"Investment Grade Rating" shall mean a rating of at least BBB
by Standard and Poor's, Fitch and/or Duff & Phelps, and/or Baa by
Moody's.
"Liquidated Pool" shall mean a UAC Pool which has been
completely liquidated.
"Liquidated Pool Life Percentage" shall mean, initially,
77.37%, and will be adjusted as described in the Enhancement
Calculation Side Letter as each UAC Pool becomes a Liquidated Pool.
"Loss Percentage" or " Loss %" shall mean, on any date of
determination, the percentage equivalent of the fraction the numerator
of which is equal to the Actual Aggregate Securitized Pool Loss Amount
and the denominator of which is equal to the Aggregate Securitized Pool
Maximum Expected Loss Amount.
"Percentage of Expected Life" shall mean for any UAC Pool the
percentage obtained by dividing (i) the current number of months since
the Cut-Off Date applicable to such pool by (ii) the Securitized Pool
Expected Life.
"Securitized Pool Expected Life" shall mean the number of
months (rounded to two decimal places) achieved by multiplying (i) the
Liquidated Pool Life Percentage by (ii) the weighted average remaining
term for such Securitized Pool as of its Cut-off Date.
"Securitized Pool Expected Losses Experienced Percentage"
shall mean, for each Securitized Pool, the percentage set forth on
Exhibit D attached hereto opposite the Percentage of Expected Life
(rounded to the next highest whole percentage) since the Cut-Off Date
applicable to such Securitized Pool. Notwithstanding anything herein to
the contrary, Exhibit D will be amended from time to time by the
Company as each UAC Pool becomes a Liquidated Pool, in order to
incorporate the timing of losses experienced by such Liquidated Pool
provided that such revised Exhibit shall be derived in the manner
described in the Enhancement Calculation Side Letter.
"Securitized Pool Maximum Expected Loss Amount" shall mean,
for each Securitized Pool and calculated as of the most recent
Settlement Period, (i) the Securitized Pool Maximum Losses Experienced
Percentage applicable to such Securitized Pool multiplied by (ii) the
aggregate Outstanding Balance of the Receivables on the Cut-Off Date
applicable to such Securitized Pool.
"Securitized Pool Maximum Losses Experienced Percentage" shall
mean, for each Securitized Pool and calculated as of the most recent
Settlement Period, (i) the Securitized Pool Expected Losses Experienced
Percentage applicable to such Securitized Pool multiplied by (ii) 4.0%.
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<PAGE>
"UAC Pool" shall mean each pool of receivables directly or
indirectly transferred by UAFC or UAC to a securitization vehicle in a
structured finance transaction involving prime automobile installment
sales contracts and installment notes and security agreements, similar
to the Contracts, beginning with and including the pool of receivables
securitized in connection with the UFSB 91B Auto Trust.
(b) The definition of "Transfer Percentage" is hereby deleted and
replaced with the following:
"Transfer Percentage" shall mean, on any date of
determination, the percentage equal to (rounded to the nearest whole
percentage) (i) 100% minus (ii) the product of (a) the Expected Loss
Projection Percentage and (b) 1.75 minus (iii) the amount available to
be withdrawn from the Reserve Account as of the last day of the most
recent Settlement Period expressed as a percentage of the Maximum Net
Investment minus (iv) in the case of any Contract(s) which upon
origination provided for more than 72 monthly payments, 8.0%, provided,
that in the event that the Transferor shall have failed to cause a
Take-Out to occur at least once in the sixteen (16) consecutive
calendar week period (or such longer period as agreed to by the
Transferor and the Company) immediately preceding such date of
determination, the Transfer Percentage shall, until the Prefunding Date
occurring after the next occurring Take-Out, equal the lesser of (x)
the Transfer Percentage described above and (y) 92%, in respect of
Contracts which upon origination provided for 72 monthly payments or
less and 84% in respect of Contracts which upon origination provided
for more than 72 monthly payments; provided further that in no case
will (i) 100% minus the Transfer Percentage plus the Reserve Account
expressed as a percentage of the Maximum Net Investment (after giving
effect to any withdrawal therefrom on such date of determination) be
less than (ii) the enhancement required for the most recent securitized
pool to achieve an Investment Grade Rating.
(c) The following definitions are hereby deleted in their entirety:
"Actual Loss Percentage", "Maximum Net Loss", and "Maximum Net Loss Percentage."
SECTION 2. Section 7.1(1) of the Transfer Agreement is hereby deleted
and replaced with the following:
(i) the Transfer Percentage is less than 80% for Contracts
which upon origination provided for 72 monthly payments or less at the
end of any Settlement Period.
SECTION 3. Exhibits. Exhibit A to the Transfer and Administration
Agreement is hereby deleted and replaced with "Reserved and Exhibit D thereto is
hereby deleted and replaced with Exhibit D attached hereto.
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<PAGE>
SECTION 4. 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 5. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 6. 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 7. 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]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 7 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ K. Carter Harris
Name: K. Carter Harris
Title: Vice President
UNION ACCEPTANCE FUNDING CORPORATION
as Transferor
By: /s/ Melanie S. Otto
Name: Melanie S. Otto
Title: Assistant Secretary
UNION ACCEPTANCE CORPORATION
as Collection Agent
By: /s/ Rick Brown
Name: Rick Brown
Title: Vice President and
Chief Financial Officer
-5-
<PAGE>
Union Acceptance Funding Corporation
Union Acceptance Corporation
March 31, 1997
Page 1
March 31, 1997
Union Acceptance Funding Corporation
250 North Shadeland Avenue
Indianapolis, IN 46219
Union Acceptance Corporation
250 North Shadeland Avenue
Indianapolis, IN 46219
Re: Enhancement Calculations for the UAFC Enterprise
Funding $350 Million Warehouse Facility
Ladies and Gentlemen:
This letter will establish the guidelines by which the definition of Liquidated
Pool Life Percentage and Exhibit D to the Transfer and Administration Agreement
will be adjusted when each UAC Pool becomes a Liquidated Pool. Capitalized terms
used herein but not defined shall have the meaning specified in the Transfer and
Administration Agreement, dated as of June 27, 1995, as amended as of September
8, 1995, September 29, 1995, March 1, 1996, September 5, 1996, October 31, 1996,
December 23, 1996 and March 31, 1997 (the "Transfer and Administration
Agreement"), among the Company, the Transferor and the Collection Agent.
When any UAC Pool becomes a Liquidated Pool, the following calculations will be
made to revise the definition of Liquidated Pool Life Percentage and Exhibit D.
1. Liquidated Pool Life Percentage - shall mean the percentage (rounded to
the nearest one hundredth of one percent) obtained from the average of
the Actual Life Percentages for each Liquidated Pool. For the purposes
of this definition, the Actual Life Percentage for any Liquidated Pool
will be equal to the percentage obtained from the ratio of (i) the
number of months from the Cut-Off Date through final liquidation of the
Liquidated Pool to (ii) the weighted average remaining term for such
pool as of the related Cut-Off Date.
2. Exhibit D - the Average Loss Curve in Exhibit D will be revised to
incorporate the historical performance of each Liquidated Pool. The
revised Average Loss Curve will be determined as the average of each
Liquidated Pool's loss curve.
<PAGE>
Union Acceptance Funding Corporation
Union Acceptance Corporation
March 31, 1997
Page 2
This letter may be executed in any number of counterparts, each of
which shall be deemed an original and all of which taken together shall
constitute one letter.
Sincerely,
/s/ K. Carter Harris
By: Enterprise Funding Corporation
Agreed and accepted as of the date first above written:
Union Acceptance Corporation
By: /s/ Rick A. Brown
Name: Rick A. Brown
Title: Vice President, Treasurer and CFO
Union Acceptance Funding Corporation
By: /s/ Melanie S. Otto
Name: Melanie S. Otto
Title: Vice President
Ms. Melanie Otto
April 28, 1997
Page 1
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
April 28, 1997
Ms. Melanie Otto
Union Acceptance 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 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, 1997" contained in clause (v) of the definition shall
read "June 25, 1998".
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 data 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.
If this letter correctly sets forth our agreement, please sign the enclosed
duplicate originals and return to Brian Krum, NationsBank Investment Banking,
NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by May
1, 1997.
Sincerely,
ENTERPRISE FUNDING CORPORATION
By: /s/ K. Carter Harris
Name: K. Carter Harris
Title: Vice President
<PAGE>
Ms. Melanie Otto
April 28, 1997
Page 2
Accepted and Agreed:
UNION ACCEPTANCE FUNDING UNION ACCEPTANCE CORPORATION
CORPORATION as Collection Agent
as Transferor
By: /s/ Melanie S. Otto By: /s/ John Stainbrook
Name: Melanie S. Otto Name: John Stainbrook
Title: Vice President Title: President
Date: 4/29/97 Date: 4/29/97
Ms. Melanie Otto
April 25, 1997
Page 1
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
April 25,1997
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 ("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 "Transfer Price" shall be amended so
that "80%" shall read "87%".
In Section 1.1, the definition of "Termination Date" shall be amended
so that "July 18, 1997" contained in clause (v) of the definition shall
read "July 18, 1998".
Section 2.2(b) shall be amended so that the reference to "80%" in
clause (i) shall be changed to "87%".
Section 2.5(a)(iii) shall be amended so that the reference to "80%" in
clause (A) shall be changed to "87%".
Section 2.9(b) shall be amended so that the references to "80%" shall
be changed to "87%".
Section 2.13(a)(vi) shall be amended so that the reference to "80%" in
clause (i) shall be changed to "87%".
Section 2.14(a) shall be amended so that the reference to "80%" in
clause (i) shall be changed to "87%".
Section 2.17(a) shall be amended so that the reference to "80%" in
clause (i)(x) shall be changed to "87%".
<PAGE>
Ms. Melanie Otto
April 25, 1997
Page 2
Section 3.1 shall be amended so that the reference to "80%" in clause
(m) shall be changed to "87%".
Section 7.1(k) shall be amended so that the reference to "80%" shall be
changed to "87%".
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 data 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.
For future reference, this letter agreement will constitute Amendment Number 4
to the TAA.
If this letter correctly sets forth our agreement, please sign the enclosed
duplicate originals and return to Brian Krum, NationsBank Investment Banking,
NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by May
1, 1997.
Sincerely,
ENTERPRISE FUNDING CORPORATION
By: /s/ K. Carter Harris
Name: K. Carter Harris
Title: Vice President
Accepted and Agreed.
PERFORMANCE FUNDING CORPORATION UNION ACCEPTANCE CORPORATION
as Transferor as Collection Agent
By: /s/ Melanie S. Otto By: /s/ John Stainbrook
Name: Melanie S. Otto Name: John Stainbrook
Title: Vice President Title: President
Date: 4/29/97 Date: 4/29/97
AMENDMENT NUMBER 5 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 5 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of June 6, 1997 between PERFORMANCE 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 July 24, 1995, as amended by those certain
letter amendments dated September 8, 1995 and September 24, 1995, among the
parties hereto (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:
The definition of "Contract" is amended by adding the phrase
"or PAC" after the phrase "and hereafter created or acquired by UAC".
The definition of "PAC" is amended by adding the phrase "UAC
or" after the phrase "shall mean".
SECTION 2. 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 3. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 4. 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.
-1-
<PAGE>
SECTION 5. 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]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 6 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stewart L. Cutler
--------------------------------------
Name: Stewart L. Cutler
Title: Vice President
UNION ACCEPTANCE FUNDING CORPORATION
as Transferor
By: /s/ Melanie S. Otto
--------------------------------------
Name: Melanie S. Otto
Title: Assistant Secretary
UNION ACCEPTANCE CORPORATION
as Collection Agent
By: /s/ John M. Stainbrook
--------------------------------------
Name: John M. Stainbrook
Title: President
-3-
Ms. Melanie Otto
June 24, 1997
Page 1
ENTERPRISE FUNDING CORPORATION
c/o MERRILL LYNCH MONEY MARKETS INC.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
June 24, 1997
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 August 20, 1996), the reference to
"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" shall be amended to read "after December 31,
1996 and prior to December 31, 1997, 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>
Ms. Melanie Otto
June 24, 1997
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If this letter correctly sets forth our agreement, please sign the enclosed
duplicate original and return to Brian D. Krum, NationsBank Investment Banking,
NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by
June 30, 1997.
Sincerely.
ENTERPRISE FUNDING CORPORATION
By: /s/ K. Carter Harris
Name: K. Carte Harris
Title: Vice President
Accepted and Agreed:
UNION ACCEPTANCE CORPORATION PERFORMANCE FUNDING CORPORATION
By: /s/ John Stainbrook By: /s/ Melanie S. Otto
Name: John Stainbrook Name: Melanie S. Otto
Title: President Title: Vice President
AMENDMENT NUMBER 6 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 6 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of July 29, 1997 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, Amendment No. 2 dated as of May 10, 1996, Amendment No. 3 dated as of
December 23, 1996 and Amendment No. 4 dated April 25, 1997 (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.
(a) Section 1. I of the Transfer and Administration Agreement is hereby
amended by deleting the definition of Transfer Price and replacing it with the
following (solely for convenience changed language is italicized):
"Transfer Price" shall mean, with respect to any Transfer, an
amount equal to the applicable Transfer Price Percentage of the
aggregate Outstanding Balance of all Eligible Receivables for which
funding hereunder is requested by the Transferor in connection
therewith."
(b) Section 1.1 of the Transfer and Administration Agreement is hereby
amended by the addition of the following definition in the appropriate
alphabetic location:
"Investment Grade Rating" shall mean a rating of at least
"BBB" by Standard & Poor's, Fitch Investor Service, LLP or Duff &
Phelps Credit Rating Co., and/or "Baa" by Moody's.
(c) Section 1.1 of the Transfer and Administration Agreement is hereby
amended by the addition of the following definition in the appropriate
alphabetic location:
"Ratio of Actual Losses to Maximum Losses" shall mean, on any
date of determination, the percentage equal to the ratio of (i) the
aggregate Actual Net Loss
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for all Monthly Groups to (ii) the aggregate Maximum Net Loss for all
Monthly Groups, such ratio to be rounded to the nearest hundredth of
one percent."
(d) Section 1. I of the Transfer and Administration Agreement is hereby
amended by the addition of the following definition in the appropriate
alphabetic location:
"Securitized Pool" shall mean each pool of receivables
directly or indirectly transferred by the Transferor or UAC to a
securitization vehicle in a structured finance transaction involving
non-prime automobile installment sales contracts and installment notes
and security agreements, similar to the Contracts."
(e) Section 1.1 of the Transfer and Administration Agreement is hereby
amended by the addition of the following definition in the appropriate
alphabetic location:
"Transfer Price Percentage" shall mean, for any date of
determination, the percentage specified in the following table
corresponding to the related Ratio of Actual Losses to Maximum Losses:
Ratio of Actual Losses Transfer Price
to Maximum Losses Percentage
70% and less 87.00%
70.01 to 80.00% 84.00%
80.01% to 90.00% 80.00%
90.01% to 100.00% 75.00%
Greater than 100.00% N/A, Termination Event
provided that in no case will (i) 100% minus (x) the Transfer Price Percentage
plus (y) the amount on deposit in the Reserve Account (after giving effect to
any withdrawal therefrom on the date of determination) expressed as a percentage
of the Maximum Net Investment be less than (ii) the enhancement required for the
most recent Securitized Pool to achieve an Investment Grade Rating."
SECTION 2. Other Amendments. (a) The references in the following
Sections which refer to "87%" (which references were put in effect pursuant to
Amendment No. 4) which appear in Sections 2.2(b)(i), 2.5(a)(iii)(A), 2.9(b),
2.13(a)(vi), 2.14(a)(i), 2.17(a)(i)(x), 3.1(m), and 7.1(k)(ii) are hereby
amended to read "the then applicable Transfer Price Percentage."
(b) The reference to WV in Section 2.13(a)(iv) is hereby amended to
read "the then applicable Transfer Price Percentage."
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SECTION 3. Exhibits. Exhibit D to the Transfer and Administration
Agreement is hereby deleted and replaced with Exhibit D attached hereto.
SECTION 4. Representations and Warranties. The Transferor hereby makes
to the Company, on and as of the date hereof, all of the representations and
warranties set forth in Section 3.1 of the Transfer and Administration
Agreement, except to the extent that any such representation or warranty
specifically refers to an earlier date. In addition, the Collection Agent hereby
makes to the Company, on the date hereof, all the representations and warranties
set forth in Section 3.2 of the Transfer and Administration Agreement, except to
the extent that any such representation or warranty specifically refers to an
earlier date.
SECTION 5. 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 6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. 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 8. 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]
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 6 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stewart L. Cutler
--------------------------------------
Name: Stewart L. Cutler
Title: Vice President
UNION ACCEPTANCE FUNDING CORPORATION
as Transferor
By: /s/ Melanie S. Otto
--------------------------------------
Name: Melanie S. Otto
Title: Assistant Secretary
UNION ACCEPTANCE CORPORATION
as Collection Agent
By: /s/ John M. Stainbrook
--------------------------------------
Name: John M. Stainbrook
Title: President
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EXHIBIT D
Max. Net-Loss to-
Beginning Balance
Month Ratios
1 0.52%
2 1.03%
3 1.29%
4 1.73%
5 2.04%
6 2.32%
7 2.72%
8 3.01%
9 3.38%
10 3.67%
11 4.00%
12 4.29%
13 5.34%
14 5.67%
15 6.08%
16 6.40%
17 6.80%
18 7.13%
19 7.34%
20 7.54%
21 7.90%
22 8.16%
23 8.41%
24 8.65%
25 8.89%
26 9.25%
27 9.48%
28 9.71%
29 9.94%
30 10.46%
31 10.67%
32 10.89%
33 11.10%
34 11.30%
35 12.05%
36 12.24%
37 12.28%
38 12.32%
39 12.43%
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40 12.54%
41 12.64%
42 12.95%
43 13.04%
44 13.14%
45 13.22%
46 13.30%
47 &UP 13.50%
NOTE PURCHASE AGREEMENT
among
UAC BOAT FUNDING CORP.
as Issuer,
ENTERPRISE FUNDING CORPORATION,
as Company,
and
NATIONSBANK, N.A.,
as Agent and Bank Investor
Dated as of April 3, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions................................................... 1
ARTICLE II
FUNDINGS; THE NOTE
SECTION 2.1. Funding; The Note............................................. 8
SECTION 2.2. The Surety Bond............................................... 16
SECTION 2.3. Sharing of Payments, Etc...................................... 16
SECTION 2.4. Right of Setoff............................................... 17
SECTION 2.5. Fees.......................................................... 17
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE ISSUER
SECTION 3.1. Representations and Warranties of the
Issuer................................................ 17
ARTICLE IV
INDEMNIFICATION
SECTION 4.1. Indemnity..................................................... 20
SECTION 4.2. Indemnity for Taxes, Reserves and
Expenses.............................................. 22
SECTION 4.3. Other Costs, Expenses and Related
Matters............................................... 25
ARTICLE V
THE AGENT; BANK COMMITMENT
SECTION 5.1. Authorization and Action....................................... 26
SECTION 5.2. Agent's Reliance, Etc.......................................... 28
SECTION 5.3. Credit Decision................................................ 28
SECTION 5.4. Indemnification of the Agent................................... 29
SECTION 5.5. Successor Agent................................................ 29
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Page
SECTION 5.6. Payments by the Agent...................................... 30
SECTION 5.7. Bank Commitment; Assignment to Bank
Investors.......................................... 31
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. Notices, Etc............................................... 36
SECTION 6.2. Successors and Assigns..................................... 37
SECTION 6.3. Severability Clause........................................ 37
SECTION 6.4. Amendments................................................. 37
SECTION 6.5. Governing Law.............................................. 38
SECTION 6.6. No Bankruptcy Petition Against the
Company............................................ 38
SECTION 6.7. Setoff..................................................... 38
SECTION 6.8. No Recourse................................................ 38
SECTION 6.9. Further Assurances......................................... 39
SECTION 6.10. No Recourse against Merrill................................ 39
SECTION 6.11. Counterparts............................................... 39
SECTION 6.12. Headings................................................... 39
EXHIBITS
EXHIBIT A Form of Assignment and Assumption Agreement A-1
EXHIBIT B Form of Surety Bond B-1
EXHIBIT C Form of Funding Request C-1
EXHIBIT D Form of Note D-1
EXHIBIT E List of Actions, Suit or Proceedings E-1
EXHIBIT F Location of Records F-1
ii
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NOTE PURCHASE AGREEMENT
NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of April
3, 1997, among ENTERPRISE FUNDING CORPORATION, a Delaware corporation, as lender
(together with its successors and assigns, the "Company"), for itself and as
agent for the Liquidity Provider, UAC BOAT FUNDING CORP., a Delaware
corporation, as borrower (together with its successors and assigns, the
"Issuer") and NATIONSBANK, N.A., a national banking association ("NationsBank"),
as agent for the Company and the Bank Investors (in such capacity, the "Agent")
and as a Bank Investor.
W I T N E S S E T H :
WHEREAS, subject to the terms and conditions of this Agreement
and the Security Agreement, the Issuer desires to obtain funds from time to time
from the Company or the Bank Investors, as applicable, and to evidence the
obligation to repay such amounts, together with interest thereon, through the
issuance of the Note;
WHEREAS, pursuant to the Security Agreement, the Issuer will
pledge to the Collateral Agent for the benefit of the Secured Parties its
interest in the Collateral, including the Issuer's security interest in the
Boats;
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings specified in the Security Agreement. The
following terms shall have the meanings specified below, and shall include in
the singular number the plural and in the plural number the singular:
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"Administrative Agent" shall mean NationsBank, N.A., as
administrative agent for the Company.
"Advance Termination Date" shall have the meaning specified in
the Security Agreement.
"Agent" means NationsBank, N.A., in its capacity as agent for
the Company and the Bank Investors, and any successor thereto appointed pursuant
to Article V of this Agreement.
"Agreement" shall mean this Note Purchase Agreement, as it may
from time to time be amended, supplemented or otherwise modified in accordance
with the terms hereof.
"Assignment Amount" with respect to a Bank Investor shall mean
at any time an amount equal to the lesser of (i) such Bank Investor's Pro Rata
Share of the Net Investment at such time and (ii) such Bank Investor's unused
Commitment.
"Assignment and Assumption Agreement" means an Assignment and
Assumption Agreement substantially in the form of Exhibit A attached hereto.
"Available Collections" shall have the meaning specified in
the Security Agreement.
"Available Funds" shall have the meaning specified in the
Security Agreement.
"Bank Investors" shall mean NationsBank, N.A. and each other
financial institution identified as such on the signature pages hereof and their
respective successors and assigns.
"Boat" shall mean, with respect to a Receivable, any new or
used boat, boat motor, accompanying boat trailer or Personal Watercraft and
accompanying trailer, together with all accessions thereto, securing the related
Obligor's indebtedness thereunder.
"Borrowing Base (Boats)" shall have the meaning specified in
the Security Agreement.
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"Borrowing Base (Personal Watercraft)" shall have the meaning
specified in the Security Agreement.
"CapMAC" shall mean Capital Markets Assurance Corporation.
"Carrying Costs" shall have the meaning specified in the
Security Agreement.
"Closing Date" shall mean April 3, 1997.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time (including any successor statute), and the regulations
promulgated and the rulings issued thereunder.
"Collateral" shall have the meaning set forth in the Security
Agreement.
"Collateral Agent" shall mean NationsBank, N.A., or any
successor thereto, as Collateral Agent under the Security Agreement.
"Collections" shall have the meaning specified in the Security
Agreement.
"Commercial Paper" shall mean promissory notes of the Company
issued by the Company in the commercial paper market.
"Commitment" means for each Bank Investor, the commitment of
such Bank Investor to make acquisitions from the Issuer or the Company in
accordance herewith in an amount not to exceed the dollar amount set forth
opposite such Bank Investor's signature on the signature page hereto under the
heading "Commitment".
"Commitment Termination Date" means April 2, 1998, or such
later date to which the Commitment Termination Date may be extended by the
Issuer, the Agent and the Bank Investors not later than 90 days prior to the
then current Commitment Termination Date.
"Common Stock" shall have the meaning set forth in the
Security Agreement.
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"Company" shall mean Enterprise Funding Corporation, a
Delaware corporation, together with its successors and assigns.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"ERISA Affiliate" shall have the meaning specified in the
Security Agreement.
"Facility Limit" shall have the meaning specified in the
Security Agreement.
"Funding" shall have the meaning specified in Section 2.1(a)
hereof.
"Governmental Authority" shall have the meaning specified in
the Security Agreement.
"Indemnified Amounts" shall have the meaning set forth in
Section 4.1 hereof.
"Indemnified Parties" shall have the meaning set forth in
Section 4.1 hereof.
"Initial Funding" shall have the meaning specified in Section
2.1(a) hereof.
"Interest Component" shall have the meaning specified in the
Security Agreement.
"Issuer" shall mean UAC Boat Funding Corp., a Delaware
corporation, and its successors and permitted assigns.
"Law" shall have the meaning specified in the Security
Agreement.
"Liquidation Proceeds" shall have the meaning specified in the
Security Agreement.
"Liquidity Agreement" shall mean the agreement between the
Company and the Liquidity Provider evidencing the obligation of the Liquidity
Provider to provide liquidity support to the Company in connection with the
issuance of Commercial Paper.
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"Liquidity Provider" shall mean the Person or Persons who will
provide liquidity support to the Company in connection with the issuance by the
Company of its Commercial Paper, and shall include any Person which acquires a
participation interest therein.
"Majority Investors" shall have the meaning specified in
Section 5.1(a) hereof.
"Maximum Permitted Borrowing Base" shall have the meaning
specified in the Security Agreement.
"Monthly Debtor's Certificate" shall have the meaning set
forth in the Security Agreement.
"Moody's" shall mean Moody's Investors Service, Inc.
"Multiemployer Plan" shall have the meaning specified in the
Security Agreement.
"Net Asset Test" shall mean either (a) (i) the Surety Bond is
in full force and effect and (ii) no Surety Bond Provider Default has occurred
and is continuing or (b) the Net Investment is not greater than the Maximum
Permitted Borrowing Base.
"Net Yield" shall have the meaning specified in the Security
Agreement.
"Note" shall mean the note issued to the Company pursuant to
Section 2.1 of this Agreement.
"Obligor" shall have the meaning set forth in the Security
Agreement.
"Official Body" shall have the meaning set forth in the
Security Agreement.
"Other Transferor" shall mean any Person other than the Issuer
that has entered into a receivables purchase agreement, transfer and
administration agreement or other similar agreement with the Company.
"Pay Out Commencement Date" shall have the meaning set forth
in the Security Agreement.
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"Person" shall have the meaning specified in the Security
Agreement.
"Personal Watercraft" shall have the meaning specified in the
Security Agreement.
"Plan" shall have the meaning specified in the Security
Agreement.
"Plan Event" shall have the meaning specified in the Security
Agreement.
"Potential Termination Event" shall have the meaning specified
in the Security Agreement.
"Potential Wind-Down Event" shall have the meaning specified
in the Security Agreement.
"Pro Rata Share" means, for a Bank Investor, the Commitment of
such Bank Investor divided by the sum of the Commitments of all Bank Investors.
"Program Fee" shall have the meaning specified in the Security
Agreement.
"Purchase Agreement" shall have the meaning specified in the
Security Agreement.
"Purchased Interest" shall mean any interest in the Note
acquired by the Liquidity Provider.
"Receivable" shall have the meaning specified in the Security
Agreement.
"Receivable Schedule" shall have the meaning specified in the
Security Agreement.
"Related Commercial Paper" shall have the meaning specified in
the Security Agreement.
"Remittance Date" shall have the meaning specified in the
Security Agreement.
"Requirements of Law" shall have the meaning specified in the
Security Agreement.
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"Reserve Account" shall have the meaning specified in the
Security Agreement.
"S&P" shall mean Standard & Poor's Ratings Group, a Division
of The McGraw-Hill Companies.
"Secured Parties" shall have the meaning specified in the
Security Agreement.
"Security Agreement" shall mean the Security Agreement dated
as of April 3, 1997 among UAC, as Seller and Servicer, the Issuer, the
Collateral Agent, the Company and the Surety Bond Provider.
"Seller" means Union Acceptance Corporation.
"Servicer" shall mean UAC as servicer under the Servicing
Agreement or any successor Servicer.
"Servicer Advance" shall have the meaning specified in the
Security Agreement.
"Servicing Agreement" shall have the meaning specified in the
Security Agreement.
"Servicing Fee" shall have the meaning specified in the
Security Agreement.
"Subsequent Funding" shall have the meaning specified in
Section 2.1(a) hereof.
"Subsidiary" shall have the meaning specified in the Security
Agreement.
"Surety Bond" shall mean that certain unconditional,
irrevocable surety bond, substantially in the form annexed hereto as Exhibit B,
to be issued by the Surety Bond Provider and naming the Agent as beneficiary.
"Surety Bond Provider" shall mean CapMAC.
"Surety Bond Provider Default" shall have the meaning
specified in the Security Agreement.
"Targeted Monthly Principal Payment" shall have the meaning
specified in the Security Agreement.
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"Termination Date" shall have the meaning specified in the
Security Agreement.
"Termination Event" shall have the meaning specified in the
Security Agreement.
"Transaction Costs" shall have the meaning specified in
Section 4.3 hereto.
"UAC" shall mean Union Acceptance Corporation.
"Uniform Commercial Code" or "UCC" shall have the meaning
specified in the Security Agreement.
"Wind-Down Event" shall have the meaning specified in Section
6.2 of the Security Agreement.
"Yield Supplement Account" shall have the meaning specified in
the Security Agreement.
ARTICLE II
FUNDINGS; THE NOTE
SECTION 2.1. Funding; The Note. (a) Initial Funding. Upon the
terms and subject to the conditions set forth herein (x) prior to the
Termination Date or the Advance Termination Date and provided that no Wind-Down
Event shall have occurred, the Company may, and (y) prior to the Commitment
Termination Date and provided that no Termination Event shall have occurred, the
Bank Investors shall, if requested, make an advance (any such advance, a
"Funding," the first such advance, the "Initial Funding," each such additional
funding, a "Subsequent Funding") to the Issuer from time to time on or after the
Closing Date. In connection with the Initial Funding, the Issuer shall, by
notice request such Funding at least one Business Day prior to the proposed date
of such Initial Funding. Such notice shall specify the amount of the proposed
Funding (which shall be at least $1,000,000 or integral multiples of $100,000 in
excess thereof) and the proposed date of the Funding. On any Business Day
occurring after the Initial Funding under this Section, upon one Business Day
notice to the Agent, which shall be in the form of Exhibit C hereto and satisfy
the requirements of Section 2.1(b)(iii) below (the "Funding Request"), the
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Issuer may request that the Company or the Bank Investors, as appropriate, make
Subsequent Fundings (which shall be at least $1,000,000 or integral multiples of
$100,000 in excess thereof). No more than one Subsequent Funding shall be
permitted each calendar week, unless the Agent and the Company shall have agreed
to more frequent Fundings.
(b) Conditions to Funding. Neither the Company nor the Bank
Investors shall have any obligation to advance any funds to the Issuer in
connection with any Funding unless on the date of such Funding (i) either (a)
the sum of the Net Investment, plus the aggregate Interest Component, if the Net
Investment is funded by the Company, or (b) the Net Investment, if the Net
Investment is funded by the Bank Investors, would not (after giving effect to
such Funding) exceed the Facility Limit; (ii) the Net Investment, after giving
effect to such Funding, would not be greater than the Maximum Permitted
Borrowing Base; (iii) the Issuer has provided a Funding Request to the Agent and
the Surety Bond Provider, which shall include the calculations necessary to
satisfy the requirements set forth in clauses (i) and (ii) above and shall also
include a certification by an authorized officer of the Issuer that to the best
of such officer's knowledge, no event has occurred since the most recent Funding
(or, the Closing Date, in the case of the Initial Funding) that would have a
material and adverse effect on the Receivables, the Servicer or the Issuer; (iv)
the Surety Bond is in full force and effect and no Surety Bond Provider Default
has occurred and is continuing; (v) the Issuer shall have deposited in the
Reserve Account, or shall have given irrevocable instructions to the Agent to
withhold from the proceeds of such Funding and to deposit in the Reserve
Account, an amount equal to the amount necessary to cause the amount on deposit
in the Reserve Account to at least equal the Required Reserve Account Balance
(calculated as if such Funding shall have occurred); (vi) each representation
and warranty of the Issuer herein or in the Security Agreement shall be true and
correct with respect to the Issuer and each Receivable included in either the
Borrowing Base (Boats) or Borrowing Base (Personal Watercraft), as of the date
of such Funding; (vii) a Potential Wind-Down Event or a Wind-Down Event (each
only in the case of a Funding to be made by the Company) or a Potential
Termination Event or a Termination Event, (in the case of a Funding to be made
9
<PAGE>
by the Bank Investors or the Company) shall not have occurred or be continuing;
(viii) the Advance Termination Date shall not have occurred (only in the case of
a Funding to be made by the Company); (ix) the Company is able to obtain funds
for the making of such Funding in the commercial paper market or pursuant to the
Liquidity Agreement (only in the case of a Funding to be made by the Company);
and (x) in connection with the Initial Funding, the conditions precedent set
forth in paragraph (f) of this Section shall be satisfied.
(c) Funding Request Irrevocable. The notice of the proposed
Initial Funding and any Subsequent Funding shall be irrevocable and binding on
the Issuer and the Issuer shall indemnify the Company and the Bank Investors
against any loss or expense incurred by the Company or the Bank Investors,
either directly or indirectly (including through the Liquidity Agreement) as a
result of any failure by the Issuer to complete the requested Funding including,
without limitation, any loss (including loss of anticipated profits) or expense
incurred by the Company or the Bank Investors, either directly or indirectly
(including pursuant to the Liquidity Agreement), by reason of the liquidation or
reemployment of funds acquired by the Company (or the Liquidity Provider)
(including, without limitation, funds obtained by issuing commercial paper or
promissory notes or obtaining deposits or loans from third parties) for the
Company or the Bank Investors to complete the requested Funding.
(d) Disbursement of Funds. No later than 4:30 p.m. (New York
City time) on the date on which a Funding is to be made, the Company or the Bank
Investors, as applicable, will make available to the Issuer in immediately
available funds, the amount of the Funding to be made on such day by remitting
the required amount thereof to an account of the Issuer as designated in the
related notice requesting such Funding.
(e) The Note.
(i) The Issuer's obligation to
pay the principal of and interest on all amounts advanced by the
Company or the Bank Investors pursuant to any Funding shall be
evidenced by a single note of the Issuer (the "Note") which shall (1)
be dated the Closing
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<PAGE>
Date; (2) be in the stated principal amount equal to the Facility Limit
(as reflected from time to time on the grid attached thereto); (3) bear
interest as provided therein; (4) be payable to the order of the Agent
for the account of the Company or the Bank Investors and mature on the
Remittance Date occurring in the calendar month following the calendar
month in which the latest maturing Receivable (determined as of the
Termination Date) is scheduled to mature (without regard to extensions
subsequently granted on any Receivable by the Issuer or any servicing
agent); (5) be entitled to the benefits of the Surety Bond and the
Security Agreement; and (6) be substantially in the form of Exhibit D
to this Agreement, with blanks appropriately completed in conformity
herewith. The Company shall, and is hereby authorized to, make a
notation on the schedule attached to the Note of the date and the
amount of each Funding and the date and amount of the payment of
principal thereon, and prior to any transfer of the Note, the Company
shall endorse the outstanding principal amount of the Note on the
schedule attached thereto; provided, however, that failure to make such
notation shall not adversely affect the Company's rights with respect
to the Note.
(ii) Although the Note shall be
dated the Closing Date, interest in respect thereof shall be payable
only for the periods during which amounts are outstanding thereun- der.
In addition, although the stated principal amount of the Note shall be
equal to the Facility Limit, the Note shall be enforceable with respect
to the Issuer's obligation to pay the principal thereof only to the
extent of the unpaid principal amount of the Fundings outstanding
thereunder at the time such enforcement shall be sought.
(f) Conditions Precedent. The Company's
and the Bank Investors' obligations under this Agreement are subject to the
accuracy of the representations and warranties on the part of the Issuer
contained herein, as of the date hereof, and as of the Closing Date (as if
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made on such date), and as of the Initial Funding Date, to the performance by
the Issuer of its obligations under this Agreement and to the satisfaction of
the following further conditions on the Closing Date:
(i) The Agent shall have received letters of
Barnes & Thornburg, special counsel to the Issuer, that it may rely on
such counsel's opinions to Moody's and S&P as to the "true sale" of the
Receivables by the Seller to the Issuer and substantive
nonconsolidation of the Seller and the Issuer under the Bankruptcy
Code.
(ii) The Agent shall have received an
opinion, dated the Closing Date from Barnes & Thornburg, special
counsel for the Issuer, in form and substance acceptable to it,
addressing corporate matters and the characterization of the Collateral
Agent's security interest in the Receivables as a first priority
perfected security interest.
(iii) The Agent shall have received an
opinion, dated the Closing Date, from Barnes & Thornburg, counsel to
the Seller, in form and substance acceptable to it, addressing
corporate and security interest matters.
(iv) The Agent shall have received a
certificate of the Issuer, dated the Closing Date, stating that (i) its
representations and warranties made herein and in the Security
Agreement are true and correct as of the Closing Date, and (ii) the
Issuer has complied with all agreements and satisfied all conditions to
be satisfied on its part pursuant to this Agreement and the Security
Agreement at or prior to the Closing Date.
(v) All conditions precedent to the
authentication and delivery of the Note under this Agreement shall have
been satisfied.
(vi) Each party shall have performed and
complied with all agreements and conditions contained herein and in the
Security
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Agreement and all other documents delivered in connection herewith or
therewith which are required to be performed or complied with by such
party before or at the Closing Date.
(vii) This Agreement, the Purchase
Agreement, the Security Agreement, the Surety Bond, the Insurance
Agreement and the Servicing Agreement shall have been duly authorized,
executed and delivered by the respective parties thereto, shall be in
full force and effect on the Closing Date and shall be in form and
substance satisfactory to the Agent.
(viii) The Agent shall have received the
following, in each case in form and substance satisfactory to it:
(1) copy of the resolutions of the Board of
Directors of the Issuer, certified by the Secretary or an Assistant
Secretary as of the Closing Date, duly authorizing the execution,
delivery and performance by the Issuer of the documents executed by or
on behalf of the Issuer in connection with the transactions
contemplated by this Agreement and the Security Agreement; and
attesting to the names and true signatures of the person or persons
executing and delivering each such document;
(2) a copy of the resolutions of the Board
of Directors of the Seller, certified by the Secretary or an Assistant
Secretary of the Seller as of the Closing Date, duly authorizing the
execution, delivery and performance by the Seller of the Purchase
Agreement and any other documents executed by or on behalf of the
Seller in connection with the transactions contemplated thereby; and an
incumbency certificate of the Seller as to the person or persons
executing and delivering each such document; and
(3) such other documents and evidence with
respect to the Issuer, the Seller and the Servicer as the Company may
reasonably request in order to establish the corporate existence and
good standing of each thereof, the proper taking of all appropriate
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corporate proceedings in connection with the transactions contemplated
by this Agreement, the Note, the Security Agreement, the Servicing
Agreement, the Insurance Agreement, and the Purchase Agreement and the
compliance with the conditions set forth herein and therein.
(ix) No fact or condition shall exist under
applicable law or applicable regulations thereunder or interpretations
thereof by any regulatory authority which in the Agent's reasonable
opinion would make it unlawful to issue the Note or for the Issuer or
any of the other parties thereto to perform their respective
obligations under this Agreement, the Security Agreement, the Purchase
Agreement, the Servicing Agreement, the Insurance Agreement or the
Surety Bond.
(x) On or prior to the Closing Date, the
Seller and the Issuer shall have filed any financing statements or
amendments thereto, wherever necessary or advisable, in order to
perfect the transfer and assignment of the Receivables to the Issuer
and the grant of the security interest therein to the Collateral Agent
and shall have delivered file-stamped copies of such financing
statements or other evidence of the filing thereof to the Agent.
(xi) All taxes and fees due in connection
with the filing of the financing statements referred to in clause (x)
of this Section 2.1(f) shall have been paid in full or duly provided
for.
(xii) The Surety Bond Provider shall have
issued the Surety Bond, in form and substance satisfactory to the
Agent, dated as of the Closing Date.
(xiii) No action or proceeding shall have
been instituted nor shall any governmental action be threatened before
any court
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or governmental agency nor shall any order, judgment or decree have
been issued or proposed to be issued by any court or governmental
agency to set aside, restrain, enjoin or prevent the performance of
this Agreement or any of the other agreements or the transactions
contemplated hereby.
(xiv) The Agent shall have been furnished
with such other documents and opinions (including executed copies,
addressed to it or otherwise expressly allowing it to rely thereon of
such documents or opinions delivered to any other person in connection
with the transactions contemplated herein) as it may reasonably
require, and all documents and opinions as well as actions and
proceedings taken by the Issuer in connection with the issuance and
sale of the Note shall be satisfactory in form and substance to the
Agent and its counsel.
(xv) An opinion of Shaw, Pittman, Potts &
Trowbridge, counsel to the Surety Bond Provider, pertaining to the
Surety Bond Provider and the enforceability of the Surety Bond and in
form and substance satisfactory to the Agent, shall have been delivered
to the Agent.
(xvi) The Agent shall have received, in
substance reasonably satisfactory to the Agent, the Fee Letter dated as
of the Closing Date.
(xvii) The Agent shall have received, in
substance reasonably satisfactory to the Agent, the Bank Fee Letter
dated as of the Closing Date.
(xviii) The Reserve Account shall have been
established at NationsBank N.A. and funded to the extent required by
the Secu- rity Agreement.
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(xix) The Yield Supplement Account shall
have been established at NationsBank N.A. and funded to the extent
required by the Security Agreement.
(xx) The Carrying Cost Account shall have
been established at NationsBank N.A. and funded to the extent required
by the Security Agreement.
(g) Maturity of Commercial Paper. The
Company shall not issue any Related Commercial Paper with a maturity in
excess of 60 days in connection with any financing or refinancing of an
increase in the Note.
SECTION 2.2. The Surety Bond. The Issuer has obtained the
Surety Bond for the benefit of the Agent on behalf of the Company and the Bank
Investors. The Issuer acknowledges that the Agent is entitled, in accordance
with the terms thereof, to demand funds thereunder for the benefit of the
Company and the Bank Investors. The Agent shall have no liability to the Issuer,
and the Issuer shall indemnify and hold the Agent harmless, in connection with
any demands made by the Agent under the Surety Bond except to the extent that
the Agent shall have acted with gross negligence in making any such demand.
SECTION 2.3. Sharing of Payments, Etc. If the Company or any
Bank Investor (for purposes of this Section only, being a "Recipient") shall
obtain any payment (whether voluntary, involuntary, through the exercise of any
right of setoff, or otherwise) on account of any interest in the Note owned by
it in excess of its ratable share of payments on account of any interest in the
Note obtained by the Company and/or the Bank Investors entitled thereto, such
Recipient shall forthwith purchase from the Company and/or the Bank Investors
entitled to a share of such amount participations in the percentage interests
owned by such Persons as shall be necessary to cause such Recipient to share the
excess payment ratably with each such other Person entitled thereto; provided,
however, that if all or any portion of such excess payment is thereafter
recovered from such Recipient, such purchase from each such other Person shall
be rescinded and each such other Person shall repay to the Recipient the
purchase price paid by such Recipient for such participation to the extent of
such recovery, together with
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an amount equal to such other Person's ratable share (according to the
proportion of (a) the amount of such other Person's required payment to (b) the
total amount so recovered from the Recipient) of any interest or other amount
paid or payable by the Recipient in respect of the total amount so recovered.
SECTION 2.4. Right of Setoff. Without in any way limiting the
provisions of Section 2.3, each of the Company and the Bank Investors is hereby
authorized (in addition to any other rights it may have) at any time after the
occurrence of a Termination Event or during the continuance of a Potential
Termination Event to set-off, appropriate and apply (without presentment,
demand, protest or other notice which are hereby expressly waived) any deposits
and any other indebtedness held or owing by the Company or such Bank Investor
to, or for the account of, the Issuer against the amount owing by the Issuer
hereunder to such Person (even if contingent or unmatured).
SECTION 2.5. Fees. The Issuer shall pay, in accordance with
the Fee Letter, the following non-refund- able fees on each Remittance Date, (i)
to the Company, the Program Fee, (ii) to the Administrative Agent, the
Administrative Fee and (iii) to the Agent, the Liquidity Fee and (iv) to the
Agent, any accrued and unpaid commercial paper dealer or placement agent fees
described in clause (c) of the definition of Carrying Costs.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE ISSUER
SECTION 3.1. Representations and Warranties of the Issuer. The
Issuer represents and warrants to and covenants with the Company and the Bank
Investors as of the Closing Date and the Initial Funding Date and, except as
otherwise provided herein, as of each date of any Subsequent Funding that:
(a) Corporate Existence and Power. The
Issuer is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has
all corporate power and all
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material governmental licenses, authorizations, consents and approvals required
to carry on its business in each jurisdiction in which its business is now
conducted.
(b) Corporate and Governmental
Authorization; Contravention. The execution, delivery and performance
by the Issuer of this Agreement, the Purchase Agreement, the Servicing
Agreement, the Security Agreement, the Fee Letter, the Bank Fee Letter,
the Insurance Agreement and the Note are within the Issuer's corporate
powers, have been duly authorized by all necessary corporate action,
require no action by or in respect of, or filing with, any governmental
body, agency or official, and do not contravene, or constitute a
default under, any provision of applicable law or regulation or of the
Certificate of Incorporation or Bylaws of the Issuer or of any
agreement, judgment, injunction, order, decree or other instrument
binding upon the Issuer or result in the creation or imposition of any
lien on assets of the Issuer, or require the consent or approval of, or
the filing of any notice or other documentation with, any governmental
authority or other Person.
(c) Binding Effect. Each of this Agreement,
the Security Agreement, the Purchase Agreement, the Servicing
Agreement, the Fee Letter, the Bank Fee Letter, the Insurance Agreement
and the Note constitutes the legal, valid and binding obligation of the
Issuer, enforceable against the Issuer in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other
similar laws affecting the rights of creditors.
(d) Accuracy of Information. All information
heretofore furnished by the Issuer (including without limitation, the
Monthly Debtor's Certificate and UAC's financial statements) to the
Company, the Bank Investors or the Agent for purposes of or in
connection with this Agreement or any transaction contemplated hereby
is, and all such information hereafter furnished by the Issuer to the
Company, the Bank Investors or the Agent will be, true and accurate in
every material respect, on the date such information is stated or
certified.
(e) Tax Status. All tax returns (federal,
state and local) required to be filed with respect to
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the Issuer have been filed (which filings may be made by an Affiliate of the
Issuer on a consolidated basis covering the Issuer and other Persons) and there
has been paid or adequate provision made for the payment of all taxes,
assessments and other governmental charges in respect of the Issuer (or in the
event consolidated returns have been filed, with respect to the Persons subject
to such returns).
(f) Action, Suits. Except as set forth in Exhibit E hereto,
there are no actions, suits or proceedings pending, or to the knowledge of the
Issuer threatened, against or affecting the Issuer or any Affiliate of the
Issuer or their respective properties, in or before any court, arbitrator or
other body, which may have a material adverse effect on the Issuer's ability to
perform its obligations hereunder or under the Purchase Agreement.
(g) Use of Proceeds. The proceeds of any Funding will be used
by the Issuer to acquire the Receivables and related property with respect
thereto from UAC pursuant to the Purchase Agreement.
(h) Place of Business. The chief place of business and chief
executive office of the Issuer are located at the address of the Issuer
indicated in Section 6.1 hereof and the offices where the Issuer keeps all its
records, are located at the address(es) described on Exhibit F.
(i) Merger and Consolidation. As of the date hereof the Issuer
has not changed its name, merged with or into or been consolidated with any
other corporation or been the subject of any proceeding under Title 11, United
States Code (Bankruptcy).
(j) Solvency. The Issuer is not insol- vent and will not be
rendered insolvent immediately following the consummation on the Closing Date
and the Initial Funding Date of the transactions contemplated by this Agreement
and the Security Agreement, including the pledge by the Issuer to the Collateral
Agent of the Collateral specified in Section 2.1 of the Security Agreement.
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(k) No Termination Event. After giving effect to the Funding,
no Potential Termination Event or Termination Event exists.
(l) Compliance. The Issuer has complied in all material
respects with all Requirements of Law in respect of the conduct of its business
and ownership of its property.
(m) Not an Investment Company. The Issuer is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, or is exempt from all provisions of such Act.
(n) ERISA. The Issuer is in compliance in all material
respects with ERISA and no lien in favor of the PBGC on any of the Receivables
shall exist.
(o) Subsidiaries. The Issuer does not have any Subsidiaries.
(p) Capital Stock. The Issuer has neither sold nor pledged any
of its Common Stock to any entity other than UAC.
Any document, instrument, certificate or notice delivered to
the Company by the Issuer hereunder shall be deemed a representation and
warranty by the Issuer.
The representations and warranties set forth in this Section
3.1 shall survive the pledge and assignment of the Collateral to the Collateral
Agent for the benefit of the Secured Parties. Upon discovery by the Issuer, the
Company, the Agent or a Bank Investor of a breach of any of the foregoing
representations and warranties, the party discovering such breach shall give
prompt written notice to the others.
ARTICLE IV
INDEMNIFICATION
SECTION 4.1. Indemnity. Without limiting any other rights
which the Company or the Bank Investors may have hereunder or under applicable
law, the Issuer agrees to indemnify the Company, the Bank Investors, the
Collateral Agent, the Agent, the Administrative Agent, the Liquidity Provider,
the Credit Support Provider and any permitted assigns and their respective
agents, officers, directors and employees (collectively, "Indemnified Parties")
from and against any and all damages, losses, claims, liabilities, costs and
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expenses, including reasonable attorneys' fees (which such attorneys may be
employees of the Company, the Bank Investors, the Agent, the Collateral Agent,
the Administrative Agent, the Liquidity Provider and the Credit Support
Provider) and disbursements (all of the foregoing being collectively referred to
as "Indemnified Amounts") awarded against or incurred by any of them arising out
of or as a result of this Agreement or the ownership, either directly or
indirectly, by the Company, the Bank Investors, the Agent, the Administrative
Agent, the Liquidity Provider or the Credit Support Provider of the Note
excluding, however, (i) Indemnified Amounts to the extent resulting from gross
negligence or willful misconduct on the part of an Indemnified Party or (ii)
recourse (except as otherwise specifically provided in this Agreement) for
uncollect- ible Receivables. Such Indemnified Amounts shall be paid in
accordance with Section 5.1(a)(xiii) of the Security Agreement. Without limiting
the generality of the foregoing, the Issuer shall indemnify each Indemnified
Party for Indemnified Amounts relating to or resulting from:
(a) reliance on any representation or warranty made by the
Issuer or the Servicer (or any officers of the Issuer or the Servicer) under or
in connection with this Agreement, the Security Agreement, the Servicing
Agreement, any Funding Request, any Monthly Debtor's Certificate or any other
information or report delivered by the Issuer or the Servicer pursuant hereto or
thereto, which shall have been false or incorrect in any material respect when
made or deemed made;
(b) the failure by the Issuer or the Servicer to comply with
any applicable law, rule or regulation with respect to the Collateral, or the
nonconformity of the Collateral with any such applicable law, rule or
regulation;
(c) the failure to vest and maintain vested in the Collateral
Agent a first priority perfected security interest in the Collateral, free and
clear of any Lien;
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(d) the failure to file, or any delay in filing, financing
statements, continuation statements, or other similar instruments or documents
under the UCC of any applicable jurisdiction or other applicable laws with
respect to all or any part of the Collateral which failure has an adverse effect
on the validity, perfected status or priority of the security interest granted
to the Collateral Agent under the Security Agreement;
(e) any valid dispute, claim, offset or defense (other than
discharge in bankruptcy of the Obli- gor) of the Obligor to the payment of any
Receivable (including, without limitation, a defense based on such Receivable
not being legal, valid and binding obligation of such Obligor enforceable
against it in accordance with its terms), or any other claim resulting from the
sale of a Boat or services related to such Receivable or the furnishing or
failure to furnish such Boat or services;
(f) any failure of the Issuer to perform its duties or
obligations in accordance with the provi- sions of Articles IV and V of the
Security Agreement; or
(g) any products liability claim or personal injury or
property damage suit or other similar or related claim or action of whatever
sort arising out of or in connection with the related Boat or related
merchandise or services which are the subject of any Receivable;
provided, however, that if the Company enters into agreements for the purchase
of interests in receivables from one or more Other Transferors, the Company
shall allocate such Indemnified Amounts which are in connection with the
Liquidity Agreement or the Credit Support Agreement to the Issuer and each Other
Transferor; and provided, further, that if such Indemnified Amounts are
attributable to the Issuer and not attributable to any Other Transfer- or, the
Issuer shall be solely liable for such Indemnified Amounts or if such
Indemnified Amounts are attributable to Other Transferors and not attributable
to the Issuer, such Other Transferors shall be solely liable for such
Indemnified Amounts.
SECTION 4.2. Indemnity for Taxes, Reserves and Expenses. (a)
If after the date hereof, the adoption of any Law or bank regulatory guideline
or any amendment or
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change in the interpretation of any existing or future Law or bank regulatory
guideline by any Official Body charged with the administration, interpretation
or application thereof, or the compliance with any directive of any Official
Body (in the case of any bank regulatory guideline, whether or not having the
force of Law):
(1) shall subject any Indemnified Party to any tax, duty or
other charge with respect to this Agreement, the Security Agreement, the Note,
the Net Investment, the Collateral or payments of amounts due hereunder, or
shall change the basis of taxation of payments to any Indemnified Party of
amounts payable in respect of this Agreement, the Note, the Net Investment, the
Collateral or payments of amounts due hereunder or its obligation to advance
funds under the Liquidity Agreement, the Credit Support Agreement or otherwise
in respect of this Agreement, the Security Agreement, the Note, the Net
Investment or the Collateral (except for changes in the rate of general
corporate, franchise, net income or other income tax imposed on such Indemnified
Party by the jurisdiction in which such Indemnified Party's principal executive
office is located); or
(2) shall impose, modify or deem applica- ble any reserve,
special deposit or similar requirement (including, without limitation, any such
requirement imposed by the Board of Governors of the Federal Reserve System)
against assets of, deposits with or for the account of, or credit extended by,
any Indemnified Party or shall impose on any Indemnified Party or on the United
States market for certificates of deposit or the London interbank market any
other condition affecting this Agreement, the Security Agreement, the Note, the
Net Investment, the Collateral or payments of amounts due hereunder or its
obligation to advance funds under the Liquidity Agreement, the Credit Support
Agreement or otherwise in respect of this Agreement, the Note, the Net
Investment or the Collateral;
(3) imposes upon any Indemnified Party any other expense
(including, without limitation, reasonable attorneys' fees and expenses, and
expenses of litigation or preparation therefor in contesting any of the
foregoing) with respect to this Agreement, the Security Agreement, the Note, the
Net Investment, the Collateral or payments of amounts due hereunder or its
obligation to
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advance funds under the Liquidity Agreement or the Credit Support Agreement or
otherwise in respect of this Agreement, the Note, the Net Investment or the
Collateral;
and the result of any of the foregoing is to increase the cost to such
Indemnified Party with respect to this Agreement, the Security Agreement, the
Note, the Net Investment, the Collateral, the obligations hereunder, the funding
of any purchases hereunder, the Liquidity Agreement or the Credit Support
Agreement, by an amount reasonably deemed by such Indemnified Party to be
material, then within 10 days after demand by the Company, the Issuer shall pay
to the Company such additional amount or amounts as will compensate such
Indemnified Party for such increased cost provided that no such amount shall be
payable with respect to any period commencing more than 90 days prior to the
date the Company first notifies the Issuer of its intention to demand
compensation therefor under this Section 4.2(a).
(b) If any Indemnified Party shall have determined that after
the date hereof, the adoption of any applicable Law or bank regulatory guideline
regarding capital adequacy, or any change therein, or any change in the
interpretation thereof by any Official Body, or any directive regarding capital
adequacy (in the case of any bank regulatory guideline, whether or not having
the force of law) of any such Official Body, has or would have the effect of
reducing the rate of return on capital of such Indemnified Party (or its parent)
as a consequence of such Indemnified Party's obligations hereunder or with
respect hereto to a level below that which such Indemnified Party (or its
parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount reasonably deemed by such Indemnified Party to be material, then from
time to time, within 10 days after demand by the Company, the Issuer shall pay
to the Company such additional amount or amounts as will compensate such
Indemnified Party (or its parent) for such reduction; provided that no such
amount shall be payable with respect to any period commencing less than 30 days
after the date the Company first notifies the Issuer of its intention to demand
compensation under this Section 4.2(b).
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(c) The Company will promptly notify the Issuer of any event
of which it has knowledge, occurring after the date hereof, which will entitle
an Indemnified Party to compensation pursuant to this Section 4.2. A notice by
the Company claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. In determining such amount, the Company may use
any reasonable averaging and attributing methods.
(d) Anything in this Section 4.2 to the contrary
notwithstanding, if the Company enters into agreements for the acquisition of
interests in receivables from one or more Other Transferors, the Company shall
allocate the liability for any amounts under this Section 4.2 ("Section 4.2
Costs") ratably to the Issuer and each Other Transferor; and provided, further,
that if such Section 4.2 Costs are attributable to the Issuer and not
attributable to any Other Transferor, the Issuer shall be solely liable for such
Section 4.2 Costs or if such Section 4.2 Costs are attributable to Other Trans-
ferors and not attributable to the Issuer, such Other Transferors shall be
solely liable for such Section 4.2 Costs.
SECTION 4.3. Other Costs, Expenses and Related Matters. (a)
The Issuer agrees, upon receipt of a written invoice, to pay or cause to be
paid, and to save the Company, the Bank Investors, the Collateral Agent, the
Agent and the Administrative Agent harmless against liability for the payment
of, all reasonable out-of-pocket expenses (including, without limitation, all
reasonable attorneys', accountant's and other third parties' fees and expenses,
any filing fees and expenses incurred by officers or employees of the Company or
any Bank Investor) incurred by or on behalf of the Company, any Bank Investor,
the Collateral Agent, the Agent or the Administrative Agent (i) in connection
with the negotiation, execution, delivery and preparation of this Agreement, the
Note and the Security Agreement and any documents or instruments delivered
pursuant hereto or thereto and the transactions contemplated hereby and thereby
and (ii) from time to time (a) relating to any amendments, waivers or consents
under this Agreement, the Note and the Security Agreement, (b) arising in
connection with the Company's or its agent's enforcement or preservation of
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rights (including, without limitation, the perfection and protection of the
Collateral Agent's security interest in the Collateral), or (c) arising in
connection with any audit, dispute, disagreement, litigation or preparation for
litigation involving this Agreement (all of such amounts, collectively,
"Transaction Costs").
ARTICLE V
THE AGENT; BANK COMMITMENT
SECTION 5.1. Authorization and Action. (a) The Company and
each Bank Investor hereby appoints and authorizes the Agent to take such action
as agent on its behalf and to exercise such powers under this Agreement and the
Security Agreement as are delegated to the Agent by the terms hereof and
thereof, together with such powers as are reasonably incidental thereto. In
furtherance, and without limiting the generality, of the foregoing, the Company
and each Bank Investor hereby appoints the Agent as its agent to execute and
deliver all further instruments and documents, and take all further action that
the Agent may deem necessary or appropriate or that the Company or a Bank
Investor may reasonably request in order to perfect, protect or more fully
evidence the interests transferred or to be transferred from time to time by the
Issuer hereunder, or to enable any of them to exercise or enforce any of their
respective rights hereunder, including, without limitation, the execution by the
Agent as secured party/assignee of such financing or continuation statements, or
amendments thereto or assignments thereof, relative to all or any of the
Receivables now existing or hereafter arising, and such other instruments or
notices, as may be necessary or appropriate for the purposes stated hereinabove.
The Company and the Majority Investors may direct the Agent to take any such
incidental action hereunder. With respect to other actions which are incidental
to the actions specifically delegated to the Agent hereunder, the Agent shall
not be required to take any such incidental action hereunder, but shall be
required to act or to refrain from acting (and shall be fully protected in
acting or refraining from acting) upon the direction of the Majority Investors;
provided, however, that Agent shall not be required to take any action hereunder
if the taking of such action, in the reasonable determination of the Agent,
shall
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be in violation of any applicable law, rule or regulation or contrary to any
provision of this Agreement or shall expose the Agent to liability hereunder or
otherwise. Upon the occurrence and during the continuance of any Termination
Event or Potential Termination Event the Agent shall take no action hereunder
(other than ministerial actions or such actions as are specifically provided for
herein) without the prior consent of the Majority Investors. The Agent shall
not, without the prior written consent of all Bank Investors and the Surety Bond
Provider (which consent shall not be unreasonably withheld or delayed, and which
consent shall only be required by the Surety Bond Provider for so long as no
Surety Bond Provider Default has occurred and is continuing), agree to (i)
amend, modify or waive any provision of this Agreement in any way which would
(A) reduce or impair Collections or the payment of fees payable hereunder to the
Bank Investors or delay the scheduled dates for payment of such amounts, (B)
increase the Servicing Fee to a percentage greater than 1.50% per annum, (C)
modify any provisions of this Agreement or the Purchase Agreement or any Surety
Bond relating to the timing of payments required to be made by the Issuer or the
Seller and/or Surety Bond Provider or the application of the proceeds of such
payments, (D) the appointment of any Person (other than the Agent) as successor
Servicer or (E) release any property from the lien provided by this Agreement
(other than as expressly contemplated herein). The Agent shall not agree to any
amendment of this Agreement which increases the dollar amount of a Bank
Investor's Commitment without the prior consent of such Bank Investor. In
addition, the Agent shall not agree to any amendment of this Agreement not
specifically described in the two preceding sentences without the consent of the
related Majority Investors(which consent shall not be unreasonably withheld or
delayed). "Majority Investors" shall mean, at any time, the Agent and those Bank
Investors which hold Commitments aggregating in excess of 66 and 2/3% of the
Facility Limit as of such date. In the event the Agent requests the Company's or
a Bank Investor's consent pursuant to the foregoing provisions and the Agent
does not receive a consent (either positive or negative) from the Company or
such Bank Investor within 10 Business Days of the Company's or Bank Investor's
receipt of such request, then the Company or such Bank Investor (and its
percentage interest hereun-
27
<PAGE>
der) shall be disregarded in determining whether the Agent shall have obtained
sufficient consent hereunder.
(b) The Agent shall exercise such rights and powers vested in
it by this Agreement and the Security Agreement, and use the same degree of care
and skill in their exercise, as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
SECTION 5.2. Agent's Reliance, Etc. Neither the Agent nor any
of its directors, officers, agents or employees shall be liable for any action
taken or omitted to be taken by it or them as Agent under or in connection with
this Agreement or the Security Agreement, except for its or their own gross
negligence or willful misconduct. Without limiting the foregoing, the Agent: (i)
may consult with legal counsel (including counsel for the Issuer or the Seller),
independent public accountants and other experts selected by it and shall not be
liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants or experts; (ii) makes
no warranty or representation to the Company or any Bank Investor and shall not
be responsible to the Company or any Bank Investor for any statements,
warranties or representations made in or in connection with this Agreement;
(iii) shall not have any duty to ascertain or to inquire as to the performance
or observance of any of the terms, covenants or conditions of this Agreement or
of the Security Agreement on the part of the Issuer, or Seller or to inspect the
property (including the books and records) of the Issuer or Seller; (iv) shall
not be responsible to the Company or any Bank Investor for the due execution,
legality, validity, enforceability, genuineness, sufficiency or value of this
Agreement, the Security Agreement or any other instrument or document furnished
pursuant hereto or thereto; and (v) shall incur no liability under or in respect
of this Agreement, the Security Agreement by acting upon any notice (including
notice by telephone), consent, certificate or other instrument or writing (which
may be by telex) believed by it to be genuine and signed or sent by the proper
party or parties.
SECTION 5.3. Credit Decision. The Company and each Bank
Investor acknowledges that it has, independently and without reliance upon the
Agent, any of the
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<PAGE>
Agent's Affiliates, any other Bank Investor or the Company (in the case of any
Bank Investor) and based upon such documents and information as it has deemed
appropriate, made its own evaluation and decision to enter into this Agreement
to which it is a party and, if so required, to acquire an interest in the Note.
The Company and each Bank Investor also acknowledges that it will, independently
and without reliance upon the Agent, any of the Agent's Affiliates, any other
Bank Investor or the Company (in the case of any Bank Investor) and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own decisions in taking or not taking action under this
Agreement and the other Transaction Documents to which it is a party.
SECTION 5.4. Indemnification of the Agent. The Bank Investors
agree to indemnify the Agent (to the extent not reimbursed by the Issuer),
ratably in accordance with their Pro Rata Shares, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against the Agent in any way relating to or
arising out of this Agreement or any action taken or omitted by the Agent,
provided that the Bank Investors shall not be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the Agent's gross negligence or
willful misconduct. Without limitation of the foregoing, the Bank Investors
agree to reimburse the Agent, ratably in accordance with their Pro Rata Shares,
promptly upon demand for any out-of-pocket expenses (including counsel fees)
incurred by the Agent in connection with the administration, modification,
amendment or enforcement (whether through negotiations, legal proceedings or
otherwise) of, or legal advice in respect of rights or responsibilities under,
this Agreement, to the extent that such expenses are incurred in the interests
of or otherwise in respect of the Bank Investors hereunder and/or thereunder and
to the extent that the Agent is not reimbursed for such expenses by the Issuer.
SECTION 5.5. Successor Agent. The Agent may resign at any time
by giving written notice thereof to each Bank Investor, the Company, the Surety
Bond Provider and the Issuer and may be removed at any time with cause
29
<PAGE>
by the Majority Investors. Upon any such resignation or removal, the Company and
the Majority Investors shall appoint a successor Agent. The Company and each
Bank Investor agrees that it shall not unreasonably withhold or delay its
approval of the appointment of a successor Agent. If no such successor Agent
shall have been so appointed, and shall have accepted such appointment, within
30 days after the retiring Agent's giving of notice of resignation or the
Majority Investors' removal of the retiring Agent, then the retiring Agent may,
on behalf of the Company and the Bank Investors, appoint a successor Agent which
successor Agent shall be either (i) a commercial bank organized under the laws
of the United States or of any state thereof and have a combined capital and
surplus of at least $50,000,000 or (ii) an Affiliate of such a bank. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under this Agreement.
After any retiring Agent's resignation or removal hereunder as Agent, the
provisions of this Article V shall continue to inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
SECTION 5.6. Payments by the Agent. Unless specifically
allocated to a Bank Investor pursuant to the terms of this Agreement, all
amounts received by the Agent on behalf of the Bank Investors shall be paid by
the Agent to the Bank Investors (at their respective accounts specified in their
respective Assignment and Assumption Agreements) in accordance with their
respective related pro rata interests in the Net Investment on the Business Day
received by the Agent, unless such amounts are received after 12:00 noon on such
Business Day, in which case the Agent shall use its reasonable efforts to pay
such amounts to the Bank Investors on such Business Day, but, in any event,
shall pay such amounts to the Bank Investors in accordance with their respective
related pro rata interests in the Net Investment not later than the following
Business Day.
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SECTION 5.7. Bank Commitment; Assignment to Bank Investors.
(a) Bank Commitment. At any time on or prior to the Commitment
Termination Date, in the event that the Company does not make a Subsequent
Funding as requested under Section 2.1, then at any time, the Issuer shall have
the right to require the Company to assign its interest in the Note in whole to
the Bank Investors pursuant to this Section 5.7. In addition, at any time on or
prior to the Commitment Termination Date (i) upon the occurrence of a
Termination Event, or a Wind-Down Event or the Termination Date or (ii) the
Company elects to give notice to the Issuer of an Advance Termination Date, the
Issuer hereby requests and directs that the Company assign its interest in the
Note in whole to the Bank Investors pursuant to this Section 5.7 and the Issuer
hereby agrees to pay the amounts described in Section 5.7(d) below. Provided
that (i) the Net Asset Test is satisfied and (ii) the Issuer shall have paid to
the Company all amounts due as described in Section 5.7(d) hereof, upon any such
election by the Company or any such request by the Issuer, the Company shall
make such assignment and the Bank Investors shall accept such assignment and
shall assume all of the Company's obligations hereunder. In connection with any
assignment from the Company to the Bank Investors pursuant to this Section 5.7,
each Bank Investor shall, on the date of such assignment, pay to the Company an
amount equal to its Assignment Amount. In addition, at any time on or prior to
the Commitment Termination Date the Issuer shall have the right to request
funding under this Agreement directly from the Bank Investors provided that at
such time all conditions precedent set forth herein and in the Security
Agreement for a Subsequent Funding shall be satisfied and provided further that
in connection with such funding by the Bank Investors, the Bank Investors accept
the assignment of the Note from the Company and assume all of the Company's
obligations hereunder concurrently with or prior to any such Subsequent Funding.
Upon any assignment by the Company to the Bank Investors contemplated hereunder,
the Company shall cease to make any further advances to the Issuer hereunder.
(b) Assignment. No Bank Investor may assign all or a portion
of its interest in the Note and its rights and obligations hereunder to any
Person unless
31
<PAGE>
approved in writing by the Agent. In the case of an assignment by the Company to
the Bank Investors or by a Bank Investor to another Person, the assignor shall
deliver to the assignee(s) an Assignment and Assumption Agreement, duly
executed, assigning to the assignee a pro rata interest in the Note and the
assignor's rights and obligations hereunder and the assignor shall promptly
execute and deliver all further instruments and documents, and take all further
action, that the assignee may reasonably request, in order to protect, or more
fully evidence the assignee's right, title and interest in and to such interest
and to enable the Agent, on behalf of such assignee, to exercise or enforce any
rights hereunder and under the other documents to which such assignor is or,
immediately prior to such assignment, was a party. Upon any such assignment, (i)
the assignee shall have all of the rights and obligations of the assignor
hereunder and under the other documents to which such assignor is or,
immediately prior to such assignment, was a party with respect to such interest
for all purposes of this Agreement and under the other documents to which such
assignor is or, immediately prior to such assignment, was a party (it being
understood that the Bank Investors, as assignees, shall (x) be obligated to
effect Subsequent Fundings under Section 2.1 in accordance with the terms
thereof, notwithstanding that the Company was not so obligated and (y) not have
the right to deliver a notice specifying an "Advance Termination Date,"
notwithstanding that the Company had such right) and (ii) the assignor shall
relinquish its rights with respect to such interest for all purposes of this
Agreement and under the other documents to which such assignor is or,
immediately prior to such assignment, was a party. No such assignment shall be
effective unless a fully executed copy of the related Assignment and Assumption
Agreement shall be delivered to the Agent and the Issuer. All reasonable costs
and expenses of the Agent and the assignor incurred in connection with any
assignment hereunder shall be borne by the Issuer and not by the assignor or any
such assignee. No Bank Investor shall assign any portion of its Commitment
hereunder without also simultaneously assigning an equal portion of its interest
in the Liquidity Agreement.
(c) Effects of Assignment. By executing and delivering an
Assignment and Assumption Agreement, the assignor and assignee thereunder
confirm to and agree
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with each other and the other parties hereto as follows: (i) other than as
provided in such Assignment and Assumption Agreement, the assignor makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement, the other documents or any other instrument or document furnished
pursuant hereto or thereto or the execution, legality, validity, enforceability,
genuineness, sufficiency or value or this Agreement, the other documents or any
such other instrument or document; (ii) the assignor makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of the Issuer or the Seller or the performance or observance by the Issuer or
the Seller of any of its obligations under this Agreement, the Purchase
Agreement, the Security Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy of
this Agreement, the Security Agreement, the Purchase Agreement, the Surety Bond
and such other instruments, documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Assumption Agreement and to purchase such interest; (iv) such
assignee will, independently and without reliance upon the Agent, or any of its
Affiliates, or the assignor and based on such agreements, documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement and the
other documents; (v) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under this
Agreement, the other documents and any other instrument or document furnished
pursuant hereto or thereto as are delegated to the Agent by the terms hereof or
thereof, together with such powers as are reasonably incidental thereto and to
enforce its respective rights and interests in and under this Agreement, the
Security Agreement and the other documents; (vi) such assignee agrees that it
will perform in accordance with their terms all of the obligations which by the
terms of this Agreement and the other documents are required to be performed by
it as the assignee of the assignor; and (vii) such assignee agrees that it will
not institute against the Company any proceeding of the type referred to in
Section 6.6 prior to the date which is one year and one day after the payment in
full of all Commercial Paper issued by the Company.
33
<PAGE>
(d) Issuer's Obligation to Pay Certain Amounts; Additional
Assignment Amount. The Issuer shall pay to the Agent, for the account of the
Company, in connection with any assignment by the Company to the Bank Investors
pursuant to this Section 5.7, an aggregate amount equal to all Carrying Costs to
accrue with respect to obligations already entered into by the Company as a
result of or in connection with this Agreement. To the extent that such Carrying
Costs relate to interest or discount on Commercial Paper issued to fund or
refinance the Net Investment, if the Issuer fails to make payment of such
amounts at or prior to the time of assignment by the Company to the Bank
Investors, such amount shall be paid by the Bank Investors (in accordance with
their respective Pro Rata Shares) to the Company as additional consideration for
the interests assigned to the Bank Investors and the amount of the Net
Investment hereunder held by the Bank Investors shall be increased by an amount
equal to the additional amount so paid by the Bank Investors.
(e) Administration of Agreement After Assignment. After any
assignment by the Company to the Bank Investors pursuant to this Section 5.7
(and the payment of all amounts owing to the Company in connection therewith),
all rights of the Administrative Agent and the Collateral Agent set forth herein
shall be deemed to be afforded to the Agent on behalf of the Bank Investors
instead of either such party.
(f) Payments. After any assignment by the Company to the Bank
Investors pursuant to this Section 5.7, all payments to be made hereunder by the
Issuer or the Collection Agent to the Bank Investors shall be made to the
Agent's account as such account shall have been notified to the Issuer.
(g) Downgrade of Bank Investor. If at any time prior to any
assignment by the Company to the Bank Investors as contemplated pursuant to this
Section 5.7, the short term debt rating of any Bank Investor shall be "A-2" or
"P-2" with negative credit implications from S&P or Moody's, respectively, such
Bank Investor, upon request of the Agent, shall, within 30 days of such
34
<PAGE>
request, assign its rights and obligations hereunder to another financial
institution (which institution's short term debt shall be rated at least "A-2"
and "P-2" from S&P and Moody's, respectively, and which shall not be so rated
with negative credit implications). If the short term debt rating of a Bank
Investor shall be "A-3" or "P-3", or lower, from S&P or Moody's, respectively
(or such rating shall have been withdrawn by S&P's or Moody's), such Bank
Investor, upon request of the Agent, shall, within five (5) Business Days of
such request, assign its rights and obligations hereunder to another financial
institution (which institution's short term debt shall be rated at least "A-2"
and "P-2" from S&P and Moody's, respectively, and which shall not be so rated
with negative credit implications). In either such case, if any such Bank
Investor shall not have assigned its rights and obligations under this Agreement
within the applicable time period described above, the Company shall have the
right to require such Bank Investor to accept the assignment of such Bank
Investor's Pro Rata Share of the Net Investment; such assignment shall occur in
accordance with the applicable provisions of this Section 5.7. Such Bank
Investor shall be obligated to pay to the Company, in connection with such
assignment, in addition to the Pro Rata Share of the Net Investment, an amount
equal to the interest component of the outstanding Commercial Paper issued to
fund the portion of the Net Investment being assigned to such Bank Investor, as
reasonably determined by the Agent. Notwithstanding anything contained herein to
the contrary, upon any such assignment to a downgraded Bank Investor as
contemplated pursuant to the immediately preceding sentence, the aggregate
available amount of the Facility Limit, solely as it relates to new Fundings,
shall be reduced by the amount of unused Commitment of such downgraded Bank
Investor; it being understood and agreed, that nothing in this sentence or the
two preceding sentences shall affect or diminish in any way any such downgraded
Bank Investor's Commitment to the Issuer or such downgraded Bank Investor's
other obligations and liabilities hereunder and under the other documents.
35
<PAGE>
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. Notices, Etc. Except where telephonic
instructions or notices are authorized herein to be given, all notices, demands,
instructions and other communications required or permitted to be given to or
made upon any party hereto shall be in writing and shall be sent by facsimile
transmission with a confirmation of the receipt thereof and shall be deemed to
be given for purposes of this Agreement on the day that the receipt of such
facsimile transmission is confirmed in accordance with the provisions of this
Section 6.1. Unless otherwise specified in a notice sent or delivered in
accordance with the foregoing provisions of this Section, notices, demands,
instructions and other communications in writing shall be given to or made upon
the respective parties hereto at their respective addresses indicated below,
and, in the case of telephonic instructions or notices, by calling the telephone
number or numbers indicated for such party below:
If to the Company:
Enterprise Funding Corporation
c/o Merrill Lynch Money Markets Inc.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
Attention: Gary Carlin
Telephone: (212) 236-7200
Telecopy: (212) 236-7584
(with a copy to the Administrative Agent)
If to the Issuer:
UAC Boat Funding Corp.
250 North Shadeland Avenue, Suite 230-A
Indianapolis, Indiana 46219
Attention: Melanie Otto
Telephone: (317) 231-6311
Telecopy: (317) 231-7926
36
<PAGE>
If to the Agent:
NationsBank N.A.
NationsBank Corporate Center
100 North Tryon Street
NC1-007-10-07
Charlotte, North Carolina 28255-0001
Attention: Michelle M. Heath
Investment Banking
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
SECTION 6.2. Successors and Assigns. This Agreement shall be
binding upon the Issuer and the Company and their respective successors and
assigns and shall inure to the benefit of the Issuer, and the Company and their
respective successors and assigns including the Liquidity Provider; provided
that the Issuer shall not assign any of its rights or obligations hereunder
without the prior written consent of the Company and the Collateral Agent. The
Issuer hereby acknowledges that the Company has assigned and granted a security
interest in all of its rights hereunder to the Collateral Agent. In addition,
the Issuer hereby acknowledges that the Company may at any time and from time to
time assign all or a portion of its rights hereunder to the Liquidity Provider
pursuant to the Liquidity Agreement. Except as expressly permitted hereunder or
in the agreements establishing the Company's commercial paper program, the
Company shall not assign any of its rights or obligations hereunder without the
prior written consent of the Issuer.
SECTION 6.3. Severability Clause. Any provisions of this
Agreement which are prohibited or unen- forceable 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 6.4. Amendments. This Agreement and the rights and
obligations of the parties hereunder may not be changed orally but only by an
instrument in writing signed by the parties hereto; provided that the written
consent of the Surety Bond Provider shall be
37
<PAGE>
required prior to any amendment or modification of Section 2.1, Section 4.2,
Section 4.3, the sixth sentence of Section 5.1, Section 6.2, Section 6.4,
Section 6.8 or Section 6.9 of this Agreement and prior to any amendment or
modification which shall materially and adversely affect the rights or
obligations of the Surety Bond Provider.
SECTION 6.5. Governing Law. This Agreement shall be construed
in accordance with and governed by the laws of the State of New York.
SECTION 6.6. No Bankruptcy Petition Against the Company. The
Issuer covenants and agrees that and each of the other parties hereto covenant
and agree that, and each such Person agrees that they shall cause any successor
servicer appointed pursuant to Section 4.1 of the Security Agreement to covenant
and agree that, prior to the date which is one year and one day after the
payment in full of all Commercial Paper issued by the Company, it will not
institute against, or join any other Person in instituting against, the Company
or the Issuer, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any federal or state
bankruptcy or similar law.
SECTION 6.7. Setoff. The Issuer hereby irrevocably and
unconditionally waives all right of setoff that it may have under contract
(including this Agreement), applicable law or otherwise with respect to any
funds or monies of the Company at any time held by or in the possession of the
Company.
SECTION 6.8. No Recourse. The Issuer's obligations under the
Note are payable solely from the Collateral and no general recourse shall be had
on the Note against the Issuer; provided that nothing in this Agreement shall
affect the ability of the Agent to demand funds under the Surety Bond in
accordance with the terms thereof. Except as otherwise expressly provided in
this Agreement, it is understood and agreed that the Issuer shall not be liable
for the payment of Purchased Interests, Commercial Paper or for any losses
suffered by the Company in respect of the Note. The foregoing sentence shall not
relieve the Issuer from any liability hereunder or under the Security Agreement
with respect to its
38
<PAGE>
representations, warranties, covenants and other payment and performance
obligations herein or therein described.
SECTION 6.9. Further Assurances. The Issuer agrees to do such
further acts and things and to execute and deliver to the Company, or the
Collateral Agent such additional assignments, agreements, powers and instruments
as are required by the Company to carry into effect the purposes of this
Agreement or the Security Agreement or to better assure and confirm unto the
Company or the Collateral Agent its rights, powers and remedies hereunder or
thereunder.
SECTION 6.10. No Recourse against Merrill. The obligations of
the Company under this Agreement are solely the corporate obligations of the
Company. No recourse shall be had for the payment of any amount owing against
Merrill Lynch Money Markets, Inc. ("Merrill") or against any stockholder,
employee, officer, director or incorporator of the Company. For purposes of this
Section 6.10, the term "Merrill" shall mean and include Merrill and all
affiliates thereof and any employee, officer, director, incorporator,
shareholder or beneficial owner of any of them; provided however, that the
Company shall not be considered to be an affiliate of Merrill for purposes of
this Section 6.10.
SECTION 6.11. Counterparts. This Agreement may be executed in
any number of copies, and by the different parties hereto on the same or
separate counterparts, each of which shall be deemed to be an original
instrument.
SECTION 6.12. Headings. Section headings used in this
Agreement are for convenience of reference only and shall not affect the
construction or interpretation of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Issuer, the Company and the Agent have
caused this Agreement to be executed by their respective officers thereunto duly
authorized as of the day and year first above written.
UAC BOAT FUNDING CORP.
as Issuer
By: /s/ Melanie S. Otto
Name: Melanie S. Otto
Title: Vice President
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ Stewart L. Culter
Name: Stewart L. Culter
Title: Vice President
NATIONSBANK, N.A., as Agent
and as Bank Investor
$75,000,000 By: /s/ Stan Meihaus
Commitment Name: Stan Meihaus
Title: Vice President
40
SECURITY AGREEMENT
among
UAC BOAT FUNDING CORP.
as Debtor,
ENTERPRISE FUNDING CORPORATION,
as Company,
NATIONSBANK, N.A.
individually and as Collateral Agent,
CAPITAL MARKETS ASSURANCE CORPORATION
as Surety Bond Provider,
and
UNION ACCEPTANCE CORPORATION
as Seller and Servicer
Dated as of April 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions................................................. 2
ARTICLE II
GRANT OF SECURITY INTEREST
SECTION 2.1 Grant of Security Interest.................................. 34
SECTION 2.2 Subrogation................................................. 36
SECTION 2.3 Increase of Note;Limit on
Commercial Paper Maturity................................... 36
SECTION 2.4 Release of Receivables...................................... 38
SECTION 2.5 Yield Supplement Account, Deposits,
Withdrawals................................................. 40
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE DEBTOR
SECTION 3.1 Representations and Warranties
Concerning Receivables....................................... 44
SECTION 3.2 Covenants of the Debtor...................................... 45
ARTICLE IV
SERVICING AND ADMINISTRATION
SECTION 4.1 Servicing.................................................... 54
SECTION 4.2 Duties of the Servicer....................................... 56
SECTION 4.3 Rights After Designation of
Successor Servicer........................................... 57
SECTION 4.4 Responsibilities of the Debtor............................... 58
SECTION 4.5 Monthly Debtor's Certificate................................. 58
SECTION 4.6 Additional Representations and Warranties
of UAC as Servicer........................................... 58
ARTICLE V
ALLOCATION AND APPLICATION
OF COLLECTIONS; RESERVE ACCOUNT
SECTION 5.1 Collections................................................... 60
SECTION 5.2 Remittances to the Secured Parties............................ 64
SECTION 5.3 Reserve Account............................................... 65
SECTION 5.4 Carrying Costs Account........................................ 68
i
<PAGE>
Page
ARTICLE VI
TERMINATION EVENTS; WIND-DOWN EVENTS
SECTION 6.1 Termination Events............................................ 71
SECTION 6.2 Wind-Down Events.............................................. 74
SECTION 6.3 Remedies...................................................... 74
SECTION 6.4 Application of Proceeds....................................... 76
ARTICLE VII
THE COLLATERAL AGENT
SECTION 7.1 Duties of the Collateral Agent................................ 77
SECTION 7.2 Compensation and Indemnification
of Collateral Agent........................................... 78
SECTION 7.3 Representations, Warranties and
Covenants of the Collateral Agent............................. 78
SECTION 7.4 Liability of the Collateral Agent............................. 79
SECTION 7.5 Merger or Consolidation of,
or Assumption of the Obligations
of, the Collateral Agent...................................... 82
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Notices, Etc.................................................. 84
SECTION 8.2 Successors and Assigns........................................ 85
SECTION 8.3 Severability Clause........................................... 86
SECTION 8.4 Amendments.................................................... 86
SECTION 8.5 Governing Law................................................. 86
SECTION 8.6 No Bankruptcy Petition Against
the Company................................................... 86
SECTION 8.7 Setoff........................................................ 86
SECTION 8.8 No Recourse................................................... 87
SECTION 8.9 Further Assurances; Replacement Surety
Bond.......................................................... 87
SECTION 8.10 Other Costs, Expenses and
Related Matters............................................... 87
SECTION 8.11 Direction of Collateral Agent; Replacement
Surety Bond................................................... 88
SECTION 8.12 Counterparts.................................................. 88
SECTION 8.13 Headings...................................................... 88
ii
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Page
EXHIBITS
EXHIBIT A Receivables Schedule A-1
EXHIBIT B Form of Surety Bond B-1
EXHIBIT C Location of Records C-1
EXHIBIT D Form of Monthly Debtor's Certificate D-1
EXHIBIT E Servicing Agreement E-1
iii
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SECURITY AGREEMENT
SECURITY AGREEMENT (this "Agreement"), dated as of April 3,
1997 among ENTERPRISE FUNDING CORPORATION, a Delaware corporation, as a secured
party (together with its successors and assigns, the "Company"), UAC BOAT
FUNDING CORP., a Delaware corporation, as debtor (together with its successors
and assigns, the "Debtor"), CAPITAL MARKETS ASSURANCE CORPORATION, a New York
monoline stock insurance company, as a secured party and as Surety Bond Provider
(in such capacity, the "Surety Bond Provider"), UNION ACCEPTANCE CORPORATION, an
Indiana corporation (the "Seller" or the "Servicer," as appropriate), and
NATIONSBANK, N.A., a national banking association ("NationsBank"), individually
and as collateral agent (together with its successors and assigns in such
capacity, the "Collateral Agent").
W I T N E S S E T H :
WHEREAS, subject to the terms and conditions of this
Agreement, the Debtor desires to grant a security interest in and to the
Receivables and related property including the Debtor's security interest in the
Boats and the Collections derived therefrom during the full term of this
Agreement;
WHEREAS, pursuant to the Insurance Agreement, the Surety Bond
Provider has issued its Surety Bond to provide for the full and timely payment
of all amounts of interest due on and principal of the Note;
WHEREAS, pursuant to the Note Purchase Agreement, the Debtor
has issued the Note to the Company and will be obligated to the holder of such
Note to pay the principal of and interest on such Note in accordance with the
terms thereof;
WHEREAS, the Debtor is granting a security interest in the
Collateral to the Collateral Agent, for the benefit of the Secured Parties, to
secure the payment and performance of the Debtor of its obligations under the
Note, the Note Purchase Agreement and the Insurance Agreement;
<PAGE>
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. All capitalized terms used herein
shall have the meanings herein specified, and shall include in the singular
number the plural and in the plural number the singular:
"Accrued Interest Component" shall mean for any Collection
Period, the Interest Component of all Related Commercial Paper outstanding at
any time during such Collection Period which has accrued from the first day
through the last day of such Collection Period whether or not such Related
Commercial Paper matures during such Collection Period. For purposes of the
immediately preceding sentence, the portion of the Interest Component of Related
Commercial Paper accrued in a Collection Period in which Related Commercial
Paper has a stated maturity date on a day other than the last day of such
Collection Period shall be based on the actual number of days elapsed in such
Collection Period during which such Related Commercial Paper was outstanding.
"Acquisition Subsidiary" shall mean a wholly owned subsidiary
of the Seller which has entered into (i) agreements with Dealers in certain
states for the origination or purchase of Receivables, and (ii) an agreement
with the Seller pursuant to which the Seller acquires all Receivables originated
or purchased by the Acquisition Subsidiary.
"Adjusted LIBOR Rate" means, with respect to any Collection
Period, a rate per annum equal to the sum (rounded upwards, if necessary, to the
next higher 1/100 of 1%) of (A) the rate obtained by dividing (i) the applicable
LIBOR Rate by (ii) a percentage equal to 100% minus the reserve percentage used
for determining the maximum reserve requirement as specified in Regulation D
(including, without limitation, any marginal, emergency, supplemental, special
or other reserves) that is applicable to the Agent during such Collection Period
in respect of eurocurrency or eurodollar funding, lending or
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liabilities (or, if more than one percentage shall be so applicable, the daily
average of such percentage for those days in such Collection Period during which
any such percentage shall be applicable) plus (B) the then daily net annual
assessment rate (rounded upwards, if necessary, to the nearest 1/100 of 1%) as
estimated by the Agent for determining the current annual assessment payable by
the Agent to the Federal Deposit Insurance Corporation in respect of
eurocurrency or eurodollar funding, lending or liabilities.
"Administrative Agent" shall mean NationsBank, N.A., as
administrative agent for the Company.
"Administrative Fee" shall have the meaning specified in the
Fee Letter.
"Advance Termination Date" means the second Business Day after
the delivery by the Company to the Debtor and the Surety Bond Provider of
written notice that the Company elects to cease advancing additional funds to
the Debtor.
"Adverse Claim" shall mean a lien, security interest, charge
or encumbrance, or other right or claim in, of or on any Person's assets or
properties in favor of any other Person.
"Affiliate" shall mean, with respect to a Person, any other
Person which directly or indirectly controls, is controlled by or is under
common control with such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"Agent" shall have the meaning specified in the Note Purchase
Agreement.
"Agreement" shall mean this Security Agreement, as it may from
time to time be amended, supplemented or otherwise modified in accordance with
the terms hereof.
"Amount Financed" with respect to a Receivable means the
amount advanced under the Receivable toward the purchase price of the related
Boat and any related costs.
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"Annual Percentage Rate" or "APR" of a Receivable means the
annual rate of finance charges stated in the Receivable.
"Available Collections" shall mean, with respect to each
Remittance Date, all Collections received by the Servicer, from whatever source,
during or with respect to the prior Collection Period.
"Bailee" means a "Bailee" within the meaning of Section 9-305
of the UCC.
"Bank Investors" shall have the meaning specified in the Note
Purchase Agreement.
"Base Rate" means, a rate per annum equal to the greater of
(i) the prime rate of interest announced by the Liquidity Provider (or, if more
than one Liquidity Provider, then by NationsBank, N.A.) from time to time,
changing when and as said prime rate changes (such rate not necessarily being
the lowest or best rate charged by the Liquidity Provider (or NationsBank, N.A.
as applicable)) and (ii) the sum of (a) 1.50% and (b) the rate equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average of the
quotations for such day for such transactions received by the Liquidity Provider
(or, if more than one Liquidity Provider, then by NationsBank, N.A.) from three
Federal funds brokers of recognized standing selected by it.
"Boat" shall mean, with respect to a Receivable, any new or
used boat, boat motor, accompanying boat trailer or Personal Watercraft and
accompanying trailer, together with all accessories thereto, securing the
related Obligor's indebtedness thereunder.
"Borrowing Base" shall mean, at any time, the sum of (a) the
Borrowing Base (Boats) and (b) the Borrowing Base (Personal Watercraft).
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"Borrowing Base (Boats)" shall mean, at any time, the
aggregate outstanding Principal Balance of all Eligible Receivables originated
in connection with the sale of a Boat (other than Personal Watercraft).
"Borrowing Base (Personal Watercraft)" shall mean, at any
time, the sum of (a) the Borrowing Base (Personal Watercraft - Extended Term)
and (b) the Borrowing Base (Personal Watercraft - Regular Term).
"Borrowing Base (Personal Watercraft - Extended Term)" shall
mean, the aggregate outstanding Principal Balance of all Eligible Receivables
originated in connection with the sale of Personal Watercraft with 49-60
scheduled monthly payments at origination.
"Borrowing Base (Personal Watercraft - Regular Term)" shall
mean, the aggregate outstanding Principal Balance of all Eligible Receivables
originated in connection with the sale of Personal Watercraft which had less
than 49 scheduled monthly payments at origination.
"Business Day" shall mean any day excluding Saturday, Sunday
and any day on which banks in New York, New York, Charlotte, North Carolina,
Little Rock, Arkansas or Indianapolis, Indiana are authorized or required by law
to close.
"Carrying Costs Account" shall mean the account established in
Section 5.4 hereof.
"Carrying Costs" shall mean for a Collection Period the sum of
(i) the sum of the dollar amount of the Company's obligations for such
Collection Period determined on an accrual basis in accordance with generally
accepted accounting principles consistently applied (a) to pay interest with
respect to Purchased Interests pursuant to the provisions of the Liquidity
Agreement (such interest to be calculated based on the Adjusted LIBOR Rate, if
available, otherwise the Base Rate, provided that if a Termination Event shall
have occurred and if a Surety Bond Provider Default shall have occurred, such
interest shall be calculated at the Base Rate plus 2.00%) outstanding at any
time during such Collection Period accrued from the day of the acquisition of
the related Purchased Interest through the last day of such Collection Period
whether or not such interest is payable
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during such Collection Period and to pay interest with respect to amounts
disbursed with respect to the Note by the Credit Support Provider pursuant to
the Credit Support Agreement outstanding at any time during such Collection
Period accrued from the first day of the acquisition of the related Purchased
Interest or the day on which such amounts are disbursed by the Credit Support
Provider through the last day of such Collection Period whether or not such
interest is payable during such Collection Period, (b) to pay the Accrued
Interest Component with respect to such Collection Period, (c) without
duplication to pay a dealer fee of 0.05% per annum of the face amount of Related
Commercial Paper issued during such Collection Period, (d) to pay any past due
interest not paid in clause (a) and (b) with respect to prior Collection
Periods, and (e) to pay the costs of the Company with respect to the operation
of the Yield Protection Provision, which amounts paid pursuant to this clause
(e) shall not exceed 1% per annum of the Net Investment and (ii) the Program
Fee, Liquidity Fee and Administrative Fee accrued from the first day through the
last day of such Collection Period whether or not such amount is payable during
such Collection Period, the sum of which amounts shall not exceed 0.30% per
annum of the Net Investment, in the case of the Program Fee and the
Administrative Fee and which amount shall not exceed 0.17% per annum of the
Facility Limit, in the case of the Liquidity Fee. During any Collection Period
during which the Bank Investors have (x) advanced funds with respect to a
Funding or (y) acquired an interest in the Note, in lieu of the amounts
described in clauses (b) and (c) above, Carrying Costs shall include interest on
the daily average Net Investment for the related Collection Period at the
Adjusted LIBOR Rate, or if such rate is unavailable, at the Base Rate, or if a
Surety Bond Provider Default and a Termination Event shall have occurred and be
continuing, at the Base Rate plus 2.00%.
"Certificated Securities" means "certificated securities" as
defined in Section 8-102(l)(a) of the UCC which are in the continuous possession
in the State of North Carolina of the Financial Intermediary.
"Clearing Corporation" means The Depository Trust Company.
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"Clearing Corporation Securities" means "certificated
securities" as defined in Section 8-102(l)(a) of the UCC which are in the
continuous possession in the States of North Carolina or New York of the
Clearing Corporation or a Custodian Bank.
"Closing Date" shall mean April 3, 1997.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time (including any successor statute), and the regulations
promulgated and the rulings issued thereunder.
"Collateral" shall have the meaning set forth in Section 2.1
of this Agreement.
"Collateral Agent" shall mean NationsBank, N.A., or any
successor thereto, as Collateral Agent hereunder.
"Collection Account" shall mean the account established
pursuant to Section 4.1(b) of this Agreement.
"Collection Period" shall mean with respect to any Remittance
Date, the calendar month immediately preceding the month of such Remittance Date
(and with respect to the initial Remittance Date, the time period from the
Closing Date to April 30, 1997).
"Collections" shall mean all Principal Collections and Finance
Charge Collections received by the Servicer in respect of the Collateral in the
form of cash, checks, wire transfers or other form of payment, but shall not
include any late fees, insufficient check charges and related charges assessed
against Obligors.
"Commercial Paper" shall mean promissory notes of the Company
issued by the Company in the commercial paper market.
"Commitment Termination Date" shall have the meaning specified
in the Note Purchase Agreement.
"Common Stock" shall mean the 100 shares of the Debtor's $1.00
par value common stock.
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"Company" shall mean Enterprise Funding Corporation, a
Delaware corporation, together with its successors and assigns.
"Contract" shall mean a retail installment sales contract or
installment loan and security interest contract.
"Credit Guidelines" shall mean policies and procedures of the
Servicer, relating to the operation of the marine financing business of the
Servicer, including, without limitation, the policies and procedures for
determining the creditworthiness of retail marine installment sales contract
customers, the extension of credit to such customers and relating to the
maintenance and collection of retail marine installment sales contracts, as such
policies and procedures may be amended from time to time.
"Credit Support Agreement" means any agreement between the
Company and the Credit Support Provider evidencing the obligation of the Credit
Support Provider to provide credit support to the Company in connection with the
issuance of Commercial Paper.
"Credit Support Provider" means the Person or Persons who will
provide credit support to the Company in connection with the issuance by the
Company of its Commercial Paper.
"Cumulative Charge-Off Ratio" shall mean with respect to any
date of determination, a fraction (expressed as a percentage) the numerator of
which is equal to (A) the aggregate principal balance at the time such
Receivable became a Defaulted Receivable of all Receivables which were added to
the Collateral from the period commencing on the day immediately following the
cut-off date relating to the most recent Take-Out (or, prior to the first
Take-Out, since the Closing Date) and ending on the last calendar day of the
fourth month prior to such date of determination; provided, however, that if the
cut-off date relating to the most recent Take-Out occurred less than four
calendar months prior to the date of determination then the ending date of such
period shall be the last day of the calendar month immediately preceding the
date of determination, minus (B) the aggregate dollar amount of Liquidation
Proceeds received on
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the Receivables designated in clause (A) above and the denominator of which is
equal to the aggregate outstanding principal balance of Receivables as of the
time such Receivables were added to the Collateral for all Receivables
designated in clause (A) above.
"Custodian Bank" means a "custodian bank" as defined in
Section 8-102(4) of the UCC.
"Dealer" shall mean a factory authorized dealer which has
entered into a Dealer Agreement with the Seller or an Acquisition Subsidiary.
"Dealer Agreement" shall mean the agreement between the Seller
or an Acquisition Subsidiary and a Dealer relating to the purchase of a
Receivable.
"Debtor" shall mean UAC Boat Funding Corp. and its successors
and assigns.
"Default Ratio" shall mean, with respect to any Collection
Period, a fraction (expressed as a percentage) (x) the numerator of which is the
aggregate Principal Balance of all Eligible Receivables in existence on the last
day of such Collection Period which became Defaulted Receivables during such
Collection Period and (y) the denominator of which is the aggregate outstanding
Principal Balance of all Eligible Receivables as of the first day of such
Collection Period.
"Defaulted Receivable" shall mean each Receivable with respect
to which (i) in accordance with the Credit Guidelines the Servicer has
determined that eventual payment in full is unlikely, (ii) the related Boat has
been repossessed or (iii) any payment is over 120 days contractually delinquent.
"Delinquent Receivable" shall mean each Receivable (i) as to
which any payment, or part thereof, remains unpaid for 30 days or more from the
original due date for such payment and (ii) is not a Defaulted Receivable.
"Delinquency Ratio" shall mean, with respect to any date of
determination, a fraction (expressed as a percentage) the numerator of which is
the aggregate outstanding Principal Balance of all Eligible Receivables
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which are Delinquent Receivables as of such date and the denominator of which is
the aggregate outstanding Principal Balance of all Eligible Receivables as of
such date provided, however, that with respect to (i) the calculation of the
Noteholder's Percentage (Boats) and Noteholder's Percentage (Personal
Watercraft-Regular Term) the denominator of the Delinquency Ratio calculated on
the date of determination occurring in each December and (ii) the Monthly
Debtor's Certificate, the denominator of the Delinquency Ratio calculated on
each date of determination occurring in each October and each month thereafter
until a Take-Out shall have occurred shall equal the aggregate outstanding
Principal Balance of all Eligible Receivables as of the date of determination in
the third prior month.
"Determination Date" shall mean with respect to any Remittance
Date, two Business Days prior to the day of the month in which the related
Remittance Date falls.
"Dollar," "Dollars" and the symbol "$" shall mean lawful money
of the United States of America.
"EFC Collateral Agent" shall mean NationsBank, N.A. as
collateral agent in respect of the Company's Commercial Paper program.
"Eligible Institution" shall mean a depositary institution or
trust company which has a short-term credit rating from Moody's and S&P of at
least "P-1" and "A-1", respectively, and a long-term credit rating from Moody's
and S&P of at least "A2" and "A", respectively.
"Eligible Investments" shall mean (a) negotiable instruments
or securities represented by instruments in bearer or registered or in
book-entry form which evidence (i) obligations fully guaranteed by the United
States of America; (ii) time deposits in, or bankers acceptances issued by, any
depositary institution or trust company incorporated under the laws of the
United States of America or any state thereof and subject to supervision and
examination by Federal or state banking or depositary institution authorities;
provided, however, that at the time of investment or contractual commitment to
invest therein, the certificates of deposit or short-term deposits, if any, or
long-term unsecured debt obligations (other than such obligation whose rating is
based
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on collateral or on the credit of a Person other than such institution or trust
company) of such depositary institution or trust company shall have a credit
rating from Moody's and S&P of at least "P-1" and "A-1", respectively, in the
case of the certificates of deposit or short-term deposits, or a rating not
lower than one of the two highest investment categories granted by Moody's and
by S&P; (iii) certificates of deposit having, at the time of investment or
contractual commitment to invest therein, a rating from Moody's and S&P of at
least "P-1" and "A-1", respectively; (iv) investments in money market funds
rated in the highest investment category or otherwise approved in writing by the
applicable rating agencies, (b) demand deposits in any depositary institution or
trust company referred to in (a)(ii) above, (c) commercial paper (having
original or remaining maturities of no more than 30 days) having, at the time of
investment or contractual commitment to invest therein, a credit rating from
Moody's and S&P of at least "P-1" and "A-1", respectively, (d) Eurodollar time
deposits having a credit rating from Moody's and S&P of at least "P-1" and
"A-1", respectively, and (e) repurchase agreements involving any of the Eligible
Investments described in clauses (a)(i), (a)(iii) and (d) hereof so long as the
other party to the repurchase agreement has at the time of investment therein, a
rating from Moody's and S&P of at least "P-1" and "A-1", respectively.
"Eligible Receivables" shall mean, as of any day, each
Receivable of the Debtor:
(a) which (i) shall have been originated
in the United States by the Seller or a Dealer for the retail sale of a Boat in
the ordinary course of such Dealer's business, shall have been fully and
properly executed by the parties thereto, shall have been purchased by an
Acquisition Subsidiary or the Seller from such Dealer under an existing Dealer
Agreement, as applicable, shall have been validly assigned by such Dealer to
such Acquisition Subsidiary or the Seller, as applicable, and if applicable
shall have been validly assigned by such Acquisition Subsidiary to the Seller,
and shall have been validly assigned by the Seller to the Debtor, (ii) shall
have created or shall create a valid, subsisting and enforceable first priority
perfected security interest in favor of the Seller and/or the Debtor in the
related financed Boat, which security interest has been
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assigned to the Debtor and shall be validly assignable by the Debtor to the
Collateral Agent for the benefit of the Surety Bond Provider and the Company,
(iii) shall contain customary and enforceable provisions such that the rights
and remedies of the holder thereof shall be adequate for realization against the
collateral of the benefits of the security, (iv) shall provide for level monthly
payments (provided that the payment in the first or last month in the life of
the Receivable may be minimally different from the level payment) that fully
amortize the Amount Financed over the original contractual term and yield
interest at the APR, and (v) shall provide for, in the event that such contract
is prepaid, a prepayment that fully pays the principal balance and includes
accrued but unpaid interest through the date of prepayment in an amount at least
equal to the APR;
(b) which, together with the sale of the related Boat, shall
have complied at the time it was originated or made, and at the date such
Receivable is included as Collateral hereunder, shall comply, in all material
respects with all requirements of applicable Federal, state, and local laws and
regulations thereunder, including, without limitation, usury laws, the Federal
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, the Federal Trade Commission Credit
Practices Rule, state unfair and deceptive trade practice laws, and state
adaptations of the National Consumer Act and of the Uniform Consumer Credit
Code, and any other applicable consumer credit, equal credit opportunity and
disclosure laws;
(c) which shall represent the genuine, legal, valid and
binding payment obligation in writing of the Obligor thereunder, enforceable by
the holder thereof in accordance with its terms;
(d) which shall not be due from the United States of America
or any state or local government or from any agency, department or
instrumentality of the United States of America or any state or local
government;
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(e) which, as of the date such Receivable first became part of
the Collateral, shall not have been satisfied, subordinated or rescinded, nor
shall the related Boat have been released from the security interests granted by
such related Receivable in whole or in part;
(f) which, as of the date such Receivable first became part of
the Collateral, no waiver (other than any waiver with respect to a delinquency
in payment permitted in accordance with the Servicer's Credit Guidelines) of any
term thereof shall be in effect;
(g) which, as of the date such Receivable first became part of
the Collateral, no right of rescission, setoff, counterclaim or defense shall
have been asserted or threatened with respect to such Receivable;
(h) which, as of the date such Receivable first became part of
the Collateral, no liens or claims were on file for work, labor or materials
relating to the related Boat which liens are prior to, or equal or coordinate
with, the security interest in the Boat granted by such Receivable;
(i) which, as of the date such Receivable first became part of
the Collateral, no default, breach, violation or event permitting acceleration
under the terms of such Receivable (other than any of such event to the extent
caused by or resulting from a delinquency in payment) shall have occurred and
neither the Seller nor the Debtor shall have waived any of the foregoing;
(j) the terms of such Receivable require the Obligor to
maintain physical damage insurance;
(k) with respect to which (i) the Debtor has good and
marketable title thereto free and clear of all liens, encumbrances, security
interests and rights of others, other than the lien of the Collateral Agent for
the benefit of the Surety Bond Provider and the Company and (ii) the sale and
assignment thereof to the Debtor pursuant to the Purchase Agreement has been
perfected under the UCC;
(l) which shall not have been originated in or be subject to
the laws of, any jurisdiction under
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which the sale, transfer and assignment of such Receivable under the Purchase
Agreement or the grant of a security interest therein pursuant to this Agreement
shall be unlawful, void or voidable;
(m) with respect to which all filings (including, without
limitation, UCC filings) necessary in any jurisdiction to give the Collateral
Agent a first priority perfected security interest therein shall have been made;
(n) of which there shall be in existence one, and only one,
original executed copy of each Receivable;
(o) with respect to which the related Obligor is required to
make payments to a lockbox under the control of the Servicer;
(p) with respect to which the perfection of the security
interest in the related Boat is not governed by the federal Ship Mortgage Act of
1920, as amended;
(q) which constitutes "chattel paper" under and as defined in
Article 9 of the UCC;
(r) which shall have had at origination not more than 240
scheduled monthly payments, provided, that with respect to any Receivable
related to a Personal Watercraft, such Receivable shall have had at origination
not more than 60 scheduled monthly payments;
(s) which, as of the date such Receivable became part of the
Collateral, is not a Delinquent Receivable;
(t) with respect to which the original copies and all related
documents and instruments are kept at the office of UAC;
(u) which is not a Defaulted Receivable as of the date such
Receivable became part of the Collateral;
(v) which when originated and as of the date such Receivable
became part of the Collateral, was
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originated and serviced in compliance with the Credit Guidelines; and
(w) with respect to which, as of the date such Receivable
became part of the Collateral, the related Obligor was not noted in the records
of the Seller, the Servicer or the Debtor as the subject of any bankruptcy
proceeding.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"ERISA Affiliate" shall mean with respect to the Debtor, at
any time, each trade or business (whether or not incorporated) that would, at
the time, be treated together with the Debtor as a single employer under Section
4001 of ERISA or Sections 414(b), (c), (m) or (o) of the Code.
"Facility Limit" shall mean $50,000,000; provided that on
March 10, 1998 the Facility Limit shall be increased to $75,000,000.
"Federal Book-Entry Securities" means securities issued by the
U.S. Treasury, FNMA or by FHLMC which are maintained in book-entry form on the
records of the Federal Reserve Bank of Richmond.
"Fee Advance" shall mean any advance by the Servicer or any
successor Servicer, in its sole discretion, in an amount equal to the Liquidity
Fee and/or the Unused Portion of the Surety Bond Premium, the sum of all such
advances during the term hereof not to exceed $500,000.
"Fee Letter" shall mean the letter agreement, dated the
Closing Date, among the Company, the Administrative Agent and the Debtor in
respect of the payment by the Debtor of certain fees.
"Finance Charge Collections" shall mean, with respect to any
Collection Period, the sum of the following amounts: (i) that portion of all
collections on Receivables allocable to interest (excluding any late fees,
insufficient check charges or related charges against Obligors), (ii)
Liquidation Proceeds, (iii) the amount paid by the Debtor in respect of a breach
of the
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representation set forth in Section 3.1(a) pursuant to clause (y) of the last
paragraph of Section 3.1, (iv) interest and investment earnings or amounts on
deposit in the Collection Account, (v) Interest Rate Hedge Receipts and (vi) any
amounts withdrawn from the Yield Supplement Account and deposited in the
Collection Account on or with respect to the Remittance Date related to such
Collection Period.
"Finance Charge Collections (Net Yield)" shall mean, with
respect to any Collection Period, the sum of the following amounts: (i) that
portion of all collections on Receivables allocable to interest (excluding any
late fees, insufficient check charges or related charges against Obligors), (ii)
Liquidation Proceeds, (iii) the amount paid by the Debtor in respect of a breach
of the representation set forth in Section 3.1(a) pursuant to clause (y) of the
last paragraph of Section 3.1, (iv) interest and investment earnings or amounts
on deposit in the Collection Account, (v) Interest Rate Hedge Receipts, (vi) the
Facility Fee (as defined in the Fee Letter), (vii) the Unused Portion of the
Surety Bond Premium and (viii) any amounts withdrawn from the Yield Supplement
Account and deposited in the Collection Account on or with respect to the
Remittance Date related to such Collection Period.
"Financial Intermediary" means NationsBank, N.A. and any other
entity acting in the capacity of a "financial intermediary" as defined in
Section 8-313(4) of the UCC.
"Financial Intermediary Securities Account" means a reserve
account which is a securities account maintained by the Financial Intermediary
in the name of NationsBank, N.A. as Collateral Agent for the Secured Parties.
"Funding" shall have the meaning specified in the Note
Purchase Agreement.
"Governmental Authority" shall mean the United States of
America, any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
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"Guaranty" shall mean any agreement, undertaking or
arrangement by which any Person guarantees, endorses, or otherwise becomes
contingently liable (whether directly, or indirectly by way of agreement,
contingent or otherwise, or purchase, to provide funds for payment, to supply
funds to or otherwise invest in the debtor, or otherwise to assure the creditor
against loss) upon, the indebtedness, obligation or liability of any Person, or
guarantees the payment of dividends or other distributions upon the stock of any
corporation.
"Hedge Counterparty" shall mean any Person reasonably
acceptable to the Surety Bond Provider who enters into an Interest Rate Hedge
with the Debtor pursuant to Section 6.1(n) hereof.
"Ineligible Receivable" shall mean each Receivable other than
an Eligible Receivable.
"Initial Funding" shall have the meaning specified in the Note
Purchase Agreement.
"Instruments" means "instruments" as defined in Section 9-105
of the UCC.
"Insurance Agreement" shall mean that certain Insurance and
Reimbursement Agreement dated as of April 3, 1997 among UAC, as Seller and as
Servicer, the Collateral Agent, the Debtor and the Surety Bond Provider.
"Interest Component" shall mean, (i) with respect to any
Related Commercial Paper issued on an interest-bearing basis, the interest
payable on such Related Commercial Paper at its maturity (including any dealer
commissions) and (ii) with respect to any Related Commercial Paper issued on a
discount basis, the portion of the face amount of such Related Commercial Paper
representing the discount incurred in respect thereof (including any dealer
commissions to the extent included as part of such discount).
"Interest Rate Hedge" shall mean any interest rate hedging
arrangement entered into by the Debtor in compliance with Section 6.1(n) hereof
and acceptable to the Surety Bond Provider.
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"Interest Rate Hedge Receipts" shall mean for any Collection
Period, any amounts paid by the Hedge Counterparty to the Collateral Agent
during such Collection Period pursuant to the terms of any Interest Rate Hedge
during such Collection Period.
"Law" shall mean any law (including common law), constitution,
statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or
award of any Official Body.
"LIBOR Rate" means, with respect to any Collection Period, the
rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
appearing on Telerate Page 3750 (or any successor page) as the London interbank
offered rate for deposits in U.S. dollars at approximately 11:00 a.m. (London
time) two London Business Days prior to the first day of such Collection Period
for a term of one month. If for any reason such rate is not available, the term
"LIBOR Rate" shall mean, for any Collection Period, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen
LIBO Page as the London inter- bank offered rate for deposits in dollars at
approximately 11:00 a.m. (London time) two London Business Days prior to the
first day of such Collection Period for a term of one month; provided, however,
if more than one rate is specified on the Reuters Screen LIBO Page, the
applicable rate shall be the arithmetic mean of all such rates.
"Lien" shall mean any mortgage, deed of trust, pledge,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever for the purpose of security,
including, without limitation, any conditional sale or other title retention
agreement, any financing lease having substantially the same economic effect as
any of the foregoing and the filing of any financing statement under the Uniform
Commercial Code (other than any such financing statement filed for informational
purposes only) or comparable law of any jurisdiction to evidence any of the
foregoing.
"Liquidation Proceeds" shall mean (i) proceeds of any claim
under any credit insurance policy and (ii)
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all monies collected in connection with the disposition of any Boat (including
any recoveries received after the disposition of the related Boat), from
whatever source, securing a Defaulted Receivable, net of the sum of (x) any
amounts expended by the Servicer in connection with the liquidation of such Boat
for the account of the Obligor and (y) any such amounts required by law to be
remitted to the Obligor.
"Liquidity Agreement" shall mean the agreement between the
Company and any Liquidity Provider evidencing the obligation of the Liquidity
Provider to provide liquidity support to the Company in connection with the
issuance of Commercial Paper.
"Liquidity Fee" shall have the meaning specified in the Fee
Letter.
"Liquidity Provider" shall mean the Person or Persons who will
provide liquidity support to the Company in connection with the issuance by the
Company of its Commercial Paper and shall include any Person acquiring a
participation interest therein.
"London Business Day" any day which is a Business Day and also
is a day on which commercial banks are open for international business
(including dealings in U.S. dollar deposits) in London.
"Material Adverse Change" Any circumstance or event which in
the reasonable judgment of the Surety Bond Provider, so long as no Surety Bond
Provider Default has occurred and is continuing (a) may be reasonably expected
to cause a material adverse change to the validity or enforceability of this
Agreement or the Servicing Agreement, (b) may be reasonably expected to be
material and adverse to the financial condition, business, operations or
property of the Servicer or (c) may be reasonably expected to materially impair
the ability of the Servicer to fulfill its obligations under this Agreement or
the Servicing Agreement.
"Maximum Permitted Borrowing Base" shall mean, at any time,
(a) the sum of (1) the Maximum Permitted Borrowing Base (Boats) plus (2) the
Maximum Permitted Borrowing Base (Personal Watercraft) minus (b) the aggregate
Principal Balance of all Eligible Receivables which
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are Precomputed Receivables to the extent that such aggregate amount exceeds 10%
of the Borrowing Base.
"Maximum Permitted Borrowing Base (Boats)" shall mean, at any
time, the product of the Noteholder's Percentage (Boats) times the Borrowing
Base (Boats).
"Maximum Permitted Borrowing Base (Personal Watercraft)" shall
mean, at any time the sum of (a) the Noteholder's Percentage (Personal
Watercraft - Extended Term) multiplied by the Borrowing Base (Personal
Watercraft - Extended Term) and (b) the Noteholder's Percentage (Personal
Watercraft - Regular Term) multiplied by the Borrowing Base (Personal Watercraft
- - Regular Term).
"Minimum Required APR" shall mean, as of the end of the
related Collection Period, the then current yield to maturity of the United
States Treasury Security having a maturity of three years (as published on
Bloomberg at the close of such Business Day) plus the sum of (a) the Servicing
Fee (calculated as if UAC or an Affiliate is not the Servicer) and (b)(i) 2.70%
per annum in the case of Boats (other than Personal Watercraft) and (ii) 3.70%
per annum in the case of Personal Watercraft.
"Monthly Debtor's Certificate" shall have the meaning
specified in Section 4.5 hereof.
"Moody's" shall mean Moody's Investors Service,
Inc.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA to which contributions are or have been
made by the Debtor or any ERISA Affiliate of the Debtor.
"Net Investment" shall mean with respect to any Determination
Date, (i) the amount of the Initial Funding and any Subsequent Funding occurring
on or prior to such Determination Date less (ii) all Collections distributed to
the Noteholder in reduction of the Net Investment pursuant to Section 5.1 hereof
on or prior to such Determination Date less (iii) any draws from the Reserve
Account distributed to the Noteholder in reduction of the Net Investment, less
(iv) any amounts paid to the Noteholder allocable to principal pursuant to
Section 3.1, less (v) amounts deposited in the Collection Account
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pursuant to Section 6.1(m) and less (vi) draws on the Surety Bond distributed to
the Noteholder in reduction of the Net Investment provided however that such
draws on the Surety Bond shall not reduce the Surety Bond Provider's right of
subrogation in the Net Investment before giving effect to any such draws.
"Net Yield" shall mean, as of the last day of any Collection
Period, the product of (i) 4 and (ii) a fraction, the numerator of which is
equal to Finance Charge Collections (Net Yield) for such Collection Period and
each of the immediately preceding two Collection Periods minus Carrying Costs
for such Collection Period and each of the immediately preceding two Collection
Periods minus the aggregate Principal Balance of Receivables which became
Defaulted Receivables during such Collection Period and each of the immediately
preceding two Collection Periods minus the Servicing Fee for such Collection
Period and each of the immediately preceding two Collection Periods minus the
Surety Bond Premium during such Collection Period and each of the immediately
preceding two Collection Periods and the denominator of which is the average of
the outstanding Principal Balance of the Eligible Receivables over such
Collection Period and the immediately preceding two Collection Periods provided,
that the calculation of Net Yield shall not be made or applicable during any
Collection Period following a Take-Out, but prior to the Termination Date,
during which Collection Period the Net Investment equals zero.
"Note" shall mean the note issued by the Debtor to the Company
pursuant to Section 2.1(e) of the Note Purchase Agreement.
"Noteholder" shall mean the Company as holder of the Note or
any assignee thereof.
"Noteholder's Percentage (Boats)" shall be 85% provided that
(A) on and following each Ratio Calculation Date (September) on which (i) the
Delinquency Ratio as of the end of the previous Collection Period is less than
2.25% and (ii) the Cumulative Charge-Off Ratio as of the end of the previous
Collection Period is less than 1.00%, the Noteholder's Percentage (Boats) shall
be 88%, (B) on and following any Ratio Calculation Date (December) on which (i)
the Delinquency Ratio as of the end of the previous Collection Period is less
than 3.50% and (ii)
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the Cumulative Charge-Off Ratio as of the end of the previous Collection Period
is less than 1.50%, the Noteholder's Percentage (Boats) shall mean 90% and (C)
for so long as S&P has not provided written notice to the Surety Bond Provider,
the Agent and the Debtor that such determination will cause an S&P Rating Event;
provided, however, that on any date after the Noteholder's Percentage
(Boats) has been determined previously pursuant to clauses (A) or (B)
above and on or after any subsequent Ratio Calculation Date (September)
with respect to on which the Delinquency Ratio or Cumulative Charge-Off
Ratio exceeds the percentages set forth in clause (A) above, (1) if no
Take-Out has occurred, the Noteholder's Percentage (Boats) shall remain
at the amount determined previously pursuant to clauses (A) and (B)
above or (2) if a Take-out has occurred the Noteholder's Percentage
(Boats) shall be reduced to 85%, provided, further, that on any date
after the Noteholder's Percentage (Boats) has been determined
previously pursuant to clauses (A) or (B) above and on or after any
subsequent Ratio Calculation Date (December) with respect to which the
Delinquency Ratio or Cumulative Charge-Off Ratio exceeds the
percentages set forth in clause (B) above, (1) if no Take-Out has
occurred, the Noteholder's Percentage (Boats) shall remain at the
amount determined previously pursuant to clauses (A) and (B) above or
(2) if a Take-out has occurred the Noteholder's Percentage (Boats)
shall be reduced to 88%.
In addition, on any date on which the Target Net Yield exceeds the Net Yield as
of the last day of the previous Collection Period, the Noteholder Percentage
(Boats) shall equal the percentage determined above minus the product of (a) 3.5
and (b) the difference between (1) Target Net Yield and (2) Net Yield.
"Noteholder's Percentage (Personal Watercraft- Extended Term)"
shall mean with respect to Personal Watercraft with 49-60 scheduled monthly
payments at origination, 65%, provided that on any date on which the Target Net
Yield exceeds the Net Yield as of the last day of the previous Collection
Period, the Noteholder Percentage (Personal Watercraft - Extended Term) shall be
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65% minus the product of (a) 2.0 and (b) the difference between (1) Target Net
Yield and (2) Net Yield.
"Noteholder's Percentage (Personal Watercraft- Regular Term)"
shall mean with respect to any Personal Watercraft with less than 49 scheduled
monthly payments at origination, 80%, provided that (A) on and following each
Ratio Calculation Date (September) on which (i) the Delinquency Ratio as of the
end of the prior Collection Period is less than 2.25% and (ii) the Cumulative
Charge- Off Ratio as of the end of the previous Collection Period is less than
1.00%, the Noteholder's Percentage (Personal Watercraft - Regular Term) shall be
83%, (B) on and following any Ratio Calculation Date (December) on which (i) the
Delinquency Ratio as of the end of the prior Collection Period is less than
3.50% and (ii) the Cumulative Charge-Off Ratio at the end of the prior
Collection Period is less than 1.50%, the Noteholder's Percentage (Personal
Watercraft - Regular Term) shall be 85% and (c) for so long as S&P has not
provided written notice to the Surety Bond Provider, the Agent and the Debtor
that such determination will cause an S&P Rating Event;
provided, however, that on any date after the Noteholder's Percentage
(Personal Watercraft - Regular Term) has been determined previously
pursuant to clauses (A) or (B) above and on or after any subsequent
Ratio Calculation Date (September) with respect to which the
Delinquency Ratio or Cumulative Charge-Off Ratio exceeds the
percentages set forth in clause (A) above, (1) if no Take-Out has
occurred, the Noteholder's Percentage (Personal Watercraft - Regular
Term) shall remain at the amount determined previously pursuant to
clauses (A) and (B) above or (2) if a Take-Out has occurred the
Noteholder's Percentage (Personal Watercraft- Regular Term) shall be
reduced to 80%, provided, further, that on any date after the
Noteholder's Percentage (Personal Watercraft - Regular Term) has been
determined previously pursuant to clauses (A) or (B) above and on or
after any subsequent Ratio Calculation Date (December) with respect to
which the Delinquency Ratio or Cumulative Charge-Off Ratio exceeds the
percentages set forth in clause (B) above, (1) if no Take-out has
occurred, the Noteholder's Percentage (Personal Watercraft Regular
Term) shall remain at the amount determined
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previously pursuant to clauses (A) and (B) above or (2) if a Take-out
has occurred the Noteholder's Percentage (Personal Watercraft - Regular
Term) shall be reduced to 83%.
In addition, on any date on which the Target Net Yield exceeds the Net Yield as
of the last day of the previous Collection Period, the Noteholder Percentage
(Personal Watercraft-Regular Term) shall be the amount determined above minus
the product of (a) 2.0 and (b) the difference between (1) Target Net Yield and
(2) Net Yield.
"Note Purchase Agreement" shall mean the Note Purchase
Agreement dated as of April 3, 1997 among the Debtor, the Company and
NationsBank as Agent and as a Bank Investor, as such agreement may be amended,
modified and supplemented from time to time.
"Obligor" shall mean, for any Receivable, each person who owes
payments under such Receivable.
"Official Body" shall mean any government or political
subdivision or any agency, authority, bureau, central bank, commission,
department or instrumentality of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.
"Pay Out Commencement Date" shall mean the date on which a
Termination Event is deemed to occur pursuant to Section 6.1 hereof.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any other entity succeeding to the functions currently performed by the Pension
Benefit Guaranty Corporation.
"Person" shall mean and include an individual, a partnership,
a corporation (including a business trust), a joint stock company, a trust, an
unincorporated association, a joint venture or other entity or a government or
an agency or political subdivision thereof.
"Personal Watercraft" shall mean a vessel less than 16 feet in
length, propelled by machinery and designed to be operated sitting, standing, or
kneeling on, instead of inside, the vessel.
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"Plan" shall mean any employee pension benefit plan that (a)
is or has been maintained by the Debtor or any ERISA Affiliate of the Debtor, or
to which contributions by any such Person are or have been required to be made,
(b) is subject to the provisions of Title IV of ERISA and (c) is not a
Multiemployer Plan.
"Plan Event" shall mean (a) the provisions of a notice of
intent to terminate any Plan under Section 4041 of ERISA other than in a
"standard termination", or the treatment of a Plan amendment as a distress
termination under Section 4041 of ERISA, (b) the receipt of any notice by any
Plan to the effect that the PBGC intends to apply for the appointment of a
trustee to administer any Plan, (c) the termination of any Plan which may result
in a material liability to the Debtor, (d) the withdrawal of the Debtor or any
ERISA Affiliate of the Debtor from any Plan described in Section 4063 of ERISA
which may result in a material liability of the Debtor, (e) the complete or
partial withdrawal of the Debtor or any ERISA Affiliate of the Debtor from any
Multiemployer Plan which may result in a material liability of the Debtor, (f) a
"reportable event" described in Section 4043 of ERISA (other than a "reportable
event" not subject to the provision for 30-day notice to the PBGC) or an event
described in Section 4068(f) of ERISA which may result in a material liability
of the Debtor, and (g) any other event or condition which under ERISA or the
Code may constitute grounds for the imposition of a lien on the assets of the
Debtor in respect of any Plan or Multiemployer Plan which is not corrected
within 30 days.
"Potential Termination Event" means an event which but for the
lapse of time or the giving of notice, or both, would constitute a Termination
Event.
"Potential Wind-Down Event" means an event which, but for the
lapse of time or the giving of notice, or both, would constitute a Wind-Down
Event.
"Precomputed Receivable" means any Receivable under which the
portion of a payment allocable to interest and the portion allocable to the
Amount Financed is determined according to the sum of periodic balances or the
sum of monthly balances or any equivalent method or are monthly actuarial
receivables.
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"Premium Portion" shall have the meaning specified in the
Insurance Agreement.
"Premium Side Letter Agreement" means that certain letter
agreement dated April 3, 1997 among the Surety Bond Provider, UAC and the
Debtor.
"Principal Balance" of a Receivable as of the close of
business on any date means the Amount Financed minus all Collections collected
by the Servicer to and including such day with respect to such Receivable and
applied by the Servicer in accordance with the Servicer's customary servicing
procedures to reduce the principal balance thereof; provided, however, that the
Principal Balance of any Receivable which has been charged-off or which
otherwise qualifies as a Defaulted Receivable or an Ineligible Receivable as
defined herein or with respect to which the Debtor has failed to make a required
deposit into the Yield Supplement Account pursuant to the terms of Section
2.5(b) shall have a Principal Balance of zero.
"Principal Collections" means, for any Remittance Date, the
sum of the following amounts with respect to the preceding Collection Period:
(i) that portion of all collections on Receivables allocable to principal, (ii)
the amount paid by the Debtor in respect of a breach of the representation set
forth in Section 3.1(a) pursuant to clause (x) of the last paragraph of Section
3.1 and (iii) prepayments of any refunded item included in the Amount Financed,
such as extended warranty protection plan costs, or physical damage, credit life
or disability insurance premiums. Principal Collections shall not include any
late fees, insufficient check charges or related charges assessed against
Obligors.
"Principal Component" shall mean with respect to Commercial
Paper (A) in the case of Commercial Paper issued on a discount basis, the amount
of proceeds received by the Company upon the sale thereof and (B) in the case of
Commercial Paper issued on an interest-bear- ing basis, the face amount thereof.
"Program Fee" shall mean a fee payable monthly to the Company
by the Debtor, the terms of which are set forth in the Fee Letter.
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"Purchase Agreement" shall mean the Amended and Restated Sale
and Purchase Agreement, dated as of April 3, 1997, between the Debtor, as
purchaser thereunder, and the Seller, as seller thereunder, as the same may be
amended, modified and supplemented from time to time in accordance with the
terms thereof and hereof.
"Purchased Interest" shall mean the interest in the Note, if
any, acquired by the Liquidity Provider.
"Ratio Calculation Date" shall mean either a Ratio Calculation
Date (September) or a Ratio Calculation Date (December).
"Ratio Calculation Date (September)" shall mean each
Determination Date occurring in the month of September.
"Ratio Calculation Date (December)" shall mean each
Determination Date occurring in the month of December.
"Receivable" shall mean indebtedness owed to the Debtor under
a Contract, whether constituting an account, chattel paper, instrument,
mortgage, deed of trust or general intangible, arising out of or in connection
with the sale of a Boat including the rendering of services by the Dealer in
connection therewith, and the right of payment of any finance charges and other
obligations of the Obligor with respect thereto. Notwithstanding the foregoing,
once the Collateral Agent has released its security interest in a Receivable
pursuant to Section 2.4 hereof, it shall no longer constitute a Receivable
hereunder.
"Receivable Schedule" shall mean the schedule of Receivables
(which schedule may be in the form of a computer file or microfiche) attached as
Exhibit A to this Agreement, as amended or modified from time to time pursuant
to the terms of this Agreement.
"Receivables File" shall have the meaning specified in the
Purchase Agreement.
"Related Commercial Paper" shall mean Commercial Paper the
proceeds of which were used to acquire, or refinance, the Net Investment.
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"Relevant UCC State" shall mean the States of New York and
Indiana.
"Re-Liening Expense" shall mean all expenses incurred by the
Servicer, the Collateral Agent or any secured party pursuant to Section 6.3(b)
hereof for the purpose of re-titling the Boats to name the Collateral Agent as
first lienholder on the certificate of title thereto and to effect any filings
or other actions necessary to perfect the Collateral Agent's interest as first
lienholder in the related Boat motors and trailers.
"Remittance Date" shall mean the 10th day of each month
beginning May 12, 1997, or, if such 10th day is not a Business Day, the next
succeeding Business Day.
"Replacement Event" shall mean the placing on "Creditwatch" or
other similar list with negative implications, the claims paying ability of the
Surety Bond Provider or the downgrade, reduction or withdrawal of the ratings
assigned by Moody's or S&P to the Surety Bond Provider's claims paying ability.
"Replacement Surety Bond" shall mean a surety bond,
substantially in the form attached hereto as Exhibit B and which has been
provided pursuant to Sections 8.8 and 8.10 hereof.
"Required Reserve Account Balance" shall mean an amount equal
to the product of (i) 0.75% and (ii) the Net Investment.
"Requirements of Law" for any Person shall mean the
certificate of incorporation or articles of association and by-laws or other
organizational or governing documents of such Person, and any law, treaty, rule
or regulation, or determination of an arbitrator or Governmental Authority, in
each case applicable to or binding upon such Person or to which such Person is
subject, whether Federal, state or local (including, without limitation, usury
laws, the Federal Truth in Lending Act and Regulation Z and Regulation B of the
Board of Governors of the Federal Reserve System).
"Reserve Account" shall mean the account established pursuant
to Section 5.3 hereof.
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"S&P" shall mean Standard & Poor's Ratings Group, a Division
of The McGraw-Hill Companies.
"S&P Rating Event" shall mean an event which would cause S&P
to downgrade, withdraw or place on "Creditwatch" with negative implications its
rating of the Receivables facility.
"Secured Parties" shall mean the Company, the Bank Investors
and the Surety Bond Provider and their respective successors and assigns.
"Seller" means Union Acceptance Corporation.
"Servicer" shall mean UAC as servicer under the Servicing
Agreement or any successor Servicer.
"Servicer Advance" shall have the meaning
specified in Section 5.1(b).
"Servicer Event of Default" shall mean (a) the failure of the
Servicer to make any payment, transfer or deposit as required hereunder, under
the Note Purchase Agreement or the Servicing Agreement, (b) the failure of the
Servicer to observe or perform in any material respect any other representation,
warranty, covenant or agreements of the Servicer (including its Credit
Guidelines) as reasonably determined by the Surety Bond Provider as set forth in
the Servicing Agreement, (c) the occurrence of any Material Adverse Change and
(d) an event of the type described in Section 6.1(c) shall occur with respect to
the Servicer.
"Servicer Transfer" shall have the meaning specified in the
Servicing Agreement.
"Servicing Agreement" shall mean the Amended and Restated
Servicing Agreement, dated as of April 3, 1997, between UAC as servicer, and the
Debtor, as such agreement may be amended, modified and supplemented from time to
time, attached hereto as Exhibit E.
"Servicing Fee" shall mean, for any Collection Period, the fee
payable pursuant to the Servicing Agreement by the Debtor to the Servicer, such
amount not to exceed 1.00% per annum in the case of UAC or an affiliate and
1.50% per annum in the case of any successor Servicer
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unaffiliated with UAC, in each case, on the aggregate outstanding Principal
Balance of Receivables as of the first day of such Collection Period.
"Settlement Sheet" shall mean a certificate signed by an
officer of the Debtor setting forth the Borrowing Base and Net Investment as of
the date of such certificate.
"Subsequent Funding" shall have the meaning
specified in the Note Purchase Agreement.
"Subsidiary" means any corporation more than 50% of the
outstanding voting securities of which shall at any time be owned or controlled,
directly or indirectly, by the Debtor or by one or more Subsidiaries or by the
Debtor and one or more Subsidiaries, or any similar business organization which
is so owned or controlled.
"Supplemented Receivable" shall have the meaning set forth in
Section 2.5(b) hereof.
"Surety Bond" shall mean that certain unconditional,
irrevocable surety bond, substantially in the form annexed hereto as Exhibit B,
to be issued by the Surety Bond Provider and naming the Agent as beneficiary.
"Surety Bond Premium" shall have the meaning specified in the
Insurance Agreement.
"Surety Bond Provider" shall mean Capital Markets Assurance
Corporation, a New York monoline stock insurance company.
"Surety Bond Provider Default" shall mean the failure by the
Surety Bond Provider to make a required payment under the Surety Bond.
"Take-Out" shall have the meaning specified in Section 2.4
hereof.
"Target Net Yield" shall mean 2.00% per annum.
"Targeted Monthly Principal Payment" shall mean, with respect
to each Remittance Date, the amount necessary to reduce the Net Investment to
the Maximum Permitted Borrowing Base.
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"Telerate Page 3750" shall mean the British Bankers
Association Libor Rates (determined at 11:00 a.m. London time) that are
published by Dow Jones Telerate, Inc.
"Termination Date" means the earliest of (i) that day
designated by the Debtor as the Termination Date at any time following 60 days
written notice to the Agent, (ii) the date of termination of the Company's
program liquidity facilities provided by any Liquidity Agreement or the
Company's credit support facilities provided by any Credit Support Agreement,
(iii) the Pay Out Commencement Date, (iv) two Business Days prior to the
Commitment Termination Date, (v) the day on which an Advance Termination Date
shall occur, or (vi) 364 days from closing, unless extended prior to such date
pursuant to a Revolving Period Extension (as defined in the Insurance
Agreement).
"Termination Event" shall have the meaning specified in
Section 6.1 hereof.
"Transaction Documents" shall mean this Agreement, the
Purchase Agreement, the Note Purchase Agree- ment, the Insurance Agreement, the
Servicing Agreement and the Surety Bond.
"Transfer" or "Transferred," when used with respect to
Eligible Investments held or to be held in the Reserve Account means:
(a) with respect to each Clearing Corporation Security,
transfer to the Collateral Agent will occur upon the latest of: (w) the making
by the Clearing Corporation of appropriate entries on its books reducing the
appropriate securities account of the transferor and increasing the appropriate
securities account of the Financial Intermediary by the amount of such Clearing
Corporation Security, (x) the sending of a confirmation to the Collateral Agent
by the Financial Intermediary of the purchase by the Collateral Agent of such
Clearing Corporation Security and (y) the identification by book entry to the
Financial Intermediary Securities Account by the Financial Intermediary of the
Clearing Corporation Securities as belonging to the Collateral Agent;
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(b) with respect to each Certificated Security, transfer to
the Collateral Agent will occur upon the latest of (x) the sending of a
confirmation by the Financial Intermediary of the purchase by the Collateral
Agent of such Certificated Security and (y) the identification by book-entry to
the Financial Intermediary Securities Account by the Financial Intermediary of
such Certificated Security as belonging to the Collateral Agent;
(c) with respect to each Federal Book-Entry Security, transfer
to the Collateral Agent will occur upon the latest of (x) the making by the
Federal Reserve Bank of Richmond of appropriate entries transferring the Federal
Book-Entry Security on its books and records to the book-entry account of the
Financial Intermediary at the Federal Reserve Bank of Richmond, (y) the sending
of a confirmation by the Financial Intermediary of the purchase by the
Collateral Agent of such Federal Book- Entry Security, and (z) the
identification by book-entry to the Financial Intermediary Securities Account by
the Financial Intermediary of such Federal Book-Entry Security as belonging to
the Collateral Agent;
(d) with respect to Instruments in the possession of a Bailee,
in the State of North Carolina, the sending of notice to the Bailee by the
Collateral Agent of the security interest of the Collateral Agent and the
sending of an acknowledgment of such notice to the Collateral Agent; and
(e) with respect to any Eligible Investment, by any method
creating a perfected security interest in favor of the Collateral Agent,
provided that the Debtor shall have delivered an opinion of counsel to the
Collateral Agent, Moody's and S&P to the effect that the Collateral Agent on
behalf of the Secured Parties has a valid perfected first priority security
interest in such Eligible Investment.
"UAC" shall mean Union Acceptance Corporation.
"Uniform Commercial Code" or "UCC" shall mean the Uniform
Commercial Code as adopted in the Relevant UCC State.
"Unused Portion" shall have the meaning specified in the
Insurance Agreement.
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"Wind-Down Event" shall have the meaning specified in Section
6.2.
"Yield Protection Provision" shall mean the compensation of
the Company and each Bank Investor by the Debtor of the Company's and the Bank
Investors' costs due to increased taxes, reserves and funding costs incurred
under Section 4.2 of the Note Purchase Agreement.
"Yield Supplement Account" shall mean the account established
by the Debtor, in the name of the Collateral Agent, for the benefit of the
Secured Parties, pursuant to Section 2.5 hereof.
"Yield Supplement Amount" shall mean, with respect to a
Supplemented Receivable and with respect to each Remittance Date, an amount
equal to the excess, if any, of (i) interest for the related Collection Period
on the outstanding Principal Balance of such Receivable as of the first day of
the related Collection Period at a rate equal to the Minimum Required APR
(determined as of the last Business Day of the Collection Period during which
such Receivable first became part of the Collateral) over (ii) interest for the
related Collection Period at the APR set forth in the related Contract on the
outstanding Principal Balance of such Receivable as of the first day of the
related Collection Period.
"Yield Supplement Deposit Amount" shall mean for each
Supplemented Receivable, the aggregate of the Yield Supplement Amounts for the
period commencing with the Collection Period in which each such Supplemented
Receivable first becomes part of the Collateral and ending with the Collection
Period during which the scheduled maturity of each such Supplemented Receivable
occurs, assuming that payments on such Supplemented Receivables are made as
scheduled and no prepayments thereon are made.
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ARTICLE II
GRANT OF SECURITY INTEREST
SECTION 2.1 Grant of Security Interest. As security for the
prompt and complete payment of the Note and the performance of all of the
Debtor's obligations under the Note, the Note Purchase Agreement, the Insurance
Agreement and this Agreement, the Debtor hereby grants to the Collateral Agent,
on behalf of the Secured Parties, a security interest in and continuing Lien on
all of the Debtor's right, title and interest in, to and under (i) all
Receivables, and the Contracts related thereto, now or hereafter existing, all
monies due or to become due with respect thereto (not including any late fees,
insufficient check charges and related charges assessed against Obligors),
whether such amounts are considered accounts, general intangibles or other
property, all monies or remittances on deposit in any lockbox account which
constitute proceeds of the Receivables and the Contracts (not including any late
fees, insufficient check charges and related charges assessed against Obligors)
and all monies on deposit in the Collection Account, the Yield Supplement
Account, the Carrying Costs Account, and the Reserve Account and any investments
made with the amounts on deposit in such accounts; (ii) the security interests
in the Boats granted by Obligors pursuant to the related Receivables and any
accessions thereto; (iii) any proceeds from claims on any physical damage,
credit life, lender's single interest, disability, hospitalization or other
insurance policies covering Boats or Obligors and any Liquidation Proceeds; (iv)
the interest of the Seller in any proceeds from Dealers relating to the
Receivables; (v) all documents relating to such Receivable including without
limitation all documents contained in the related Receivables File; (vi) any
investment earnings on the Collection Account, Yield Supplement Account, Reserve
Account and Carrying Costs Account, (vii) any Interest Rate Hedge Receipts; and
(viii) proceeds of any and all of the foregoing; in addition, the Debtor hereby
assigns to the Collateral Agent all of its rights under each of the Purchase
Agreement and the Servicing Agreement with respect to the Receivables and the
Contracts related thereto (all of the foregoing, collectively, the
"Collateral"). The foregoing pledge does not constitute an assumption by the
Collateral Agent of any obligations of the Debtor to
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Obligors or any other Person in connection with the Collateral or under any
agreement and instrument relating to the Collateral, including without
limitation any obligation to make future advances to or on behalf of such
Obligors.
In connection with such pledge, the Debtor agrees to record
and file, at its own expense, financing statements with respect to the
Collateral now existing and hereafter created for the transfer of chattel paper
and general intangibles (each as defined in Article 9 of the UCC as in effect in
the Relevant UCC State) meeting the requirements of applicable state law in such
manner and in such jurisdictions as are necessary to perfect the security
interest in the Collateral to the Collateral Agent, and to deliver a
file-stamped copy of such financing statements or other evidence of such filing
(which may, for purposes of this Section 2.1, consist of telephone confirmation
of such filing) to the Agent on or prior to the Closing Date. In addition, the
Debtor agrees to clearly and unambiguously mark all computer tapes and computer
records, if any, to show that the Receivables and the Contracts related thereto
have been pledged to the Collateral Agent hereunder.
In connection with such pledge, the Debtor agrees to direct
UAC as Servicer, on or prior to the Closing Date, to indicate, on or prior to
the Closing Date, clearly and unambiguously in its computer tapes and computer
records described in the preceding paragraph that the Receivables have been
pledged to the Collateral Agent pursuant to this Agreement. The Debtor shall
deliver to the Collateral Agent a computer file or microfiche list containing a
true and complete list of all such Receivables, identified by account number and
Principal Balance as of two Business Days prior to the Closing Date. Such file
or list shall be marked as the Receivable Schedule, delivered to the Collateral
Agent as confidential and proprietary information, and is hereby incorporated
into and made a part of this Agreement. The Debtor agrees to deliver to the
Collateral Agent at such times as requested by the Collateral Agent in
connection with a third-party's request to review Schedule A, as provided in the
financing statement filed by the Collateral Agent under the UCC, a computer file
or microfiche list containing a true and complete list of all Receivables
subject to the lien of this Agreement, identified
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by account number and by outstanding Principal Balance as of such day or date.
Such updated and revised file or list shall be marked as the Receivable Schedule
and Schedule A to this Agreement, delivered to the Collateral Agent as
confidential and proprietary information, shall replace the previously delivered
Receivable Schedule identified as Schedule A, and shall be incorporated into and
made a part of this Agreement. The Debtor agrees to direct the Servicer, by the
end of each Collection Period, to indicate clearly and unambiguously in its
computer files that the Receivables acquired by the Debtor during such
Collection Period have been pledged to the Collateral Agent pursuant to this
Agreement.
SECTION 2.2 Subrogation. The Debtor, the Company, each Bank
Investor, the Collateral Agent and the Surety Bond Provider acknowledge that, to
the extent of any payment made under the Surety Bond, the Surety Bond Provider
is to be fully subrogated to the extent of such payment, to the rights of the
Noteholder to any moneys paid or payable to such holder in respect of the
corresponding amounts due on such Note and under the Note Purchase Agreement (it
being understood that the Surety Bond Provider shall be entitled to payments in
respect of such subrogation only to the extent that no amounts are at such time
due and payable to the Noteholder under the Note). The parties hereto each agree
to such subrogation and each further agrees to execute such instruments and to
take such actions as, in the sole judgment of the Surety Bond Provider, are
necessary to evidence such subrogation and to perfect the rights of the Surety
Bond Provider to receive any moneys paid or payable hereunder, under the Note
Purchase Agreement and the Insurance Agreement.
SECTION 2.3 Increase in Principal Amount of Note; Limit on
Commercial Paper Maturity. (a) The Debtor may increase the outstanding principal
amount under the Note only upon satisfaction of the following conditions:
(i) neither (x) a Termination Event, a
Potential Termination Event or the Commitment Termination Date (in the
case of a Funding by the Company or the Bank Investors) nor (y) (in the
case of a Funding by the Company only) a Wind-Down Event, a Potential
Wind- Down Event, the Termination Date or the Advance Termination Date
shall have occurred and be continuing;
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(ii) after giving effect to any such
increase, the Net Investment shall not be greater than the Maximum
Permitted Borrowing Base and the Net Investment plus the Interest
Component shall not exceed the Facility Limit and the Collateral Agent,
the Agent and the Surety Bond Provider shall have received an executed
certification by an authorized officer of the Servicer showing the
calculations necessary to support the foregoing;
(iii) each representation and warranty of
the Debtor herein or in the Note Purchase Agreement shall be true and
correct with respect to the Debtor and each Receivable included in
either the Borrowing Base (Boats) or Borrowing Base (Personal
Watercraft) is an Eligible Receivable as of the date of such Funding;
(iv) the Company is able to obtain funds for
the making of such Funding in the commercial paper market or pursuant
to the Liquidity Agreement (only in the case of a Funding to be made by
the Company);
(v) the Debtor shall have deposited in the
Reserve Account, or shall have given irrevocable instructions to the
Agent to withhold from the proceeds of such Funding and to deposit in
the Reserve Account, an amount equal to the amount necessary to cause
the amount on deposit in the Reserve Account to at least equal the
Required Reserve Account Balance (calculated as if such increase shall
have occurred); and
(vi) the Surety Bond shall be in full force
and effect and no Surety Bond Provider Default shall have occurred.
(b) The Company shall not issue any Related Commercial Paper
with a maturity in excess of 60 days in connection with any financing or
refinancing of an increase in the Note.
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SECTION 2.4 Release of Receivables. On any Business Day, the
Debtor shall have the right to require the Collateral Agent to release all of
the Collateral Agent's right, title and interest in and to all or certain
specified Receivables on the terms and conditions set forth herein. It shall be
a condition precedent to any such release that (i) after giving effect to any
such release, the Net Investment shall not exceed the Maximum Permitted
Borrowing Base, such determination to be based on the most recent Monthly
Debtor's Certificate or Settlement Sheet delivered by the Debtor provided that,
if after giving effect to any such release, the Net Investment shall exceed the
Maximum Permitted Borrowing Base, the Debtor shall pay to the Collateral Agent,
on or prior to such Business Day, for payment to the Noteholder on the day of
receipt from the Debtor, an amount equal to the amount necessary, if any, to
reduce the Net Investment such that the Net Investment does not exceed the
Maximum Permitted Borrowing Base after giving effect to such release, (ii) such
release does not result in a Termination Event, (iii) the Debtor shall pay to
the Collateral Agent, on or prior to such Business Day, for payment to the
Noteholder on the day of receipt from the Debtor, an amount equal to all unpaid
Carrying Costs (including Carrying Costs not yet accrued) to the extent
reasonably determined by the Collateral Agent to be attributable to that portion
of the Net Investment to be reduced as a result of the payment referred to in
clause (i) above, (iv) the Debtor shall have given the Collateral Agent, the
Surety Bond Provider and the Agent at least five (5) days prior written notice
of its intention to request the release of such Receivables, and (v) all amounts
due hereunder, under the Note Purchase Agreement and the Insurance Agreement, to
the extent accrued to the date of such release or, at the option of the
Collateral Agent, acting upon the instructions of the Agent and the Surety Bond
Provider, acting separately, accrued to such date and to accrue thereafter,
shall be fully paid; provided, however, that if such release is a partial
release, the Delinquency Ratio and the Cumulative Charge- off Ratio shall each
be recalculated as of the most recent Ratio Calculation Date, as if such partial
release had already occurred and such partial release shall
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only occur if the Noteholder's Percentage would not be reduced by such
recalculation of the related Delinquency Ratio and the Cumulative Charge-off
Ratio. It is the intention of the parties that, to the extent the Company is the
Noteholder and the Company is funding its interest in the Note through Related
Commercial Paper, the Debtor shall pay to the Collateral Agent such amounts as
are required under this Section on the Business Day preceding the maturity date
of the Related Commercial Paper issued by the Company to fund its interest in
the Note. The Company agrees to use its reasonable efforts to reinvest in
overnight Eligible Investments any payments received by the Company from the
Debtor in respect of maturing Commercial Paper prior to the Business Day
preceding such maturity and remit the proceeds of such investments to the
Debtor.
The amount described in clause (i) above upon receipt by the
Noteholder shall be applied in reduction of the Net Investment.
The Debtor shall also be obligated to pay the reasonable legal
fees and expenses of the Collateral Agent, the Company, each Bank Investor, the
Surety Bond Provider, the Administrative Agent and the Agent arising
in connection with any such release.
The Debtor shall at least once in each twelve month period,
the first such period to commence April 3, 1997, cause the release of all
Receivables in existence as of a date not more than 31 days prior to the
proposed date of release, and shall make the requisite payments described above
and satisfy the requisite conditions precedent described above to cause such
release to occur (such a release, a "Take-Out").
Upon the deposit to the Collection Account and the payment to
the respective parties of the amounts described in this Section, the Collateral
Agent shall execute and deliver to the Debtor, at the Debtor's expense, such
documents or instruments as are necessary to terminate the Collateral Agent's
interest in the applicable Receivables and the proceeds thereof. Any such
documents shall be prepared by or on behalf of the Debtor and shall specifically
identify (by loan or account number and outstanding Principal Balance) the
Receivables in which
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the Collateral Agent's security interest is to be released.
SECTION 2.5 Yield Supplement Account, Deposits, Withdrawals.
(a) On or before the Initial Funding, the
Debtor shall establish a segregated account (the "Yield Supplement
Account") with the Collateral Agent in the name of the Collateral
Agent, for the benefit of the Secured Parties. Subject to the terms
hereof, the Collateral Agent shall possess all right, title and
interest in and to all funds deposited from time to time in the Yield
Supplement Account. The Collateral Agent shall maintain the Yield
Supplement Account at an Eligible Institution. If the Eligible
Institution holding the Yield Supplement Account shall cease to be an
Eligible Institution, the Surety Bond Provider (as long as no Surety
Bond Provider Default has occurred and is continuing) shall have the
right to direct the transfer of the Yield Supplement Account to an
Eligible Institution. Notwithstanding the foregoing, the Collateral
Agent shall not withdraw any funds from, or otherwise exercise control
over, the Yield Supplement Account except as provided in this
Agreement. All amounts on deposit in the Yield Supplement Account shall
be held by the Collateral Agent for the benefit of the Secured Parties.
(b) On or prior to each Remittance Date,
with respect to all Receivables which were added as Collateral during
the Collection Period relating to such Remittance Date, the Debtor
shall (i) deposit into the Yield Supplement Account or (ii) shall
instruct the Collateral Agent to make such deposit from the proceeds of
Related Commercial Paper issued on such Remittance Date, for each such
Receivable with respect to which the related Contract provides for
interest to accrue thereunder at a rate less than the Minimum Required
APR (determined as of the last Business Day of such Collection Period)
(each, a "Supplemented Receivable") an amount equal to the Yield
Supplement Deposit Amount in respect of each such Supplemented
Receivable.
(c) (i) Funds on deposit in the Yield
Supplement Account shall be invested in Eligible Investments by or at
the written direction of the Debtor, provided that if a Termination
Event shall have occurred,
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such investments shall be made as directed by the Surety Bond Provider (or by
the Collateral Agent, if there shall have been a Surety Bond Provider Default).
Any such written directions shall specify the particular investment to be made
and shall certify that such investment is an Eligible Investment and is
permitted to be made under this Agreement.
(ii) All investments of amounts on deposit
in the Yield Supplement Account shall be accomplished in a manner so as
to cause such investments to be Transferred to the Collateral Agent;
provided that upon the effectiveness in the State of New York of the
1994 Official Text of Article 8 of the Uniform Commercial Code,
investments need not be Transferred to the Collateral Agent. The
Collateral Agent agrees that, without the prior consent of the Surety
Bond Provider, it shall not accept for credit to the Yield Supplement
Account any investment as to which it has knowledge of any adverse
claim thereto. NationsBank, N.A. hereby agrees (and any other Financial
Intermediary holding the Yield Supplement Account shall so agree) to
comply with all Entitlement Orders (as defined in Section 8-102 of the
1994 Official Text of the Uniform Commercial Code) received by it with
respect to the Yield Supplement Account from the Collateral Agent.
(iii) Funds on deposit in the Yield
Supplement Account on the Closing Date and thereafter shall be so
invested in Eligible Investments that mature on the Business Day
preceding the succeeding Remittance Date. No Eligible Investment may be
liquidated or disposed of prior to its maturity. All proceeds of any
Eligible Investment shall be deposited in the Yield Supplement Account.
Investments may be made on any date (provided such investments mature
in accordance with the preceding sentence), only after giving effect to
deposits to and withdrawals from the Yield Supplement Account on such
date. Not later than 11:00 a.m. (New York time) on each Remittance
Date, all interest and earnings (net of losses and investment expenses,
if any) received since the
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previous Remittance Date (or since the Closing Date in the case of the
first Remittance Date) on funds on deposit in the Yield Supplement
Account shall be withdrawn by Collateral Agent and shall be remitted to
the Debtor. Realized losses, if any, on amounts invested in Eligible
Investments shall be charged against undistributed investment earnings
on amounts on deposit in the Yield Supplement Account.
(iv) The Debtor and the Surety Bond Provider
shall each provide the Collateral Agent on the date hereof and from
time to time an incumbency certificate or the substantial equivalent
with respect to each officer of the Debtor and the Surety Bond
Provider, respectively, that is authorized to provide instructions
relating to investments in Eligible Investments.
(d) Eligible Investments shall be maintained by the Collateral
Agent in such manner as may be necessary to maintain the first priority
perfected security interest in favor of the Collateral Agent on behalf of the
Secured Parties. NationsBank, N.A. agrees (and any other Financial Intermediary
holding the Yield Supplement Account shall so agree) that it shall not agree to
comply with Entitlement Orders (as defined in Section 8-102 of the 1994 version
of the Official Text of Article 8 of the Uniform Commercial Code) with respect
to the Yield Supplement Account given to it by any Person other than the
Collateral Agent.
All amounts or property credited to the Yield Supplement
Account shall be subject to the lien of the Collateral Agent until released or
withdrawn from the Yield Supplement Account.
(e) Funds may be released from the Yield Supplement Account
under the circumstances described in this Section 2.5(e). On each Remittance
Date the Collateral Agent shall withdraw from the Yield Supplement Account, the
Yield Supplement Amount (as set forth in the Monthly Debtor's Certificate) with
respect to each Supplemented Receivable and deposit such amount(s) in the
Collection Account. On any day on which the Collateral Agent, pursuant to
Section 2.4, releases to the Debtor
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its interest in a Contract and related Receivable with respect to which the
Debtor deposited funds in the Yield Supplement Account pursuant to Section
2.5(b), the amount of such deposit less any amounts released from the Yield
Supplement Account with respect to such Receivable shall be released to the
Debtor. Amounts on deposit in the Yield Supplement Account will be released to
the Debtor each Remittance Date to the extent the amount on deposit in the Yield
Supplement Account exceeds the sum of all projected Yield Supplement Amounts for
all future Remittance Dates, assuming that future scheduled payments on all
Supplemented Receivables are made on their scheduled due dates and no
prepayments thereon occur. Upon the occurrence of a Termination Event, all
amounts on deposit in the Yield Supplement Account shall be withdrawn at the
option of the Surety Bond Provider (for so long as no Surety Bond Provider
Default has occurred and is continuing) or the Administrative Agent (for so long
as a Surety Bond Provider Default has occurred and is continuing) from such
account and applied in reduction of the Net Investment. Each of the Debtor, the
Seller, the Company and the Surety Bond Provider acknowledge that the Collateral
Agent shall have no liability for amounts withdrawn from the Yield Supplement
Account in reliance upon a Monthly Debtor's Certificate.
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ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE DEBTOR
SECTION 3.1 Representations and Warranties Concerning
Receivables. The Debtor represents and warrants to and covenants with the
Collateral Agent and the Secured Parties as of the Closing Date and, with
respect to any Receivables added to the Collateral after the Closing Date, on
and as of the date such Receivables were added to the Collateral that:
(a) Eligible Receivable. Each Receivable included in the
applicable Borrowing Base is an Eligible Receivable.
(b) Place of Business. The chief place of business and chief
executive office of the Debtor are located at the address of the Debtor
indicated in Section 8.1 hereof and the offices where the Debtor keeps all its
records, are located at the address(es) described on Exhibit C.
(c) Merger and Consolidation. As of the date hereof the Debtor
has not changed its name, merged with or into or consolidated with any other
corporation or been the subject of any proceeding under Title 11, United States
Code (Bankruptcy).
In the event of a breach of the representation set forth in Section
3.1(a) with respect to any Receivable, such Receivable shall be deemed to have a
Principal Balance of zero for purposes of calculating the applicable Borrowing
Base and the Debtor shall pay to the Collateral Agent for deposit into the
Collection Account an amount equal to the sum of (x) the lesser of (A) the
amount, if any, by which the Net Investment exceeds the Maximum Permitted
Borrowing Base (after giving effect to any such exclusion) and (B) the Principal
Balance (determined in this case without giving effect to the proviso in the
definition thereof) of the Receivable with respect to which the breach occurred
and (y) an amount equal to interest accrued and unpaid on such Receivable at the
related APR through the day immediately preceding the succeeding Remittance
Date. Such payment shall be made on the Business Day preceding the next
Remittance Date.
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SECTION 3.2 Covenants of the Debtor
The Debtor hereby covenants to the Collateral Agent and the
Secured Parties, so long as any amounts shall be outstanding under the Note, the
Note Purchase Agreement or the Insurance Agreement or the Surety Bond is in
effect, that:
(a) Corporate Existence. The Debtor will preserve and maintain
its existence as a corporation duly organized and existing under the laws of the
jurisdiction of its incorporation and will remain duly qualified as a foreign
corporation under the laws of each other jurisdiction in which the failure to so
qualify would have a material adverse effect on the ability of the Debtor to
perform its obligations under this Agreement, the Note Purchase Agreement, the
Note, the Insurance Agreement or the Purchase Agreement.
(b) Losses, Etc. In any suit, proceeding or action brought by
the Collateral Agent or any Secured Party for any sum owing thereto, the Debtor
will save, indemnify and keep the Collateral Agent and the Secured Parties
harmless from and against all expense, loss or damage suffered by reason of any
defense, setoff, counterclaim, recoupment or reduction of liability whatsoever
of the Obligor under such Receivable, arising out of a breach by the Debtor of
any obligation under the related Receivable or arising out of any other
agreement, indebtedness or liability at any time owing to or in favor of such
Obligor or its successor from the Debtor, and all such obligations of the Debtor
shall be and remain enforceable against and only against the Debtor and shall
not be enforceable against the Collateral Agent or any Secured Party.
(c) Compliance With Law. The Debtor will comply, in all
material respects, with all acts, rules, regulations, orders, decrees and
directions of any governmental authority applicable to the Receivables or any
part thereof; provided, however, that the Debtor may contest any act, rule,
regulation, order, decree or direction in any reasonable manner which will not
materially and adversely affect the rights of the Collateral Agent in the
Receivables or the collectability of the Receivables.
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(d) No Instruments. The Debtor will take no action to cause
any Receivable to be evidenced by any instrument (as defined in the UCC as in
effect in the Relevant UCC State).
(e) No Liens. Except for the conveyances contemplated
hereunder, the Debtor will not sell, pledge, assign or transfer to any other
Person, or grant, create, incur, assume or suffer to exist any Lien on any
Receivable or any interest therein; the Debtor will notify the Collateral Agent
of the existence of any Lien on any Receivable immediately upon discovery
thereof; and the Debtor shall defend the right, title and interest of the
Collateral Agent in, to and under the applicable Receivables against all claims
of third parties claiming through or under the Debtor; provided, however, that
nothing in this Section 3.2(e) shall prevent the Debtor from suffering to exist
upon any of the Receivables any Liens for taxes and other governmental charges
if such taxes or governmental charges shall not at the time be due and payable
or if the Debtor shall currently be contesting the validity thereof in good
faith by appropriate proceedings and shall have set aside on its books adequate
reserves with respect thereto.
(f) Notice to Collateral Agent. The Debtor will advise the
Collateral Agent promptly, in reasonable detail, (i) of any Lien asserted or
claim made against any of the Receivables, (ii) of the occurrence of any breach
by the Debtor of any of its representations, warranties and covenants contained
herein and (iii) of the occurrence of any other event which would have a
material adverse effect on the Collateral Agent's security interest in the
Receivables or the collectability thereof.
(g) Books and Records. The Collateral Agent and its agents and
representatives shall at all times have reasonable access during normal business
hours to all the computer tapes, books, correspondence and records of the Debtor
insofar as they relate to the Receivables, and the Collateral Agent and its
agents and representatives may examine the same, take extracts therefrom and
make photocopies thereof, and the Debtor agrees to render to the Collateral
Agent or its agents and representatives, at the Debtor's cost and expense, such
clerical and other assistance as may be reasonably
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requested with regard thereto. The Debtor hereby assigns to the Collateral Agent
and its agents and representatives all rights the Debtor has or shall have to
examine computer tapes, books, correspondence and records relating to
Receivables serviced by the Servicer or any successor servicer thereto. The
Collateral Agent acknowledges that in exercising the rights and privileges
conferred in this Section 3.2(g) it, or its agents and representatives, may from
time to time obtain knowledge of information and practices set forth in such
computer tapes, books, correspondence and records (whether in the possession of
the Debtor or the Servicer) of a confidential nature and in which the Debtor has
a proprietary interest. The Collateral Agent agrees that all such information,
practices, books, correspondence and records are to be regarded as confidential
information and that (i) it shall retain in strict confidence and shall use its
best efforts to ensure that its representatives retain in strict confidence and
will not disclose without the prior written consent of the Debtor any or all of
such information, practices, books, correspondence and records furnished to them
and (ii) it will not, and will use its best efforts to ensure that its agents
and representatives will not, make any use whatsoever (other than for the
purposes contemplated by this Agreement) of any of such information, practices,
computer tapes, books, correspondence and records without the prior written
consent of the Debtor, unless such information (i) is generally available to the
public, (ii) is required by law to be disclosed or is requested by any
Governmental Authority having authority over the Company, any Bank Investor, the
Agent, the Collateral Agent, the Administrative Agent, the Surety Bond Provider,
any Liquidity Provider or Credit Support Provider or (iii) is requested by
Moody's or S&P in connection with their rating of the Company's Commercial Paper
or the implied rating on the facility.
(h) Administrative Procedures. The Debtor will maintain and
implement administrative operating procedures (including, without limitation, an
ability to recreate records evidencing the Receivables in the event of the
destruction of the originals thereof) and keep and maintain all documents,
books, records and other information reasonably necessary or advisable for the
collection of all Receivables.
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(i) UCC Filings. The Debtor shall execute and file such
continuation statements and any other documents requested by the Collateral
Agent or which may be required by law to fully preserve and protect the interest
of the Collateral Agent hereunder in and to the Receivables.
(j) Change of Location. The Debtor will not (i) without
providing 30 days' notice to the Agent, the Surety Bond Provider, and the
Collateral Agent and without filing such amendments to any previously filed
financing statements as the Collateral Agent may require, (A) change the
location of its principal executive office or the location of the offices where
the records relating to the accounts are kept, and (B) change its name, identity
or corporate structure in any manner which would, could or might make any
financing statement or continuation statement filed by the Debtor in accordance
with this Agreement seriously misleading within the meaning of Section 9-402(7)
of the UCC or any applicable enactment of the UCC.
(k) Reporting. The Debtor will furnish, or cause to be
furnished to the Agent, the Surety Bond Provider, the Collateral Agent (unless
otherwise provided to the Collateral Agent) and, each of Moody's and S&P:
(i) Notice of Termination Event, Potential
Termination Event or Servicer Event of Default. As soon as possible and
in any event within five days after the occurrence of each Termination
Event, or each Potential Termination Event hereunder, or each Servicer
Event of Default, a statement of the chief financial officer or chief
accounting officer of the Debtor setting forth details of such
Termination Event, Potential Termination Event or Servicer Event of
Default and the action which the Debtor proposes to take with respect
thereto.
(ii) Change in Credit Guidelines. Within 15
days of the effectiveness of any material change in or amendment to the
Credit Guidelines notice thereof, and within 30 days after such
effective date, a copy of the
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Credit Guidelines, then in effect indicating such change or amendment.
(iii) Annual Reporting. Within ninety (90)
days after the close of each of its fiscal years, audited financial
statements, prepared in accordance with generally accepted accounting
principles on a consolidated basis for UAC and its subsidiaries,
including balance sheets as of the end of such period, related
statements of operations, shareholder's equity and cash flows,
accompanied by an audit report of a nationally recognized firm of
independent certified public accountants (or such other firm of
independent certified public accountants acceptable to the Collateral
Agent and the Surety Bond Provider) which report shall be unqualified
as to going concern and scope of audit and shall state that such
consolidated financial statements present fairly the financial position
of UAC and each of its subsidiaries at the dates indicated and the
results of their operations and their cash flow for the periods
indicated is in conformity with GAAP and that the examination had been
made in accordance with generally accepted auditing standards.
(iv) Quarterly Reporting. Within forty-five
(45) days after the close of the first three quarterly periods of each
of its fiscal years, for UAC and its subsidiaries, consolidated
unaudited balance sheets as of the close of each such period and
consolidated related statements of operations, shareholder's equity and
cash flows for the period from the beginning of such fiscal year to the
end of such quarter, all certified by UAC's chief financial officer.
(v) Compliance Certificate. Concurrently
with the delivery by the Debtor of the financial statements with
respect to UAC and its subsidiaries including the Debtor required
hereunder, a compliance certificate signed by an appropriate officer
reasonably familiar with the applicable provisions of this
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Agreement stating that no Termination Event, Potential Termination
Event or Servicer Event of Default exists, or if any Termination Event
or Potential Termination Event exists, stating the nature and status
thereof.
(l) The Debtor shall not, without the prior written consent of
the Collateral Agent,
(i) engage in any business or activity other
than those set forth in Article [III] of the Debtor's Certificate of
Incorpora- tion;
(ii) incur any indebtedness, assume or
guaranty an indebtedness of any other entity, other than any
indebtedness to the Seller thereof incurred in connection with the
acquisition of Receivables, which indebtedness shall be subordinated to
all other obligations of the Debtor or engage in any transactions with
any affiliates, except as contemplated under this Agreement, the Note
Purchase Agreement, the Servicing Agreement or pursuant to a Take-Out;
(iii) institute proceedings to be
adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or file a petition
seeking or consent to reorganization or relief under any applicable
federal or state law relating to bankruptcy, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the corporation or a substantial part of
its property, or make any assignment for the benefit of creditors, or
admit in writing its inability to pay its debts generally as they
become due, or take corporate action in furtherance of any such action,
in each case, without the affirmative vote of 100% of the members of
the Board of Directors of the Debtor.
(iv) fail to (a) to the extent the Debtor's
office is located in the offices
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of UAC or any Affiliate of UAC, pay fair market rent for its executive
office space located in the offices of UAC or any Affiliate of UAC, (b)
maintain the Debtor's books, financial statements, accounting records
and other corporate documents and records separate from those of UAC or
any other entity, (c) not commingle the Debtor's assets with those of
UAC or any other entity (it being understood that certain Collections
on Receivables owned by the Debtor may be temporarily commingled with
collections on other receivables serviced by UAC); (d) act solely in
its corporate name and through its own authorized officers and agents,
(e) make investments directly or by brokers engaged and paid by the
Debtor or its agents (provided that if any such agent is an Affiliate
of the Debtor it shall be compensated at a fair market rate for its
services), (f) separately manage the Debtor's liabilities from those of
UAC or any Affiliates of UAC and pay its own liabilities, including all
administrative expenses, from its own separate assets, and (g) pay from
the Debtor's assets all obligations and indebtedness of any kind
incurred by the Debtor. The Debtor shall abide by all corporate
formalities, including the maintenance of current minute books, and the
Debtor shall cause its financial statements to be prepared in
accordance with generally accepted accounting principles in a manner
that indicates the separate existence of the Debtor and its assets and
liabilities. The Debtor shall (i) pay all its liabilities, (ii) not
assume the liabilities of UAC or any Affiliate of UAC, and (iii) not
guarantee the liabilities of UAC or any Affiliate of UAC. The officers
and directors of the Debtor (as appropriate) shall make decisions with
respect to the business and daily operations of the Debtor independent
of and not dictated by any controlling entity.
(v) amend, alter, change or repeal Articles
III, IV, V, VI, and XI of its Certificate of Incorporation as in effect
on the date hereof without the prior written consent of the Surety Bond
Provider.
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(vi) transfer any shares of its Common
Stock, or issue additional shares of its Common Stock or any other
equity interests in the Debtor to any Person other than the Seller or
acquire any shares of stock or equity interest in any other entity or
have any subsidiaries.
(vii) change its name, merge with or into or
be consolidated with any other corporation.
(m) Opinion of Counsel. At the end of each calendar quarter,
commencing in June, 1997, with respect to any state in which Obligors are
located with respect to Eligible Receivables that account for more than 10% of
the aggregate Principal Balance of Eligible Receivables and with respect to such
state, the Debtor has not previously delivered a security interest opinion
relating to the Boats, the Debtor shall be required to deliver a legal opinion
satisfactory to the Surety Bond Provider, counsel for the Surety Bond Provider
and S&P and shall be required to deliver a copy of such opinion to Moody's as to
the status of the security interest of the Collateral Agent, on behalf of the
Secured Parties, in the related Boats, provided that any Eligible Receivable the
Obligor of which is located in a state that accounts for more than 10% of the
aggregate Principal Balance of Eligible Receivables and with respect to such
state the Debtor has failed to deliver the security interest opinion described
above, the Principal Balance of such Eligible Receivable for purposes of
calculating the Borrowing Base shall be deemed to be $0.
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(n) Yield Supplement Account. The Debtor shall, with respect
to each Supplemented Receivable, deposit the Yield Supplement Deposit Amount, on
or prior to the Business Day prior to the Remittance Date relating to the first
Collection Period during which such Supplemented Receivable became part of the
Collateral, into the Yield Supplement Account for the period commencing with the
Collection Period in which each such Supplemented Receivable first becomes part
of the Collateral and ending with the Collection Period during which the
scheduled maturity of each such Supplemented Receivable occurs, assuming that
payments on such Supplemented Receiv ables are made as scheduled and no
prepayments thereon are made.
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ARTICLE IV
SERVICING AND ADMINISTRATION
SECTION 4.1 Servicing. (a) Pursuant to the Servicing
Agreement, the Debtor has contracted with Union Acceptance Corporation ("UAC")
to act as servicer to manage, collect and administer each of the Receivables.
Until such time as UAC is terminated as servicer under the Servicing Agreement,
references to the Servicer herein shall refer to UAC as servicer under the terms
of the Servicing Agreement. In the event of a Servicer Event of Default, the
Collateral Agent, acting, for so long as no Surety Bond Provider Default has
occurred, upon the written direction of the Surety Bond Provider, shall have the
right to cause the Debtor to terminate UAC as servicer thereunder. Upon
termination of UAC as servicer of the Receivables pursuant to Section 6.02 of
the Servicing Agreement, the Collateral Agent, acting upon, for so long as no
Surety Bond Provider Default has occurred, the written direction of the Surety
Bond Provider shall have the right to appoint a successor servicer and enter
into a servicing agreement with such successor servicer at such time and direct
the Collateral Agent in the exercise of its rights under Section 4.3 hereof.
Such appointment shall be subject to the consent of the Debtor, which consent
shall not be unreasonably withheld; provided, however, that if a Termination
Event shall have occurred, or a Potential Termination Event shall have occurred
and be continuing, the consent of the Debtor shall not be required. In the event
that a successor Servicer is not appointed within 30 days of the Servicer Event
of Default which led to the termination of the preceding Servicer, NationsBank,
N.A. shall thereupon be appointed to act as successor Servicer and NationsBank,
N.A. agrees to so act. Such servicing agreement shall specify the duties and
obligations of such successor Servicer, and all references herein to the
Servicer shall be deemed to refer to such successor servicer. Notwithstanding
the above, NationsBank, N.A. may appoint any established financial institution
having a net worth of not less than $50,000,000 and whose regular business
includes the servicing of automobile or marine installment sales contracts as
the successor Servicer hereunder.
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(b) There shall be established on the Closing Date and
maintained, for the benefit of the Secured Parties in the name of the Collateral
Agent, a segregated account (the "Collection Account"), bearing a designation
clearly indicating that the funds deposited therein are held for the benefit of
the Secured Parties. Funds on deposit in the Collection Account (other than
investment earnings) shall be invested by the Collateral Agent at the direction
of the Debtor in Eligible Investments that will mature so that such funds will
be available prior to the next Remittance Date, except that in the case of funds
representing Collections with respect to a succeeding Collection Period, such
Eligible Investments may mature so that such funds will be available no later
than the Business Day prior to the Remittance Date for such Collection Period.
Any funds on deposit in the Collection Account to be so invested shall be
invested solely in Eligible Investments. The Collateral Agent will maintain the
Collection Account at an Eligible Institution. If the Eligible Institution
holding the Collection Account shall cease to be an Eligible Institution, the
Surety Bond Provider (as long as no Surety Bond Provider Default has occurred
and is continuing) shall have the right to direct the transfer of the Collection
Account to an Eligible Institution. On each Remittance Date, all interest and
earnings (net of losses and investment expenses) on funds on deposit in the
Collection Account shall be included in Available Collections and be distributed
pursuant to Section 5.1.
(c) After the Initial Funding, the Debtor shall cause the
Servicer under the Servicing Agreement to deposit all Collections (other than
Liquidation Proceeds which shall be deposited on or prior to the Determination
Date) into the Collection Account no later than two Business Days after receipt
thereof.
(d) On or before ninety (90) days after the end of each fiscal
year of the Servicer, beginning with the fiscal year ending June 30, 1997, the
Servicer shall cause a firm of independent public accountants (who may also
render other services to the Servicer or the Debtor) to furnish a report to the
Collateral Agent and the Secured Parties to the effect that they have (i)
compared the information contained in the Monthly Debtor's Certificates
delivered during such fiscal year, based on a sample size provided by the
Collateral Agent, with the
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information contained in the Contracts and the Servicer's records and computer
systems for such period, and that, on the basis of such agreed upon procedures,
such firm is of the opinion that the information contained in the Monthly
Debtor's Certificates reconciles with the information contained in the Contracts
and the Servicer's records and computer system and that the servicing of the
Receivables has been conducted in compliance with this Agreement, (ii) verified
the aggregate Principal Balance of the Receivables as of the end of each
Collection Period during such fiscal year, and (iii) verified that a sample of
Receivables treated by the Servicer as Eligible Receivables in fact satisfied
the requirements of the definition thereof contained herein and (iv) conducted a
'negative confirmation' of a sample of the Receivables and verified that the
Servicer's records and computer system used in servicing the Receivables
contained correct information with regard to due dates and outstanding balances,
except, in each case for (a) such exceptions as such firm shall believe to be
immaterial (which exceptions need not be enumerated) and (b) such other
exceptions as shall be set forth in such statement.
SECTION 4.2 Duties of the Servicer.
(a) The Servicer shall take or cause to be taken all such
action as may be necessary or advisable to collect each Receivable from time to
time, all in accordance with applicable laws, rules and regulations, with
reasonable care and diligence, and in accordance with the Credit Guidelines.
Each of the Debtor and the Secured Parties hereby appoints as its agent the
Servicer, from time to time designated pursuant to Section 4.1, to enforce its
respective rights and interests in and under the Collateral. So long as no
Termination Event shall have occurred, the Servicer may, unless otherwise
required by law, in accordance with the Credit Guidelines, extend the maturity
of Receivables, as the Servicer may determine to be appropriate to maximize
Collections thereof. The Servicer shall hold in trust for the Secured Parties
all records which evidence or relate to all or any part of the Collateral. In
the event that a successor Servicer is appointed, the outgoing Servicer shall
deliver to the successor Servicer and the successor Servicer shall hold in trust
for the Debtor and the Secured Parties all records which evidence or relate to
all or any part of the Collateral.
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(b) If UAC or any affiliate thereof is not the Servicer, the
Collateral Agent, with the consent of the Surety Bond Provider and the Agent may
revise the percentage used to calculate the Servicing Fee so long as the revised
percentage will not result in a Servicing Fee that exceeds 1.50% per annum. The
Servicer, if other than UAC, shall as soon as practicable upon demand, deliver
to the Debtor all records in its possession which evidence or relate to
indebtedness of an Obligor which is not a Receivable.
SECTION 4.3 Rights After Designation of Successor Servicer. At
any time following the designation of a Servicer (other than UAC) pursuant to
Section 4.1:
(i) The Collateral Agent may intercept
payments made by or on behalf of Obligors and direct that payment of
all amounts payable under any Receivable be made directly to the
Collateral Agent or its designee.
(ii) The Debtor shall, at the Collateral
Agent's request and at the Debtor's expense, give notice of the
Collateral Agent's interest in the Receivables to each Obligor and
direct that payments be made directly to the Collateral Agent or its
designee.
(iii) The Debtor shall, at the Collateral
Agent's request, (A) assemble all of the records relating to the
Collateral, including all Receivables Files, and shall make the same
available to the Collateral Agent at a place selected by the Collateral
Agent or its designee, and (B) segregate all cash, checks and other
instruments received by it from time to time constituting collections
of Collateral in a manner acceptable to the Collateral Agent and shall,
promptly upon receipt, remit all such cash, checks and instruments,
duly endorsed or with duly executed instruments of transfer, to the
Collateral Agent or its designee.
(iv) The Debtor hereby authorizes the
Collateral Agent to take any and all steps in the Debtor's name and on
behalf of the
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Debtor necessary or desirable, in the determination of the Collateral
Agent, to collect all amounts due under any and all of the Collateral
with respect thereto, including, without limitation, endorsing the
Debtor's name on checks and other instruments representing Collections
and enforcing the Receivables.
SECTION 4.4 Responsibilities of the Debtor. Anything herein to
the contrary notwithstanding, the Debtor shall (i) perform all of its
obligations under the Receivables to the same extent as if a security interest
in such Receivables had not been granted hereunder and the exercise by the
Collateral Agent of its rights hereunder shall not relieve the Debtor from such
obligations and (ii) pay when due any taxes, including without limitation, any
sales taxes payable in connection with the Receivables and their creation and
satisfaction. Neither the Collateral Agent nor any Secured Party shall have any
obligation or liability with respect to any Receivable, nor shall any of them be
obligated to perform any of the obligations of the Debtor thereunder.
SECTION 4.5 Monthly Debtor's Certificate. On each
Determination Date, the Debtor shall deliver to the Agent, the Surety Bond
Provider and the Collateral Agent a certificate in substantially the form of
Exhibit D attached hereto (the "Monthly Debtor's Certificate") for the related
Collection Period. The Agent shall provide to the Debtor, by the day prior to
the related Determination Date in the calendar month following the Collection
Period to which such Monthly Debtor's Certificate relates, information relating
to the amount of each obligation of the Company which comprises Carrying Costs
for such Collection Period. The Monthly Debtor's Certificate shall specify
whether a Termination Event is deemed to have occurred with respect to the
Collection Period preceding such Determination Date. Upon receipt of the Monthly
Debtor's Certificate, the Collateral Agent shall rely (and shall be fully
protected in so relying) on the information contained therein for the purposes
of making distributions and allocations as provided for herein.
SECTION 4.6 Additional Representations and Warranties of UAC
as Servicer. UAC, in its capacity as Servicer, represents and warrants to the
Surety Bond Provider and the Collateral Agent, as of the Closing Date
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that the only material servicing computer systems and related software utilized
by the Servicer to service the Receivables are provided by Alltell Information
Services, Inc. (formerly known as Systematics System Financial Services, Inc.)
under an agreement (and related non-exclusive license) and related letter
agreements dated July 13, 1994 and October 25, 1994. Should the Servicer or any
of its Affiliates develop and implement computer software for servicing that is
owned or exclusively licensed to the Servicer or an Affiliate and utilize such
software in the servicing of the Receivables, the Surety Bond Provider shall be
entitled to compel a license or sublicense for the benefit of the Surety Bond
Provider or its designee of any such rights to the extent the Surety Bond
Provider deems reasonably necessary and appropriate to assure that it or a duly
appointed successor servicer would be able to continue to service the
Receivables should that be required in accordance with the Servicing Agreement.
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ARTICLE V
ALLOCATION AND APPLICATION
OF COLLECTIONS; RESERVE ACCOUNT
SECTION 5.1 Collections. (a) On each Remittance Date, the
Collateral Agent shall determine by reference to the Monthly Debtor's
Certificate, the Available Collections with respect to such Remittance Date and
shall withdraw such amount from the Collection Account including amounts
deposited in the Collection Account from the Yield Supplement Account pursuant
to Section 2.5(e) and allocate and pay such amounts in the following order of
priority:
(i) to the Servicer, to repay Servicer
Advances and then to the successor Servicer, to pay any and all
expenses relating to a Servicer Transfer then due and payable which
have not been previously paid by or on behalf of the Debtor;
(ii) if UAC or an Affiliate is
not the Servicer, to the Servicer, an amount
equal to the Servicing Fee;
(iii) to the Agent, for the account of the
Company or the Bank Investors an amount equal to Carrying Costs payable
on such Remittance Date;
(iv) to the Carrying Costs Account, an
amount equal to interest accrued on the Related Commercial Paper
through such Remittance Date net of all such amounts paid in respect of
the Interest Component of Related Commercial Paper on the maturity date
thereof on or prior to such Remittance Date;
(v) to the Agent, for the account of the
Company or the Bank Investors, an amount equal to the Targeted Monthly
Principal Payment;
(vi) to the Collateral Agent, for the
account of the Hedge Counterparty, any
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amounts owed to the Hedge Counterparty under any Interest Rate Hedge,
which have not previously been paid;
(vii) if UAC or an Affiliate is the
Servicer, to the Servicer, an amount equal to the Servicing Fee;
(viii) provided no Surety Bond Provider
Default shall have occurred and be continuing, to the Surety Bond
Provider, the Unused Portion and the Premium Portion of the Surety Bond
Premium, including any overdue Surety Bond Premiums and accrued
interest thereon at the rate provided in the Insurance Agreement;
(ix) to the Surety Bond Provider, the
aggregate amount of any previously unreimbursed draws on the Surety
Bond (plus any other amounts payable to the Surety Bond Provider under
the Insurance Agreement, plus accrued interest thereon at the rate
provided in the Insurance Agreement);
(x) to the Collateral Agent or
the Surety Bond Provider, the amount to be applied by the Collateral
Agent or the Surety Bond Provider, as appropriate, to pay any and all
Re-Liening Expenses then due and payable which have not been previously
paid by or on behalf of the Debtor;
(xi) after the occurrence of a Termination
Event, to the Noteholder to reduce the Net Investment, until the Net
Investment has been reduced to zero;
(xii) to the Reserve Account, the amount
necessary to increase the amount on deposit in the Reserve Account to
the Required Reserve Account Balance;
(xiii) to the Agent, for the account of the
Persons entitled thereto, an amount equal to all other amounts owed
under the Note Purchase Agreement;
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(xiv) to the Servicer, an amount equal to
reimburse any Fee Advance then due and payable which has not been
previously paid by or on behalf of the Debtor; and
(xv) prior to the occurrence of a
Termination Event, all remaining amounts shall be distributed to the
Debtor. Following the occurrence of a Termination Event all remaining
amounts will be held in the Collection Account and applied until all
amounts owing to the Secured Parties under the Transaction Documents
have been paid in full.
(b) On any date that a tranche of Related Commercial Paper
matures whether or not such date is a Remittance Date (each, an "Interest
Payment Date"), the Interest Component of matured or maturing Related Commercial
Paper due and payable on such day shall be payable as interest on the Note
("Note Interest"). Accordingly, the Collateral Agent, acting upon notice from
the Administrative Agent, shall withdraw such amount from funds on deposit in
the Carrying Cost Account, to the extent of amounts on deposit therein, and
remit such amount to the Agent for the account of the Company. To the extent
that amounts withdrawn by the Collateral Agent from the Carrying Costs Account
are insufficient to pay such costs, the Collateral Agent, acting upon notice
from the Administrative Agent,shall withdraw the amount of such remaining
shortfall from the Collection Account, to the extent of Collections on deposit
therein, and remit such amount to the Agent for the account of the Company. To
the extent that amounts withdrawn by the Agent, as specified above are
insufficient to pay such costs, the Servicer, acting upon notice from the
Administrative Agent, shall make an advance in an amount equal to such costs due
and payable on such day (a "Servicer Advance") and remit to the Agent for the
account of the Company, the amount of such advance provided, however, that the
Servicer shall not be obligated to make any such advance except to the extent
that the Servicer reasonably expects to be reimbursed for such advance on a
succeeding Remittance Date pursuant to Section 5.1(a)(i). To the extent that
amounts advanced by the Servicer are insufficient to pay such costs and the
Debtor fails to make a payment to the Collateral Agent on such day in the amount
of such shortfall, the
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Collateral Agent shall withdraw the amount of such remaining shortfall from the
Reserve Account, to the extent of amounts on deposit therein, and remit such
amount to the Agent, for the account of the Company. To the extent that there
remains a shortfall, the Agent shall make a demand for payment under the Surety
Bond, in accordance with the terms thereof. Amounts required to be remitted
pursuant to this Section 5.1(b) to the Agent or the Collateral Agent shall be
remitted in immediately available funds to the Agent's account no later than
11:00 a.m., New York City time, on the date due.
(c) If the Available Collections in respect of a Remittance
Date are insufficient to pay the sum of the amounts to be distributed pursuant
to clauses (i) through (iii) of Section 5.1(a), the Collateral Agent shall
withdraw the amount of such shortfall from the Reserve Account, to the extent of
amounts on deposit therein, and apply such amount to the payment of the items
described in clauses (i), (ii) and (iii) of Section 5.1(a), in that order of
priority.
(d) If on any Remittance Date, after giving effect to any
withdrawals from the Reserve Account pursuant to Section 5.1(c), there remains
any shortfall in amounts available to pay the amounts to be distributed pursuant
to clause (iii) of Section 5.1 (a), the Servicer, or any successor Servicer may
make a Fee Advance in respect of the Liquidity Fee, and if the Servicer or any
successor Servicer declines to make a Fee Advance with respect to any Liquidity
Fee due thereunder, or after giving effect such Fee Advance, a shortfall
remains, the Agent shall review the terms of the Surety Bond, and if a demand
for payment may be made thereunder for any such shortfall, the Agent shall make
a demand thereunder in accordance with the terms of the Surety Bond.
(e) If on any Remittance Date, after giving effect to any
withdrawals from the Reserve Account pursuant to Section 5.1(c), the Net
Investment exceeds the outstanding Principal Balance of the Eligible
Receivables, the Collateral Agent shall withdraw the amount of such excess from
the Reserve Account, to the extent of amount on deposit therein and distribute
such amount as principal on the Note in reduction of the Net Investment. To the
extent the Net Investment exceeds the outstanding
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Principal Balance of the Eligible Receivables after such withdrawal and
distribution, the Agent shall review the terms of the Surety Bond, and if a
demand for payment may be made thereunder with respect to principal for the
amount by which the Net Investment exceeds the outstanding Principal Balance of
the Eligible Receivables, the Agent shall make a demand thereunder in accordance
with the terms of the Surety Bond.
(f) If on any Remittance Date, after giving effect to any
withdrawals from the Reserve Account pursuant to Section 5.1(c), there remains
any shortfall in amounts available to pay the amount to be distributed in
respect of the Unused Portion of the Surety Bond Premium pursuant to clause
(viii) of Section 5.1(a), the Servicer or any successor Servicer may make a Fee
Advance in respect of the Unused Portion of such Surety Bond Premium.
(g) To the extent that the Collateral Agent shall receive any
late fees, insufficient check charges and similar charges assessed against
Obligors, the Collateral Agent shall remit such amounts to, or upon the order of
the Servicer, if UAC, otherwise, the Debtor. Such amounts shall be so remitted
by the Collateral Agent to the Servicer notwithstanding that a Termination Event
shall have occurred.
(h) In the event that an Interest Rate Hedge is entered into
by the Debtor in compliance with Section 6.1(n), then in such event all amounts
payable by the Hedge Counterparty to the Debtor shall be deposited directly into
the Collection Account and as of any Remittance Date shall comprise Interest
Rate Hedge Receipts and all such amounts shall be treated as Finance Charge
Collections hereunder.
SECTION 5.2 Remittances to the Secured Parties. On each
Remittance Date, the Collateral Agent shall remit all applicable amounts to each
Secured Party in accordance with the provisions of Section 5.1. The foregoing
notwithstanding, the final remittance in respect of the Note shall be made in
the applicable manner specified above only upon presentation and surrender of
the Note at the office of the Debtor specified by it in the notice of such final
remittance or repurchase.
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SECTION 5.3 Reserve Account. (a) On or before the Initial
Funding, the Debtor shall establish a segregated account (the "Reserve Account")
with the Collateral Agent in the name of the Collateral Agent, for the benefit
of the Secured Parties. Subject to the terms hereof, the Collateral Agent shall
possess all right, title and interest in and to all funds deposited from time to
time in the Reserve Account. The Collateral Agent shall maintain the Reserve
Account at an Eligible Institution. If the Eligible Institution holding the
Reserve Account shall cease to be an Eligible Institution, the Surety Bond
Provider (as long as no Surety Bond Provider Default has occurred and is
continuing) shall have the right to direct the transfer of the Reserve Account
to an Eligible Institution. Notwithstanding the foregoing, the Collateral Agent
shall not withdraw any funds from, or otherwise exercise control over, the
Reserve Account except as provided in this Agreement. All amounts on deposit in
the Reserve Account shall be held by the Collateral Agent for the benefit of the
Secured Parties.
(b) On or prior to the Initial Funding, the Debtor shall
deposit or cause to be deposited in the Reserve Account, the Required Reserve
Account Balance (calculated as if such Initial Funding had occurred). The Debtor
shall deposit into the Reserve Account all amounts which are required to be
deposited therein by this Agreement. The Collateral Agent shall promptly
withdraw from the Reserve Account all amounts required to be withdrawn therefrom
pursuant to Section 5.1(b) and 5.1(c) hereof, and shall either (i) pay such
amounts to the Agent, for the account of the Company (in the case of withdrawals
pursuant to Section 5.1(b)) or (ii) deposit such amounts to the credit of the
Collection Account (in the case of withdrawals therefrom pursuant to Section
5.1(c)).
(c) Prior to the occurrence of a Termination Event and to the
extent that amounts on deposit in the Reserve Account on any Remittance Date,
after giving effect to any required withdrawals therefrom on such day, exceed
the Required Reserve Account Balance, such excess amounts shall be withdrawn
from the Reserve Account by the Collateral Agent and remitted to the Debtor.
(d) (i) Funds on deposit in the Reserve Account shall be
invested in Eligible Investments by or at
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the written direction of the Debtor, provided that if a Termination Event shall
have occurred, such investments shall be made as directed by the Surety Bond
Provider (or by the Collateral Agent if there shall have been a Surety Bond
Provider Default). Any such written directions shall specify the particular
investment to be made and shall certify that such investment is an Eligible
Investment and is permitted to be made under this Agreement.
(ii) All investments of amounts on deposit
in the Reserve Account shall be accomplished in a manner so as to cause
such investments to be Transferred to the Collateral Agent; provided
that upon the effectiveness in the State of New York of the 1994
Official Text of Article 8 of the Uniform Commercial Code, investments
need not be Transferred to the Collateral Agent. The Collateral Agent
agrees that, without the prior consent of the Surety Bond Provider, it
shall not accept for credit to the Reserve Account any investment as to
which it has knowledge of any adverse claim thereto. NationsBank, N.A.
hereby agrees (and any other Financial Intermediary holding the Reserve
Account shall so agree) to comply with all Entitlement Orders (as
defined in Section 8-102 of the 1994 Official Text of the Uniform
Commercial Code) received by it with respect to the Reserve Account
from the Collateral Agent.
(iii) Funds on deposit in the Reserve
Account on the Closing Date and thereafter shall be so invested in
Eligible Investments that mature such that such funds or the proceeds
thereof will be available for withdrawal pursuant to Section 5.1(b) and
5.1(c) on the maturity date of Related Commercial Paper; in any event
the maturity of any Eligible Investment shall not exceed 30 days. No
Eligible Investment may be liquidated or disposed of prior to its
maturity. All proceeds of any Eligible Investment shall be deposited in
the Reserve Account. Investments may be made on any date (provided such
investments mature in accordance with the preceding sentence), only
after giving effect to deposits to and with-
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drawals from the Reserve Account on such date. Realized losses, if any,
on amounts invested in Eligible Investments shall be charged against
investment earnings on amounts on deposit in the Reserve Account.
(iv) The Debtor and the Surety Bond Provider
shall each provide the Collateral Agent on the date hereof and from
time to time an incumbency certificate or the substantial equivalent
with respect to each officer of the Debtor and the Surety Bond
Provider, respectively, that is authorized to provide instructions
relating to investments in Eligible Investments.
(e) Eligible Investments shall be maintained by the Collateral
Agent in such manner as may be necessary to maintain the first priority
perfected security interest in favor of the Collateral Agent on behalf of the
Secured Parties. NationsBank, N.A. agrees (and any other Financial Intermediary
holding the Reserve Account shall so agree) that it shall not agree to comply
with Entitlement Orders (as defined in Section 8-102 of the 1994 version of the
Official Text of Article 8 of the Uniform Commercial Code) with respect to the
Reserve Account given to it by any Person other than the Collateral Agent.
All amounts or property credited to the Reserve Account shall
be subject to the lien of the Collateral Agent until released or withdrawn from
the Reserve Account.
(f) If and to the extent that the Net Investment has been
reduced to zero and all amounts owed by the Debtor to the Secured Parties
hereunder, under the Note Purchase Agreement, the Insurance Agreement, the Note
and any other Transaction Document have been paid in full, any amounts on
deposit in the Reserve Account shall be released to the Debtor. In the event
that thereafter the Debtor shall request that the Noteholder increase its Net
Investment, it shall be a condition precedent thereto that the Reserve Account
be funded in an amount equal to the Required Reserve Account Balance after
giving effect to any such requested increase in the Net Investment.
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SECTION 5.4 Carrying Costs Account. (a) On or before the
Initial Funding, the Debtor shall establish a segregated account (the "Carrying
Costs Account") with an Eligible Institution designated by the Collateral Agent
in the name of the Collateral Agent, for the benefit of the Secured Parties. If
the Eligible Institution holding the Carrying Costs Account shall cease to be an
Eligible Institution, the Surety Bond Provider (as long as no Surety Bond
Provider Default has occurred and is continuing) shall have the right to direct
the transfer of the Carrying Costs Account to an Eligible Institution. Subject
to the terms hereof, the Collateral Agent shall possess all right, title and
interest in and to all funds deposited from time to time in the Carrying Costs
Account. Notwithstanding the foregoing, the Collateral Agent shall not withdraw
any funds from, or otherwise exercise control over, the Carrying Costs Account
except as provided in this Agreement. All amounts on deposit in the Carrying
Costs Account shall be held for the benefit of the Secured Parties.
(b) The Servicer shall deposit into the Carrying Costs Account
all amounts which are required to be deposited therein pursuant to Section
5.1(a)(iv). The Collateral Agent shall promptly withdraw from the Carrying Costs
Account all amounts required to be withdrawn therefrom pursuant to Section
5.1(b) hereof, and shall pay such amounts to the Agent, for the account of the
Company.
(c) (i) Funds on deposit in the Carrying Costs Account shall
be invested in Eligible Investments by the Collateral Agent.
(ii) All investments of amounts on deposit
in the Carrying Costs Account shall be accomplished in a manner so as
to cause such investments to be Transferred to the Collateral Agent;
provided that upon the effectiveness in the State of New York of the
1994 Official Text of Article 8 of the Uniform Commercial Code,
investments need not be Transferred to the Collateral Agent. The
Collateral Agent agrees that, without the prior consent of the Surety
Bond Provider, it shall not accept for credit to the Carrying Costs
Account any investment as to which it has knowledge of any adverse
claim
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thereto. The Collateral Agent shall cause any Financial Intermediary
holding the Carrying Costs Account to agree to comply with all
Entitlement Orders (as defined in Section 8-102 of the 1994 Official
Text of the Uniform Commercial Code) received by it with respect to the
Carrying Costs Account from the Collateral Agent.
(iii) Funds on deposit in the Carrying Costs
Account on the Closing Date and thereafter shall be so invested in
Eligible Investments that mature such that sufficient amounts of such
funds or the proceeds thereof will be available for withdrawal pursuant
to Section 5.1(b) on the maturity date of Related Commercial Paper; in
any event the maturity of any Eligible Investment shall not exceed 30
days. No Eligible Investment may be liquidated or disposed of prior to
its maturity. All proceeds of any Eligible Investment shall be
deposited in the Carrying Costs Account. Investments may be made on any
date (provided such investments mature in accordance with the preceding
sentence), only after giving effect to deposits to and withdrawals from
the Carrying Costs Account on such date. Realized losses, if any, on
amounts invested in Eligible Investments shall be charged against
investment earnings on amounts on deposit in the Carrying Costs
Account.
(d) Eligible Investments shall be maintained by the Collateral
Agent in such manner as may be necessary to maintain the first priority
perfected security interest in favor of the Collateral Agent on behalf of the
Secured Parties. Any Financial Intermediary holding the Carrying Costs Account
shall agree that it shall comply with Entitlement Orders (as defined in Section
8- 102 of the 1994 version of the Official Text of Article 8 of the Uniform
Commercial Code) with respect to the Carrying Costs Account given to it by any
Person other than the Collateral Agent.
All amounts or property credited to the Carrying Costs Account
shall be subject to the lien of the
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Collateral Agent until released or withdrawn from the Carrying Costs Account.
(f) On each Distribution Date, all investment earnings (net of
any losses) on Eligible Investments earned during the related Collection Period
shall be released to the Debtor. If and to the extent that the Net Investment
has been reduced to zero and all amounts owed by the Debtor to the Secured
Parties hereunder, under the Note Purchase Agreement, the Insurance Agreement,
the Note and any other Transaction Document have been paid in full, any amounts
on deposit in the Carrying Costs Account shall be released to the Debtor.
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ARTICLE VI
TERMINATION EVENTS; WIND-DOWN EVENTS
SECTION 6.1 Termination Events. The occurrence and
continuation of any one of the following events shall be a "Termination Event"
under this Agreement:
(a) failure on the part of the Debtor to pay or disburse when
due the amounts provided for herein (with the exception of any failure to pay
any Yield Supplement Amount), in the Note Purchase Agreement, the Insurance
Agreement, or in the Note and such failure continues for two Business Days or
the failure on the part of UAC to make any payment or effect any transfer of
Receivables under the Purchase Agreement or the Servicer to make any payment
under the Servicing Agreement and such failure continues for two Business Days;
(b) failure (i) by the Debtor or the Seller, to observe or
perform any term, covenant, condition or agreement set forth in Sections 3.2(a),
(d), (e), (f), (i), (k)(i) and (l) of this Agreement or the Servicer in the
Servicing Agreement, or (ii) of any representation or warranty of the Debtor,
the Seller or the Servicer contained herein, the Note Purchase Agreement, the
Purchase Agreement, the Insurance Agreement or the Servicing Agreement to be
true and correct in all material respects on any day when made or deemed made
hereunder or thereunder, or (iii) by the Debtor to observe or perform any other
term, covenant, condition or agreement provided for herein or in the Note (other
than a term addressed in clause (i) above) which, in the case of clause (ii)
above continues for a period of thirty (30) days after the earlier of (u) the
date on which written notice of such breach shall have been given to the Debtor,
the Seller or the Servicer, by the Agent, the Surety Bond Provider or the
Collateral Agent, or (v) the date on which the Debtor, the Servicer or the
Seller became aware of such breach, or which, in the case of clause (ii) above
continues for a period of ten (10) days after the earlier of (x) the date on
which written notice of such failure shall have been given to the Debtor, the
Servicer or the Seller by the Agent, the Surety Bond Provider or the Collateral
Agent or (y) the date on which the Debtor, the Servicer or the Seller became
aware of such failure; notwithstanding clause (ii) above, in the
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event the Debtor makes the payment required by Section 3.1 as a result of a
breach of the representation set forth in Section 3.1(a), the breach of such
representation shall not constitute a Termination Event hereunder;
(c) the Debtor, the Seller or the Servicer shall consent to
the appointment of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Debtor, the Seller or the Servicer, as the
case may be, or of or relating to all or substantially all of its property, or a
decree or order of a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Debtor, the Seller or the Servicer,
as the case may be, and such decree or order shall have remained in force
undischarged or unstayed for a period of 60 days; or the Debtor, the Seller or
the Servicer shall admit in writing its inability to pay its debts generally as
they become due, file a petition to take advantage of an applicable insolvency
or reorganization statute, make any assignment for the benefit of its creditors
or voluntarily suspend payment of its obligations; or the Debtor, the Seller or
the Servicer, as the case may be, shall become unable for any reason to pledge
Collateral to the Collateral Agent in accordance with the provisions of this
Agreement;
(d) the Debtor or the Servicer (if the Servicer is UAC) shall
enter into any merger or consolidation or shall convey all or substantially all
of its assets to another Person, wherein the case of a merger, it is not the
surviving entity;
(e) a Servicer Event of Default shall occur;
(f) the Delinquency Ratio averaged over any three consecutive
Collection Periods shall equal or exceed 4%;
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(g) the Default Ratio averaged over any three consecutive
Collection Periods shall equal or exceed 1.75%;
(h) the Collateral Agent shall fail for any reason to have a
valid and perfected first priority security interest in the Collateral and the
proceeds thereof;
(i) the Seller or the Servicer shall default and such default
shall continue for a period of 30 days in any payment in excess of $100,000
contained in any agreement for borrowed money to which it is a party;
(j) any demand for payment is made under the Surety Bond;
(k) a Surety Bond Provider Default has occurred and is
continuing;
(l) the term of the Surety Bond is not at least equal to the
term of the latest maturing Receivable plus 366 days);
(m) (i) (x) At any time the Net Investment exceeds the sum of
the Borrowing Base (Boats) plus the Borrowing Base (Personal Watercraft) or (y)
the Net Investment exceeds the Maximum Permitted Borrowing Base for a period of
sixty consecutive Business Days and the Debtor fails to (A) deliver a Settlement
Sheet indicating an increase in the Maximum Permitted Borrowing Base such that
the Maximum Permitted Borrowing Base exceeds the Net Investment or (B) make a
deposit into the Collection Account to be applied as principal in reduction of
the Net Investment in an amount such that the Maximum Permitted Borrowing Base
exceeds the Net Investment;
(n) the Net Yield with respect to any Determination Date shall
be less than 1% and none of (x) a Take-Out, (y) delivery of a Settlement Sheet
by the Debtor indicating an increase in the Maximum Permitted Borrowing Base
such that the Maximum Permitted Borrowing Base exceeds the Net Investment or (z)
the Debtor has entered into an Interest Rate Hedge acceptable to the Surety Bond
Provider, shall have occurred within 30 days;
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(o) a Take-Out does not occur at least once every 12 months
provided that the initial Take-Out shall occur no later than April 3, 1998;
(p) a downgrade in the claims-paying rating of the Surety Bond
Provider below "Aa" or "AA" by Moody's or S&P, respectively, provided that the
Servicer has not succeeded in finding a successor Surety Bond Provider
acceptable to the Agent within 30 days of such downgrade; or
(q) any of this Agreement, the Note Purchase Agreement, the
Insurance Agreement, the Purchase Agreement, the Servicing Agreement or the Note
shall cease to be in full force and effect.
SECTION 6.2 Wind-Down Events. The occurrence and continuation
of any one of the following events shall be a "Wind-Down Event" under this
Agreement:
(a) the Liquidity Provider or the Credit Support Provider
shall have notified the Agent that an event of default has occurred under the
Liquidity Agreement or the Credit Support Agreement, respectively;
(b) the Company's Commercial Paper shall no longer be rated at
least "A-2", in the case of S&P, and at least "P-2", in the case of Moody's; or
(c) either the Liquidity Fee or the Unused Portion of the
Surety Bond Premium shall not be paid pursuant to Section 5.1.
SECTION 6.3 Remedies. If a Termination Event as specified in
Section 6.1 shall have occurred, the Agent or the Collateral Agent may, in each
case, with the consent of the Surety Bond Provider (provided that no Surety Bond
Provider Default shall have occurred), or shall upon the written direction of
the Surety Bond Provider (provided that no Surety Bond Provider Default shall
have occurred) have the right to declare by written notice to the Debtor any
date as the Pay Out Commencement Date and to declare all amounts outstanding
under the Note, the Note Purchase Agreement and the Insurance Agreement to be
then due and payable. If the Note and such other amounts are declared due and
payable, the Col-
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lateral Agent may, with the consent of the Surety Bond Provider, or shall upon
the written direction of the Surety Bond Provider (provided that no Surety Bond
Provider Default shall have occurred) do any one or more of the following:
(a) take all necessary action to foreclose upon the
Collateral;
(b) cause the Debtor to take all steps necessary to cause the
certificate of title or other evidence of ownership of the related Boat to be
revised to name the Collateral Agent on behalf of the Secured Parties as first
lienholder and to effect any filings or take any actions necessary under
applicable certificate of title statutes to perfect the Collateral Agent's
interest as first lienholder in the boat motors and boat trailers if a
Termination Date has occurred or upon the occurrence of a Termination Event upon
the discretion of the Surety Bond Provider, if the Surety Bond Provider shall
have determined that such action is prudent to protect the interest of the
Secured Parties hereunder. Any costs associated with such revision of the
certificate of title or other evidence of ownership shall be paid by the Debtor
and to the extent such costs are not paid by the Debtor such unpaid costs shall
be recovered as described in Section 5.1 hereof.
(c) cause the Debtor to cease purchasing Receivables from the
Seller, and retain in satisfaction of any amounts owed by the Debtor, all
amounts otherwise payable to the Debtor pursuant to this Agreement, to the
extent necessary to pay in full all amounts (including principal and interest)
(i) due and payable under the Note, (ii) due and payable by the Debtor under the
Note Purchase Agreement, and (iii) all amounts due and payable by the Debtor
under the Insurance Agreement;
(d) pursue any available remedy by pro- ceeding at law or in
equity including complete or partial foreclosure of the lien upon the Collateral
and sale of the Collateral or any portion thereof or rights on interest therein
as may appear necessary or desirable (i) to collect amounts owed pursuant to the
Note and any other payments then due and thereafter to become due under the Note
or (ii) to enforce the performance and observance of any obligation, covenant,
agreement or provision con-
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tained in this Agreement to be observed or performed by the Debtor;
(e) exercise any remedies of a secured
party under the Uniform Commercial Code and take any other appropriate action to
protect and enforce the rights and remedies of the Collateral Agent on behalf of
the Secured Parties, subject to Section 8.7 hereof.
SECTION 6.4 Application of Proceeds. Any proceeds received by
the Collateral Agent from the sale, disposition or liquidation of the
Collateral, including as a result of any sale or foreclosure thereon as
contemplated by Section 6.3 above, shall be applied as follows:
(a) to the payment of (i) all accrued and unpaid interest in
accordance with Section 5.1 hereof and (ii) principal on the Note;
(b) to the reimbursement of all amounts due and payable to the
Hedge Counterparty under any Interest Rate Hedge;
(c) to the reimbursement of all draws made on the Surety Bond
and the payment of all accrued and unpaid interest related thereto;
(d) to the payment of all other amounts due hereunder, under
the Note Purchase Agreement or the Insurance Agreement to the Agent, the
Collateral Agent, the Company, the Surety Bond Provider or the Bank Investors
(pro rata among them in the event sufficient funds are not available to pay such
Persons in full); and
(e) any remainder after the payment in full of all of the
foregoing, to the Debtor.
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ARTICLE VII
THE COLLATERAL AGENT
SECTION 7.1 Duties of the Collateral Agent. The Collateral
Agent, both prior to the occurrence of a Termination Event or Wind-Down Event
hereunder and after a Termination Event or Wind-Down Event shall have been cured
or waived, shall undertake to perform such duties and only such duties as are
specifically set forth in this Agreement. The Collateral Agent shall at all
times after the occurrence of a Termination Event or Wind-Down Event which has
not been cured or waived exercise such of the rights and powers vested in it
pursuant to this Agreement using the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs.
All Collections received by the Collateral Agent from the
Servicer or otherwise will, pending remittance to the Secured Party entitled
thereto, be held in trust by the Collateral Agent for the benefit of the Secured
Parties and together with all other payment obligations of the Debtor hereunder
owing to the Secured Parties shall be payable to the Secured Parties in
accordance with the provisions of Article V hereof.
Except as otherwise provided herein, the Collateral Agent
shall not resign from the obligations and duties hereby imposed on it except
upon determination that (i) the performance of its duties hereunder is no longer
permissible under applicable law and (ii) there is no reasonable action which
the Collateral Agent could take to make the performance of its duties hereunder
permissible under applicable law. Any such determination permitting the
resignation of the Collateral Agent shall be evidenced as to clause (i) above by
an opinion of counsel to such effect delivered to the Secured Parties, Moody's
and S&P. Notwithstanding the foregoing, the Collateral Agent may resign if,
after demand therefor, it does not receive payment of any compensation due from
the Debtor pursuant to the letter agreement described in Section 7.2. No
resignation of the Collateral Agent shall become effective until a successor
Collateral Agent approved by the Secured Parties shall have assumed the
responsibilities and obligations of the Collateral Agent hereunder.
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SECTION 7.2 Compensation and Indemnification of Collateral
Agent. The Collateral Agent shall be compensated for its activities hereunder
and reimbursed for reasonable out-of-pocket expenses (including the reasonable
compensation and expenses of its counsel and agents) pursuant to a separate
letter agreement between the Collateral Agent and the Debtor. Subject to the
terms of such letter agreement, the Collateral Agent shall be required to pay
the expenses incurred by it in connection with its activities hereunder from its
own account. Notwithstanding any other provisions in this Agreement, the
Collateral Agent shall not be liable for any liabilities, costs or expenses of
the Debtor arising under any tax law, including without limitation any Federal,
state or local income or franchise taxes or any other tax imposed on or measured
by income (or any interest or penalties with respect thereto or arising from a
failure to comply therewith).
The Debtor shall indemnify the Collateral Agent, its officers,
directors, employees and agents for, and hold it harmless against any loss,
liability or expense incurred without willful misconduct, gross negligence or
bad faith on its part, arising out of or in connection with (i) the acceptance
or administration of this Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties under this Agreement and (ii) the
negligence, willful misconduct or bad faith of the Debtor in the performance of
its duties hereunder. The provisions of this Section 7.2 shall survive the
termination of this Agreement.
SECTION 7.3 Representations, Warranties and Covenants of the
Collateral Agent. The Collateral Agent agrees to make the following
representations, warranties and covenants, and further agrees that the Secured
Parties shall be deemed to have relied upon such representations, warranties and
covenants in entering into this Agreement, the Note Purchase Agreement and the
Insurance Agreement.
(a) Organization and Good Standing. The Collateral Agent is a
national banking association duly organized, validly existing and in good
standing under the laws of the United States of America, and has full
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corporate power, authority and legal right to own its properties and conduct its
business as such properties are presently owned and such business is presently
conducted, and to execute, deliver and perform its obligations under this
Agreement.
(b) Due Authorization. The execution, delivery, and
performance of this Agreement have been duly authorized by the Collateral Agent
by all necessary corporate action on the part of the Collateral Agent.
(c) Binding Obligation. This Agreement constitutes a legal,
valid and binding obligation of the Collateral Agent, enforceable in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereinafter in effect, affecting the enforcement of creditors' rights in general
and except as such enforceability may be limited by general principles of equity
(whether considered in a proceeding at law or in equity).
(d) No Conflict. The execution and de- livery of this
Agreement by the Collateral Agent, and the performance of the transactions
contemplated by this Agreement and the fulfillment of the terms hereof
applicable to the Collateral Agent, will not conflict with, violate, result in
any breach of any of the terms and provisions of, or constitute (with or without
notice or lapse of time or both) a default under, any Requirement of Law
applicable to the Collateral Agent or any indenture, contract, agreement,
mortgage, deed of trust or other instrument to which the Collateral Agent is a
party or by which it is bound.
SECTION 7.4 Liability of the Collateral Agent. (a) The
Collateral Agent shall be liable in accordance herewith only to the extent of
the obligations specifically undertaken by the Collateral Agent in such capacity
herein. No implied covenants or obligations shall be read into this Agreement
against the Collateral Agent and, in the absence of bad faith on the part of the
Collateral Agent, the Collateral Agent may conclusively rely on the truth of the
statements and the correctness of the opinions expressed in any certificates or
opinions furnished to the Collateral Agent and conforming to the requirements of
this Agreement.
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(b) The Collateral Agent shall not be liable for an error of
judgment made in good faith, unless it shall be proved that the Collateral Agent
shall have been negligent in ascertaining the pertinent facts.
(c) The Collateral Agent shall not be liable with respect to
any action taken, suffered or omitted to be taken in good faith in accordance
with this Agreement or at the direction of a Secured Party relating to the
exercise of any power conferred upon the Collateral Agent under this Agreement.
(d) The Collateral Agent shall not be charged with knowledge
of any Termination Event or Wind- Down Event unless an officer personally
familiar with and currently responsible for administering this Agreement obtains
actual knowledge of such event or the Collateral Agent receives written notice
of such event from the Debtor, the Servicer, the Company, the Surety Bond
Provider or the Agent, as the case may be.
(e) Without limiting the generality of this Section 7.4, the
Collateral Agent shall have no duty (i) to see to any recording, filing or
depositing of this Agreement or any agreement referred to herein or any
financing statement or continuation statement evidencing a security interest in
the Receivables or the Boats, or to see to the maintenance of any such recording
or filing or depositing or to any recording, refiling or redepositing of any
thereof, (ii) to see to any insurance of the Boats, or Obligors or to effect or
maintain any such insurance, (iii) to see to the payment or discharge of any
tax, assessment or other governmental charge or any Lien or encumbrance of any
kind owing with respect to, assessed or levied against, any part of the
Receivables, (iv) to confirm or verify the contents of any reports or
certificates of the Servicer or the Debtor delivered to the Collateral Agent
pursuant to this Agreement believed by the Collateral Agent to be genuine and to
have been signed or presented by the proper party or parties or (v) to inspect
the Boats at any time or ascertain or inquire as to the performance or
observance of any of the Debtor's or the Servicer's representations, warranties
or covenants or the Servicer's duties and obligations as Servicer and as
custodian of books, records, files and computer records relating to the
Receivables under the Servicing Agreement.
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(f) The Collateral Agent shall not be required to expend or
risk its own funds or otherwise incur financial liability in the performance of
any of its duties hereunder, or in the exercise of any of its rights or powers,
if there shall be reasonable ground for believing that the repayment of such
funds or adequate indemnity against such risk or liability shall not be
reasonably assured to it, and none of the provisions contained in this Agreement
shall in any event require the Collateral Agent to perform, or be responsible
for the manner of performance of, any of the obligations of the Servicer under
this Agreement.
(g) The Collateral Agent may rely and shall be protected in
acting or refraining from acting upon any resolution, officer's certificate, any
Monthly Debtor's Certificate, certificate of auditors, or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order,
appraisal, bond or other paper or document reasonably believed by it to be
genuine and to have been signed or presented by the proper party or parties.
(h) The Collateral Agent may consult with counsel and any
opinion of such counsel shall be full and complete authorization and protection
in respect of any action taken or suffered or omitted by it under this Agreement
in good faith and in accordance with such opinion of counsel.
(i) The Collateral Agent shall be under no obligation to
exercise any of the rights or powers vested in it by this Agreement or to
institute, conduct or defend any litigation under this Agreement or in relation
to this Agreement, at the request, order or direction of a Secured Party
pursuant to the provisions of this Agreement, unless such Secured Party shall
have offered to the Collateral Agent reasonable security or indemnity against
the costs, expenses and liabilities that may be incurred therein or thereby;
nothing contained in this Agreement, however, shall relieve the Collateral Agent
of its obligations, upon the occurrence of a Termination Event or a Wind-Down
Event (that shall not have been cured or waived), to exercise such of the rights
and powers vested in it by this Agreement, and to use the same degree of care
and skill in their exercise
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as a prudent person would exercise or use under the circumstances in the conduct
of his or her own affairs.
(j) The Collateral Agent shall not be liable for any action
taken, suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon it by
this Agreement.
(k) Prior to the occurrence of a Termination Event or
Wind-Down Event before the Collateral Agent has received notice of such
Termination Event or Wind- Down Event and after the curing or waiving of all
Termination Events or Wind-Down Event that may have occurred, the Collateral
Agent shall not be bound to make any investigation into the facts of matters
stated in any resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, approval, bond or other paper or document,
unless requested in writing so to do by a Secured Party; provided, however, that
if the payment within a reasonable time to the Collateral Agent of the costs,
expenses or liabilities likely to be incurred by it in the making of such
investigation shall be, in the opinion of the Collateral Agent, not reasonably
assured by the Debtor, the Collateral Agent may require reasonable indemnity
against such cost, expense or liability as a condition to so proceeding. The
reasonable expense of every such examination shall be paid by the Debtor or, if
paid by the Collateral Agent, shall be reimbursed by the Debtor upon demand.
(l) The Collateral Agent may execute any of the trusts or
powers hereunder or perform any duties under this Agreement either directly or
by or through agents or attorneys or a custodian. The Collateral Agent shall not
be responsible for any misconduct or negligence of any such agent or custodian
appointed with due care by it hereunder.
SECTION 7.5 Merger or Consolidation of, or Assumption of the
Obligations of, the Collateral Agent. The Collateral Agent shall not consolidate
with or merge into any other corporation or convey or transfer its properties
and assets substantially as an entirety to any Person, unless:
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(i) the corporation formed by such
consolidation or into which the Collateral Agent is merged or the
Person which acquires by conveyance or transfer the properties and
assets of the Collateral Agent substantially as an entirety shall be a
corporation organized and existing under the laws of the United States
of America or any State or the District of Columbia and, if the
Collateral Agent is not the surviving entity, shall expressly assume,
by an agreement supplemental hereto, executed and delivered to the
Secured Parties in form satisfactory to the Secured Parties, the
performance of every covenant and obligation of the Collateral Agent
hereunder; and
(ii) the Collateral Agent has delivered to
the Secured Parties and Moody's an officer's certificate and an opinion
of counsel each stating that such consolidation, merger, conveyance or
transfer and such supplemental agreement comply with this Section 7.5
and that all conditions precedent herein provided for relating to such
transaction have been complied with.
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ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Notices, Etc. Except where telephonic instructions
or notices are authorized herein to be given, all notices, demands, instructions
and other communications required or permitted to be given to or made upon any
party hereto shall be in writing and shall be sent by facsimile transmission
with a confirmation of the receipt thereof and shall be deemed to be given for
purposes of this Agreement on the day that the receipt of such facsimile
transmission is confirmed in accordance with the provisions of this Section 8.1.
In addition, the Debtor agrees to deliver to the Surety Bond Provider all
notices provided by it to the Collateral Agent pursuant to this Agreement, the
Servicing Agreement and the Purchase Agreement. Unless otherwise specified in a
notice sent or delivered in accordance with the foregoing provisions of this
Section, notices, demands, instructions (including payment instructions) and
other communications in writing shall be given to or made upon the respective
parties hereto at their respective addresses and accounts indicated below, and,
in the case of telephonic instructions or notices, by calling the telephone
number or numbers indicated for such party below:
If to the Company:
Enterprise Funding Corporation
c/o Merrill Lynch Money Markets Inc.
World Financial Center - South Tower
225 Liberty Street
New York, New York 10281
Attention: Gary Carlin
Telephone: (212) 236-7200
Telecopy: (212) 236-7584
(with a copy to the Administrative Agent)
If to the Debtor:
UAC Boat Funding Corp.
250 N. Shadeland Avenue, Suite 230-A
Indianapolis, Indiana 46219
Attention: Melanie Otto
Telephone: (317) 231-6311
Telecopy: (317) 231-7926
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If to the Collateral Agent, the Administrative
Agent or the Agent:
NationsBank N.A.
NationsBank Corporate Center
100 North Tryon Street
NC1-007-10-07
Charlotte, North Carolina 28255-0001
Attention: Michelle M. Heath
Investment Banking
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
Payment Information:
Bankers Trust Company
ABA #: 021001033
Acct. #:
Reference:
If to the Surety Bond Provider:
Capital Markets Assurance Corporation
885 Third Avenue
New York, New York 10022
Attention: Managing Director -
Credit Enhancement
Telephone: (212) 755-1155
Telecopy: (212) 755-5462
Payment Information: The Bank of New York
ABA #: 021-000-018 IOC 565
Acct. #: 052040
Reference: UAC BFC WH
SECTION 8.2 Successors and Assigns. This Agreement shall be
binding upon the Debtor, the Collateral Agent, the Secured Parties, the Seller
and their respective successors and permitted assigns and shall inure to the
benefit of the Debtor, the Servicer, the Collateral Agent, the Secured Parties
and the Seller and their respective successors and permitted assigns including
any Bank Investors and the Liquidity Provider; provided that the Debtor shall
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<PAGE>
not assign any of its rights or obligations hereunder without the prior written
consent of the Collateral Agent acting upon written instruction of the Secured
Parties. The Debtor and the Collateral Agent hereby acknowledge that the Agent
has granted a security interest in all of its rights hereunder to the EFC
Collateral Agent. In addition, the Debtor hereby acknowl edges that the Company
may at any time and from time to time assign all or a portion of its rights
hereunder to the Liquidity Provider pursuant to the Liquidity Agreement.
SECTION 8.3 Severability Clause. Any provisions of this
Agreement 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 8.4 Amendments. This Agreement and the rights and
obligations of the parties hereunder may not be changed orally but only by an
instrument in writing signed by the party against which enforcement is sought.
The parties hereunder agree that they will not amend, modify, waive, or
terminate any provisions of this Agreement without the written consent of each
party hereto and written notice to each of Moody's and S&P. The Debtor agrees
that it shall enter into any amendment reasonably requested by the Surety Bond
Provider or the Collateral Agent to put into effect any Interest Rate Hedge
pursuant to Section 6.1(n).
SECTION 8.5 Governing Law. This Agreement shall be construed
in accordance with and governed by the laws of the State of New York.
SECTION 8.6 No Bankruptcy Petition Against the Company. The
Debtor and each of the other parties hereto covenant and agree that, and each
such Person agrees that they shall cause any successor servicer appointed
pursuant to Section 4.1 to covenant and agree that, prior to the date which is
one year and one day after the payment in full of all Commercial Paper issued by
the Company it will not institute against, or join any other Person in
instituting against, the Company or the Debtor, any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings, or other proceedings under
any federal or state bankruptcy or similar law.
SECTION 8.7 Setoff. To the extent permitted by applicable law,
the Debtor hereby irrevocably and
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<PAGE>
unconditionally waives all right of setoff that it may have under contract
(including this Agreement), applicable law or otherwise with respect to any
funds or monies of the Debtor at any time held by or in the possession of the
Collateral Agent.
SECTION 8.8 No Recourse. Except as otherwise expressly
provided in this Agreement, it is understood and agreed that the Debtor shall
not be liable for amounts due under the Note, this Agreement, the Insurance
Agreement or the Note Purchase Agreement, except to the extent of the
Collateral, for any losses suffered by the Company in respect of the Note. The
preceding sentence shall not relieve the Debtor from any liability hereunder
with respect to its representations, warranties, covenants and other payment and
performance obligations herein described.
SECTION 8.9 Further Assurances; Replacement Surety Bond. The
Debtor agrees to do such further acts and things and to execute and deliver to
the Collateral Agent such additional assignments, agreements, powers and
instruments as are required by the Collateral Agent to carry into effect the
purposes of this Agreement or to better assure and confirm unto the Collateral
Agent its rights, powers and remedies hereunder. The Debtor further agrees, that
after the occurrence of a Replacement Event and upon the request of the Agent,
the Debtor will obtain a Replacement Surety Bond, acceptable to the Agent and
the Company within 30 days of such request and shall pay or cause to be paid all
amounts due and payable to the current Surety Bond Provider.
SECTION 8.10 Other Costs, Expenses and Related Matters. (a)
The Debtor agrees, upon receipt of a written invoice, to pay or cause to be
paid, and to save the Collateral Agent harmless against liability for the
payment of, all reasonable out-of-pocket expenses (including, without
limitation, reasonable attorneys', accountant's and other third parties' fees
and expenses, any filing fees and expenses incurred by officers or employees of
the Collateral Agent) incurred by or on behalf of the Collateral Agent (i) in
connection with the negotiation, execution, delivery and preparation of this
Agreement and any documents or instruments delivered pursuant hereto and the
transactions contemplated hereby (including, without limitation, the perfection
or protec-
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<PAGE>
tion of the Collateral Agent's security interest in the Collateral) and (ii)
from time to time (a) relating to any amendments, waivers or consents under this
Agreement, (b) arising in connection with the Collateral Agent's or its agent's
enforcement or preservation of rights (including, without limitation, the
perfection and protection of the Collateral Agent's security interest in the
Collateral under this Agreement), or (c) arising in connection with any audit,
dispute, disagreement, litigation or preparation for litigation involving this
Agreement.
SECTION 8.11 Direction of Collateral Agent; Replacement Surety
Bond. The Collateral Agent acknowledges that unless expressly indicated to the
contrary herein, all of its rights under this Agreement shall be exercised at
the direction of the Surety Bond Provider unless there shall have been a Surety
Bond Provider Default. The Collateral Agent further acknowledges that,
notwithstanding anything to the contrary herein, upon the direction of the
Company or the Agent, the Collateral Agent shall release the Surety Bond to the
Surety Bond Provider upon the occurrence of a Replacement Event, provided that;
(i) a Replacement Surety Bond, acceptable to (and issued by an entity acceptable
to) the Company and the Agent has been previously or simultaneously delivered to
the Collateral Agent and (ii) all amounts due and payable to the current Surety
Bond Provider pursuant to the terms of the Security Agreement and the Insurance
Agreement have been paid in full.
SECTION 8.12 Counterparts. This Agreement may be executed in
any number of copies, and by the different parties hereto on the same or
separate counterparts, each of which shall be deemed to be an original
instrument.
SECTION 8.13 Headings. Section headings used in this Agreement
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
88
<PAGE>
IN WITNESS WHEREOF, the Debtor, the Seller, the Company, the
Collateral Agent, the Surety Bond Provider and, solely, with respect to Sections
4.1 and 5.3, NationsBank, N.A. in its individual capacity have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.
UAC BOAT FUNDING CORP.
as Debtor
By: /s/ Melanie S. Otto
Name: Melanie S. Otto
Title: Vice President
UNION ACCEPTANCE CORPORATION
as Seller and Servicer
By: /s/ Rick A. Brown
Name: Rick A. Brown
Title: Vice President and Chief Financial
Officer
ENTERPRISE FUNDING CORPORATION
as Company
By: /s/ Stewart L. Cutler
Name: Stewart L. Cutler
Title: Vice President
NATIONSBANK, N.A.
individually and as
Collateral Agent
By: /s/ Stan Meihaus
Name: Stan Meihaus
Title: Vice President
CAPITAL MARKETS ASSURANCE
CORPORATION
as Surety Bond Provider
By: /s/ Scott Mangan
Name: Scott Mangan
Title: Vice President
89
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
UAC Boat Funding Corp. Delaware
UAC Finance Corp. Indiana
Circle City Car Company Indiana
[Letterhead]
KPMG Peat Marwick LLP
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
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, 1997, relating to the consolidated balance sheets of the Union Acceptance
Corporation and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of earnings and cash flows for each of the years in the
three-year period ended June 30, 1997, and the related consolidated statement of
shareholders' equity for the years ended June 30, 1997 and 1996, which report
appears in the June 30, 1997 Annual Report on Form 10-K of Union Acceptance
Corporation.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's consolidated financial statements for the twelve month's ended June
30, 1997, 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-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 147,202
<SECURITIES> 0
<RECEIVABLES> 123,393
<ALLOWANCES> (780)
<INVENTORY> 0
<CURRENT-ASSETS> 269,815
<PP&E> 4,724
<DEPRECIATION> (2,574)
<TOTAL-ASSETS> 392,166
<CURRENT-LIABILITIES> 25,550
<BONDS> 280,501
<COMMON> 58,270
0
0
<OTHER-SE> 27,845
<TOTAL-LIABILITY-AND-EQUITY> 392,166
<SALES> 0
<TOTAL-REVENUES> 72,413
<CGS> 0
<TOTAL-COSTS> 29,941
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,188
<INTEREST-EXPENSE> 25,688
<INCOME-PRETAX> 12,596
<INCOME-TAX> 5,195
<INCOME-CONTINUING> 7,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,401
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
