United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
250 N. Shadeland Avenue, Indianapolis, IN 46219
- ----------------------------------------- -----
(Address of principal executive office) (Zip Code)
(317) 231-6400
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 14, 1997
Class A Common Stock, without par value 4,016,788 Shares
--------------------------------------- ----------------
Class B Common Stock, without par value 9,200,000 Shares
--------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements :
Condensed Consolidated Balance Sheets as of
December 31, 1996 and June 30, 1996 3
Condensed Consolidated Statements of Earnings for the Three
Months and Six Months Ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1996 and 1995 5
Condensed Consolidated Statement of Shareholders' Equity for
Six Months Ended December 31, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION 16
Signatures 17
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
Dollars in thousands, except share data
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
-------- --------
<S> <C> <C>
Assets (Unaudited)
Cash $ 12,407 $ 13,459
Restricted cash 16,219 14,789
Loans, net 220,077 259,290
Accrued interest receivable 2,073 2,127
Furniture and equipment, net 2,224 2,026
Excess servicing 99,522 83,434
Spread accounts 72,644 63,590
Other assets 13,383 12,480
-------- --------
Total Assets $438,549 $451,195
======== ========
Liabilities
Amounts due under warehouse facilities $156,416 $187,756
Long-term debt 156,000 156,000
Accrued interest payable 4,772 5,820
Amounts due to trusts 11,733 7,931
Dealer premiums payable 2,944 3,381
Deferred income tax payable 13,076 8,357
Other payables and accrued expenses 2,783 3,326
-------- --------
Total Liabilities 347,724 372,571
-------- --------
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 58,270 58,180
Class B Common Stock, without par value,
authorized 20,000,000 shares; 9,200,000 shares
issued and outstanding -- --
Retained earnings 32,555 20,444
-------- --------
Total Shareholders' Equity 90,825 78,624
-------- --------
Total Liabilities and Shareholders' Equity $438,549 $451,195
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Statement of Earnings
Dollars in thousands, except share data
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans $ 9,096 $ 7,232 $ 18,329 $ 14,178
Interest on spread accounts and
restricted cash 1,545 1,386 3,055 2,756
----------- ----------- ----------- -----------
Total interest income 10,641 8,618 21,384 16,934
Interest expense 6,265 5,556 12,675 10,845
----------- ----------- ----------- -----------
Net interest margin 4,376 3,062 8,709 6,089
Provision for credit losses 993 300 1,848 1,450
----------- ----------- ----------- -----------
Net interest margin
after provision 3,383 2,762 6,861 4,639
Gain on sales of loans, net 7,790 8,483 14,665 15,207
Servicing fees, net 6,258 2,584 12,084 6,550
Other 910 724 1,845 1,474
----------- ----------- ----------- -----------
Total revenues 18,341 14,553 35,455 27,870
----------- ----------- ----------- -----------
Salaries and benefits 3,900 3,111 7,532 5,438
Other 3,932 2,491 7,447 4,883
----------- ----------- ----------- -----------
Total operating expenses 7,832 5,602 14,979 10,321
----------- ----------- ----------- -----------
Earnings before provision for
income taxes 10,509 8,951 20,476 17,549
Provision for income taxes 4,316 3,705 8,365 7,187
----------- ----------- ----------- -----------
Net earnings $ 6,193 $ 5,246 $ 12,111 $ 10,362
=========== =========== =========== ===========
Earnings per share $ 0.47 $ 0.40 $ 0.92 $ 0.78
=========== =========== =========== ===========
Weighted average common
shares outstanding 13,215,515 13,209,173 13,213,437 13,207,398
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------
1996 1995
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 12,111 $ 10,362
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Gain on sales of loans (22,526) (19,914)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (28,355) (23,331)
Return of excess servicing cashflows 18,074 19,963
Provision for credit losses 1,848 1,450
Spread accounts (9,054) (4,738)
Amortization and depreciation 1,860 1,354
Restricted cash (1,430) (5,768)
Other assets and accrued interest receivable (3,473) (2,019)
Amounts due to trusts 3,802 892
Other payables and accrued expenses 3,218 8,677
Loan acquisitions in excess of liquidations (588,707) (414,238)
Securitization of loans held for sale 625,192 441,960
Proceeds on sale of interest only strip 18,293 12,708
--------- ---------
Net cash provided by operating activities 30,853 27,358
--------- ---------
Cash flows used in investing activities:
Purchase of fixed assets (561) (398)
--------- ---------
Cash flows provided (used) in financing activities:
Net change in Due to Union Federal, including
regulatory equity distribution -- (337,423)
Net change in warehouse facilities (31,340) 145,862
Proceeds from issuance of senior notes -- 110,000
Payment of borrowing fees (4) (1,835)
Net proceeds from issuance of common stock -- 58,000
--------- ---------
Net cash used by financing activities (31,344) (25,396)
--------- ---------
Change in cash (1,052) 1,564
Cash, beginning of period 13,459 9,483
--------- ---------
Cash, end of period $ 12,407 $ 11,047
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid $ 4,200 $ 5,970
========= =========
Interest paid $ 13,399 $ 7,129
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
For the Six Months Ended December 31, 1996
(Dollars in thousands, except share data)
(Unaudited)
<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, 1996 4,011,358 9,200,000 $58,180 $20,444 $78,624
Shares Issued 5,430 - 90 - 90
Net Earnings - - - 12,111 12,111
--------- --------- ------- ------- -------
Balance at December 31, 1996 4,016,788 9,200,000 $58,270 $32,555 $90,825
========= ========= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended December 31, 1996 and December 31, 1995
(Unaudited)
Note 1 - Basis of Presentation
The forgoing condensed consolidated financial statements are unaudited. However,
in the opinion of management, all adjustments necessary for a fair presentation
of the results of the interim period presented have been included. All
adjustments are of a normal and recurring nature. Results for any interim period
are not necessarily indicative of results to be expected for the year. The
condensed consolidated financial statements include the accounts of Union
Acceptance Corporation and Subsidiaries (formerly the "Union Division"). On
August 7, 1995, the Company ("UAC") issued 4 million shares of Class A Common
Stock at $16.00 per share with net proceeds of $58.0 million simultaneously with
a private placement of $110.0 million of Senior Notes with net proceeds of
$108.6 million. These proceeds and fundings under a $350.0 million Prime
Warehouse Facility and a $50.0 million Non-prime Warehouse Facility were used to
eliminate amounts due to its former parent, and to capitalize UAC's business and
fund ongoing operations. The Business Transfer was completed at this time. The
Company's business is conducted solely by UAC and its subsidiaries. A summary of
the Corporation's significant accounting policies is set forth in "Note 1" of
the "Notes to Consolidated Financial Statements" in the Corporation's Annual
Report on Form 10-K for the year ended June 30, 1996.
The condensed consolidated financial statements for interim period have been
prepared in accordance with Form 10-Q specifications, and, therefore, do not
include all information and footnotes normally shown in full annual financial
statements.
Note 2 - Earnings Per Share
The initial public offering was completed on August 7, 1995. Earnings per share
for the six months ended December 31, 1995, were computed by dividing net
earnings by the average common shares outstanding during the period. Shares
outstanding from August 7, 1995, through September 30, 1995, were assumed to be
outstanding for the entire three months ended September 30, 1995. The effect of
unexercised stock options on earnings per share is less than three percent
dilutive and has not been included in the earnings per share computations.
Note 3 - Excess Servicing
Excess servicing is as follows (in thousands) at:
<TABLE>
<CAPTION>
December 31,1996 June 30,1996
---------------- ------------
Estimated value of excess servicing
<S> <C> <C>
cash flows, net of estimated prepayments $ 136,088 $ 112,564
Allowance for estimated credit losses
on securitized loans (55,197) (43,516)
Discount to present value (12,464) (9,535)
----------- -----------
68,427 59,513
Accrued interest on securitized loans 12,922 10,454
Estimated dealer premium rebates 18,173 13,467
----------- -----------
$ 99,522 $ 83,434
=========== ===========
Outstanding balance of loans serviced
through securitized trusts $ 1,622,684 $ 1,351,480
Allowance for estimated credit losses
as a percentage of securitized loans serviced 3.40% 3.22%
</TABLE>
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Six Months Ended December 31, 1996 and December 31, 1995
(Unaudited)
Note 4 - Reclassifications
Certain amounts in the fiscal 1996 Condensed Consolidated Financial Statements
have been reclassified to conform to fiscal 1997 presentation.
Note 5 - "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities"
During June 1996, the FASB 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.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. Due
to the timing of the issuance of this pronouncement, management is currently
reviewing SFAS 125 to determine the effect, if any, it will have on the
financial statements of the Company.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company derives substantially all of its earnings from the
acquisition, securitization and servicing of automobile loans originated by
dealerships affiliated with major domestic and foreign manufacturers. To fund
the acquisition of loans prior to securitization, the Company utilizes revolving
warehouse facilities, discussed in "Liquidity and Capital Resources." Through
securitizations, the Company periodically pools and sells loans to a trust which
issues Certificates to investors representing pro-rata interests in the loans
sold. When the Company sells loans in a securitization, it records a gain (or
loss) on sale of loans and establishes excess servicing as an asset. Excess
servicing cashflows are recorded against the excess servicing asset as received
over the life of the related securitization.
Acquisition Volume. The Company acquires loans on automobiles made to
borrowers who exhibit a favorable credit profile. The Company currently acquires
loans in 27 states from nearly 2,900 manufacturer-franchised auto dealerships
("Prime lending") and, since October 1994, to borrowers with adequate credit
quality who would not qualify for a loan under the Company's Prime lending
program ("Non-prime lending"). Nearly 800 of the Company's dealerships
participate in the Non-prime program, PAC. The Company continues to expand its
operations by entering new cities and signing new dealers in existing markets.
Loan acquisitions continue to be stronger than in corresponding periods of prior
fiscal years. Prime loan acquisitions increased 49.8% over the same quarter of
last year, and were up 4.9% over the prior quarter. Non-prime loan acquisitions
were $10.9 million and $25.2 million for the three and six months ended December
31, 1996, respectively. Non-prime loans represented approximately 3.5% and 4.2%
of total loans acquired for the three and six months ended December 31, 1996,
respectively. The Company's marine lending program generated approximately $917
thousand and $1.6 million for the three and six months ended December 31, 1996.
The Company has historically focused it efforts and resources towards the prime
auto segment, and will continue to do so in the future despite expanding its
operations to include other products and programs. Management believes that
there is much potential for growth in the prime auto segment.
The Company has been able to increase its loan acquisitions despite the
tightening of credit standards. Policy changes implemented during the third
quarter of fiscal 1996 included an increase in cut-off scores in several markets
where losses were running at 2.50% (loss to liquidation) or greater over the
life of the pools. This strategy was employed in order to improve the overall
average quality of the contracts being purchased. Management continues to focus
on controlled growth, recognizing that the underlying credit quality of the
portfolio is one of the most important factors associated with long-term
profitability. These strategies appear to be providing the Company with the
desired results; not only has volume increased steadily over the last fiscal
year, but the implied loss statistics as of December 31, 1996, indicated that
the 1996 loan pools were performing better than the 1995 loan pools with respect
to delinquency and credit loss statistics.
Gross and Net Spreads. Market interest rates had experienced continued
decreases over most of fiscal 1996, but began to rebound in March 1996. Because
changes in loan rates on automobile loans tend to lag behind fluctuations in
market rates of interest, the decrease in market rates during fiscal 1996
resulted in very favorable gross and net spreads on the prime securitizations
compared to previous years. Likewise, as market rates increased, beginning with
the non-prime securitization in March 1996 and the prime securitization in June
1996, there was a compression of net spreads. Market interest rates dropped
slightly for the first and second quarter securitizations, while loan rates were
still rising as a result of earlier market interest rate increases (due to the
lag as discussed above). The gross spread on the second quarter securitization
was 7.39%, 38 b.p. lower than the same quarter of last year, but 57 b.p. higher
than in the first quarter securitization. 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. Net
spread on the most recent prime securitization (November 1996) was 5.37%
compared to 6.04% compared to a year ago quarter, and 5.11% in the first quarter
securitization (August 1996). The net spreads on securitization transactions had
experienced steady compression since the first quarter of fiscal 1996, but have
rebounded
<PAGE>
slightly in the second quarter securitization (27 b.p. over the first quarter
securitization), and have continued to be significantly higher than those
spreads realized in fiscal 1995 and prior years.
Looking ahead, management is currently targeting net spreads of 5.00%
to 5.50% on prime securitizations (assuming a pricing spread for asset-backed
certificates over the two-year treasury note of 50 basis points) for fiscal
1997. Management believes that by targeting a spread of 7.00% to 7.50% between
loan rates and the two-year treasury rate, these net spreads can be achieved.
Although management believes these spreads can be achieved, material factors
affecting the net spreads are difficult to predict and could cause management's
projections to be materially inaccurate. These include current market conditions
with respect to market interest rates and demand for asset-backed securities
generally, and for Certificates representing interests in securitizations
sponsored by the Company. See - "Discussion of Forward-Looking Statements ,"
below.
Gain on Sales of Loans. Gain on Sales of Loans continues to be a
significant element of the Company's net earnings. The gain on sales of loans is
affected by several factors, but is primarily affected by the amount of loans
securitized and the net spread. The Company adjusts its pricing frequently and
employs a hedging strategy to help ensure an adequate net spread in the ensuing
securitization, while mitigating the risks of increasing interest rates and the
volatility in net spreads.
Portfolio Performance. Set forth below is certain information
concerning the Company's experience pertaining to delinquencies and net
charge-offs on the Prime fixed rate retail automobile, light truck and van
receivables serviced by the Company. There can be no assurance that future
delinquency and net loss experience on receivables will be comparable to that
set forth below.
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996 December 31, 1995
--------------------- --------------------- ---------------------
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 165,270 $1,766,525 147,722 $1,548,538 129,997 $1,308,780
Delinquencies
30-59 days 1,743 18,973 1,602 17,030 1,684 18,104
60-89 days 1,235 14,388 694 7,629 771 8,702
90 days or more 892 10,744 333 3,811 565 6,582
------- ---------- ------- ---------- ------- ----------
Total delinquencies 3,870 44,105 2,629 28,470 3,020 33,388
Delinquencies as a
percentage of servicing
portfolio 2.34% 2.50% 1.78% 1.84% 2.32% 2.55%
</TABLE>
As indicated by the above table, delinquency rates improved slightly
over the same quarter of last year. Delinquency rates based upon outstanding
loan balances of accounts 30 days past due and over were 2.50% at December 31,
1996, compared to 2.55% at December 31, 1995, for the prime servicing portfolio.
Delinquent accounts, however, increased from 2.02% at September 30, 1996 and
1.84% at June 30, 1996. The increased delinquency over the September 1996
quarter is partially due to an increase in bankrupt accounts which are included
in delinquency statistics pending resolution. Over 40% percent of the increase
in delinquency relates to these bankrupt accounts.
Non-prime portfolio delinquency was 3.79% based on outstanding loan
balances of accounts 30 days past due and over at December 31, 1996, compared to
3.35% at June 30, 1996, and 2.75% at December 31, 1995. Delinquency based on the
number of receivables 30 days past due and over was 3.57%, 3.29%, and 2.69% at
December 31, 1996, June 30, 1996, and December 31, 1995, respectively. The
Company began acquiring non-prime loans in October 1994. Management expects
fluctuations in delinquency rates on the non-prime portfolio as it becomes more
seasoned. Additionally, the increase in delinquency is due, in part, to a more
strict application of the Company's deferral policy primarily through the
reduction of discretionary deferrals under such policy. To date, the portfolio
is performing within the ranges anticipated by the Company. The non-prime
portfolio makes up only approximately 3.5% of the Company's total servicing
portfolio. The Company has historically focused on the prime end of the credit
spectrum and will continue to do so.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended Fiscal Year Ended
December 31, 1996 June 30, 1996 June 30, 1995
---------------------- --------------------- ----------------------
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing portfolio 157,815 $1,674,077 132,363 $1,343,770 104,455 $982,875
Gross charge-offs 2,254 24,895 3,663 40,815 3,493 28,628
Recoveries 9,646 19,543 15,258
---------- ---------- --------
Net charge-offs 15,249 21,272 13,370
Gross charge-offs as
a percentage of
average servicing
portfolio 2.86% 2.97%* 2.77% 3.04% 3.34% 2.91%
Recoveries as a % of gross
charge-offs 38.75% 47.88% 53.30%
Net charge-offs as a % of avg.
servicing portfolio 1.82%* 1.58% 1.36%
* Annualized
</TABLE>
As indicated in the table above, annualized net charge-offs as a
percentage of the average servicing portfolio were 1.82% for the six months
ended December 31, 1996, compared to 1.58% for the year ended June 30, 1996, and
1.59% for the six months ended December 31, 1995.
Portfolio performance continues to be within the parameters of
management's expectations despite its recent increases in delinquency and net
charge-offs. The level of credit loss risk is gauged against the potential for
profit in the underwriting process. Management has implemented various
collections and underwriting changes throughout the year in order to improve
portfolio performance, and continues to monitor closely the performance of the
portfolio, and its response to policy changes.
Although net charge-off percentages have experienced an upturn, the
gross charge-off rates have been relatively stable at around 3.00%. Recovery
rates with respect to the prime servicing portfolio have declined from 53.30%
for fiscal 1995 to 47.88% for fiscal 1996 and are at 38.75% for fiscal 1997 to
date. Management attributes the decline to a softening in current used car
prices. Management is working to improve the recovery percentage by refocusing
on its recovery efforts.
Non-prime net charge-offs totaled approximately $548,000 for the
quarter. Annualized net charge-offs were 3.51% of the average Non-prime
servicing portfolio for the six months ended December 31, 1996, compared to
2.37% for the fiscal year ended June 30, 1996, and 2.22% for the six months
ended December 31, 1995. Management is closely monitoring the performance of the
Non-prime portfolio as it matures, and is comfortable with the level of risk in
relation to its earning potential.
Overall, the Company has made strategic changes with respect to pricing
and underwriting, including an increase in cut-off scores in several of its
markets during the third quarter of fiscal 1996, and the implementation of a
scoring matrix in October 1996. Adjustments with respect to cut-off scores were
made in markets whose implied loss statistics indicated losses at 2.50% or above
on a static pool basis. The new scoring matrix combines the Company's custom
score with a credit bureau score with the intent of improving the average
quality of the contracts being acquired. The Company has been able to increase
its loan acquisitions despite the tightening of its credit standards. Management
continues to focus on controlled growth with an emphasis on credit quality.
These strategies appear to be providing the Company with the desired results as
the implied loss statistics as of December 31, 1996, indicated that the 1996
loan pools were improved over the 1995 loan pools.
Provisions are made for estimated credit losses in conjunction with
each loan sale. The allowance for estimated credit losses is inherent in the
excess servicing asset recorded upon sale. Management believes that the
allowance for estimated credit losses on securitized loans represents an
appropriate estimate of potential credit losses. However, the adequacy of such
provisions cannot be determined with certainty as many factors exist which could
result in credit losses materially different from management's original
estimates. The allowance for estimated credit losses as a percentage of
outstanding securitized loans was 3.40% at December 31, 1996 compared to 3.22%
at June 30, 1996, and 2.45% at December 31, 1995.
<PAGE>
Results of Operations
Net earnings for the three months and six months ended December 31,
1996 were up 18.1% and 16.9% respectively, compared to the three months and six
months ended December 31, 1995. The increase in net earnings is primarily
attributable to improved net interest margins and increased servicing fees. The
Company's total loan acquisitions for the quarter increased by 49.5% compared to
the same quarter of last year. Year to date loan acquisitions are up 35.6% over
the comparable periods of fiscal 1996. The servicing portfolio reached over $1.8
billion, a 36.5% increase over a year ago.
Net interest margin after provision increased 22.5% to $3.4 million and
47.9% to $6.9 million for the three months and six months ended December 31,
1996, respectively, compared to $2.8 million and $4.6 million for the three
months and six months ended December 31, 1995. The increase in interest income
resulted from an increase in the average monthly balance of prime loans held for
sale to $213.5 million for the quarter ended December 31, 1996, from $154.0
million for the corresponding period ended December 1995, which was a result of
increased loan acquisitions in the quarter ended December 31, 1996, relative to
the quarter ended December 31, 1995. Total interest expense for the three and
six months ended December 31, 1996, was greater than in the corresponding
periods of the prior fiscal year as a result of increased average outstanding
borrowings (due to increased loan acquisitions and the issuance of 9.99% Senior
Subordinated Debt in April 1996). However, interest expense as a percentage of
the average outstanding borrowings has decreased. The relative decrease in
interest expense is a result of the complete amortization of upfront fees paid
in connection with the warehouse facilities in fiscal 1996; because the
warehouse facility agreements provided for a term of one year subject to
renewal, the Company amortized all upfront costs over the first year. The
warehouse facilities have subsequently been renewed. The ongoing interest costs
related to the warehouse facilities (through which loan acquisitions are funded
) are variable and are based on commercial paper rates.
Gain on sales of loans decreased slightly to $7.8 million and $14.7
million for the three and six months ended December 31, 1996, respectively, from
$8.5 million and $15.2 million for the corresponding periods ended December 31,
1995. The Company securitized nearly $311.0 million in loans during the first
quarter and $314.2 million (including $31.1 million in a non-prime
securitization) in the second quarter of fiscal 1997, compared to $236.4 million
and $205.5 million and for the first and second quarters of fiscal 1996.
Although the volume of loans securitized was increased over prior periods, the
net spreads were slightly less favorable than in the same periods of fiscal
1996. However, net spread in the second quarter securitization did improve to
5.37% from 5.11% in the previous quarter. Net spreads had suffered compressions
throughout fiscal 1996 due to upward moving market interest rates. There tends
to be a lag between changes in market rates of interest (i.e. treasury rates)
and automobile rates. Treasury rates fell from the first quarter's
securitization (21 b.p.) while weighted average contract rates on prime loans
sold in the most recent securitization during the same period increased by 27
b.p. in response to earlier increases in market rates due to the lag as
discussed above. The decrease in treasury rates coupled with the increase in
loan rates on the most recently securitized portfolio served to increase the net
spread realized on the second quarter transaction. The securitization of $31.1
million in non-prime receivables yielded nearly $1.9 million in gain on sales of
loans. The decrease in gain on sales of loans is also due, in part, to the
effect of the additional general reserves recorded by the Company in the first
and second quarters of fiscal 1997. Additional reserves of $1.1 million and $2.6
million were recorded in the first and second quarters of fiscal 1996,
respectively.
Servicing fees, net increased to $6.3 million and $12.1 million for
the three and six months ended December 31, 1996, respectively, compared to $2.6
million and $6.6 million for the corresponding periods ended December 31, 1995.
Servicing fees consist of contractual servicing fees (1% on prime
securitizations), the accretion of discount on excess servicing cashflows, and
excess rebates. Increased servicing fees were primarily a result of the increase
in the average securitized loans of approximately 35% for the three and six
months ended December 31, 1996 as compared to the same periods of the previous
year. The increase in servicing fees, net during the second quarter of fiscal
1997 is also partially a result of the timing of excess servicing cash flows.
Previously, actual excess servicing cash flows were recorded as income in the
period received and offset by scheduled amortization of excess servicing. The
timing of cash collections in respect of securitized loans during the second
quarter of last fiscal year caused servicing fees, net for that quarter to be
artificially low; the effect was to shift servicing fees into the third quarter
of fiscal
<PAGE>
1996. As a result, the method for recording the receipt of excess servicing cash
flows was changed in the fourth quarter of fiscal 1996 to improve the matching
of excess servicing cash flows with amortization.
Other revenues increased to $910,000 and $1.8 million for the three and
six months ended December 31, 1996, respectively, from $724,000 and $1.5 million
for the three and six months ended December 31, 1995. Other revenue consists
primarily of late charge income and origination fee income. The increase
resulted primarily from increases in late charge fee income. The increase is
mainly due to the increased size of the servicing portfolio, but also due to
increased delinquent accounts. Late charge income is not accrued, but is
recorded as income when received.
Salaries and benefits increased 25.4% to $3.9 million and 38.5% to $7.5
million for the three and six months ended December 31, 1996, respectively, from
$3.1 million and $5.4 million for the corresponding periods ended December 31,
1995. These increases resulted primarily from increased full-time equivalent
("FTE") employees. Average FTE's for the three and six months ended December 31,
1996, were 373 and 360, respectively, compared to 263 and 246 for the comparable
periods ended December 31, 1995. The Company has experienced growth in
collections, credit, sales, operations, and support personnel. 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, in part, to
increased profitability-based incentive payments made during the three and six
months ended December 31, 1996.
Other expense increased 57.8% to $3.9 million and 52.5% to $7.4 million
for the three and six months ended December 31, 1996, respectively, from $2.5
million and $4.9 million for the three and six months ended December 31, 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 increased during the three and
six months ended December 31, 1996, compared to the same periods of fiscal 1996.
Financial Condition
Loans, net includes the principal balance of loans held for sale, net
of unearned discount and allowance for estimated credit losses, loans in
process, and prepaid dealer premiums. The Company's portfolio of loans, net
decreased to $220.1 million at December 31, 1996, from $259.3 million at June
30, 1996. Loan acquisition volume was higher in the quarter ended June 30, 1996,
than in the quarter ended December 31, 1996, as a result of seasonal
fluctuations. The Company effected one prime and one non-prime securitization in
the quarter ended December 31, 1996, and one prime securitization for the
quarter ended June 30, 1996, for $314.2 million and $245.1 million of loans,
respectively.
Excess Servicing increased to $99.5 million as of December 31, 1996,
from $83.4 million as of June 30, 1996. This balance increased by the amount
capitalized upon consummation of the UACSC 1996-C and 1996-D Auto Trusts
("1996-C" and "1996-D") related to excess servicing and estimated dealer premium
rebates, and excess servicing related to the non-prime securitization effected
in December 1996. Structuring of the prime securitizations included the sale of
"interest only strips" which generated more cash from the sale, but served to
reduce the initial excess servicing asset recorded. The amount capitalized was
offset by the return of excess cashflows as received over the six months ended
December 31, 1996, related to all outstanding securitizations. The Company made
an additional $1.1 million provision to the allowance for estimated credit
losses on securitized loans during the first quarter and $2.6 million during the
second quarter of fiscal 1997. The provision was charged to gain on sales of
loans. Allowance for estimated credit losses on securitized loans is included as
a component of the excess servicing asset. At December 31, 1996, the
undiscounted allowances, related to both prime and non-prime securitized loans,
totaled $55.2 million or 3.40% of the total securitized loan portfolio.
Spread Accounts increased to $72.6 million at December 31, 1996, from
$63.6 million at June 30, 1996. These balances were increased by deposits made
monthly from excess servicing cashflows, and are reduced by any withdrawals 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 deposit was
made in connection with the last several prime
<PAGE>
transactions as a result of the structuring which utilized alternative credit
enhancements (i.e. surety bonds) in lieu of initial spread account deposits.
The Warehouse Facilities, Senior Notes, and Senior Subordinated Notes
constitute the Company's primary funding facilities. The Company issued $110.0
million in 8.53% Senior Notes (Due 2002) in August 1995, in conjunction with the
spin-off from its former parent. In April 1996, the Company issued $46 million
in 9.99% Senior Subordinated Notes (Due 2003) in a private placement. The
balance of the Warehouse Facilities was $156.4 million at December 31, 1996,
compared to $187.8 million at June 30, 1996. The decrease in total borrowings is
due to the relative decrease in second quarter fiscal 1997 loan acquisitions as
compared to the quarter ended June 30, 1996. Additionally, the Company has
realized additional liquidity by utilizing alternative credit enhancement
features in its securitizations as discussed above, and by deferring a portion
of the gain on sales of loans for income tax purposes.
The net deferred income taxes payable totaled $13.1 million at December
31, 1996 compared to $8.4 million at June 30, 1996. The increase is a result of
the deferral of a portion of the gain on sales of loans for the securitizations
effected during the first and second quarters of fiscal 1997 in excess of
previously deferred income recognized currently for tax purposes.
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) acquisitions and financing of loans, (ii) payment of Dealer
Premiums, (iii) securitization costs including cash held in Spread Accounts and
similar cash collateral accounts under Warehouse Facilities, (iv) servicer
advances of payments on securitized loans pursuant to securitization trusts, (v)
losses on hedging transactions realized in connection with the closing of
securitization transactions where interest rates have declined during the period
covered by the hedge, (vi) operating expenses, (vii) interest expense, and
(viii) payment of income taxes. The Company's sources of cash from operations
include (i) standard servicing fees, generally 1.0% per annum of the prime
securitized portfolio, (ii) Excess Servicing Cash Flows, (iii) Dealer Premium
rebates, (iv) gains on hedging transactions realized in connection with the
closing of securitization transactions where interest rates have increased
during the periods covered by the hedge, (v) interest income, (vi) sales of
loans in securitization transactions, and (vii) sales of interest-only strips.
Net cash provided by operating activities increased to $30.9 million for the six
months ended December 31, 1996, from $27.4 million for the six months ended
December 31, 1995.
Hedging transactions may represent a source or a use of cash during a
given period depending on the change in interest rates. In the first and second
quarters of fiscal 1997, hedging transactions have required a use of cash of
$5.1 million.
Financing Activities and Credit Facilities. The Company has substantial
capital requirements to support its ongoing operations and anticipated growth.
The Company's sources of liquidity are currently funds from operations,
securitizations and external financings including long-term debt and revolving
warehouse credit facilities. Historically, the Company has used the
securitization of loan pools as its primary source of long-term funding, and
intends to continue to do so. Securitization transactions enable the Company to
improve its liquidity, to recognize gains from the sales of the loan pools while
maintaining the servicing rights to the loans, and to control interest rate risk
by matching the repayment of amounts due to investors in the securitizations
with the actual cash flows from the securitized assets.
The Company has borrowing arrangements with an independent financial
institution for the Prime Warehouse Facility of up to $350.0 million and a
similar Non-prime Facility of up to $50.0 million. The Prime Warehouse Facility
provides funding for loan acquisitions at a purchase price of up to 98.0% of the
outstanding principal balance of eligible loans at the time of purchase to the
extent allocable to loans which, upon origination, 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 up to 90.0% of the outstanding
principal balance. The advance rate may be reduced to as low as 88.0% (72
monthly payments and less) and 80.0% (greater than 72 monthly payments) if
certain financial tests are not met, and/or if a securitization has not been
effected in the preceding sixteen weeks. The Non-prime Warehouse Facility
provides funding for loan acquisitions at a purchase price of 80.0% of the
outstanding principal balance of eligible loans at the time of purchase. The
Company also issued $110.0 million in Senior Notes in
<PAGE>
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. Between securitization transactions,
the Company relies primarily on the Warehouse 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 Warehouse Facilities is dependent upon its compliance with
the terms and conditions thereof. The Company's ability to obtain successor
facilities or similar financing will depend on, among other things, the
willingness of financial institutions to participate in funding automobile
financing businesses and the Company's financial condition and results of
operations. Moreover, the Company's growth may be inhibited, at least
temporarily, if the Company is not able to obtain additional funding through
these or other facilities or if it is unable to satisfy the conditions to
borrowing under the Warehouse Facilities.
Management believes that the proceeds from the Company's initial public
offering, the Senior Notes, the Senior Subordinated Notes, the Warehouse
Facilities described above, future earnings, and periodic securitization of
loans could provide the necessary capital and liquidity for its operations
during the remainder of fiscal 1997; however, it is management's intent to take
full advantage of favorable market conditions to raise additional working
capital as they occur. In fact, the Company is currently planning to issue
additional senior debt in the third quarter of fiscal 1997, and is also
currently negotiating the terms of a $50 million Warehouse Facility for the
funding of its marine portfolio. There can be no assurance, however, that such
senior debt will be issued or that such Warehouse Facility will be consummated.
The period during which its existing capital resources will continue to
be sufficient will, however, be affected by the factors described above
affecting the Company's cash requirements. A number of these factors are
difficult to predict, including particularly the cash-effect of hedging
transactions, the availability of outside credit enhancement in securitizations
or other financing transactions and other factors affecting the net cash
provided by securitizations. Depending on the Company's ongoing cash and
liquidity requirements, market conditions and investor interest, the Company may
seek to raise additional capital including equity securities or additional debt
in the near term. The sale of additional equity, including Class A Common Stock
or preferred stock, would dilute the interests of current shareholders.
Other Matters
As a part of its ongoing development of its business plan, the Company
is researching the possibilities of engaging in other finance-related businesses
such as leasing, and other non-auto consumer lending. Additionally, the Company
is researching the possibility of expanding its dealer base to include
nationally-recognized used rental car outlets which are not
manufacturer-franchised dealerships. Based on this research, the Company may
expand its current operations to include some or all of the above
finance-related businesses. It is management's philosophy to continually search
for new products and markets to grow and expand the Company in order to maximize
profits and shareholder value.
Discussion of Forward-Looking Information
The above discussions contain forward-looking statements made by the
Company regarding its results of operations, cash flow needs and liquidity, loan
acquisition volume, target spreads, potential credit losses, servicing income,
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. See the "Discussion of Forward-Looking Information" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for fiscal 1996 which is
incorporated herein by this reference.
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders, on October 23, 1996,
the following members were elected to the Board of Directors.
Affirmative Votes
Votes Withheld
Howard L. Chapman 45,024,971 580
John M. Davis 45,024,971 580
Fred M. Fehsenfeld 44,974,971 80,580
Donald A. Sherman 45,024,971 580
John M. Stainbrook 45,025,171 380
Jerry D. Von Deylen 45,025,171 380
Richard D. Waterfield 45,025,171 380
Thomas M. West 45,024,971 580
The following proposals were approved at the Company's Annual Meeting on October
23, 1996:
Ratification of appointment of auditors. KPMG Peat Marwick, LLP was retained as
the Company's auditors for the fiscal year 1997. The votes were as follows:
45,024,501 Affirmative Votes; 950 Negative Votes; and 100 Votes Abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following Exhibits are filed as a part of this
report:
Exhibit 4.1 - Amendment No. 6 to Transfer and Administration
Agreement between Union Acceptance Funding
Corporation, Union Acceptance Corporation and
Enterprise Funding Corporation, dated as of
December 23, 1996
Exhibit 4.2 - Amendment No. 3 to Transfer and Administration
Agreement between Perfomrance Funding Corporation,
Union Acceptance Corporation and Enterprise
Funding Corporation dated as of December 23, 1996
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Acceptance Corporation
February 14, 1997 By: /S/ Rick A. Brown
------------------------------------
Rick A. Brown
VP, Treasurer and Chief Financial Officer
AMENDMENT NUMBER 6 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 6 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of December 23, 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, September 5,
1996 and October 31, 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:
"Acquisition Subsidiary" shall mean a wholly owned subsidiary
of UAC which has entered into (i) agreements with dealers in certain
states for the origination or purchase of Receivables, and (ii) an
agreement with UAC pursuant to which UAC acquires all Receivables
originated or purchased by such Acquisition Subsidiary.
(b) The definition of "Eligible Receivables" is hereby amended by
deleting paragraph (i) therefrom and replacing it with the following text
(solely for convenience of reference, the revised language in this definition is
italicized):
"(i) (A) which shall have been either (x) originated by or
through a factory authorized dealer located in the United States and
which, together with the Contract related thereto, shall have been
validly assigned by such dealer to an Acquisition Subsidiary, UAC or
UFSB pursuant to the terms of such Contract, for the retail sale of the
related Financed Vehicle in the ordinary course of its business, shall
have been validly assigned to UAC if such Receivable had been assigned
by such a dealer to an Acquisition Subsidiary, shall have been validly
assigned to UAC if such Receivable had been assigned by such a dealer
to UFSB, shall have been fully and properly executed by the parties
thereto, and
-1-
<PAGE>
shall have been advanced directly to or for the benefit of the Obligor
for the purchase of the related Financed Vehicle, or (y) originated by
an Acquisition Subsidiary or UAC, for the retail sale of the related
Financed Vehicle in the ordinary course of its business, shall have
been validly assigned to UAC if such Receivable had been originated by
an Acquisition Subsidiary, shall have been fully and properly executed
by the parties thereto, and shall have been advanced directly to or for
the benefit of the Obligor for the purchase of the related Financed
Vehicle, (B) shall have been sold by UAC to the Transferor pursuant to
the Sale and Purchase Agreement and to which the Transferor has good
title thereto, free and clear of all Adverse Claims, and (C) the
Contract related to which shall contain customary and enforceable
provisions such that the rights and remedies of the holder thereof
shall be adequate for the realization against the collateral of the
benefits of the security provided thereby;
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. Consent to Amendment of Sale and Purchase Agreement. Without
implying any amendment or future waiver of rights by the Company under the
Transfer and Administration Agreement, the Company hereby consents to the
execution and delivery by the Transferor of the Second Amendment and Restatement
of Sale and Purchase Agreement dated as of December 23, 1996.
SECTION 4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
SECTION 5. Severability; Counterparts. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 6. Ratification. Except as expressly affected by the provisions
hereof, the Transfer and Administration Agreement as amended shall remain in
full force and effect in accordance with its terms and ratified and confirmed by
the parties hereto. On and after the date hereof, each reference in the Transfer
and Administration Agreement to "this
-2-
<PAGE>
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]
-3-
<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
-4-
AMENDMENT NUMBER 3 TO
TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NUMBER 3 TO TRANSFER AND ADMINISTRATION AGREEMENT (this
"Amendment"), dated as of December 23, 1996 between PERFORMANCE FUNDING
CORPORATION, a Delaware corporation, as transferor (in such capacity, the
"Transferor"), UNION ACCEPTANCE CORPORATION, an Indiana
corporation, in its individual capacity and as collection agent (in such
capacity, the "Collection Agent"), and ENTERPRISE FUNDING CORPORATION, a
Delaware corporation (the "Company") amending that certain Transfer and
Administration Agreement dated as of July 24, 1995, as amended by Amendment No.
1 dated as of September 8, 1995, and Amendment No. 2 dated as of May 10, 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:
"Acquisition Subsidiary" shall mean a wholly owned subsidiary
of UAC which has entered into (i) agreements with dealers in certain
states for the origination or purchase of Receivables, and (ii) an
agreement with PAC pursuant to which PAC acquires all Receivables
originated or purchased by such Acquisition Subsidiary.
(b) The definition of "Eligible Receivables" is hereby amended by
deleting paragraph (i) therefrom and replacing it with the following text
(solely for convenience of reference, the revised language in this definition is
italicized):
"(i) (A) which shall have been either (x) originated by or
through a factory authorized dealer located in the United States and
which, together with the Contract related thereto, shall have been
validly assigned by such dealer to an Acquisition Subsidiary or PAC
pursuant to the terms of such Contract, for the retail sale of the
related Financed Vehicle in the ordinary course of its business, shall
have been validly assigned to PAC if such Receivable had been assigned
by such a dealer to an Acquisition Subsidiary, shall have been validly
assigned to UAC if such Receivable had been assigned by such a dealer
to UFSB, shall have been fully and properly executed by the parties
thereto, and shall have been
-1-
<PAGE>
advanced directly to or for the benefit of the Obligor for the purchase
of the re lated Financed Vehicle, or (y) originated by an Acquisition
Subsidiary or PUAC, for the retail sale of the related Financed Vehicle
in the ordinary course of its business, shall have been validly
assigned to PAC if such Receivable had been originated by an
Acquisition Subsidiary, shall have been fully and properly executed by
the parties thereto, and shall have been advanced directly to or for
the benefit of the Obligor for the purchase of the related Financed
Vehicle, (B) shall have been sold by UAC to the Transferor pursuant to
the Sale and Pur chase Agreement and to which the Transferor has good
title thereto, free and clear of all Adverse Claims, and (C) the
Contract related to which shall contain customary and enforceable
provisions such that the rights and remedies of the holder thereof
shall be adequate for the realization against the collateral of the
benefits of the security provided thereby;
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. Consent to Amendment of Sale and Purchase Agreement. Without
implying any amendment or future waiver of rights by the Company under the
Transfer and Administration Agreement, the Company hereby consents to the
execution and delivery by the Transferor of the Second Amendment and Restatement
of Sale and Purchase Agreement dated as of December 23, 1996.
SECTION 4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
SECTION 5. Severability; Counterparts. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 6. Ratification. Except as expressly affected by the provisions
hereof, the Transfer and Administration Agreement as amended shall remain in
full force and effect in accordance with its terms and ratified and confirmed by
the parties hereto. On and after the date hereof, each reference in the Transfer
and Administration Agreement to "this
-2-
<PAGE>
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]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment Number 3 as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: /s/ K. Carter Harris
----------------------------------------
Name: K. Carter Harris
Title: Vice President
PERFORMANCE FUNDING CORPORATION
as Transferor
By: /s/ Melanie S. Otto
----------------------------------------
Name: Melanie S. Otto
Title: Assistant Secretary
UNION ACCEPTANCE CORPORATION
As Collection Agent
By: /s/ Maureen A. Schoch
----------------------------------------
Name: Maureen A. Schoch
Title: Vice President
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED DECEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927790
<NAME> Union Acceptance Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 101,270
<SECURITIES> 0
<RECEIVABLES> 221,147
<ALLOWANCES> (1,070)
<INVENTORY> 0
<CURRENT-ASSETS> 321,347
<PP&E> 4,358
<DEPRECIATION> (2,134)
<TOTAL-ASSETS> 438,549
<CURRENT-LIABILITIES> 191,724
<BONDS> 156,000
<COMMON> 58,270
0
0
<OTHER-SE> 32,555
<TOTAL-LIABILITY-AND-EQUITY> 438,549
<SALES> 0
<TOTAL-REVENUES> 49,978
<CGS> 0
<TOTAL-COSTS> 14,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,848
<INTEREST-EXPENSE> 12,675
<INCOME-PRETAX> 20,476
<INCOME-TAX> 8,365
<INCOME-CONTINUING> 12,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,111
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
</TABLE>
