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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, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction (I.R.S. Employer
of incorporation Identification Number)
or organization)
250 N. Shadeland Avenue, Indianapolis, IN 46219
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 317-231-6400
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Class A Common
Stock, without par value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of the 4,047,351 shares of the issuer's Class A
Common Stock held by non-affiliates, as of September 23, 1998, was $21,754,512.
There is no trading market for the issuer's Class B Common Stock.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
The number of shares of Class A Common Stock of the Registrant, without par
value, outstanding as of September 23, 1998, was 4,376,446 shares. The number of
shares of Class B Common Stock of the Registrant, without par value, as of such
date was 8,855,036.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders are
incorporated into Part III.
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX
PART I Page
Item 1. Business................................................... 3
Item 2. Properties................................................. 19
Item 3. Legal Proceedings.......................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........ 19
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................ 20
Item 6. Selected Consolidated Financial Data....................... 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 22
Item 7a. Quantitative and Qualitative Disclosures................... 38
Item 8. Financial Statements and Supplementary Data................ 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 61
PART III
Item 10. Directors and Executive Officers of the Registrant......... 61
Item 11. Executive Compensation..................................... 61
Item 12. Security Ownership of Certain Beneficial
Owners and Management...................................... 61
Item 13. Certain Relationships and
Related Transactions....................................... 61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................ 61
SIGNATURES........................................................... 62
<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, ("Tier I"). The Company currently acquires loans in 32 states from over
3,600 manufacturer-franchised auto dealerships nationwide. The Company also
acquires loans from borrowers with adequate credit quality who would not qualify
for a loan under the Company's Tier I quality criteria ("Tier II"). In June
1996, the Company began acquiring loans under the Marine Lending program and
terminated the program in March 1998. Tier II and marine loan acquisitions
accounted for 2.7% of total loan acquisitions during fiscal 1998.
During the third quarter of fiscal 1998, the Tier I and Tier II origination
departments were combined effectively reducing the administrative complexity
involved with separate operating structures. The Company will continue to track
performance and acquisition volume separately, as well as maintain separate
underwriting criteria.
In July 1998, the Company opened a new car franchised dealership in
Indianapolis and began retailing a portion of its repossessed autos. The new car
franchised dealership, Circle City Car Company, will be used as a supplement to
wholesale disposal at auctions. The Company anticipates retailing approximately
20% of its repossessions and will not finance any of its repossessed auto
resales.
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."
<PAGE>
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 19.2 million used automobiles at retail in calendar
1997 at an average price of $12,100 for a total sales volume of approximately
$232.3 billion. Based on its knowledge of the industry, the Company believes
that dealership finance departments typically originate or direct the
origination of approximately 60%, or $139.4 billion in calendar 1997, of the
financing of used car loans. The Company believes that it currently funds less
than 1.0% of dealer-directed used car financing in the United States.
Competition in the field of financing retail automobile sales is intense.
The auto finance market is highly fragmented and historically has been serviced
by a variety of financial entities including the captive finance affiliates of
major automotive manufacturers, banks, savings associations, independent finance
companies, credit unions and leasing companies. Providers of retail automobile
financing have traditionally competed on the basis of interest rates charged,
the quality of credit accepted, the flexibility of loan terms offered and the
quality of service provided to the dealers and customers. In seeking to
establish itself as one of the principal financing sources at the dealerships it
serves, the Company competes predominantly on the basis of providing a high
level of dealer service (including evening and weekend hours and quick
application response time), offering flexible loan terms, and developing strong
relationships with dealerships. While the Company seeks to offer rates that are
competitive in each of its geographic markets, the Company does not currently
seek to compete by offering the lowest rates or by accepting lower quality
credit (although its Tier II Lending competes in a lower credit-quality market
segment).
The Company's competition varies among its geographic markets. In the Tier
I Lending market segment, the Company has experienced its most intense
competition in the Midwest, particularly in Indiana and Ohio. The Company's
primary competitors for Tier I loans are regional banks and the captive finance
affiliates of major automotive manufacturers. Competition in the Tier II sector
comes predominantly from independent finance companies.
Dealer Marketing and Service
The Company has entered into dealer agreements with over 3,600 retail
automobile dealers in 32 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
1.9% of the Company's loan purchases during the fiscal year ended June 30, 1998.
The Company's ability to acquire Tier I 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.
<PAGE>
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 1998 was under one 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 analysts 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 geographic 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. Additionally, the Company created a department that
specifically handles dealer customer service issues, in order to allow the
outside sales representatives and the credit analysts to focus strictly on
marketing and buying loans. A portion of the sales representatives' compensation
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 program 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 Automated Clearing House ("ACH") 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
payments 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.
<PAGE>
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
geographic 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 is entered into the
Company's computer system, and the application is assigned to a credit analyst.
The Company's computer system obtains a credit bureau report, applies the Credit
Scoring model and generates summary credit analysis for the credit analyst. In
April 1998, the Company automated the calculation of its income and debt to
income ratios and incorporated these automated calculations as well as credit
score into a quality control underwriting screen. The Company evaluates
applications based on four key income or debt to income ratios as well as credit
score and judgment of the credit analyst. Approval authority and advance amounts
are determined by the combination of the five key underwriting criteria. The
credit analyst analyzes the application data, the quality control data, and the
credit bureau report and sends a response by facsimile transmission to the
dealer.
Approximately 69% 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
credit analysts to visit dealers and their finance managers, both to develop
dealer rapport and to maintain awareness of local economic trends.
<PAGE>
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. While the Company is pleased with the performance of the existing
scorecard, the Company has been developing a new customized scorecard that it
plans to implement by the first half of calendar 1999.
The Company's purchasing philosophy generally focuses on acquiring high
quality credit 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. Based on underwriting guidelines, credit analysts must
review each of the five criteria, mentioned above, in the approval process. An
application that does not meet the minimum underwriting guidelines for any of
the five underwriting criteria requires the approval of a Regional Credit
Manager. Credit analysts may approve applications that meet all of these
guidelines, with limits on advance amounts based on the combination of the five
criteria. Regardless of the key underwriting ratios, the application
characteristics and credit history must support the credit decision. The prior
auto dealership business experience of a majority of the Company's credit
employees is valuable, not only in assuring sound credit analysis, but also in
protecting the Company from attempts by dealers or their customers to obtain
approval of unacceptable credit. Management monitors and regularly audits credit
analysts' decisions, and during fiscal 1998, the Company created a quality
control department that primarily focuses on reviewing loan files. The
department reviews 100% of the cashed Tier II loan files and a percentage of the
Tier I cashed files based on predetermined high risk characteristics including
high advance rates and approvals of loans that were below the minimum
underwriting criteria. The Company tracks the delinquency and charge-off rates
of all loans purchased by each individual credit analyst. The review process has
created additional management controls, more immediate feedback on underwriting
trends, and an additional source for capturing valuable loan data information
that can be analyzed and used as origination or collection tools.
Of the Tier I loan applications received from dealerships for the year
ended June 30, 1998, the Company approved approximately 16.5% unconditionally
and approximately 18.0% with conditions. Of the approved and conditionally
approved loans, approximately 33.9% were ultimately acquired. During fiscal
1998, the Company acquired approximately $944.7 million in Tier I 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 geographic 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
became more prevalent during fiscal 1997 and continues to increase as the
Company enters new geographic markets using generic contracts. For dealers that
<PAGE>
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 began utilizing dealer drafts on
its Tier II quality loans as part of an administrative change resulting from the
combination of Tier I and Tier II Lending departments. Previously, the Company
did not utilize dealer drafts in its Tier II Lending.
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 approximately 50% of all loan acquisitions, the dealer
is paid the entire Dealer Premium in advance. 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 the
majority of the other loan acquisitions, 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. Before the termination of the Marine Lending program, the Company
paid Dealer Premium in conjunction with marine loan acquisitions. The Company
does not pay a Dealer Premium to dealers for Tier II loans. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
<PAGE>
Geographic Concentration
The following table sets forth certain information concerning the states in
which the Company is operating its Tier I business:
<TABLE>
<CAPTION>
Loans Acquired For The
Twelve Months Ended At June 30,1998
------------------------------------
Date Re-entry June 30, Servicing Number Of Number Of
State Established Date 1998 1997 1996 Portfolio Metro Areas Dealers
----- ----------- ---- ---- ---- ---- --------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Indiana................ Jan-86 $ 25,464 40,858 38,755 69,518 1 192
Ohio................... Apr-88 52,699 69,928 58,123 127,318 3 241
Kentucky............... Jan-90 Oct-96 7,383 4,701 - 9,425 2 34
Arizona................ Jun-91 27,231 40,452 55,955 78,948 1 91
Colorado............... Dec-91 18,712 17,861 31,984 38,061 1 92
Kansas................. Jan-92 10,249 8,591 11,559 17,333 1 36
Missouri............... Jan-92 18,986 25,034 16,643 43,688 1 91
Texas.................. Jun-92 115,143 140,576 153,174 287,473 5 320
Minnesota ............. Aug-92 Apr-97 13,325 1,167 - 12,492 1 72
Utah................... Sep-92 Jun-97 7,121 - - 6,102 1 49
Oklahoma............... Oct-92 33,682 50,459 60,022 92,530 1 75
Florida................ Apr-93 76,883 81,815 55,292 146,215 5 222
North Carolina......... Jul-93 85,515 105,920 113,131 204,302 3 192
Georgia................ Apr-94 36,244 28,610 20,981 63,906 2 111
Virginia............... May-94 63,110 70,134 68,688 128,695 2 174
South Carolina......... Jul-94 35,711 35,353 15,175 58,351 2 80
Iowa................... Aug-94 24,170 23,672 13,673 38,838 2 93
Illinois............... Sep-94 69,599 78,508 85,716 144,051 2 255
California............. Nov-94 111,501 134,702 129,220 223,473 5 532
Nebraska............... Nov-94 4,210 2,528 1,053 5,561 1 24
New Mexico............. Dec-94 3,383 9,058 11,492 12,734 1 27
Wisconsin.............. Apr-95 9,866 14,316 18,007 22,414 2 84
Oregon................. Jun-95 2,331 5,116 9,861 7,009 1 37
Washington............. Jun-95 7,062 9,257 9,022 13,680 1 55
Maryland............... Nov-95 20,279 25,699 7,418 35,747 2 98
Tennessee.............. Feb-96 26,898 21,770 6,704 38,935 4 73
Michigan............... May-96 24,460 23,181 2,869 36,499 1 100
Pennsylvania........... May-96 7,712 4,606 317 9,285 2 59
Nevada................. Jan-97 3,757 2,192 - 4,305 1 34
Idaho.................. Sep-97 1,013 - - 823 0 * 17
Massachuesetts......... Jun-98 990 - - 990 1 19
South Dakota........... Jun-98 36 - - 220 0 ** 49
======================================= ================================
TOTAL....... $ 944,725 $1,076,064 $994,834 $1,978,920 58 3,628
======================================= ================================
</TABLE>
* Boise, Idaho is considered part of the Salt Lake City, Utah metropolitan
area
** Sioux Falls, South Dakota is considered part of the Omaha, Nebraska
metropolitan area.
The Company intends to continue its strategy of expanding into new
geographic 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 geographic markets is relatively low, and the Company 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 areas.
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. See - "Year 2000 Compliance."
The Customer Service Department utilizes an automated voice response unit
("VRU") which allows customers to access standard account information as well as
general information 24 hours a day, seven days a week. The VRU receives an
average of 70,000 calls per month. Approximately 44% of the total calls are
handled entirely by the VRU; the other 56% are transferred to live agents. The
VRU provides many efficiencies for the Company and is user-friendly and
convenient for customers.
The Company is currently in the process of implementing a new, enhanced VRU
that will be capable of handling a larger call volume and also offer additional
menu options for the customers. The Collection Department plans to use this
system which should in turn improve the efficiency of the Department. The
Company expects to implement the new VRU during the second quarter of fiscal
1999. See - "Year 2000 Compliance."
Loan Servicing and Servicing Portfolio
Under the terms of its New Credit Facility and securitization transactions,
the Company acts as servicer or subservicer with respect to the related
automobile loans. Since August 1995, Tier I loan acquisitions have been funded
through the $350 million Prime Warehouse Facility through Union Acceptance
Funding Corporation ("UAFC"), a wholly-owned Company subsidiary. In September
1998, the Prime and Non-prime Warehouse Facilities were terminated by the
Company and replaced by the New Credit Facility with the same lender, having a
borrowing capacity of $450 million and a term of one year. 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 pooling and servicing agreements.
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 Tier I Lending
servicing portfolio at June 30, 1998:
<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 33,971 $ 470,598 23.8% $13,853 59.2 12.38%
Used auto / van 150,032 $1,508,322 76.2% $10,053 54.1 13.31%
----------- ----------------- -----------
Total 184,003 $1,978,920 100.0% $10,755 55.3 13.09%
=========== ================= ===========
Loans held for sale 8,472 $ 108,159 5.5% $12,767 67.9 12.27%
Other loans serviced(2) 175,531 $1,870,761 94.5% $10,658 54.6 13.14%
----------- ----------------- -----------
Total 184,003 $1,978,920 100.0% $10,755 55.3 13.09%
=========== ================= ===========
================================================================================
</TABLE>
(1) Terms are shown in months.
(2) Amounts include, Tier I 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 $11,000)
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, of approximately $1.4 million at June 30, 1998.
At June 30, 1998, the Tier I servicing portfolio, including the principal
balance of auto loans held for sale and securitized auto loans, was
approximately $2.0 billion in aggregate principal balance. Approximately 76.2%
of the Tier I servicing portfolio, as of June 30, 1998, 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 certain expenses of repossession and then to
unpaid principal.
Tier II Lending
The Company began acquiring Tier II loans in the fall of 1994 to fund loans
to borrowers with adequate credit quality who would not qualify under the
Company's Tier I Lending quality criteria. Originally, the Company operated Tier
II Lending under the name Performance Acceptance Corporation ("PAC").
As discussed previously, the Tier I and Tier II origination departments
were combined during the third quarter of fiscal 1998. The origination of Tier
II loans requires more extensive credit review and verification and also
requires the approval of a Regional Credit Manager. Additionally, 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 Tier II
loan applications as it offers on Tier I applications to permit more extensive
credit review and verification. The Company's collection and repossession
procedures relating to all new Tier II loans are essentially the same as Tier I
loans. In the past, the Company's policy was to repossess Tier II loans at or
before 90 days delinquent, however, this policy was changed to 120 days
delinquent based on management's decision to allow for more expanded collection
time and achieve consistency in collection practices. The Company, under the
name PAC, commenced Tier II loan acquisitions in Indiana and has since expanded
Tier II Lending into markets at dealerships from which the Company currently
acquires Tier I loans.
The following table describes the composition of the Company's Tier II
Lending servicing portfolio at June 30, 1998:
<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 937 $12,989 19.4% $13,862 53.0 18.00%
Used auto / van 5,348 $53,866 80.6% $10,072 48.1 19.28%
-------------- ----------------- ------------
Total 6,285 $66,855 100.0% $10,637 49.0 19.03%
============== ================= ============
Loans held for sale 660 $7,624 11.4% $11,552 55.1 18.27%
Securitized loans 5,625 $59,231 88.6% $10,530 48.2 19.13%
-------------- ----------------- ------------
Total 6,285 $66,855 100.0% $10,637 49.0 19.03%
============== ================= ============
- - --------------------------------------------------------------------------------
</TABLE>
(1) Terms are shown in months.
The Company currently purchases Tier II loans at face value at an
appropriate interest rate of approximately 5.00% above the rate at which it
purchases Tier I loans. The Company's Tier II loans experience higher default
rates than those historically experienced by the Company with respect to its
Tier I Lending operations but also earn higher interest rates. The Company does
not, however, pay Dealer Premiums to dealers in connection with the acquisition
of Tier II loans, which reduces its cash flow requirements for Tier II
operations. Since September, 1995, Tier II loan acquisitions have been funded
through a separate $50 million Non-prime Warehouse Facility through Performance
Funding Corporation ("PFC"), a wholly-owned Company subsidiary. Beginning in the
third quarter of fiscal 1998, the funding of Tier II loan acquisitions was moved
to Union Acceptance Funding Corporation ("UAFC"). As discussed previously, in
September 1998, the Prime and Non-prime Warehouse Facilities were terminated by
the Company and replaced by the New Credit Facility with the same lender, having
a borrowing capacity of $450 million and a term of one year. The Company,
through its wholly-owned, special-purpose subsidiary, Performance Securitization
Corporation ("PSC"), effected its first securitization of Tier II loans in the
third quarter of fiscal 1996 and completed its second Tier II securitization
during the second quarter of fiscal 1997. The Company completed a third Tier II
securitization during the fourth quarter of fiscal 1998.
Of the loan applications received from dealerships for Tier II loans in the
year ended June 30, 1998, the Company approved approximately 8.4%
unconditionally and approximately 13.7% with conditions. Of the approved and
conditionally approved loans, approximately 15.7% were ultimately acquired. In
fiscal 1998, the Company acquired approximately $24.0 million in Tier II loans.
Marine Lending program
The Company began the Marine Lending program in June 1996 to fund boat and
personal watercraft loans to borrowers who are classified as low risk. On March
1, 1998, the Marine Lending program was terminated due to strict rate
competition in the market, resulting in the inability to acquire large volumes
of loans with profitable spreads. The majority of the marine portfolio was sold
in June 1998. Marine loan acquisitions totaled $2.5 million for the year ended
June 30, 1998.
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
analyst. 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 in most states, but as early as 7 days
delinquent for other states. The collections area operates during regular
business hours, weekday evenings, and on Saturdays. Consistent with the growth
of the servicing portfolio and higher delinquencies and credit losses seen in
the latter half of fiscal 1997 and the first quarter of fiscal 1998, the Company
increased its collection staff by over 26.0% or 45 full-time employees during
fiscal 1998. See - "Employees."
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 handle approximately 400 calls per day.
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
contracted repossession agents. The repossession agent transfers most of the
autos to an independent auto auction company that reconditions the repossessed
autos and sells them for the Company. Historically, some autos repossessed in
central Indiana determined to be eligible for retail sales have been
reconditioned and sold at an Indianapolis location owned by the Company. The
Company opened a new car franchised dealership in Indianapolis in July 1998. As
a result of the opening of the dealership, repossession agents will now transfer
a selection of the autos from a broader region to the dealership for retail
sale.
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.
Until September 1998, the Company utilized a $350 million Prime Warehouse
Facility to provide funding for its Tier I loan acquisitions, a $50 million
Non-prime Warehouse Facility to fund Tier II loan acquisitions, and until March
1998, a $50 million Marine Warehouse Facility to fund boat and personal
watercraft loans. In September 1998, the Prime and Non-prime Warehouse
Facilities were terminated by the Company and replaced by the New Credit
Facility with the same lender, having a borrowing capacity of $450 million and a
term of one year. 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 maturity approximating the average maturity of loans to be acquired
during the relevant period. The Company's hedging strategy is an integral part
of its practice of periodically securitizing loans. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition" for a
discussion of hedging risks and related issues.
Securitizations. The Company sells its loans in securitization transactions
to increase the Company's liquidity, to provide for redeployment of capital and
to reduce risks associated with interest rate fluctuations. The Company applies
the net proceeds from securitization transactions to repay amounts owed to
short-term financing sources, thereby making such sources available for future
loan acquisitions. 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
$5.4 billion in auto loan receivables in 29 public offerings and completed three
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 IBCA. 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 Net Loss
Original at June 30, Average Loan Certificate Gross Net to Original
Securitization Amount 1998 Rate Rate Spread (1) Spread (2) Balance (3)
-------------- ------ ---- ---- ---- ---------- ---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
UACSC 1998-B Auto Trust $ 267,980 $ 257,764 12.51% 6.01% 6.50% 5.06% 0.00%
UACSC 1998-A Auto Trust $ 228,938 $ 202,189 12.92% 6.11% 6.81% 5.27% 0.13%
UACSC 1997-D Auto Trust $ 204,147 $ 158,696 13.02% 6.30% 6.72% 5.07% 0.32%
UACSC 1997-C Auto Trust $ 218,390 $ 163,330 13.48% 6.45% 7.03% 5.38% 0.70%
UACSC 1997-B Auto Trust $ 295,758 $ 198,415 13.21% 6.57% 6.64% 5.15% 1.06%
UACSC 1997-A Auto Trust $ 293,348 $ 176,557 13.29% 6.33% 6.96% 5.43% 2.22%
UACSC 1996-D Auto Trust $ 283,085 $ 148,084 13.53% 6.14% 7.39% 5.37% 2.85%
UACSC 1996-C Auto Trust $ 310,999 $ 145,016 13.26% 6.44% 6.82% 5.11% 3.53%
UACSC 1996-B Auto Trust $ 245,102 $ 101,567 12.96% 6.45% 6.51% 5.58% 3.29%
UACSC 1996-A Auto Trust $ 203,048 $ 68,396 13.13% 5.40% 7.73% 5.68% 4.32%
UACSC 1995-D Auto Trust $ 205,550 $ 64,860 13.74% 5.97% 7.77% 6.04% 4.79%
UACSC 1995-C Auto Trust $ 236,410 $ 61,060 14.08% 6.42% 7.66% 6.11% 5.33%
UACSC 1995-B Grantor Trust $ 220,426 $ 46,001 13.91% 6.61% 7.30% 4.88% 5.30%
UACSC 1995-A Grantor Trust $ 173,482 $ 32,178 13.22% 7.77% 5.45% 3.88% 5.10%
UFSB 1994-D Grantor Trust $ 114,070 $ 17,566 12.51% 7.69% 4.82% 3.91% 4.06%
UFSB 1994-C Grantor Trust $ 150,725 $ 16,014 12.05% 6.77% 5.28% 4.04% 3.23%
UFSB 1994-B Grantor Trust $ 142,613 $ 13,057 10.74% 6.46% 4.28% 3.54% 2.94%
UFSB 1994-A Grantor Trust $ 119,960 $ - 9.98% 5.08% 4.90% 3.60% 2.54%
UFSB 1993-C Auto Trust $ 141,811 $ - 11.00% 4.88% 6.12% 4.82% 2.58%
UFSB 1993-B Auto Trust $ 212,719 $ - 11.50% 4.45% 7.05% 5.31% 2.51%
UFSB 1993-A Grantor Trust $ 133,091 $ - 11.49% 4.53% 6.96% 4.96% 1.84%
UFSB 1992-C Grantor Trust $ 119,280 $ - 11.64% 5.80% 5.84% 4.48% 1.71%
UFSB 1992-B Grantor Trust $ 116,266 $ - 12.39% 4.90% 7.49% 5.49% 1.59%
UFSB 1992-A Grantor Trust $ 103,619 $ - 13.66% 6.70% 6.96% 5.80% 1.94%
UFSB 1991-B Grantor Trust $ 106,612 $ - 13.64% 7.15% 6.49% 4.94% 1.72%
UFSB 1991-A Grantor Trust $ 150,436 $ - 12.52% 8.40% 4.12% 2.25% 0.79%
UFSB 1989-B Grantor Trust $ 66,469 $ - 14.09% Variable - 2.82% 3.15%
UFSB 1989-A Grantor Trust $ 113,080 $ - 13.24% 8.75% 4.49% 1.97% 1.94%
UFSB 1988 Grantor Trust $ 105,179 $ - 12.73% 9.50% 3.23% 1.71% 2.74%
Total Tier I ---------- -------------
Securitized Trusts $ 5,282,593 $ 1,870,750
PSC 1998-1 Grantor Trust $ 28,659 $ 28,003 18.69% 6.29% 12.40% 8.04% 0.00%
PSC 1996-2 Grantor Trust $ 31,108 $ 18,070 19.65% 6.40% 13.25% 9.00% 6.98%
PSC 1996-1 Grantor Trust $ 34,488 $ 13,158 19.87% 6.87% 13.00% 8.79% 11.23%
Total Tier II ----------- -------------
Securitized Trusts $ 94,255 $ 59,231
----------- -------------
Grand Total...........$ 5,376,848 $ 1,929,981
=========== =============
</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.
(3) Net loss to original balance at June 30, 1998, for all pools with a
remaining principal balance and net loss to original balance at time of
repurchase for all remaining pools.
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 Tier I 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 ("UACSC"). Its Tier II securitizations have been
effected through Performance Securitization Corporation, also a wholly-owned
special purpose subsidiary. In striving to complete the most efficient
securitization transactions, the Company intends to securitize the Tier II loan
acquisitions with the Tier I loan acquisitions in the future through its
wholly-owned subsidiary UACSC. 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 494
full-time employees and 67 part-time employees, including 73 full-time and 15
part-time employees in the operations department, 216 full-time and 49 part-time
employees in the collection department, 72 full-time employees in loan
purchasing, 20 full-time employees in the accounting and finance department and
41 full-time and 1 part-time systems and administrative employees. In addition,
the Company has 37 sales representatives who reside and work in the Company's
loan purchasing market areas, and 35 full-time and 2 part-time employees in the
reconditioning and remarketing operations. None of the employees are 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, Idaho, Illinois, Indiana, Iowa,
Kansas, Kentucky, Maryland, Massachusetts, 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, Massachusetts, Michigan, Missouri, Nebraska, New Mexico, North
Carolina, Pennsylvania and Wisconsin. In Colorado, Idaho, 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 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 and loans it makes.
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.
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 Non-prime loan acquisitions and a $50 million
Marine Warehouse Facility (the "Marine Warehouse Facility") to fund loan
acquisitions through it Marine Lending program. In September 1998, the Prime and
Non-prime Warehouse Facilities were terminated by the Company and replaced by
the New Credit Facility. The Marine Lending program was terminated March 1,
1998.
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.
Future Servicing Cash Flows - Future Servicing Cash Flows 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 Tier I), and ongoing trust and credit enhancement fees,
plus estimated Dealer Premium rebates.
Gain (Loss) on Sales of Loans - Gain (Loss) on Sales of Loans represents the
difference between the sales proceeds and the carrying amount of loans after
reduction for amounts allocated to Retained Interest, less expenses of the sale
and hedging gains or losses.
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. Marine Lending was
terminated in March 1998.
Marine Warehouse Facility - See definition of Credit Facility, above. New Credit
Facility - An external financing arrangement negotiated by the Company with an
independent financial institution having a borrowing capacity of $450 million
and a one year term which replaces the Credit Facilities and will fund Tier I
and II loan acquisitions.
Non-prime Warehouse Facility - See definition of Credit Facility, above.
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 Warehouse Facility - See definition of Credit Facility, above.
Retained Interest in Securitized Assets ("Retained Interest") - Retained
Interest represents the Company's retained interest in loans sold. At the
closing of each securitization, the Company allocates its basis in the loans
between the portion of the loans sold through the certificates and the portion
of the loans retained from the securitizations ("Residuals" and "Servicing
Assets") based on the relative fair values of those portions at the date of the
sale. The fair value is based upon the cash proceeds received for the loans sold
and the estimated fair value of the Residuals. Residuals consist of (a) the cash
held in the Spread Account and (b) the excess servicing receivables ("ESRs").
ESRs represent the discounted cash flows to be received by the Trust in the
future and dealer premium rebates less a discounted allowance for estimated
credit losses. The fair value of the Residuals is determined by discounting the
expected cash flows released from the Spread Account (the cash out method) using
a discount rate which the Company believes is commensurate with the risks
involved. An allowance for estimated credit losses is established using
information from scoring models and available historical loss data for
comparable loans and the specific characteristics of the loans purchased by the
Company. Market discount rates are based on current market conditions, and
prepayment assumptions are based on historical performance experience of
comparable loans and the impact of trends in the economy. Accrued interest
through the date of securitization, which will be returned to the Company
through the trust, is also classified under the provisions of Statement of
Financial Accounting Standard ("SFAS") 125 as Retained Interest. Retained
Interest is reduced by actual servicing cash flows as received over the life of
the securitization. Retained Interest 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 attributable to the
change in the fair value of the Residuals are excluded from earnings and are
reported net of related income taxes as a separate component of shareholders'
equity until realized. Retained Interest is reviewed periodically for other than
temporary impairment, with impairment, if any, recorded as a component of Gain
on Sales of Loans, net.
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.
Servicing Asset - The present value benefit derived from retaining the right to
service loans securitized in excess of adequate servicer compensation. Servicing
Assets are classified as held-to-maturity securities and are carried at their
amortized cost.
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 component of Retained Interest in Securitized Assets) - A cash
collateral account or specific cash 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. The Company
receives cash flow Residuals that represent collections on the loans in excess
of the amounts required to pay the Certificate principal and interest, the base
servicing fees and certain other fees such as credit enhancement fees. If the
amount of cash required for the allocations exceeds the amount collected during
the collection period, the shortfall is drawn from the Spread Account. If the
cash collected during the period exceeds the amount necessary for the
allocations, and the related Spread Account is not at the required level, the
excess cash collected is retained in the Spread Account until the specified
level or maximum level is achieved. Once the required or maximum Spread Account
level is achieved, the excess is released to the Company. 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.
Tier I 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 Tier I 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 Tier I credit.
Tier II Lending - The Company's practice of acquiring loans made to borrowers
who generally would not be eligible for credit under Tier I 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 Tier II 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 Tier
II borrower may not qualify for a loan from a captive finance subsidiary but may
access credit through non-traditional finance sources.
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.
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 a lease with Waterfield. The Company sublets a portion of the building to
Union Federal. In addition, the Company leases a garage of 5,000 square feet for
vehicle reconditioning and remarketing, an office of 500 square feet and a
75-car lot located in Beech Grove, Indiana, from an independent party. These
facilities are currently used to recondition and sell a small amount of 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
headquarters in Indianapolis at which it has established an automobile retail
dealership for the purpose of expanding its reconditioning and remarketing
operations.
Item 3. Legal Proceedings
The Company is party to litigation in the ordinary course of business. Most
of the litigation is initiated by the Company against debtors to collect
deficiency balances. Claims are, however, also asserted against the Company on a
regular basis. The claims against the Company often involve allegations of
wrongdoing by the motor vehicle dealer which originated the contract or sold the
vehicle financed by the Company, and the Company is named as a defendant due to
its status as holder of the contract. Claims are also asserted against the
Company under the consumer protection laws described above and some of these
claims, including the claims specifically described below, are asserted on
behalf of a class of consumers. Similar litigation is common among industry
participants.
The first of the pending actions for which class certification is sought
was commenced October 23, 1997, in the Common Pleas Court of Cuyahoga County,
Ohio, Civil Division, by plaintiff Barohda Rucker. Suit was initially filed
against the Company and Jackshaw Chevrolet, Inc. ("Jackshaw"), alleging that
Jackshaw committed unfair, deceptive and unconscionable acts in connection with
the sale of a vehicle, and further alleging that the Company committed
disclosure and other violations of the Ohio Retail Installment Sales Act.
Plaintiff has recently amended her complaint asserting similar claims on behalf
of a class consisting of all consumers in Ohio who entered into loan agreements
with the Company. The amended complaint also asserts new claims under or related
to the Ohio Mortgage Loan Act on behalf of the proposed class. The plaintiff
seeks rescission of the contracts, injunctive relief, statutory penalties,
damages and attorney fees.
The Company is also a defendant in an action brought in the District Court
for Boulder County, Colorado, on April 10, 1998, by plaintiff Cristy Waggoner.
The plaintiff alleges usury, contending that the retail installment contracts
purchased by the Company were, in fact, direct loans by the Company subject to a
lower usury limitation. The plaintiff has also asserted claims on behalf of a
class of similarly situated Colorado residents who entered into retail
installment contracts assigned to the Company. The plaintiff seeks unspecified
damages, statutory penalties and attorney fees.
Finally, the Company is a defendant in an adversary action brought in the
United States Bankruptcy Court for the Northern District of Illinois, Eastern
Division on August 23, 1998, by plaintiff, Keith D. Ferrell. The plaintiff
alleges that the Company overstated the value of its collateral in connection
with his Chapter 13 bankruptcy proceedings. The plaintiff has also asserted
claims on behalf of a class consisting of similarly situated debtors involved in
Chapter 13 proceedings. The plaintiff seeks injunctive relief, actual and
punitive damages, and attorney fees.
Each of the forgoing proceedings are in their early stages and no class has
yet been certified. All proceedings are being vigorously defended and, although
there can be no assurance that the Company will ultimately prevail in each of
the pending proceedings, the Company, based on advice from outside legal
counsel, does not, at this time, expect any of the proceedings to have a
material effect on the Company.
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
1998 and 1997:
Fiscal Year Ended June 30, 1998 1997
---- ----
High Low High Low
---- --- ---- ---
First Quarter 11 1/4 8 7/8 19 1/4 12 1/4
Second Quarter 10 1/4 5 1/8 19 3/4 16 1/4
Third Quarter 9 1/8 7 1/4 22 1/2 13 1/4
Fourth Quarter 9 1/8 6 3/4 14 5/8 7 1/2
As of September 23, 1998, there were approximately 105 holders of record of
the Company's Class A Common Stock and 8 persons holding Class B Common Stock of
the Company of record. The Company estimates that its Class A Common Stock is
owned beneficially by approximately 1,800 persons. There is no market for Class
B Common Stock, and management has no plans to list the Class B Common Stock on
Nasdaq or any exchange.
The Company currently intends to retain earnings for use on the operation
and expansion of its business and therefore does not anticipate paying cash
dividends on Class A Common Stock or Class B Common Stock in the foreseeable
future. The payment of dividends is within the discretion of the Board of
Directors and will depend, among other things, upon earnings, capital
requirements, any financing agreement covenants and the financial condition of
the Company. In addition, provisions of the Senior and Senior Subordinated Notes
limit distributions to shareholders.
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected consolidated financial
information reflecting the consolidated operations and financial condition of
the Company for each year in the five year period ended June 30, 1998. 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. As
described more fully in the notes to Consolidated Financial Statements, this
report contains financial information which has been restated to correct the
June 30, 1997 valuation of Retained Interest in Securitized Assets.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income $ 33,727 $ 40,299 $ 34,160 $ 18,638 $ 14,260
Interest expense(1) 26,107 25,688 22,275 12,961 7,769
---------------------------------------------------------------------
Net interest margin 7,620 14,611 11,885 5,677 6,491
Provision for estimated
credit losses 8,050 4,188 2,875 1,074 484
---------------------------------------------------------------------
Net interest margin (deficit) after provision (430) 10,423 9,010 4,603 6,007
Gain (loss) on sales of loans, net (11,926) 963 30,357 8,684 4,643
Servicing fees, net 26,137 25,344 16,926 14,628 11,570
Other 4,087 3,820 3,096 2,783 2,735
---------------------------------------------------------------------
Total revenues 17,868 40,550 59,389 30,698 24,955
Operating expenses 35,546 30,502 23,841 14,913 8,995
---------------------------------------------------------------------
Earnings (loss) before provision for income taxes (17,678) 10,048 35,548 15,785 15,960
Provision (benefit) for income taxes (7,856) 4,166 14,406 6,396 6,384
---------------------------------------------------------------------
Net earnings (loss) $ (9,822) $ 5,882 $ 21,142 $ 9,389 $9,576
=====================================================================
Operating Data:
Tier I auto receivables acquired $944,725 $1,076,064 $ 994,834 $766,972 $614,627
Tier II auto receivables acquired 24,027 39,610 36,030 21,511 -
Marine receivables acquired 2,515 6,590 50 - -
---------------------------------------------------------------------
Total receivables acquired (dollars) $971,267 $1,122,264 $1,030,914 $788,483 $614,627
=====================================================================
Tier I auto receivables acquired 64,152 75,844 71,070 58,409 49,307
Tier II auto receivables acquired 1,746 3,050 2,870 1,770 -
Marine receivables acquired 200 496 6 - -
---------------------------------------------------------------------
Total receivables acquired (number of loans) 66,098 79,390 73,946 60,179 49,307
=====================================================================
Tier I auto loans securitized $919,455 $1,183,190 890,110 $658,703 $617,103
Tier II auto loans securitized
28,659 31,108 34,488 - -
---------------------------------------------------------------------
Total auto loans securitized $948,114 $1,214,298 $ 924,598 $658,703 $617,103
=====================================================================
Ratio of operating expenses as a % of
average servicing portfolio 1.78% 1.67% 1.73% 1.49% 1.21%
Servicing fees, net, as a % of operating
expenses 73.53% 83.09% 71.00% 98.09% 128.63%
Tier I credit losses as a % of avg. servicing portfolio 2.80% 2.40% 1.58% 1.36% 0.69%
Tier II credit losses as a % of avg. servicing portfolio 7.67% 5.18% 2.37% 2.97% N/A
Marine credit losses as a % of avg. servicing portfolio 1.12% 0.25% N/A N/A N/A
Tier I delinquencies of 30 days or more as a
% of servicing portfolio 3.07% 2.96% 1.84% 1.40% 1.40%
Tier II delinquencies of 30 days or more as a
% of servicing portfolio 8.29% 6.18% 3.35% 1.25% N/A
Marine deliquencies of 30 days or more as a
% of servicing portfolio N/A 0.10% N/A N/A N/A
</TABLE>
<PAGE>
Item 6. Selected Consolidated Financial Data (Continued)
<TABLE>
<CAPTION>
At June 30, 1998 1997 1996 1995 1994
- - ----------- ---- ---- ---- ---- ----
(Dollars in thousands)
Balance Sheet Data(2):
<S> <C> <C> <C> <C> <C>
Loans, net $118,259 $121,156 $259,290 $201,022 $ 96,101
Retained interest in securitized assets 171,593 170,791 147,024 118,076 78,598
Total assets 411,533 391,268 451,195 349,283 181,516
Due to Union Federal - - - 338,958 177,577
Amounts due under warehouse facilities 73,123 44,455 187,756 - -
Long-term debt 221,000 221,000 156,000 - -
Total shareholder equity(3) 82,473 86,848 78,624 2 2
Other Data:
Tier I auto servicing portfolio $1,978,920 $1,860,272 $1,548,538 $1,159,349 $843,245
Tier II auto servicing portfolio 66,855 68,289 47,062 19,858 -
Marine servicing portfolio - 6,227 50 - -
Other loans serviced 1,642 2,488 3,420 5,203 -
---------------------------------------------------------------------
Total servicing portfolio $2,047,417 $1,937,276 $1,599,070 $1,184,410 $ 843,245
=====================================================================
Average Tier I auto servicing portfolio 1,922,977 1,759,666 1,343,770 982,875 744,149
Average Tier II auto servicing portfolio 69,622 63,305 33,124 9,448 -
Average Marine servicing portfolio 6,920 2,357 - -
Other loans average servicing portfolio 1,941 2,799 4,222 6,643 -
---------------------------------------------------------------------
Total average servicing portfolio $2,001,460 $1,828,127 $1,381,116 $998,966 $744,149
=====================================================================
Number of Tier I auto loans serviced (at period end) 184,003 173,693 147,722 117,837 91,837
Number of Tier II auto loans serviced (at period end) 6,285 6,056 4,067 1,687 -
Number of Marine loans serviced (at period end) - 472 6 - -
Number of Other loans serviced (at period end) 256 402 537 836 -
---------------------------------------------------------------------
Total number of loans serviced (at period end)
190,544 180,623 152,332 120,360 91,837
Number of dealers
3,628 3,204 2,523 1,604 884
Number of employees (full-time equivalents)
529 387 313 215 142
</TABLE>
- - --------------------------------------------------------------------------------
(1) Interest expense for the years ended June 30, 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 consolidated 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,
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 the revolving New Credit
Facility, 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 Retained Interest as an asset. Future Servicing
Cash Flows are received over the life of the related securitization. See the
"Glossary" under "Item 1. Business" for definitions of accounting terms
pertaining to securitizations.
The following table illustrates changes in the Company's total loan
acquisition volume and information with respect to Gain (Loss) on Sales of
Loans, net and Securitizations during the past eight quarters. More complete
quarterly statements of earnings information is set forth in Note 14 of the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Selected Quarterly Financial Information
For Quarters in the Fiscal Years Ended June 30,
-------------------------------------------------------------
1998
-------------------------------------------------------------
First Second Third Fourth (3)
----- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans acquired $252,877 $227,405 $220,317 $ 270,668
Gain on Sales of Loans 5,549 3,173 5,749 5,110
Less: Impairment (16,396) (1,153) (2,636) (3,451)
Less: Cash out adjustment - - - (7,871)
Gain (loss) on Sales of (10,847) 2,020 3,113 (6,212)
Servicing portfolio
at period end 1,977,368 2,001,111 2,008,287 2,047,417
Selected
Securitization Data: 1997-C 1997-D 1998-A 1998-B/1998-1
Original amount 218,390 204,147 228,938 267,980/28,659
Weighted avg. loan rate 13.48% 13.02% 12.92% 12.51%/18.69%
Weighted avg.
remaining maturity (mos.) 70.68 67.14 70.80 67.50/57.70
Certificate rate 6.45% 6.30% 6.11% 6.01%/6.29%
Gross spread (1) 7.03% 6.72% 6.81% 6.50%/12.40%
Net spread (2) 5.38% 5.07% 5.27% 5.06%/8.04%
- - ---------------------------------------------------------------------------------------------------
</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 (Tier I securitization) and one private placement
(Tier II securitization)
<TABLE>
<CAPTION>
Selected Quarterly Financial Information
For Quarters in the Fiscal Years Ended June 30,
-------------------------------------------------------------
1997
-------------------------------------------------------------
First Second (3) Third Fourth
----- ---------- ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans acquired $296,601 $307,420 $279,847 $238,396
Gain on Sales of Loans 6,875 7,790 9,783 7,693
Less: Impairment - - (15,951) (4) (15,227)
Less: Cash out adjustment - - - -
Gain (loss) on Sales of
Loans, net 6,875 7,790 (6,168) (7,534)
Servicing portfolio
at period end 1,709,917 1,835,662 1,910,455 1,937,276
Selected
Securitization Data: 1996-C 1996-D/1996-2 1997-A 1997-B
Original amount 310,999 283,085/31,108 293,348 295,758
Weighted avg. loan rate 13.26% 13.53%/19.65% 13.29% 13.21%
Weighted avg.
remaining maturity (mos.) 67.41 67.75/62.70 71.35 69.18
Certificate rate 6.44% 6.14%/6.40% 6.33% 6.57%
Gross spread (1) 6.82% 7.39%/13.25% 6.96% 6.64%
Net spread (2) 5.11% 5.37%/9.00% 5.43% 5.15%
- - ----------------------------------------------------------------------------------------------------
</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 (Tier I securitization) and one private placement
(Tier II securitization)
(4) Impairment was reduced by reserves taken during the first two quarters
of fiscal 1997 of $3.7 million and by existing reserves at June 30,
1996 of $2.2 million.
Acquisition Volume. The Company currently acquires loans in 58 metropolitan
areas in 32 states from over 3,600 manufacturer-franchised auto dealerships. The
Company primarily acquires loans on automobiles made to borrowers who exhibit a
favorable credit profile ("Tier I Lending"). The Company also offers a second
level of loan quality to borrowers with adequate credit quality, but who would
not qualify for a loan under the Company's Tier I Lending quality criteria
("Tier II Lending"). During fiscal 1997, the Company developed a Marine Lending
program to fund loans to borrowers for boats and personal watercraft and
terminated the program in March 1998. The Company's focus is on the Tier I
automobile lending market. Only 2.7% of total loan acquisitions represented
loans made to borrowers for Tier II and marine loans. During fiscal 1998, the
Company extended operations into the states of Idaho, Massachusetts and South
Dakota.
The Company's total loan acquisitions decreased 13.5% to $971.3 million for
the year ended June 30, 1998, from $1.1 billion in fiscal 1997. The decrease
resulted primarily from increased competition in the consumer finance market
combined with the Company's decision to tighten credit standards during the
third quarter of fiscal 1997. Additionally, the termination of the Marine
Lending program contributed to the decrease. Marine loan acquisitions totaled
$2.5 million for the year ended June 30, 1998, compared to $6.6 million for
fiscal 1997. Tier II loan acquisitions totaled $24.0 million for the year ended
June 30, 1998, compared to $39.6 million in fiscal 1997. In late fiscal 1997 the
Company made 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 first three
quarters of fiscal 1998, however, Tier I acquisition volume increased 16.4% in
fourth quarter of fiscal 1998 compared to the fourth quarter of fiscal 1997.
Loan acquisitions for the first quarter of fiscal 1999 have increased
significantly over all fiscal 1998 quarters. Total Tier I loan acquisitions for
the months of July and August have surpassed $257.0 million, and total loan
acquisitions for the first quarter of fiscal 1999 are expected to be nearly
$400.0 million. See "Discussion of Forward-Looking Statements." The Company's
servicing portfolio increased 5.7% to approximately $2.0 billion at June 30,
1998, compared to approximately $1.9 billion at June 30, 1997. Total serviced
loans increased as a result of increased loan acquisition volume in excess of
loan repayments and gross charge-offs, but decreased by approximately $7.0
million as a result of selling the marine portfolio. The volume of loans sold in
securitizations decreased to $948.1 million for the year ended June 30, 1998,
from $1.2 billion for the prior year. The decreased volume of loans securitized
is a result of a decrease in Tier I loan acquisitions. 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
From June 1997 to September 1997, the Company continued to see a general
deterioriation in the consumer credit markets primarily as a result of debtor
over extension. As a result of the deterioration, the Company experienced higher
delinquency and net credit losses from June to September 1997.
Due to rising delinquency and net credit losses, the Company made strategic
changes in its origination and collection departments. As a result of these
strategic efforts, the Company has seen improvements in delinquency and credit
loss ratios since the September 30, 1997, quarter. The efforts in the
origination department include implementing tighter credit standards in March
1997, developing quality control screens that rank an obligor by not only credit
score, but by predetermined debt and income ratios, and growing the portfolio
with quality obligors through dealer development and dealer expansion. The
collection department's efforts include restructuring the collectors to form
specialized sub-departments of collectors for auxiliary functions such as skip
tracing and high risk accounts, initiating collection calls earlier in the
delinquency process through use of the power dialer, targeting higher risk
obligors through the use of quarterly updated credit scores, and increasing
collection efforts on charged-off accounts.
The Company has seen improvements in recoveries as a percentage of gross
charge-offs since the September 30, 1997, quarter. This percentage, however,
remains below management's expectations, and the Company continues to look for
ways to improve. In July 1998, the Company opened a new car franchised
dealership in Indianapolis and has begun retailing a portion of its repossessed
autos through the dealership. The Company anticipates that this method of
repossession disposal along with stricter monitoring of the repossession and
resale process should continue to increase the recovery percentage to within
management's expectations over time. The Company will not finance any of its
repossessed auto resales. See "Discussion of Forward-Looking Statements".
Provisions are made for estimated credit losses in conjunction with each
loan sale. Current credit loss assumptions utilized in the calculation of the
Gain on Sales of Loans during the year for Tier I and Tier II securitizations
were 4.00% and 12.00%, respectively, over the life of the pool. Allowance for
estimated credit losses on securitized loans (inherent in Retained Interest)
increased to 4.67% at June 30, 1998, compared to 4.40% at June 30, 1997. The
Company recorded a pre-tax charge of $23.6 million and $34.9 million during the
years ended June 30, 1998, and June 30, 1997, respectively, to primarily
increase the provision for estimated credit losses on those pools which were
deemed to have other than temporary impairment.
Tier I Portfolio. Set forth below is certain information concerning the
delinquency experience and net credit losses on the Tier I fixed rate retail
automobile, light truck and van receivables serviced by the Company. There can
be no assurance that future delinquency and net credit loss experience on the
receivables will be comparable to that set forth below. See "Discussion of
Forward-Looking Statements."
Tier I Delinquency Experience
At June 30,
----------------------------------------------
1998 1997
--------------------- ----------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
--------- ------ --------- ------
Servicing portfolio 184,003 $1,978,920 173,693 $1,860,272
Delinquencies
30-59 days 3,179 32,967 2,487 27,373
60-89 days 1,907 20,819 1,646 18,931
90 days or more 657 6,992 723 8,826
------- ---------- ------- ----------
Total delinquencies 5,743 $ 60,778 4,856 $ 55,130
======= ========== ======= ==========
Total delinquencies
as a % of servicing portfolio 3.12% 3.07% 2.80% 2.96%
As indicated in the above table, delinquency rates based upon outstanding
loan balances of accounts 30 days past due and over increased to 3.07% at June
30, 1998, from 2.96% at June 30, 1997, for the Tier I Lending portfolio. The
Company attributes the increase in delinquency from one year ago to the general
deterioration in the consumer credit market. Although delinquency rates have
increased from a year ago, the June 1998 quarter is the third consecutive
quarter of improved performance in the servicing portfolio. The steady
improvement is a direct result of the Company's continued focus on refining its
collection practices and consistent application of conservative underwriting
guidelines.
<TABLE>
<CAPTION>
Tier I Credit Loss Experience
For the Years Ended June 30,
-------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- -------------------
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 179,822 $1,922,977 164,858 $1,759,666 132,363 $1,343,770
Gross charge-offs 7,909 87,325 6,280 70,830 3,663 40,815
Recoveries 33,545 28,511 19,543
-------- ------ ------
Net credit losses $ 53,780 $42,319 $21,272
======== ======== ======
Gross charge-offs as a % of
avg servicing
portfolio 4.40% 4.54% 3.81% 4.03% 2.77% 3.04%
Recoveries as a %
of gross charge-offs 38.41% 40.25% 47.88%
Net credit losses as a %
of avg. servicing
portfolio 2.80% 2.40% 1.58%
</TABLE>
As indicated in the table above, net credit losses on the Tier I portfolio
totaled $53.8 million for the fiscal year ended June 30, 1998, or 2.80% as a
percentage of the average servicing portfolio, compared to $42.3 million or
2.40% for the fiscal year ended June 30, 1997. Net credit losses have increased,
and recovery rates have decreased over one year ago; however, as stated above,
both net credit losses and recovery rates have improved steadily since the
quarter ended September 30, 1997.
Tier II Portfolio. Set forth below is information pertaining to delinquency
and net credit loss information on the Company's Tier II 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."
Tier II Delinquency Experience
At June 30,
---------------------------------------------
1998 1997
--------------------- ---------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
Servicing portfolio 6,285 $ 66,855 6,056 $ 68,289
Delinquencies
30-59 days 365 4,023 236 2,807
60-89 days 140 1,457 123 1,412
90 days or more 5 64 - -
----- -------- ----- --------
Total delinquencies 510 $ 5,544 359 $ 4,219
===== ======== ===== ========
Total delinquencies
as a % of servicing portfolio 8.11% 8.29% 5.93% 6.18%
<TABLE>
<CAPTION>
Tier II Credit Loss Experience
For the Years Ended June 30,
-------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
--------- ------ --------- ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing
portfolio 6,320 $69,622 5,491 $ 63,305 2,869 $33,124
Gross charge-offs 748 8,275 422 4,698 136 1,455
Recoveries 2,937 1,420 670
======== ======== ========
Net credit losses $ 5,338 $3,278 $ 785
======== ======== =========
Gross charge-offs
as a % of avg.
servicing portfolio 11.84% 11.89% 7.69% 7.42% 4.74% 4.39%
Recoveries as a %
of gross charge-offs 35.49% 30.23% 46.07%
Net credit losses as a %
of avg. servicing
portfolio 7.67% 5.18% 2.37%
</TABLE>
Tier II portfolio delinquency was 8.29% based on outstanding loan balances
of accounts 30 days past due and over at June 30, 1998, compared to 6.18% at
June 30, 1997. Credit losses during fiscal 1998 totaled $5.3 million, or 7.67%
as a percentage of the average Tier II servicing portfolio, compared to $3.3
million, or 5.18%, in fiscal 1997. The Company began acquiring Tier II loans in
October 1994.
Marine Portfolio. Due to the termination of the Marine Lending program and
the resulting sale of most of the marine loans, delinquency was minimal at June
30, 1998 and 1997. Credit losses during fiscal 1998 totaled $78,000 or 1.12% as
a percentage of the average marine servicing portfolio compared to .25% for
fiscal 1997.
Results of Operations
The following table illustrates the Company's consolidated financial
results for the past eight fiscal quarters. More complete earnings information
can be found in the Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
Selected Quarterly Financial Information
For Quarters in the Fiscal Year Ended June 30,
---------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest on loans $ 6,627 $ 6,473 $ 7,133 $7,638 $ 9,233 $ 9,096 $ 7,543 $ 8,042
Interest on spread accounts
and restricted cash 1,572 1,461 1,443 1,380 1,510 1,545 1,618 1,712
---------- ------- ------- ------ ------- ------- -------- -------
Total interest income 8,199 7,934 8,576 9,018 10,743 10,641 9,161 9,754
Interest expense 6,053 6,167 6,990 6,897 6,410 6,265 6,118 6,895
---------- ------- ------- ------ ------- ------- -------- -------
Net interest margin 2,146 1,767 1,586 2,121 4,333 4,376 3,043 2,859
Provision for estimated
credit losses 1,505 1,770 1,900 2,875 855 993 1,180 1,160
---------- ------- ------- ------ ------- ------- -------- -------
Net interest margin
(deficit) after provision 641 (3) (314) (754) 3,478 3,383 1,863 1,699
Gain (loss) on sales
of loans, net (10,847) 2,020 3,113 (6,212) 6,875 7,790 (6,168) (7,534)
Servicing fees, net 6,286 6,533 6,529 6,789 5,826 6,258 6,854 6,406
Other revenues 1,020 985 1,065 1,017 934 910 1,011 965
Operating expenses 8,623 9,036 8,822 9,065 7,146 7,832 7,545 7,979
Net earnings (loss) $ (6,867) $ 1,210 $ 917 $ (5,082) $ 5,918 $6,193 $ (2,398) (3,831)
</TABLE>
Years Ended June 30, 1998 and 1997
Net earnings (loss) decreased to ($9.8) million or ($0.74) per share for
the year ended June 30, 1998, compared to $5.9 million or $.45 per share for the
year ended June 30, 1997. The decrease in net earnings is primarily a result of
lower gains recognized on the fiscal 1998 securitization transactions of $19.6
million pre-tax ($12.0 million net of tax) compared to the fiscal 1997
securitization transactions of $32.1 million pre-tax ($19.1 million net of tax).
Gains on the securitizations were offset by charges taken for pool by pool
impairments of the Retained Interest asset of $23.6 million pre-tax ($14.2
million net of tax) and $31.2 million pre-tax ($18.5 million net of tax) for the
years ended June 30, 1998 and 1997, respectively. Net earnings also decreased
due to the implementation of valuing Retained Interest on a "cash out" rather
than "cash in" basis effectively reducing after-tax net earnings by $4.9
million. Exclusive of the after-tax other than temporary Retained Interest
impairment charges and the after-tax "cash out" charge for fiscal 1998, net
earnings would have been $9.3 million or $0.70 per share for fiscal 1998
compared to $24.4 million and $1.85 per share for fiscal 1997.
The "cash out" method estimates Retained Interest by discounting the
expected excess cash flows from the time they are projected to be released from
the Spread Account using a discount rate which the Company believes is
commensurate with the risks involved. Historically the Company has estimated
Retained Interest, recognized as a component of the gain on sale, and its
subsequent fair value by discounting the projected Future Servicing Cash Flows
from the time they are received by the respective trust, the "cash in" method.
Use of the "cash out" method resulted in a larger discount of estimated Retained
Interest due to the timing of the expected excess cash flows released from the
Spread Account. Additionally, interest income earned on the Spread Accounts
became a component of the expected excess cash flows and beginning in the fourth
quarter of fiscal 1998, will no longer be recognized as interest income.
Offsetting the lower gain on sales and the reduction of interest earned was an
increase in the accretion of discounted excess servicing.
Net interest margin (deficit) after provision decreased 104.1% to
($430,000) for the year ended June 30, 1998, compared to $10.4 million for
fiscal 1997. The decreased interest margin after provision as compared to prior
year is a result of a combination of factors but is primarily due to a decrease
in the average loans held for sale balance and an increase in the provision for
estimated credit losses.
Interest on loans decreased 17.8% to $27.9 million for the year ended June
30, 1998, compared to $33.9 million for year ended June 30, 1997. The decrease
in interest income resulted from a decrease in the average outstanding balance
of loans held for sale to $206.2 million for the year ended June 30, 1998, from
$228.3 million for fiscal 1997, which was a result of decreased loan
acquisitions during the first three quarters of fiscal 1998. Interest earned on
the Tier II and marine portfolios was approximately $5.2 million and $801,000,
respectively.
Interest earned on spread accounts and restricted cash decreased 8.3% to
$5.9 million for the year ended June 30, 1998, compared to $6.4 million for the
year ended June 30, 1997. The decrease is primarily due to the reclassification
of collection account interest. As a result of the implementation of SFAS 125,
the Company established a Servicing Asset related to all securitization
transactions after UACSC 1996-D. The Servicing Asset related to fiscal 1998
securitizations totaled $2.3 million compared to $1.5 million for fiscal 1997
securitizations. Such amounts equal the discounted projected cash flow of the
interest earned on the collection account and are deemed to be additional
servicing compensation. Such amounts were recognized as a component of the gain
on sale with the discount being accretive into income in future periods.
Establishment of the Servicing Asset had the effect of reducing interest income
by $1.1 million and $153,000 for the years ended June 30, 1998 and 1997,
respectively, however accretion of the discount will somewhat offset the
reduction of interest income in future periods. The decrease related to the
establishment of the Servicing Asset was partially offset by higher average
balances on the cash collection and Spread Accounts. The average balance of
these accounts was $139.2 million in fiscal 1998, compared to $127.4 million in
fiscal 1997. The increased restricted cash balances result from the increased
size of the securitized servicing portfolio. Average securitized loan balances
were $1,793.3 million during the current fiscal year, compared to $1,445.4
million in fiscal 1997. Cash collection accounts represent customer 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. Spread Account balances represent 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.
As a result of the implementation of the "cash out" method of valuing
Retained Interest, interest earned on spread accounts will be lower in future
periods. However the reduction in income will be partially offset by higher
discount accretion.
Interest expense increased 1.6% to $26.1 million for the year ended June
30, 1998, from $25.7 million for the year ended June 30, 1997. The increase
relates to the issuance of $65.0 million in Senior Notes during March 1997
resulting in higher long-term debt expense for all four quarters of fiscal 1998,
but only the fourth quarter of fiscal 1997. Interest expense related to
long-term debt was $19.5 million and $15.7 million for the years ended June 30,
1998 and 1997, respectively. The increase in interest related to long-term debt
was offset by a decrease in the average warehouse borrowing needs for fiscal
1998 compared to fiscal 1997. The average outstanding borrowings was $111.2
million for the year ended June 30, 1998, compared to $174.2 million for the
year ended June 30, 1997. The average cost of funds on the combined long-term
debt and warehouse borrowings increased to 7.86% for the year ended June 30,
1998, from 7.39% for the year ended June 30, 1997. Interest rates on the New
Credit Facility and Credit Facilities are variable in nature and are affected by
changes in market rates of interest.
Provision for estimated credit losses increased to $8.1 million for the
year ended June 30, 1998, compared to $4.2 million for the year ended June 30,
1997. Increased provisions were made in response to increased losses and
delinquency trends being experienced by the Company during the latter part of
fiscal 1997 and the first quarter of fiscal 1998 and the consumer finance
industry in general. The increase in the provision was also related to a higher
balance of modified loans at June 30, 1998, compared to June 30, 1997, that were
not eligible for securitization until the fourth quarter of fiscal 1998.
Gain (loss) on sales of loans, net and interest rate risk. Gain (Loss) on
Sales of Loans continues to be a significant element of the Company's net
earnings. The Gain (Loss) on Sales of Loans is affected by several factors,
primarily the amount of loans securitized, the net spread and the level of
estimated credit losses. Historically, the Company has estimated the Future
Servicing Cash Flows recognized as a component of the gain on sale by
discounting the projected Future Servicing Cash Flows from the time they are
received by the respective trust. However, management implemented the "cash out"
method during the fourth quarter of fiscal 1998 which discounts the expected
Future Servicing Cash Flows from the time they are released from the Spread
Account to the Company. Loss on sales of loans totaled $11.9 million for the
year ended June 30, 1998, compared to a gain of $963,000 for the year ended June
30, 1997. The decrease in Gain (Loss) on Sales of Loans is primarily a result of
lower gains recognized on fiscal 1998 securitization transactions compared to
fiscal 1997. The gain for the years ended June 30, 1998 and 1997, consisted of
gains on new securitization transactions of $19.6 million and $32.1 million,
(including $2.3 million and $1.5 million of Servicing Asset income), and charges
for other than temporary impairments of Retained Interest of $23.6 million and
$31.2 million, respectively. The net gain for the year ended June 30, 1998, was
also lower than prior year due to a $7.9 million charge related to the
implementation of the "cash out" method of valuing Retained Interest. The
decrease in the Gain (Loss) on Sales of Loans is also attributed to a 21.9%
decrease in the volume of loans securitized to $948.1 million for fiscal 1998
compared to $1,214.3 million for fiscal 1997. Additionally, the weighted average
net spread decreased to 5.28% for the year ended June 30, 1998, compared to
5.36% for the year ended June 30, 1997. Credit loss assumptions on the Tier I
transactions were 4.00% throughout fiscal 1998 compared to 3.25% throughout most
of fiscal 1997. Allowance for credit losses were 12.00% for the Tier II fiscal
1998 securitization compared to 10.00% for the two previous securitizations.
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. See "Discussion of Forward-Looking Statements."
Gross and net spreads. Market interest rates were lower in fiscal 1998 as
compared to the corresponding periods of fiscal 1997. 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 spreads peaked in the third quarter of fiscal 1997 at 5.43% and have
fluctuated over the succeeding five quarters between 5.06% and 5.38%. Net
spreads have been decreasing but continue to be within management's
expectations.
Management is currently targeting net spreads of 5.00% to 5.50% on Tier I
securitizations (assuming a pricing spread for Asset-Backed Securities over the
two-year treasury note of 50 basis points). Management believes that by
targeting a gross 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."
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 Retained Interest at the time of
securitization, and rebates received in excess of original estimates inherent in
the Gain (Loss) on Sales of Loans calculation until the third quarter of fiscal
1997. Servicing fees, net increased 3.1% to $26.1 million for the year ended
June 30, 1998, compared to $25.3 million for the year ended June 30, 1997.
Servicing fees, net as a percentage of the average securitized servicing
portfolio decreased to 1.46% for fiscal 1998, from 1.75% for fiscal 1997.
Although the average securitized loan portfolio increased 24.1% to $1.8 billion
for the year ended June 30, 1998, from $1.4 billion for the year ended June 30,
1997, the increase in servicing fees related to the larger securitized portfolio
was nearly offset by a decrease in excess rebates. Rebates received in excess of
original estimate inherent in the gain calculation were recorded as a reduction
of Retained Interest during fiscal 1998, but were recorded as a component of
servicing fees in fiscal 1997 and totaled $2.3 million. The change in recording
excess rebates was made during the third quarter of fiscal 1997.
Other revenues increased 7.0% to $4.1 million for the year ended June 30,
1998, from $3.8 million for the year ended June 30, 1997. Other revenues consist
primarily of late charge fee income and origination fee income. The increase in
the current year resulted primarily from increases in late charge fee income to
$3.3 million from $2.6 million in the prior year but was offset by a decrease in
origination fees. The increase in late charge fee income is primarily due to the
increase in the servicing portfolio as well as higher delinquencies experienced
during fiscal 1998 compared to fiscal 1997. The decrease in origination fees is
primarily due to a lower volume of loans acquired during the first three
quarters of fiscal 1998 compared to fiscal 1997. Additionally, origination fees
have decreased due to the use of a greater percentage of generic contracts that
do not allow for an origination fee to be charged.
Salaries and benefits expense increased 24.0% to $19.4 million for the year
ended June 30, 1998, from $15.7 million for the year ended June 30, 1997. This
increase resulted primarily from an increase in full-time equivalent ("FTE")
employees. Average FTE's for the year ended June 30, 1998, were 466 compared to
368 for the year ended June 30, 1997. The Company has experienced growth in
collections, human resources and training, operations, systems and retail
operations. The increases in the collections and operations areas are in
response to an increase in the servicing portfolio and an increase in
delinquencies during the year. Increases in human resources and training
resulted from a focus on providing better training to employees. The systems
area increased because of a Company commitment to improve internal analysis and
reporting of corporate financial, origination and collection data that will be
used to improve operations and lead to a stronger more profitable portfolio. The
increase in the number of reconditioning and remarketing operations employees
was due to the opening of a new automotive dealership in July 1998 to facilitate
remarketing of repossessed vehicles. 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 8.7% to $16.1 million for
the year ended June 30, 1998, from $14.8 million for the year ended June 30,
1997. The increase in other operating expense was primarily attributed to an
increase in consulting and professional fees for the Activity Based Management
("ABM") consulting project that began in July 1997 and the non-recurring fees
related to the change in commercial domicile for five of the Company's
subsidiaries. ABM is used as a tool to better manage the Company's business and
to improve the pricing of products and overall operating efficiency. The change
in commercial domicile provided a one-time income tax benefit of $860,000 in the
second quarter of fiscal 1998 which was recorded as a component of income tax
expense.
Years Ended June 30, 1997 and 1996
Net earnings decreased to $5.9 million or $0.45 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 third
and fourth quarter after-tax charges of $9.5 and $9.0 million, respectively,
($16.0 and $15.2 million pre-tax, respectively,) for the impairment of Retained
Interest related primarily 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 Retained Interest on a pool by pool basis. Exclusive of the pool by
pool impairment charges, net earnings would have been $24.4 million or $1.85 per
share.
Net interest margin after provision increased 15.7% to $10.4 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 18.1% to $33.9 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 Tier II and Marine portfolios were
approximately $3.8 million and $255,000, respectively.
Interest earned on spread accounts and restricted cash increased 17.2% to
$6.4 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. Average securitized loan balances were $1,445.4
million during the current fiscal year, compared to $1,179.4 million in fiscal
1996. The average interest yield on the Spread Accounts and restricted cash
accounts improved approximately 15 basis points which contributed to the
increase as well. Spread Account balances represent 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. Cash collection accounts represent
customer 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. As a result of the implementation of SFAS 125, the
Company established a Servicing Asset related to the 1997A and 1997B
securitization transactions of $743,000 and $750,000, respectively. Such amounts
equal the discounted projected cash flow of the interest earned on the
collection account and are deemed to be additional servicing compensation. Such
amounts were recognized as a component of the gain on sale with the discount
being accretive to income in the future. Establishment of the Servicing Asset
will have the effect of reducing interest earned on restricted cash in future
periods, however, accretion of the discount on the Servicing Asset will somewhat
offset this decrease.
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, offset by a decline in the average cost of funds 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 Prime and Non-prime
Warehouse Facilities totaled approximately $1.5 million. The renewal of the
Prime and Non-Prime Warehouse Facilities do not require payment of additional
fees. Interest rates on the Prime and Non-prime 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.
Gain (loss) on sales of loans, net and interest rate risk. Gain (Loss) on
Sales of Loans continues to be a significant element of the Company's net
earnings. The Gain (Loss) 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
(Loss) on Sales of Loans decreased to $963,000 for the year ended June 30, 1997,
from $30.4 million for the year ended June 30, 1996. The decrease in gains
recognized by the Company in the current fiscal year is due to pre-tax charges
of $31.2 million for the impairment of Retained Interest primarily related to
the increase in allowance for estimated credit losses related to its securitized
portfolio. Exclusive of the charges, gains recorded in conjunction with the
fiscal 1997 securitization transactions were $31.7 million compared to $30.4
million in fiscal 1996 and included $1.5 million in servicing asset income.
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
Tier I transactions were 3.25% throughout most of fiscal 1997; however, the
Company began providing for losses at 3.50% on Tier I 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 Tier II
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 Tier I 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.
Management is currently targeting net spreads of 5.00% to 5.50% on Tier I
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 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 Retained Interest at the time of
securitization, and rebates received in excess of original estimates recorded 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 Future Servicing Cash Flows and excess rebates. Excess
rebates received during fiscal 1997 were $2.3 million, compared to $2.8 million
in fiscal 1996. The Company's rebate receivable was marked to market as a
component of Retained Interest in accordance with SFAS 125 during the third
quarter of fiscal 1997.
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 30.8% to $15.7 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.
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 $118.3 million at June 30, 1998, from $121.2 million at June 30,
1997. This decrease was due primarily to the fourth quarter Tier II
securitization and the sale of the marine portfolio. The Tier II securitization
and the sale of the marine portfolio accounted for $18.3 million of the
difference but was offset by an increase in the Tier I loans held for sale
balance of $17.8 million. The modified loan portfolio balance included in loans
held for sale totaled $20.8 million at June 30, 1998, compared to $14.3 million
at June 30, 1997. The modified loan portfolio balance increased during fiscal
1998; however, due to more refined underwriting policies for modifications and
the ability to securitize a small percentage of the modified portfolio in future
securitizations, the balance is expected to decrease. Allowance for credit
losses on loans held for sale was increased $1.1 million from June 30, 1997,
primarily as a result of higher losses from modifications. The Company serviced
$1.9 billion and $1.8 billion in securitized loans, and the total servicing
portfolio was $2.0 billion and $1.9 billion as of June 30, 1998, and June 30,
1997, respectively.
Retained interest in securitized assets ("Retained Interest"). Beginning
with the June 30, 1998, consolidated financial statements, the previously
captioned Excess Servicing asset and the Spread Account asset have been combined
into one asset entitled Retained Interest in Securitized Assets ("Retained
Interest"). Retained Interest increased to $171.6 million at June 30, 1998, from
$170.8 million at June 30, 1997. The Retained Interest balance increased by the
amounts capitalized upon consummation of the various Tier I and Tier II
securitizations, including estimated dealer premium rebates, unrealized gains
recognized on certain pools, and in some securitizations, the initial cash
deposits into a specific cash account ("Spread Account") held by the Trust as
credit enhancement for the benefit of the investors. Total amounts capitalized
for the year ended June 30, 1998, were $49.1 million. Retained Interest also
increased by an additional pre-tax unrealized gain of $8.5 million and a
$800,000 increase in accrued interest. Additions to Retained Interest were
offset by the return of excess cash flows over the year ended June 30, 1998,
related to all securitizations of $22.5 million and by the effect of the $23.6
million impairment of Retained Interest taken during the fiscal year ended June
30, 1998. Impairment of Retained Interest is measured on a disaggregate basis
(pool by pool) in accordance with SFAS 115. Additionally, Retained Interest
decreased by the net decrease in Spread Accounts of $3.6 million for the year
ended June 30, 1998, and by $7.9 million related to the implementation of the
"cash out" method of valuing Retained Interest. Withdrawals of Spread Account
funds are made when the balance of the account is in excess of the requirements
stipulated in the servicing agreement (the Company's servicing agreements are
collectively referred to as the "Pooling and Servicing Agreements"). Allowance
for estimated credit losses on securitized loans is included as a component of
Retained Interest. At June 30, 1998, the allowances related to both Tier I and
Tier II securitized loans totaled $90.2 million or 4.67% of the total
securitized loan portfolio, compared to $79.9 million or 4.40% at June 30, 1997.
See--"Note 1 of the Consolidated Financial Statements."
Amounts due under credit facilities and long-term debt. Beginning in August
1995, after the Spin-off from its parent, the revolving 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 Credit Facilities and the Senior and Senior Subordinated Notes was
$294.1 million at June 30, 1998, compared to $265.5 million at June 30, 1997.
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 the revolving 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
Tier I securitized portfolio; (ii) Future 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) proceeds from sale of
interest-only strips in conjunction with securitization transactions. Net cash
used by operating activities decreased to $5.0 million for the year ended June
30, 1998, from net cash provided by operating activities of $126.0 million for
the year ended June 30, 1997. The decrease was primarily attributable to a
decrease in loans securitized relative to loans acquired and a decrease in
proceeds from the sale of interest-only strips. Proceeds from the sale of
interest-only strips generated $13.9 million in cash for the period ended June
30, 1998, compared to $31.8 million for the period ended June 30, 1997. The
increase in cash used for investing activities was primarily due to the purchase
of property for the expansion of the reconditioning and remarketing operations
in Indianapolis.
Hedging. Hedging transactions may represent a source or a use of cash
during a given period depending on changes in interest rates. During fiscal
1998, hedging transactions have required a net use of cash of $2.7 million
compared to $6.3 million used during fiscal 1997.
Financing activities. Net cash provided by financing activities for fiscal
1998 was $28.6 million compared to a use of $79.7 million in the prior year. The
increase was a result of an increase in warehouse borrowings at June 30, 1998,
relative to the balance at June 30, 1997. 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 financing including long-term debt and the
revolving New Credit Facility. Historically, the Company has used the
securitization of loan pools as its primary source of long-term funding.
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. Between securitization transactions, the Company
relies primarily on the New Credit Facility 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 New Credit Facility 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 business
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 New Credit Facility. The
Company consistently assesses it's long-term loan funding arrangements with a
view to optimizing cash flows and reducing costs.
Warehouse facility. The aggregate capacity of the Prime and Non-prime
Warehouse Facilities was $400.0 million, of which $73.1 million was utilized,
and an additional $4.7 million was available to borrow based on the outstanding
principal balance of eligible loans at June 30, 1998. According to the credit
agreement, modified loans can not be pledged as collateral, thus, they are not
considered eligible loans that can be borrowed against.
In September 1998, the Company entered into a borrowing arrangement with an
independent financial institution for the $450.0 million New Credit Facility
that is insured by a surety bond provider. The proceeds from the New Credit
Facility were used to pay off and close the existing Prime and Non-prime
Warehouse Facilities. The New Credit Facility is renewable annually and allows
for borrowings against both Tier I and Tier II loan acquisitions. The New Credit
Facility provides funding for loan acquisitions at a purchase price of up to
100% of the outstanding principal balance of eligible loans at the time of
purchase. The advance rate may be adjusted based on an actual net yield
percentage that is measured monthly on all receivables in the Warehouse.
Long-term debt. The Company issued $110.0 million of 8.53% Senior Notes due
August 1, 2002, in connection with the Company's initial public offering.
Interest on the Notes is payable semiannually, and principal payments began
August 1, 1998, and are due on each subsequent August 1, in the amount equal to
approximately 20% of the stated original principal balance. In April 1996, the
Company completed a private placement of $46.0 million of 9.99% Senior
Subordinated Notes due March 30, 2003, with interest payable quarterly and
principal due at maturity. In March 1997, the Company issued $65.0 million of
Senior Notes due December 27, 2002. The Notes were issued as "Series A" in the
principal amount of $50.0 million at 7.75% interest and "Series B" in the
principal amount of $15.0 million at 7.97% interest. Interest on the Notes is
payable semiannually and a principal payment is due March 15, 2002, in the
amount equal to approximately 33 1/3% of the stated original balance.
The Company's credit agreements, among other things, require compliance
with monthly and quarterly financial maintenance tests as well as restrict the
Company's ability to create liens, incur additional indebtedness, sell or merge
assets and make investments. The Company is in compliance with all covenants and
restrictions imposed by the terms of indebtedness.
During the fiscal quarter ended December 31, 1997, the Company was notified
by FITCH IBCA ("Fitch") that its ratings of the Company's Senior and Senior
Subordinated Notes were being reduced one grade. At the time of the initial
downgrade, Fitch informed the Company that it would consider a further downgrade
of such securities if the Company failed to show material improvement in asset
quality unless the Company obtained additional equity capital. Although
improvement in asset quality during the second and third quarters of fiscal 1998
occurred, the Company was notified on February 27, 1998, of a further downgrade
to "BB+" and "BB" on the Senior and Senior Subordinated notes, respectively.
Given the improvement in asset quality and adequacy of capital resources, at
that time, the Company did not seek additional equity investment in the current
fiscal year. The Company completed a Tier I securitization including a portion
of the modified loan portfolio and a Tier II securitization during the fourth
quarter of fiscal 1998 resulting in an increase in liquidity for the short-term.
Management believes that the Company's existing capital resources, the New
Credit Facility described above, future earnings, expected growth in loan
acquisitions, and periodic securitization of loans should provide the necessary
capital and liquidity for its operations through at least the third quarter of
fiscal 1999. 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
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 Facility and/or its ability to obtain funding
to replace and/or supplement such facility should it become necessary to do so.
The Company's ability to obtain successor facility 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 Facility.
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 geographic 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. The
Company therefore bears interest rate risk on loans until they are securitized
and employs a hedging strategy to mitigate this risk. As a part of the hedging
strategy, the Company executes short sales of U.S. Treasury securities having a
maturity approximating the average maturity of loans to be acquired during the
relevant period. There is no assurance that this strategy will completely offset
changes in interest rates. In particular, such strategy depends on management's
estimates of loan acquisition volume. The Company realizes a gain on its hedging
transactions during periods of increasing interest rates and realizes a loss on
such transactions during periods of decreasing interest rates. The hedging gain
or loss will substantially offset changes in interest rates as seen by a lower
or higher reported gain on sales of loans, respectively. Recognition of
unrealized gains or losses is deferred until the sale of loans during the
securitization. On the date of the sale, hedging deferred gains and losses are
recognized as a component of Gain (Loss) on Sales of Loans.
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 Retained Interest recognized in
each transaction reflect deductions for estimates of future defaults and
prepayments. The carrying value of Retained Interest may be adjusted
periodically to reflect differences between estimated and actual credit losses
and prepayments on past securitizations. The Company's results of operations
could be adversely affected if default or prepayment rates on securitized loans
substantially exceed the estimated levels.
Regulation. The Company's business is subject to numerous federal and state
consumer protection laws and regulations which, among other things: (i) require
the Company to obtain and maintain certain licenses and qualifications; (ii)
limit the interest rates, fees and other charges the Company is allowed to
charge; (iii) limit or prescribe certain other terms of the Company's contracts;
(iv) require specified disclosures; and (v) define the Company's rights to
repossess and sell collateral. Changes in existing laws or regulations, or in
the interpretation thereof, or the promulgation of any additional laws or
regulation could have an adverse effect on the Company's business.
Impact of Current Accounting Pronouncements
In June, 1997, The Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," 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.
In February 1998, FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits." The Statement does not alter the
measurement and recognition provisions currently outlined in generally accepted
accounting principles but merely standardizes the disclosure requirements. 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 when
adopted.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement is effective for fiscal years
beginning after June 15, 1999, with earlier application allowed. Management is
currently assessing the impact of this Statement on the financial condition of
operations of the Company upon adoption.
Year 2000 Compliance
During the year ended June 30, 1997, the Company began a risk evaluation of
potential Year 2000 issues. The outcome of this evaluation was the formation of
a Year 2000 Committee that consists of directors, officers and employees of the
Company. The purpose of this committee is to assess all risks, analyze current
systems, coordinate upgrades and replacements, and report current and projected
status of all known Year 2000 compliance issues.
During the assessment phase, over thirty service bureaus and system vendors
were identified that performed or supplied potential Year 2000 compliance
issues. The list included eight service bureaus, seven software vendors, seven
hardware vendors, one electric company, six maintenance and supplies companies
and four telecommunications companies. Once the systems were identified an
immediate correspondence was established for the purpose of educating the
Company on known Year 2000 issues or Year 2000 compliance certification.
The systems identified were put through one of two possible phases. If the
vendor provided proof that the system in question had proper Year 2000
compliance certification and a testing cycle was possible, an appropriate
testing cycle was performed. If the testing cycle failed or the system had known
Year 2000 issues, a mission critical evaluation and replacement recommendations
were performed.
The Company has three known mission critical systems that are not in Year
2000 compliance. All three of the systems have Year 2000 compliance certified
replacement products that are scheduled for implementation in November 1998,
February 1999 and March 1999, respectively.
The replacement or remedied costs for year 2000 compliance issues with the
Company is estimated to be less than $100,000, which the Company recognizes as
incurred. This extimated cost is mostly due to software upgrades that include
new features which are combined with Year 2000 corrections.
The Company estimates that the worst case Year 2000 issue scenario would be
discontinuance of electrical power. Although the Company has numerous power
backup devices, a long-term power outage would bring the Company to a
standstill. Because of this potentially crippling effect, the Company has been
examining the potential of installing a complete electrical backup generator at
a cost of approximately $400,000.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
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 Retained Interest recognized in each transaction reflect deductions for
estimates of future defaults and prepayments. The carrying value of Retained
Interest may be adjusted periodically to reflect differences between estimated
and actual credit losses and prepayments on past securitizations. For example,
if credit losses increased or decreased by 1.00%, the gain on sale of a $300.0
million securitization would result in a reduction or an increase of the Gain
(Loss) on Sales of Loans by $3.0 million pre-tax. The same 1.00% increase or
decrease would result in a reduction or an increase of the Retained Interest of
approximately $19.3 million as of June 30, 1998. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
"Notes 1 and 4 of the Consolidated Financial Statements."
The Company's sources of funds generally have variable rates of interest
and its loan portfolio bears interest at fixed rates. The Company therefore
bears interest rate risk on loans until they are securitized and employs a
hedging strategy to mitigate this risk. As a part of the hedging strategy, the
Company executes short sales of U.S. Treasury securities having a maturity
approximating the average maturity of loans to be acquired during the relevant
period. There is no assurance that this strategy will completely offset changes
in interest rates. In particular, such strategy depends on management's
estimates of loan acquisition volume. The Company realizes a gain on its hedging
transactions during periods of increasing interest rates and realizes a loss on
such transactions during periods of decreasing interest rates. The hedging gain
or loss will substantially offset changes in interest rates as seen by a lower
or higher reported gain on sales of loans, respectively. Recognition of
unrealized gains or losses is deferred until the sale of loans during the
securitization. On the date of the sale, hedging deferred gains and losses are
recognized as a component of gain on sales of loans. Increases or decreases in
interest rates reduce or increase the fair value of long-term debt,
respectively. See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Notes 2 and 6 of the Consolidated
Financial Statements."
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 Union Acceptance
Corporation and Subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of earnings (loss) and comprehensive earnings (loss),
shareholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998 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.
As discussed in note 13 to the consolidated financial statements, the Company
has restated its June 30, 1997 consolidated financial statements to include an
other than temporary impairment adjustment of the retained interest in
securitized assets.
/s/ KPMG Peat Marwick LLP
- - -------------------------
KPMG Peat Marwick LLP
August 27, 1998
Indianapolis, Indiana
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
Assets 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 75,612 $ 58,801
Restricted cash 17,823 16,657
Loans, net 118,259 121,156
Accrued interest receivable 1,045 1,232
Property, equipment, and leasehold improvements, net 7,921 2,150
Retained interest in securitized assets 171,593 170,791
Other assets 19,280 20,481
- - ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 411,533 $ 391,268
- - ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- - ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Amounts due under warehouse facilities $ 73,123 $ 44,455
Long-term debt 221,000 221,000
Accrued interest payable 6,280 5,793
Amounts due to trusts 15,510 16,067
Dealer premiums payable 1,374 1,372
Deferred income tax payable 9,573 13,859
Other payables and accrued expenses 2,200 1,874
- - -------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 329,060 $ 304,420
- - ---------------------------------------------------------------------------------------------------------------------------
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;
4,376,446 and 4,016,788 shares issued and outstanding at June 30, 1998
and June 30, 1997, respectively 58,360 58,270
Class B common stock, without par value, authorized 20,000,000 shares;
8,855,036 and 9,200,000 shares issued and outstanding at June 30, 1998
and June 30, 1997, respectively -- --
Net unrealized gain on retained interest in securitized assets 7,609 2,252
Retained earnings 16,504 26,326
- - ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 82,473 86,848
- - ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 411,533 $ 391,268
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)
Years ended June 30, 1998, 1997, and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on loans $ 27,871 $ 33,914 $ 28,712
Interest on spread accounts and restricted cash 5,856 6,385 5,448
- - --------------------------------------------------------------------------------------------------------------------------
Total interest income 33,727 40,299 34,160
Interest expense 26,107 25,688 22,275
- - --------------------------------------------------------------------------------------------------------------------------
Net interest margin 7,620 14,611 11,885
Provision for estimated credit losses 8,050 4,188 2,875
- - --------------------------------------------------------------------------------------------------------------------------
Net interest margin (deficit) after provision (430) 10,423 9,010
Gain (loss) on sales of loans, net (11,926) 963 30,357
Servicing fees, net 26,137 25,344 16,926
Other revenues 4,087 3,820 3,096
- - --------------------------------------------------------------------------------------------------------------------------
Total revenues 17,868 40,550 59,389
- - --------------------------------------------------------------------------------------------------------------------------
Salaries and benefits 19,427 15,673 11,985
Other revenues 16,119 14,829 11,856
- - --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 35,546 30,502 23,841
- - --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before provision (benefit) for income taxes (17,678) 10,048 35,548
Provision (benefit) for income taxes (7,856) 4,166 14,406
- - --------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) (9,822) 5,882 21,142
- - --------------------------------------------------------------------------------------------------------------------------
Other comprehensive earnings before taxes:
Net unrealized gain on retained interests in securitized assets 8,527 3,785 -
Income taxes related to items of other comprehensive earnings (3,170) (1,533) -
- - --------------------------------------------------------------------------------------------------------------------------
Other comprehensive earnings, net of taxes 5,357 2,252 -
- - --------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings (loss) $ (4,465) $ 8,134 $ 21,142
==========================================================================================================================
Net earnings (loss) per common share (basic and diluted) $ (0.74) $ 0.45 $ 1.60
==========================================================================================================================
Weighted average number of common shares outstanding 13,226,651 13,215,112 13,209,378
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended June 30, 1998, 1997, and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
Net
Number of unrealized
common stock gain on
shares outstanding retained Total
--------------------------------------- Common interest in Retained shareholders'
Class A Class B stock securitized earnings equity
assets
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 1 1 $ 2 - - 2
Issuance of common
stock through initial
public offering 4,000,000 9,200,000 58,000 - - 58,000
Regulatory equity
distributions related
to spin-off (1) (1) (2) - (698) (700)
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 - - - - 5,882 5,882
Net change in unrealized
gain on retained interest
in securitized assets - - - 2,252 - 2,252
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 4,016,788 9,200,000 58,270 2,252 26,326 86,848
Grants of common stock 14,694 - 90 - - 90
Conversion of Class B
common stock into
Class A common stock 344,964 (344,964) - - - -
Net loss - - - - (9,822) (9,822)
Net change in unrealized
gain on retained interest
in securitized assets - - - 5,357 - 5,357
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 4,376,446 8,855,036 $ 58,360 7,609 16,504 82,473
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) $ (9,822) 5,882 21,142
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Loan originations in excess of liquidations (953,252) (1,087,065) (982,800)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (40,526) (53,461) (50,059)
Securitization of loans held for sale 948,114 1,214,298 924,598
Gain on sales of loans (19,253) (46,713) (37,900)
Proceeds on sale of interest only strip 13,869 31,773 26,686
Return of excess and servicing asset cash flows,
net of present value effect 23,347 24,738 37,871
Impairment of retained interest in securitized assets 23,636 34,828 --
Provision for estimated credit losses 8,050 4,188 2,875
Amortization and depreciation 4,689 3,979 4,395
Spread accounts 3,631 (8,154) (6,176)
Restricted cash (1,166) (1,868) (5,934)
Other assets and accrued interest receivable (2,425) (10,296) (6,788)
Amounts due to trusts (557) 8,136 2,030
Other payables and accrued expenses (3,383) 5,697 14,281
- - ------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (5,048) 125,962 (55,779)
- - ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, equipment, and leasehold improvements (6,809) (967) (1,347)
- - ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in warehouse credit facilities 28,668 (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)
Net proceeds from issuance of common stock -- -- 58,000
Net change in due to Union Federal, including
regulatory equity distribution -- -- (337,423)
- - ------------------------------------------------------------------------------------------------------
Net cash provided (used) from financing activities 28,668 (79,653) 61,102
- - ------------------------------------------------------------------------------------------------------
Change in cash 16,811 45,342 3,976
Cash, beginning of year 58,801 13,459 9,483
- - ------------------------------------------------------------------------------------------------------
Cash, end of year $ 75,612 58,801 13,459
=======================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 22 4,288 10,680
=======================================================================================================
Interest paid $ 26,472 26,475 15,648
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997, and 1996
- - --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Description of Business
Union Acceptance Corporation ("UAC") is an Indiana corporation formed in
December 1993. UAC and its subsidiaries (collectively, the Company)
engage primarily in the business of acquiring, securitizing, and
servicing retail automobile installment sales contracts originated by
dealerships affiliated with major domestic and foreign automobile
manufacturers. The Company currently acquires loans from a network of
over 3,600 manufacturer-franchised automobile dealerships in 32 states.
No individual dealer or group of affiliated dealers accounted for more
than 1.9% of the Company's loan acquisitions during the year ended June
30, 1998.
The Company's lending program focuses on acquiring two levels of loan
quality. Primarily, the Company acquires loans from borrowers who
exhibit a favorable credit profile ("Tier I" lending) purchasing late
model used and, to a lesser extent, new automobiles. The Company also
acquires loans from borrowers with adequate credit quality who would not
qualify for the Company's Tier I lending quality criteria ("Tier II"
lending). Tier II loan acquisitions accounted for 2.5% of total loan
acquisitions during fiscal 1998 and 3.3% of loan servicing portfolio at
June 30, 1998.
(b) Basis of Financial Statement Presentation
The consolidated financial statements included the accounts of UAC and
its wholly-owned subsidiaries, Union Acceptance Funding Corporation, UAC
Securitization Corporation, Performance Funding Corporation, Performance
Securitization Corporation, UAC Boat Funding Corp., UAC Finance
Corporation, Circle City Car Company, and Union Acceptance Receivables
Corporation.
All significant intercompany balances 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. In preparing the financial statements, management is
required 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 significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the valuation of retained
interest in securitized assets, gain (loss) on sales of loans, net, and
the allowance for credit losses.
Priorto the UAC's initial public offering in August 1995, the Company
was a wholly-owned subsidiary of Union Federal Savings Bank of
Indianapolis Union Federal. 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.
(c) Cash
The Company considers all investments with a maturity of three months or
less when purchased to be cash equivalents.
(d) Restricted Cash
Restricted cash primarily consists of funds held in reserve accounts in
compliance with the terms of the Warehouse Facility Agreements.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
(e) Loans, Net
All loans in the Company's Tier I and Tier II portfolios are held for
sale and include automobile, light-truck, van, and other loans including
dealer premiums (on Tier I 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. The
Company accrues interest on loans until the earlier of an account being
charged-off or becoming 120 days delinquent.
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.
On January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities (SFAS 125). The
adoption of SFAS 125 had the effect of reducing fiscal 1997 net earnings
by $1,311,000 or $0.10 per share and increasing retained earnings by
$941,000.
(f) Accrued Interest Receivable
Accrued interest receivable represents interest earned but not
collected on loans held for sale.
(g) Property, Equipment, and Leasehold Improvements, Net
Property, equipment, and leasehold improvements are recorded at cost.
Depreciation is determined on accelerated methods over the estimated
useful lives of the respective assets.
(h) Retained Interest in Securitized Assets and Gain (Loss) on Sales of
Loans
The Company acquires loans with the primary intention of reselling them
as asset-backed securities through securitizations. In the
securitization transactions, the Company sells a portfolio of loans to a
wholly owned subsidiary ("SPS") which has been established for the
limited purpose of buying and reselling the Company's loans. The SPS
transfers the same loans to a trust vehicle (the "Trust"), which issues
interest-bearing asset-backed securities (the "Certificates"). The
Certificates are generally sold to investors in the public market. The
Company provides credit enhancement for the benefit of the investors in
the form of a specific cash account ("Spread Account") held by the
Trust. The Spread Account is required by the servicing agreement (the
Company's servicing agreements are collectively referred to as the
"Pooling and Servicing Agreements") to be maintained at specified
levels.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
At the closing of each securitization, the Company allocates its basis
in the loans between the portion of the loans sold through the
certificates and the portion of the loans retained from the
securitizations ("Residuals" and "Servicing Assets") based on the
relative fair values of those portions at the date of the sale. The fair
value is based upon the cash proceeds received for the loans sold and
the estimated fair value of the Residuals and Servicing Assets.
Residuals consist of (a) the fair value of cash held in the Spread
Account and (b) the excess servicing receivables ("ESRs"). ESRs
represent the discounted cash flows to be received by the Trust in the
future and dealer premium rebates less a discounted allowance for
estimated credit losses. Servicing Assets represent the present value
benefit derived from retaining the right to service loans securitized in
excess of adequate servicer compensation. The excess of the cash
received over the basis allocated to the loans sold, less transaction
costs, and hedging gains and losses, equals the net gain on sale of
loans recorded by the Company.
The Company recognizes unrealized gains or losses attributable to the
change in the fair value of the Residuals, which are recorded as
"available-for-sale" securities, net of related income taxes as a
separate component of shareholders' equity until realized. The Company
is not aware of an active market for the purchase or sale of residuals,
and accordingly, the Company determines the estimated fair value of the
Residuals by discounting the expected cash flows released from the
Spread Account (the cash out method) using a discount rate which the
Company believes is commensurate with the risks involved. The Company
has utilized discount rates ranging from 9.00% to 11.50% on the
estimated cash flows released from the Spread Account to value the
Residuals.
The Annual Percentage Rate ("APR") on the loans is relatively high in
comparison to the pass through rate on the certificates, accordingly,
the Residuals described above are a significant asset of the Company. In
determining the fair value of the Residuals described above, the Company
must estimate the future rates of prepayments, delinquencies, defaults
and default loss severity as they impact the amount and timing of the
estimated cash flows. The Company estimates prepayments by evaluating
historical prepayment performance of comparable loans and the impact of
trends in the economy. The Company has used annual prepayment estimates
ranging from 20.0% to 26.5%. The Company estimates defaults and default
loss severity using available historical loss data for comparable loans
and the specific characteristics of the loans purchased by the Company.
The Company used default losses of 3.0% to 6.3% for Tier I loans and
12.0% to 15.0% for Tier II loans as a percentage of the original
principal balance over the life of the loans.
The Company receives periodic base servicing fees for the servicing and
collection of the loans. In addition, the Company is entitled to the
cash flows from the Residuals that represent collections on the loans in
excess of the amounts required to pay the Certificate principal and
interest, the base servicing fees and certain other fees such as credit
enhancement fees. In general, at the end of each collection period, the
aggregate cash collections from the loans are allocated first to the
base servicing fees, then to the Certificateholders for interest at the
pass-through rate on the certificates plus principal as defined in the
Pooling and Servicing Agreements, and finally to the credit enhancement
fees. If the amount of cash required for the above allocations exceeds
the amount collected during the collection period, the shortfall is
drawn from the Spread Account. If the cash collected during the period
exceeds the amount necessary for the above allocations, and the related
Spread Account is not at the required level, the excess cash collected
is retained in the Spread Account until the specified level is achieved.
The cash in the Spread Accounts is restricted from use by the Company.
Once the required Spread Account level is achieved, the excess is
released to the Company. Cash held in the various Spread Accounts is
invested in high quality liquid investment securities, as specified in
the Pooling and Servicing Agreements. The specified credit enhancement
levels are defined in the Pooling and Servicing Agreements as the Spread
Account balance expressed generally as a percentage of the current
collateral principal balance.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
An other than temporary impairment adjustment to the carrying value of
the Residuals may be required if the present value of an individual
Residual (the pool by pool method), discounted at a risk free rate, is
less than its carrying value. Other than temporary impairment
adjustments are recorded as a component of gain on sales of loans, net.
(i) Servicing Assets
Servicing Assets are the Company's present value benefit derived from
retaining the right to service loans securitized in excess of adequate
servicer compensation. Servicing Assets are recognized as a component of
gain on sales of loans, net. Accretion of related discount to present
value is recognized as a component of interest income.
Servicing Assets are carried at their amortized cost and is included in
other assets. Impairment is measured using relative fair value of the
individual Servicing Assets and recognized through a valuation
allowance. Impairment adjustments are recorded as a component of gain on
sales of loans, net.
(j) 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.
The Company's charter provides that shares of Class B Common Stock
convert automatically to shares of Class A Common Stock on a
share-for-share basis upon transfer outside a prescribed group of
initial holders and certain affiliates. Pursuant to such provision,
344,964 shares of Class B Common Stock were converted to shares of Class
A Common Stock during fiscal 1998.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(l) 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.
(m) Servicing Fees, Net
Servicing fees, net include the contractual fee, typically one percent
of loans serviced, earned from each trust plus the accretion of
discounted retained interest in securitized assets.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
(n) Hedging
Loan production is hedged periodically to such time as the next
securitization is estimated to occur. Securitizations of the Tier I
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.
(o) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share
(SFAS 128). SFAS 128 provides computation, presentation, and disclosure
requirements for earnings per share and supersedes Accounting Principles
Board Opinion 15. Basic EPS for fiscal 1998, 1997, and 1996 have been
computed on the basis of the weighted average number of common shares
outstanding. The effect of stock options not exercised during the
periods presented are anti-dilutive and therefore not included in
diluted earnings per share.
The initial public offering was completed on August 7, 1995. Shares
outstanding from August 7, 1995, through September 30, 1995, were
assumed to be outstanding for the entire three months ended September
30, 1995.
(p) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 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 equity. The Statement is effective for fiscal years beginning after
December 15, 1997 with earlier application permitted. The Company
elected to adopt SFAS 130 as of June 30, 1998, and the Statement had no
impact on the financial condition or results of operations.
(q) Reclassification
Certain amounts for the prior periods have been reclassified to conform
to the current presentation.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
(2) Loans, Net
Loans, net are as follows (in thousands, except average loan balance) at:
- - --------------------------------------------------------------------------------
June 30,
-------------------------
1998 1997
- - --------------------------------------------------------------------------------
Principal balance of Tier I loans held for sale,
net of unearned discount $ 108,159 90,331
Principal balance of Tier II loans held for sale,
net of unearned discount 7,624 19,829
Other loans held for sale 171 6,227
Loans in process (154) 1,189
Dealer premiums 4,375 4,360
Allowance for credit losses (1,916) (780)
- - --------------------------------------------------------------------------------
$ 118,259 121,156
- - --------------------------------------------------------------------------------
Activity in the allowance for credit losses on loans held for sale (in
thousands):
- - --------------------------------------------------------------------------------
Year ended June 30,
----------------------------------
1998 1997 1996
- - -------------------------------------------------------------------------------
Balance at the beginning of the period $ 780 1,099 453
Charge-offs (10,635) (7,361) (4,556)
Recoveries 3,721 2,854 2,327
Provision for estimated credit losses 8,050 4,188 2,875
- - -------------------------------------------------------------------------------
Balance at the end of the period $ 1,916 780 1,099
- - -------------------------------------------------------------------------------
(cont'd)
<PAGE>
Loans serviced are as follows (in thousands) at:
- - --------------------------------------------------------------------------------
June 30,
--------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Loans held for sale:
Tier I (net of unearned discount) $ 108,159 $ 90,331
Tier II (net of unearned discount) 7,624 19,829
Other 171 6,227
- - --------------------------------------------------------------------------------
115,954 116,387
- - --------------------------------------------------------------------------------
Securitized loan:
Tier I 1,870,750 1,769,903
Tier II 59,231 48,460
- - --------------------------------------------------------------------------------
1,929,981 1,818,363
- - --------------------------------------------------------------------------------
Other loans serviced 1,482 2,526
- - --------------------------------------------------------------------------------
$ 2,047,417 $1,937,276
================================================================================
Certain characteristics of loans serviced are as follows at:
- - --------------------------------------------------------------------------------
June 30,
--------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Weighted average interest rate (Tier I) 13.09% 13.18%
Weighted average interest rate (Tier II) 19.03 19.62%
Average loan balance (Tier I) $ 10,755 $10,710
Average loan balance (Tier II) $ 10,637 $11,276
- - --------------------------------------------------------------------------------
During fiscal 1998, loan acquisitions relating to borrowers who reside
in Texas, California, and North Carolina totaled 12.5%, 11.6%, and 9.1%,
respectively, of all loans acquired. At June 30, 1998, borrowers who
reside in Texas, California, and North Carolina totaled 15.0%, 11.0%,
and 10.5%, respectively, of the loan servicing portfolio. A significant
adverse change in the economic climate in Texas, California, and North
Carolina or other states could result in fewer loans held for sale and
potentially less revenue.
Notional amounts and unrealized losses related to outstanding hedges
follow (in thousands) at:
- - --------------------------------------------------------------------------------
June 30,
--------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Notional amounts outstanding $ 210,000 $204,000
Unrealized losses on hedging transactions 394 909
- - --------------------------------------------------------------------------------
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
Notional amounts of $210 million were expected to be closed in September
1998 for the amounts outstanding at June 30, 1998, and $180 million, $18
million and $6 million were closed in September 1997, December 1997, and
March 1998, respectively, for amounts outstanding at June 30, 1997.
Hedging realized losses were approximately $2,669,000, $6,293,000, and
$2,733,000 during fiscal 1998, 1997, and 1996, respectively.
(3) Property, Equipment, and Leasehold Improvements, Net
Property, equipment, and leasehold improvements, net are as follows (in
thousands) at:
- - --------------------------------------------------------------------------------
June 30,
-----------------------
1998 1997
- - --------------------------------------------------------------------------------
Property, equipment, and leasehold improvements $ 11,410 4,724
Accumulated depreciation (3,489) (2,574)
- - --------------------------------------------------------------------------------
$ 7,921 2,150
================================================================================
(4) Retained Interest in Securitized Assets
The carrying amount of retained interest in securitized assets is as
follows (in thousands) at:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
June 30,
--------------------------
1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Estimated fair value of excess servicing receivable,
net of estimated prepayments $ 175,164 145,872
Estimated dealer premium rebates 25,718 26,447
Allowance for estimated credit losses on securitized loans (90,203) (79,923)
Discount to present value (33,117) (9,941)
- - -----------------------------------------------------------------------------------------------
77,562 82,455
Spread accounts 68,113 71,744
Accrued interest on securitized loans 13,606 12,807
Unrealized gain 12,312 3,785
- - -----------------------------------------------------------------------------------------------
$ 171,593 170,791
===============================================================================================
Outstanding balance of securitized loans serviced $ 1,929,981 1,818,363
- - -----------------------------------------------------------------------------------------------
Allowance for estimated credit losses as a
percentage of securitized loans serviced 4.67% 4.40%
- - -----------------------------------------------------------------------------------------------
</TABLE>
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
Retained interest in securitized assets activity is as follows (in
thousands):
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
Year ended June 30,
-----------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 170,791 147,024 118,036
Amounts capitalized (including estimated dealer rebates) 49,071 68,922 56,436
Return of excess cash flows, net of present value effect (22,457) (24,619) (37,871)
Change in spread accounts (3,631) 8,154 6,176
Change in accrued interest on securitized loans 799 2,353 4,247
Impairment of retained interest in securitized assets (23,636) (34,828) -
Change in method of estimating fair value of excess
servicing receivable (7,871) - -
Change in unrealized gain 8,527 3,785 -
- - ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 171,593 170,791 147,024
===========================================================================================================================
</TABLE>
Because of current trends with respect to credit loss and delinquency,
and their effects on the valuation of the retained interest in
securitized assets, the Company recorded a pre-tax charge of $23,636,000
and $34,828,000 for the impairment of the retained interest in
securitized assets during fiscal 1998 and 1997, respectively. During the
fourth quarter of fiscal 1998, the Company changed the method of
estimating the fair value of the retained interest in securitized assets
from "cash in" to "cash out." This change in method, which is
inseparable from the change in estimate, reduced the retained interest
in securitized assets by $7,871,000 as of June 30, 1998, and had the
effect of reducing fiscal 1997 net earnings by $4,864,000 or $0.37 per
share. The change in estimate adjustment was recorded as a component of
gain on sales of loans, net.
The weighted average yield, net of fees, on spread accounts was 4.85%
and 4.97% at June 30, 1998 and 1997, respectively.
(5) Other Assets
Other assets are as follows (in thousands) at:
- - -------------------------------------------------------------------------
June 30,
-----------------------
1998 1997
- - -------------------------------------------------------------------------
Repossessed assets $ 5,934 5,048
Accrued servicing fees 3,228 2,511
Servicing assets 2,743 1,374
Deferred borrowing fees 1,981 3,078
Income tax receivable 1,577 5,735
Advance of delinquent interest 1,387 1,056
Other 2,430 1,679
- - -------------------------------------------------------------------------
$ 19,280 20,481
=========================================================================
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
(6) Amounts Due Under Warehouse Facilities
At June 30, 1998 and 1997, the Company, through its wholly owned
special-purpose subsidiaries, had borrowing arrangements with a
financial institution which provided for two and three, respectively,
revolving Warehouse Facilities (the Facilities) with an aggregate
borrowing capacity of $400 million and $450 million, respectively.
Borrowings under these facilities are collateralized by certain loans
held for sale. There are separate Facilities for the funding of Tier I
auto, Tier II auto, and until March 1998, marine loan acquisitions.
Outstanding borrowings of the Facilities at June 30, 1998 and 1997, was
$73,123,000 and $44,455,000, respectively. The weighted average cost of
funds, net of income earned, of the Facilities for the years ended June
30, 1998 and 1997, was 6.92% and 5.94%, 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.
Upfront warehouse fees are non-recurring costs related to the initial
set-up of the Facilities. The Company recognized $6,622,000, $9,991,000,
and $12,491,000 of interest expense during the years ended June 30,
1998, 1997, and 1996, respectively, related to amounts due under
Warehouse Facilities.
The Facilities agreements specify a term of one year and are renewable
annually. Both the Tier I auto and Tier II auto Facilities have been
renewed for an additional year, and expire in June and July 1999,
respectively.
(7) 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, in a private placement, $46 million
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.
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.
The Company recognized $19,485,000, $15,697,000, and $9,784,000 of
interest expense during the years ended June 30, 1998, 1997, and 1996,
respectively, related to long-term debt.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
Scheduled contractual maturities of long-term debt at June 30, 1998
follows:
- - --------------------------------------------------------------------------
1999 $ 22,000,000
2000 22,000,000
2001 22,000,000
2002 43,666,667
2003 111,333,333
- - --------------------------------------------------------------------------
Total $ 221,000,000
==========================================================================
(8) Other Revenue and Expenses
Other revenue and expenses follow (in thousands):
- - --------------------------------------------------------------------------------
Year ended June 30,
-------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Other revenues:
Late charges $ 3,283 2,618 1,922
Origination fees 637 1,019 1,072
Other 167 183 102
- - --------------------------------------------------------------------------------
$ 4,087 3,820 3,096
================================================================================
Other expenses:
Loan expenses 2,691 2,948 2,202
Outside services 3,223 2,767 2,515
Office, telephone and postage 2,522 2,626 2,207
Occupancy 1,769 1,433 891
Equipment 1,190 1,013 839
Other 4,724 4,042 3,202
- - --------------------------------------------------------------------------------
$ 16,119 14,829 11,856
================================================================================
(9) Income Taxes
The composition of income tax expense (benefit) follows (in thousands):
- - --------------------------------------------------------------------------------
Year ended June 30,
---------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Current tax expense (benefit) $ (9,863) (1,644) 9,096
Deferred tax expense 2,007 5,810 5,310
- - --------------------------------------------------------------------------------
$ (7,856) 4,166 14,406
================================================================================
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
The effective income tax rate differs from the statutory federal
corporate tax rate as follows:
- - --------------------------------------------------------------------------------
Year ended June 30,
---------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Statutory rate 35.0% 35.0 35.0
State income taxes 3.2 5.5 5.5
Change in commercial domicile 4.9 - -
Other 1.3 1.0 -
- - --------------------------------------------------------------------------------
Effective rate 44.4% 41.5 40.5
================================================================================
The composition of deferred income taxes payable is as follows (in
thousands):
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
June 30,
------------------------
1998 1997
- - ------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Net operating losses carryforward $ 11,304 1,841
Allowance for estimated credit losses 732 316
Mark to market and allowance for credit losses 5,713 2,073
- - ------------------------------------------------------------------------------------------------
17,749 4,230
- - ------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Retained interest in securitized assets 22,619 16,556
Unrealized gain on retained interest in securitized assets 4,703 1,533
- - ------------------------------------------------------------------------------------------------
27,322 18,089
- - ------------------------------------------------------------------------------------------------
Deferred income taxes payable $ 9,573 13,859
===============================================================================================
</TABLE>
The Company believes the deferred tax assets will more likely than not be
realized due to the reversal of deferred tax liabilities and expected
future taxable income. Accordingly, no deferred tax asset valuation
allowance has been established.
(10) 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.
Retained interest in securitized assets--Amount carried at fair value.
Spread accounts--Cost approximates fair value as the interest rate
earned is at a variable rate.
Repossessed assets--Cost approximates fair market value.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
All liabilities, except long-term debt--Cost approximates fair value.
Long-term debt--Carrying amount of $221,000,000 at June 30, 1998 and
1997, has been calculated to have a fair value of approximately
$195,000,000 and $221,000,000, 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.
(11) 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, 1998 are as follows:
- - --------------------------------------------------------------------------------
1999 $ 1,341,000
2000 1,161,000
2001 954,000
2002 911,000
2003 759,000
Thereafter -
- - --------------------------------------------------------------------------------
Total $ 5,126,000
================================================================================
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense for premises and equipment
amounted to approximately $1,900,000, $1,572,000, and $1,015,000 for the
years ended June 30, 1998, 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 party to litigation in the ordinary course of business,
often involving claims by consumers under the consumer protection laws
described above. Other claims brought are primarily allegations of
wrongdoing by the motor vehicle dealer which originated the contract or
sold the vehicle financed by the Company. The Company is named as a
co-defendant in such actions because of its status as holder of the
contract. Such litigation is common for industry participants.
The Company is currently a defendant in an action commenced October 23,
1997, in the Common Pleas Court of Cuyahoga County, Ohio, Civil
Division, by plaintiff Barohda Rucker. Suit was initially filed against
the Company and Jackshaw Chevrolet, Inc. ("Jackshaw"), alleging that
Jackshaw committed unfair, deceptive and unconscionable acts in
connection with the sale of a vehicle, and further alleging that the
Company committed disclosure and other violations of the Ohio Retail
Installment Sales Act. Plaintiff seeks rescission of the contract,
injunctive relief and damages. Although the suit was considered routine
when initiated, the plaintiff has now sought to amend the complaint,
asserting class action claims and seeking monetary damages. The class
claims relate to the claims set forth in the original complaint and new
claims under or related to the Ohio Mortgage Loan Act. The court has
not, at this time, granted the motion to amend.
The Company is also a defendant in an action brought in the District
Court for Boulder County, Colorado, on April 10, 1998, by plaintiff
Cristy Waggoner. The suit alleges usury, contending that the retail
installment contracts purchased by the Company were, in fact, direct
loans by the Company subject to a lower usury limitation. The complaint
seeks certification of a class of Colorado residents similarly injured
but no class has been certified at this time.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
The Company is a defendant in an adversary action brought in the United
States Bankruptcy Court for the Northern District of Illinois, Eastern
Division on August 23, 1998, by plaintiff, Keith D. Ferrell. The
plaintiff alleges the Company overstated the value of its collateral in
connection with his Chapter 13 bankruptcy proceedings. The plaintiff has
also asserted claims on behalf of a class consisting of similarly
situated debtors involved in Chapter 13 proceedings. The plaintiff seeks
injunctive relief, actual and punitive damages and attorney fees.
Management of the Company, based on advice of outside legal counsel,
does not expect any pending proceeding to have a material adverse effect
on the Company, and such proceedings are being vigorously defended.
(12) 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):
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------
June 30,
--------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss):
As reported $ (9,822) 5,882 21,142
Pro forma (10,951) 4,543 19,449
Net earnings (loss) per common share (basic and diluted):
As reported (0.74) 0.45 1.60
Pro forma (0.83) 0.34 1.47
==================================================================================================
</TABLE>
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.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
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 1998, 1997, and 1996;
dividend yield of 0.0% for all three years; expected volatility of 100%
for all three years; weighted average risk-free interest rates of 5.45%,
6.50%, and 6.41%, respectively; and expected lives of ten years for all
three years.
A summary of the status of the Company's stock option plans as of June
30, 1998 and 1997 changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- -------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
- - -----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
<S> <C> <C> <C> <C> <C>
beginning of year 314,485 $ 16.02 276,915 $ 16.03 - $ -
Options granted 74,000 9.69 39,750 16.00 280,600 16.04
Options exercised - - - - - -
Options canceled 19,810 14.63 2,180 17.48 3,685 16.31
- - -----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
end of year 368,675 $ 14.86 314,485 $ 16.02 276,915 $ 16.03
- - -----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $ 8.86 $14.71 $ 14.79
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
---------------------------------------------- -----------------------------
Weighted prices Weighted
average remaining Average Average
number contractual exercise Number exercise
outstanding life price exercisable price
- - --------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 9.69 67,500 9.10 $ 9.69 3,500 $ 9.69
16.00 298,375 7.27 16.00 109,288 16.00
17.88 2,800 7.53 17.88 1,120 17.88
- - ---------------------------------------------------------------------------------------------------
368,675 7.67 $ 14.86 113,908 $ 15.90
- - ---------------------------------------------------------------------------------------------------
</TABLE>
In addition to the options outstanding at June 30, 1998, there were
99,843 shares of Class A Common Stock were available for future grants
or awards.
The Incentive Stock Plan also provides that each director of the Company
who is not 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 14,694, 5,430,
and 11,358 in fiscal 1998, 1997, and 1996, respectively, and
compensation cost charged against income was $90,000 in 1998 and 1997,
and $180,000 in 1996.
(cont'd)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
(13) Restatement of Consolidated Financial Statements
The Company determined in August 1998 that it should have been measuring
other than temporary impairment of Retained Interest in Securitized Assets,
previously captioned Excess Servicing, on a disaggregate basis (the
pool-by-pool method) as opposed to its historical method which measured
impairment on an aggregate basis. The adjustments resulting from the
measurement of other than temporary impairment on a disaggregate basis were
of sufficient significance to require restatement of the consolidated
financial statements since the implementation of SFAS 125. This restatement
had the effect of reducing fiscal 1997 earnings by $1,890,000 (net of
income taxes of $1,288,000) or $0.14 per share. The restatement had no
effect on shareholders equity at June 30, 1997. In connection with the
restatement, the Company made other adjustments, which were not
individually significant, that increased fiscal 1997 net earnings by
$372,000 (net of income taxes of $259,000) or $0.03 per share and increased
shareholders' equity at June 30, 1997 by $733.000.
(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, 1998
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest on loans $ 6,627 $ 6,473 $ 7,133 $ 7,638 $27,871
Interest on spread
accounts and
restricted cash 1,572 1,461 1,443 1,380 5,856
Interest expense (6,053) (6,167) (6,990) (6,897) (26,107)
Provision for
estimated credit
losses on loans
held for sale (1,505) (1,770) (1,900) (2,875) (8,050)
- - --------------------------------------------------------------------------------------------------
Net interest margin
(deficit)
after provision 641 (3) (314) (754) (430)
Gain (loss) on sales of
loans, net (10,847) 2,020 3,113 (6,212) (11,926)
Servicing fees, net 6,286 6,533 6,529 6,789 26,137
Other revenues 1,020 985 1,065 1,017 4,087
- - --------------------------------------------------------------------------------------------------
Total revenues (2,900) 9,535 10,393 840 17,868
- - --------------------------------------------------------------------------------------------------
Salaries and benefits 4,610 4,871 4,815 5,131 19,427
Other expenses 4,013 4,165 4,007 3,934 16,119
- - --------------------------------------------------------------------------------------------------
Operating expenses 8,623 9,036 8,822 9,065 35,546
- - --------------------------------------------------------------------------------------------------
Provision (benefit) for
income taxes (4,656) (711) 654 (3,143) (7,856)
- - --------------------------------------------------------------------------------------------------
Net earnings (loss) $ (6,867) $ 1,210 $ 917 $ (5,082) $(9,822)
==================================================================================================
Net earnings (loss)
per common
share (basic and
diluted) (0.52) 0.09 0.07 (0.38) (0.74)
==================================================================================================
Weighted average common
shares outstanding $13,216,788 13,227,010 13,231,482 13,231,482 13,226,651
==================================================================================================
</TABLE>
(cont'd)
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information required by this item with respect to directors is
incorporated by reference to the information contained under the caption
"Election of Directors" in the Company's 1998 Proxy Statement for its 1998
Annual Shareholder Meeting (the "1998 Proxy Statement").
Item 11. Executive Compensation
----------------------
Only the information required by this item to be included with this
report is incorporated by reference to the information contained under the
caption "Compensation" in the 1998 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required by this item is incorporated by reference to
the information contained under the captions "Voting Securities and Principal
Holders Thereof" and "Election of Directors" in the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information required by this item is incorporated by reference to
the information contained under the caption "Certain Transactions with Related
Persons" in the 1998 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, 1998 and 1997
Consolidated Statements of Earnings for the Years Ended
June 30, 1998, 1997, 1996
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997, 1996
Consolidated Statement of Shareholders' Equity for the Years
Ended June 30, 1998 and 1997
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter
ended June 30, 1998
(c) The exhibits filed herewith or incorporated by reference herein
are set forth following the signature page which appears on page
62.
<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 ("UAFC Transfer and
Administration Agreement").
4.3(a) Amendment No. 1 to UAFC Transfer and Administration 10Q 9/95
Agreement dated September 8, 1995 4.3(a)
4.3(b) Amendment No. 2 to UAFC Transfer and Administration 10Q 9/95
Agreement dated September 29, 1995 4.3(b)
4.3(c) Letter Agreement regarding UAFC Transfer and 10K 1996
Administration Agreement dated November 13, 1995 4.3(c)
4.3(d) Amendment No. 3 to UAFC Transfer and Administration 10K 1996
Agreement dated March 1, 1996 4.3(d)
4.3(e) Letter Agreement UAFC regarding UAFC Transfer and 10K 1996
Administration Agreement dated May 30, 1996 4.3(e)
4.3(f) Amendment No. 4 to UAFC Transfer and Administration 10K 1996
Agreement dated September 5, 1996 4.3(f)
4.3(g) Amendment No. 5 to UAFC Transfer and Administration 10K 1997
Agreement dated October 31, 1996 4.3(g)
4.3(i) Amendment No. 6 to UAFC Transfer and Administration 10Q 12/96
Agreement dated December 23, 1996 4.1
4.3(h) Amendment No. 7 to UAFC Transfer and Administration 10K 1997
Agreement dated March 31, 1997 4.3(h)
4.3(j) Letter Agreement No. 3 with respect to UAFC Transfer 10K 1997
and Administration Agreement, dated April 28, 1997 4.3(j)
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.
<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.
<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.
<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
<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 28, 1998 By: /S/ John M. Stainbrook
John M. Stainbrook
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Signature Title Date
(1) Principal Executive Officer: )
)
/s/ John M. Stainbrook President and Chief )
-------------------------------------- Executive Officer )
John M. Stainbrook
)
(2) Principal Financial/Accounting Officer: )
)
Treasurer and )
/s/ Rick A. Brown Chief Financial )
-------------------------------------- Officer )
Rick A. Brown )
)
(3) A Majority of the Board of Directors: )
)
/s/ Howard L. Chapman Director )
-------------------------------------- )
Howard L. Chapman )
)
/s/ John M. Davis Director ) September 28, 1998
-------------------------------------- )
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 )
)
Director )
-------------------------------------- )
Jerry D. Von Deylen )
)
Director )
-------------------------------------- )
Richard D. Waterfield )
)
/s/ Thomas M. West Director )
-------------------------------------- )
Thomas M. West )
)
</TABLE>
- - --------------------------------------------------------------------------------
NOTE PURCHASE AGREEMENT
among
UNION ACCEPTANCE FUNDING CORPORATION
as Issuer,
ENTERPRISE FUNDING CORPORATION,
as Company,
and
NATIONSBANK, N.A.,
as Agent and Bank Investor
Dated as of September 18, 1998
- - --------------------------------------------------------------------------------
<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. Sharing of Payments, Etc....................................11
SECTION 2.3. Right of Setoff.............................................12
SECTION 2.4. Fees........................................................12
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ISSUER
SECTION 3.1. Representations and Warranties of the Issuer................12
SECTION 3.2. Covenants of the Issuer.....................................15
ARTICLE IV
INDEMNIFICATION
SECTION 4.1. Indemnity...................................................21
SECTION 4.2. Indemnity for Taxes, Reserves and
Expenses....................................................23
SECTION 4.3. Other Costs, Expenses and Related
Matters.....................................................26
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.............................................29
SECTION 5.4. Indemnification of the Agent................................29
SECTION 5.5. Successor Agent.............................................30
SECTION 5.6. Payments by the Agent.......................................30
SECTION 5.7. Bank Commitment; Assignment to Bank
Investors...................................................31
1
<PAGE>
Page
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. Notices, Etc.................................................36
SECTION 6.2. Successors and Assigns.......................................37
SECTION 6.3. Severability Clause..........................................39
SECTION 6.4. Amendments...................................................39
SECTION 6.5. Governing Law................................................39
SECTION 6.6. No Bankruptcy Petition Against the
Company......................................................39
SECTION 6.7. Setoff.......................................................39
SECTION 6.8. No Recourse..................................................40
SECTION 6.9. Further Assurances...........................................40
SECTION 6.10. No Recourse Against Stockholders, Officers or Directors......40
SECTION 6.11. Counterparts.................................................41
SECTION 6.12. Headings.....................................................41
EXHIBITS
EXHIBIT A Form of Assignment and Assumption
Agreement A-1
EXHIBIT B Form of Initial Funding Request B-1
EXHIBIT C Form of Prefunding Notice C-1
EXHIBIT D Form of Note D-1
<PAGE>
NOTE PURCHASE AGREEMENT
NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of
September 18, 1998, among ENTERPRISE FUNDING CORPORATION, a Dela ware
corporation, as lender (together with its successors and assigns, the "Com
pany"), UNION ACCEPTANCE FUNDING CORPORATION, a Delaware corpora tion, 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, together with its succes
sors, 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 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
Contracts;
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION I.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:
"Administrative Agent" shall mean NationsBank, N.A., as
administra tive agent for the Company.
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"Affiliate" 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, (ii) such Bank Investors Pro Rata
Share of the aggregate Outstanding Balance of Receivables (excluding Defaulted
Receivables) at such time, and (iii) 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.
"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.
"Carrying Costs" shall have the meaning specified in the
Security Agreement.
"Closing Date" shall mean September 18, 1998.
"Collateral" shall have the meaning set forth in the Security
Agree ment.
"Collateral Agent" shall mean NationsBank, N.A., or any
successor thereto, as Collateral Agent under the Security Agreement.
"Collection Agent" shall mean UAC as collection agent, or any
of its successors or assigns.
"Collections" shall have the meaning specified in the Security
Agreement.
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"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" shall have the meaning specified
in the Security Agreement.
"Common Stock" shall mean 1000 shares of the Issuer's common
stock, par value $1.00 per share.
"Company" shall mean Enterprise Funding Corporation, a
Delaware corporation, together with its successors and assigns.
"Conduit Assignee" shall mean any commercial paper conduit
administered by NationsBank and designated by NationsBank from time to time to
accept an assignment of the Company of all or a portion of the Net Investment.
"Credit and Collection Policy" shall have the meaning
specified in the Security Agreement.
"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 mean $450,000,000.
"Funding" shall mean the Initial Funding and any Prefunding
Deposit.
"Funding Date" shall mean the date upon which any Funding
occurs.
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"GAAP" shall mean generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements of the
Financial Accounting Standards Board or in such other statements or
pronouncements by such other entity as approved by a significant segment of the
accounting profession, which are in effect from time to time.
"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 set forth in Section
2.1(a) hereof.
"Initial Funding Request" shall have the meaning specified in
2.1(a) hereof.
"Interest Component" shall have the meaning specified in the
Security Agreement.
"Issuer" shall mean Union Acceptance Funding Corporation, a
Delaware corporation, and its successors and permitted assigns.
"Law" shall have the meaning specified in the Security
Agreement.
"Liquidity Provider 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.
"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.
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"Majority Investors" shall have the meaning specified in
Section 5.1(a) hereof. "Merrill" shall have the meaning specified in Section
6.10.
"Moody's" shall mean Moody's Investors Service, Inc.
"Net Asset Test" shall mean a test that is satisfied if the
Net Invest ment less the quotient of (a) the amount on deposit in the Prefunding
Account Account and (b) 100% less the quotient of (x) the percentage used to
determine the Required Reserve Account Amount and (y) the Noteholder's
Percentage is equal to or less than the product of the Noteholder's Percentage
and the Net Receivables Balance.
"Net Investment" 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, security agreement or other similar agreement with the
Company.
"Outstanding Balance" shall have the meaning specified in the
Security Agreement.
"Person" shall have the meaning specified in the Security
Agreement.
"Potential Termination Event" shall have the meaning specified
in the Security Agreement.
"Prefunding Deposit" shall have the meaning specified in
Section 2.1(c) hereof.
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"Prefunding Notice" shall have the meaning specified in
Section 2.1 hereof.
"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.
"Remittance Date" shall have the meaning specified in the
Security Agreement.
"Requirements of Law" for any Person means 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).
"Sale and Purchase Agreement" shall have the meaning specified
in the Security Agreement.
"S&P" shall mean Standard & Poor's Ratings Services, 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 September 18, 1998 among UAC, as Collection Agent, the Issuer, the
Collateral Agent, the Insurer and the Company.
"Servicing Fee" shall have the meaning specified in the
Security Agreement.
"Subsidiary" shall mean any corporation more than 50% of the
outstanding voting securities of which shall at any time be owned or controlled,
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directly or indirectly, by the Issuer or one or more Subsidiaries, or any
similar business organization which is so owned or controlled.
"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.
"Transaction Documents" shall have the meaning specified in
the Security Agreement.
"UAC" shall mean Union Acceptance Corporation, an Indiana
corporation, and its permitted successors and assigns.
"Uniform Commercial Code" or "UCC" shall mean, with respect to
any state, the Uniform Commercial Code as from time to time in effect in such
state.
ARTICLE II
FUNDINGS; THE NOTE
SECTION II.1. Funding; The Note. (a) Initial Funding. Upon the
terms and subject to the conditions herein set forth, the Company may, at its
option, or the Bank Investors shall, if so requested by the Company, make an
initial advance (the "Initial Funding") to the Issuer on or after the Closing
Date and prior to the Termination Date. In connection with the Initial Funding,
the Issuer shall, by notice in the form of Exhibit B hereto (the "Initial
Funding Request") request such Funding at least one Business Day prior to the
proposed date of such Initial Funding. Such notice shall specify the proposed
Funding Amount (which shall be at least $1,000,000) and the proposed date of the
Initial Funding.
(b) Conditions to Initial Funding. Neither the Company nor
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the Bank Investors shall, and shall have no obligation to, advance any funds to
the Issuer in connection with the Initial Funding if on the date of the Initial
Funding, (i) either (x) if the Initial Funding is to be made by the Company, the
sum of the Net In vestment after giving effect to the Initial Funding plus the
Interest Component of Commercial Paper issued in connection with such Funding
would exceed the Facility Limit, or (y) if the Initial Funding is to be made by
the Bank Investors, the Net Investment, after giving effect to the Initial
Funding, would exceed the Facility Limit, (ii) after giving effect to such
Funding, the Net Asset Test is not satisfied, (iii) if the Net Investment is
funded by the Company, the Company is unable to obtain funds therefor in the
commercial paper market or under the Liquidity Provider Agreement, (iv) the
Issuer shall have failed to deposit any Required Yield Deposit Amount into the
Yield Supplement Account required pursuant to Section 2.13 of the Security
Agreement, (v) the Issuer is not in compliance with Section 5.3 of the Security
Agreement, (vi) the Policy shall not be in full force and effect or the Insurer
shall have failed to make any required payment thereunder; (vii) the Issuer
shall not have deposited in the Reserve Account, or shall not have given
irrevocable instructions to the Agent to withhold from the proceeds of the
Initial Funding, an amount equal to the amount necessary to cause the amount on
deposit in the Reserve Account to equal the Required Reserve Account Amount
(calculated as if the Initial Funding shall have occurred); (viii) a Potential
Termination Event or the Termination Date shall have oc curred and be
continuing, or (ix) the conditions precedent set forth in Section 4.1 of the
Security Agreement shall not be satisfied.
(c) Prefunding Deposits. On the Business Day prior to each
Prefunding Date, the Issuer shall provide the Agent and the Insurer with a
written notice in substantially the form of Exhibit C (a "Prefunding Notice")
setting forth the Issuer's reasonable best estimate of the aggregate amount of
Receivables projected to be acquired or originated by UAC and purchased by the
Issuer pursuant to the Sale and Purchase Agreement during the period from such
Prefunding Date to but not including the next succeeding Prefunding Date. The
Company and the Bank Investors agree that on the related Prefunding Date,
provided that (i) no Potential Termination Event has occurred, (ii) the Issuer
shall have made the Interest Reserve Deposit to the Prefunding Interest Reserve
Account as required by Section 2.11(b) of the Security Agreement on such day,
(iii) after giving effect to any such deposit (x) if the Net Investment is held
by the Company, the Net Investment plus the aggregate Interest Component of
Related Commercial Paper (as estimated by the Agent and provided to the Issuer),
after giving effect to such Prefunding Deposit, would not
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exceed the Facility Limit, or (y) if the Net Investment is held by the Bank
Investors, the Net Investment, after giving effect to such Prefunding Deposit,
would not exceed the Facility Limit, (iv) after giving effect to such Prefunding
Deposit, the Net Asset Test shall be satisfied, (v) the Collection Agent shall
be in compliance with the re quirements of Section 5.3 of the Security Agreement
in respect of such Prefunding Date, (vi) the Issuer shall have deposited all
Required Yield Deposit Amounts into the Yield Supplement Account required
pursuant to Section 2.13 of the Security Agreement, (vii) the Policy shall
continue to be in full force and effect and the Insurer shall have made all
required payments thereunder, (viii) the amount on deposit in the Reserve
Account shall not be less than the Required Reserve Account Amount (calculated
(x) immediately prior to such Prefunding Date and (y) as if such Prefunding
Deposit shall have occurred), and (ix) the Company (if the deposit is to be made
by the Company) shall be able to obtain funds therefor in the commercial paper
market, the Company or the Bank Investors, if the Company is not so able to
obtain funds and the Company shall have assigned the Note to the Bank Investors
pursuant to Section 5.7 hereof, shall deposit in the Prefunding Account an
amount equal to the product of the Noteholder's Percentage and the aggregate
amount of Receivables so projected to be acquired or originated (such product,
the "Prefunding Deposit"). Funds equal to the product of (i) the percentage used
to determine the Required Reserve Account Amount and (ii) the Prefunding Deposit
divided by the Noteholder's Percentage will be removed from the Prefunding
Account and transferred to the Reserve Account.
(d) Initial Funding Request and Prefunding Notices
Irrevocable. The Initial Funding Request and any Prefunding Notice shall be
irrevo cable 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 Provider 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 Provider 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.
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(e) Disbursement of Funds. (i) No later than 4:30 p.m. (New
York City time) on the date on which the Initial 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.
(ii) No later than 4:30 p.m. (New York City time) on the
date on which any Prefunding Deposit is to be made, the
Company or the Bank Investors, as applicable, will deposit in
immediately available funds, the amount of the Funding to be
made on such day by remitting the required amount thereof to
the Prefunding Account.
(f) 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 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 fourth calendar month
following the calendar month in which the latest maturing
Receivable (deter mined as of the Termination Date) is
scheduled to mature (without regard to extensions subsequently
granted on any Receivable by the Issuer or the Collection
Agent) (5) be entitled to the benefit of the Policy 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 Agent 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 Agent 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 or any Bank
Investor's rights with respect to the Note.
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(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 thereunder. In
addi tion, 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.
SECTION II.2. 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 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 II.3. Right of Setoff. Without in any way limiting the
provisions of Section 2.2, 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
occur rence 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 indebt edness 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).
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SECTION II.4. Fees. The Issuer shall pay, in accordance with
the Fee Letter, such fees as are described therein, all of which shall be
non-refundable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE ISSUER
SECTION III.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, except as otherwise provided herein,
as of any Funding Date that:
(a Corporate Existence and Power. The Issuer is a corpora tion
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all corporate power and all material
governmen tal 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; Contraven tion.
The execution, delivery and performance by the Issuer of this Agreement and the
other Transaction Documents 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 governmen tal authority or other
Person.
(c Binding Effect. Each of this Agreement and the other
Transaction Documents constitutes the legal, valid and binding obligation of the
Issuer, enforceable against the Issuer in accordance with its terms, subject to
applica ble bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors.
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(d Accuracy of Information. All information heretofore
furnished by the Issuer (including without limitation, the Settlement Statement
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 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. 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, under the
Security Agreement, the Note, the Sale and Purchase Agreement or any other
Transaction Document.
(g Use of Proceeds. The proceeds of any Funding will be used
by the Issuer to (a) acquire the Receivables, the Contracts related thereto and
the Related Security with respect thereto from UAC pursuant to the Sale and Pur
chase Agreement, (b) to pay down debt in connection with the purchase of the
Receivables and Contracts pursuant to the Sale and Purchase Agreement, or (c) to
make distributions constituting a return of capital.
(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 9.3 of the Security Agreement and the offices where the
Issuer keeps all its records, are located at the address indicated in Section
9.3 of the Security Agreement.
(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).
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(j Solvency. The Issuer is not insolvent and will not be
rendered insolvent immediately following the consummation on the Closing 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.
(k No Termination Event. After giving effect to each 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, any Bank Investor or the Agent 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.
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ARTICLE IV
INDEMNIFICATION
SECTION IV.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
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
uncollectible Receivables. Such Indemnified Amounts shall be paid in accordance
with Section 2.3(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, UAC or the Collection Agent (or any officers of the Issuer or the
Collection Agent) under or in connection with this Agreement, the Security
Agreement, the Initial Funding Request, any Prefunding Notice, any Settlement
Statement or any other information or report delivered by the Issuer, UAC or the
Collection Agent 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, UAC or the Collection Agent 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;
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(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;
(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 Obligor) 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 services related to such Receivable or the furnishing or failure to
furnish such services;
(f any failure of the Issuer to perform its duties or
obligations in accordance with the provisions 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 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 Provider 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 Transferor, 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 IV.2. Indemnity for Taxes, Reserves and Expenses. (a)
If after the date hereof, the adoption of any Law or bank regulatory guideline
or any
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amendment or change in the interpretation of any existing or future Law or bank
regulatory guideline by any Official Body charged with the administration,
interpre tation 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):
(10 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 Provider 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 federal,
state or local general corporate, franchise, net income or other income or
similar tax imposed on such Indemnified Party by the jurisdiction in which such
Indemnified Party's principal executive office is located); or
(20 shall impose, modify or deem applicable 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 Provider Agreement, the Credit
Support Agreement or otherwise in respect of this Agreement, the Note, the Net
Investment or the Collateral;
(30 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 advance funds under the Liquidity Provider Agreement or the Credit
Support Agreement or otherwise in respect of this Agreement, the Note, the Net
Investment or the Collateral;
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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 Provider 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 Agent, the Issuer shall pay
to the Agent 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 Agent 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 Agent, the Issuer shall pay to
the Agent 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 Agent first notifies the Issuer of its intention to demand compensation
under this Section 4.2(b).
(c The Agent or 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 Agent 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 Agent may use
any reasonable averaging and attributing methods.
(d Anything in this Section 4.2 to the contrary notwith
standing, 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; provided, however, 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 Transferors and not
attributable to the Issuer, such Other Transferors shall be solely liable for
such Section 4.2 Costs.
SECTION IV.3. Other Costs, Expenses and Related Matters. 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 other Transaction Document 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, any
Bank Investor's or any of their agent's agent's enforcement or preservation of
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 V.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
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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 the Agent shall not be required to take any action
hereunder if the taking of such action, in the reasonable determination of the
Agent, shall 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. "Majority Investors" shall mean, at any time, the Agent and those
Bank Investors which hold Commitments aggregating in excess of 50% 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 hereunder) 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.
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SECTION V.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 Agree ment 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 UAC),
independent public accoun tants 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 perfor mance
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 UAC or to inspect the
property (including the books and records) of the Issuer or UAC; (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 V.3. Credit Decision. The Company and each Bank
Investor acknowledges that it has, 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 upon such documents and information as
it has deemed appropriate, made its own evaluation and decision to enter into
this Agree ment 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.
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SECTION V.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 Agree ment 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 V.5. Successor Agent. The Agent may resign at any time
by giving written notice thereof to each Bank Investor, the Company and the
Issuer and may be removed at any time with cause 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
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its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement.
SECTION V.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.
SECTION V.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 Bank Investors elect to make
a Prefunding Deposit as requested under Section 2.1, then at any time, the
Issuer shall be considered to have directed the Company to assign its interest
in the Note in whole to the Bank Investors pursuant to this Section 5.7, the
Bank Investors agree to accept such assignment, and the Issuer hereby agrees to
pay the amounts described in Section 5.7(d) below. In addition, at any time on
or prior to the Commitment Termination Date upon the occurrence of a Termination
Event or the 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. 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 assign ment 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 Commit ment Termination Date the Issuer
shall have the right to request funding under this Agreement and the Security
Agreement directly from the Bank Investors provided that at such time all
conditions precedent set forth herein and in the Security Agree ment for a
Prefunding Deposit shall be satisfied and provided further that in connec tion
with such funding by the Bank Investors, the Bank Investors accept the assign
ment of the Note from the Company and assume all of the Company's obligations
hereunder concurrently with or prior to any such Prefunding Deposit. 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 approved in writing by the Agent and the Issuer. 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 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 Provider Agreement.
(c Effects of Assignment. By executing and delivering an
Assignment and Assumption Agreement, the assignor and assignee thereunder
confirm to and agree with each other and the other parties hereto as follows:
(i) other
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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,
genuine ness, 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 UAC or the performance or observance by the Issuer or UAC of
any of its obligations under this Agreement, the Sale and 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 Sale and Purchase Agreement 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 or the Conduit Assignee, as applicable.
(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
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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. In the
event that the sum of the Assignment Amount paid by the Bank Investors and the
amounts paid to the Company pursuant to Section 5.7(d) in connection with such
assignment is less than the sum of the Net Investment plus the Interest
Component of all outstanding Related Commercial Paper, then to the extent
payments made hereunder in respect of the Net Investment exceed the Assignment
Amount, such excess shall be remitted by the Agent to the Company.
(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 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
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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 advance to the
Agent an amount equal to its Commitment for deposit by the Agent into an
account, in the name of the Agent, which shall be in satisfaction of such Bank
Investor's obligations to make Fundings and to accept an assignment from the
Company in accordance with Section 5.7(a) hereof. The amount on deposit in such
account shall be invested by the Agent in Eligible Investments and such Eligible
Investments shall have a term of no more than 30 days, at the Agent's sole
discretion. The Agent shall remit to such Bank Investor, monthly, the income
thereon. Nothing in the two preceding sentences shall affect or diminish in any
way any such downgaded Bank Investor's Commitment to the Issuer or such
downgraded Bank Investor's other obligations and liabilities hereunder and under
the other documents.
ARTICLE VI
MISCELLANEOUS
SECTION VI.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:
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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 10218
Telephone: (212) 236-7200
Telecopy: (212) 236-7584
(with a copy to the Administrative Agent)
If to the Issuer:
Union Acceptance Funding Corporation
9240 Bonita Beach Road, Suite 1109-C
Bonita Springs, Florida 34135-4250
Attn: Leeanne W. Graziani, Vice President
Telephone: (941) 948-1852
Telecopy: (941) 948-1855
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 VI.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,
however, that the Issuer shall not assign any of its rights or obligations
hereunder without the prior written consent of the Company, the Collateral Agent
and the Insurer. The Issuer
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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 Provider 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.
Without limiting the foregoing, the Company may, from time to
time, with prior or concurrent notice to the Issuer and the Collection Agent, in
one transaction or a series of transactions, assign all or a portion of the Net
Investment and its rights and obligations under this Agreement and any other
Transaction Documents to which it is a party to a Conduit Assignee. Upon and to
the extent of such assignment by the Company to a Conduit Assignee, (i) such
Conduit Assignee shall be the owner of the assigned portion of the Net
Investment, (ii) the related administrative or managing agent for such Conduit
Assignee will act as the Adminis trative Agent for such Conduit Assignee, with
all corresponding rights and powers, expressed or implied, granted to the
Administrative Agent hereunder or under the other Transaction Documents, (iii)
such Conduit Assignee and its liquidity support provider(s) and credit support
provider(s) and other related parties shall have the benefit of all the rights
and protections provided to the Company and its Liquidity Provider(s) and Credit
Support Provider(s), respectively, herein and in the other Transaction Documents
(including, without limitation, any limitation on recourse against such Conduit
Assignee or related parties, any agreement not to file or join in the filing of
a petition to commence an insolvency proceeding against such Conduit Assignee,
and the right to assign to another Conduit Assignee as provided in this
paragraph), (iv) such Conduit Assignee shall assume all (or the assigned or
assumed portion) of the Company's obligations, if any, hereunder or any other
Transaction Document, and the Company shall be released from such obligations,
in each case to the extent of such assignment, and the obligations of the
Company and such Conduit Assignee shall be several and not joint, (v) all
distributions in respect of the Net Investment and the Note shall be made to the
applicable agent or administrative agent, as applicable, on behalf of the
Company and such Conduit Assignee on a pro rata basis according to their
respective interets, (vi) the definition of the term "Carrying Costs" with
respect to the portion of the Net Investment funded with commercial paper issued
by the Conduit Assignee from time to time shall be determined on the
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basis of the interest rate or discount applicable to commercial paper issued by
such Conduit Assignee (rather than the Company), (vii) the defined terms and
other terms and provisions of this Agreement and the other Transaction Documents
shall be interpreted in accordance with the foregoing, and (viii) if requested
by the Agent or the agent of administrative agent with respect to te Conduit
Assignee, the parties will execute and deliver such further agreements and
documents and take such other actions as the Agent or such agent or
administrative agent may reasonably request to evidence and give effect to the
foregoing. No Assignment by the Company to a Conduit Assignee of all or any
portion of the Net Investment shall in any way diminish the related Bank
Investors' obligation under Section 2.1(a) to fund the Initial Funding if not
funded by the Company or such Conduit Assignee or under Section 5.7(a) to
acquire from the Company or such Conduit Assignee all or any portion of the Net
Investment.
SECTION VI.3. Severability Clause. Any provisions of this
Agree ment 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 VI.4. Amendments. (a) No failure or delay on the part
of the Agent, the Company and the Bank Investors in exercising any power, right
or remedy under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or remedy preclude any other
further exer cise thereof or the exercise of any other power, right or remedy.
The rights and remedies herein provided shall be cumulative and nonexclusive of
any rights or remedies provided by law.
(b) Any provision of this Agreement may be amended or waived
if, but only if, such amendment is in writing and is signed by the Issuer, the
Company, the Insurer and the Majority Investors (and, if Article V or the rights
or duties of the Agent are affected thereby, by the Agent); provided, that no
such amendment or waiver shall, unless signed by each Bank Investor directly
affected thereby, (i) increase the Commitment of a Bank Investor, (ii) reduce
the Net Investment or rate of interest to accrue thereon or any fees or other
amounts payable hereunder, (iii) postpone any date fixed for the payment of any
scheduled distribution in respect of
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the Net Investment or interest with respect thereto or any fees or other amounts
payable hereunder or for termination of any Commitment, (iv) change the
percentage of the Commitments or the number of Bank Investors, which shall be
required for the Bank Investors or any of them to take any action under this
Section or any other provision of this Agreement, (v) extend or permit the
extension of the Commitment Termination Date, (vi) 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, (vii) increase the Servicing Fee to
a percentage greater than 1.0% per annum of the aggregate Outstanding Balance of
the Receivables as of the first day of the related Settlement Period, (viii)
modify any provisions of this Agreement or the Sale and Purchase Agreement
relating to the timing of payments required to be made by the Issuer or UAC or
the application of the proceeds of such payments, or (ix) provide for the
appointment of any Person (other than the Agent) as a successor Collection
Agent. In the event the Agent requests the Company's or a Bank Inves tor'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
hereunder) shall be disregarded in determining whether the Agent shall have
obtained sufficient consent hereunder.
SECTION VI.5. Governing Law. This Agreement shall be con
strued in accordance with and governed by the laws of the State of New York.
SECTION VI.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
Collection Agent appointed pursuant to 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 (or, if the Net Investment
(or any portion thereof) has been assigned to a Conduit Assignee, one year and
one day after the payment in full of all Commercial Paper issued by such Conduit
Assignee), it will not institute against, or join any other Person in
instituting against, the Company, the Issuer or any Conduit Assignee any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings,
or other proceedings under any federal or state bankruptcy or similar law.
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SECTION VI.7. Setoff. The Issuer hereby irrevocably and
uncondi tionally 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 VI.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 or UAC. Except as otherwise expressly provided in
this Agreement, it is understood and agreed that neither the Issuer nor UAC
shall be liable for the payment of 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 representations, warranties, covenants and other payment and
performance obliga tions herein or therein described.
SECTION VI.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 VI.10. No Recourse Against Stockholders, Officers or
Directors. Notwithstanding anything to the contrary contained in this Agreement,
the obligations of the Company under this Agreement and all other Transaction
Docu ments are solely the corporate obligations of the Company and shall be
payable solely to the extent of funds received from the Issuer in accordance
herewith or from any party to any Transaction Document in accordance with the
terms thereof in excess of funds necessary to pay matured and maturing
Commercial Paper. No recourse under any obligation, covenant or agreement of the
Company contained in this Agreement shall be had against Merrill Lynch Money
Markets Inc. ("Merrill")(or any affiliate thereof), or any stockholder, officer
or director of the Company, as such, by the enforcement of any assessment or by
any legal or equitable proceeding, by virtue of any statute or otherwise; it
being expressly agreed and understood that this Agreement is solely a corporate
obligation of the Company, and that no personal liability whatsoever shall
attach to or be incurred by Merrill (or any affiliate thereof), or the
stockholders, officers or directors of the buyer, as such, or any of them, under
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or by reason of any of the obligations, covenants or agreements of the Company
contained in this Agreement, or implied therefrom, and that any and all personal
liability for breaches by the Company of any of such obligations, covenants or
agreements, either at common law or at equity, or by statute or constitution, of
Merrill (or any affiliate thereof) and every such stockholder, officer or
director of the Company is hereby expressly waived as a condition of and
consideration for the execution of this Agreement.
SECTION VI.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 VI.12. Headings. Section headings used in this
Agreement are for convenience of reference only and shall not affect the
construction or interpre tation of this Agreement.
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IN WITNESS WHEREOF, the Issuer, the Company and the Agent have
caused this Note Purchase Agreement to be executed by their respective officers
thereunto duly authorized as of the day and year first above written.
UNION ACCEPTANCE FUNDING CORPORATION,
as Issuer
By:
Name:
Title:
ENTERPRISE FUNDING CORPORATION,
as Company
By:
Name:
Title:
NATIONSBANK, N.A., as Agent
and as Bank Investor $450,000,000 Commitment
By:
Name:
Title:
---------------------------------------------------------------
SECURITY AGREEMENT
among
ENTERPRISE FUNDING CORPORATION,
as Company,
UNION ACCEPTANCE FUNDING CORPORATION,
as Debtor
UNION ACCEPTANCE CORPORATION,
Individually and as Collection Agent
MBIA INSURANCE CORPORATION
as Insurer
and
NATIONSBANK, N.A.,
as Collateral Agent and Bank Investor
Dated as of September 18, 1998
---------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms.........................................2
SECTION 1.2 Other Terms..................................................21
SECTION 1.3 Computation of Time Periods..................................22
ARTICLE II
GRANT OF SECURITY INTEREST AND SETTLEMENTS
SECTION 2.1 Grant of Security Interest...................................22
SECTION 2.2 Carrying Costs, Fees and Other Costs and Expenses............23
SECTION 2.3 Allocations of Collections; Servicer Advances................23
SECTION 2.4 Liquidation Settlement Procedures............................26
SECTION 2.5 Fees.........................................................26
SECTION 2.6 Protection of Interest of the Collateral Agent...............26
SECTION 2.7 Payments on Receivables; Application of Payments.............28
SECTION 2.8 Payments and Computations, Etc...............................28
SECTION 2.9 Reports......................................................29
SECTION 2.10 Collection Account...........................................29
SECTION 2.11 Prefunding Account; Prefunding Interest Reserve Account;
Interest Reserve Deposits; Interest Reserve Advances;
Reimbursements...............................................31
SECTION 2.12 Prefunding Account and Prefunding Interest Reserve Account
Withdrawals..................................................34
SECTION 2.13 Yield Supplement Account, Deposits; Withdrawals..............35
SECTION 2.14 Reserve Account; Withdrawals; Releases; Draws on Policy......37
SECTION 2.15 Optional Release.............................................39
SECTION 2.16 Hedging Amounts..............................................42
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Debtor.................44
SECTION 3.2 Representations and Warranties of the Collection Agent.......47
SECTION 3.3 Reaffirmation of Representations and Warranties..............49
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ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.1 Conditions to Effectiveness..................................50
ARTICLE V
COVENANTS
SECTION 5.1 Affirmative Covenants of the Debtor and UAC..................52
SECTION 5.2 Negative Covenants of Debtor and UAC.........................56
SECTION 5.3 Hedging Arrangements.........................................58
ARTICLE VI
ADMINISTRATION AND COLLECTIONS
SECTION 6.1 Appointment of Collection Agent..............................58
SECTION 6.2 Duties of Collection Agent...................................59
SECTION 6.3 Collection Agent Defaults....................................61
SECTION 6.4 Rights After Designation of New Collection Agent.............61
SECTION 6.5 Responsibilities of the Debtor...............................62
[SECTION 6.6 Suspension of Previous Servicing Agreement...................63
ARTICLE VII
TERMINATION EVENTS
SECTION 7.1 Termination Events...........................................63
SECTION 7.2 Termination..................................................65
SECTION 7.3 Proceeds.....................................................66
ARTICLE VIII
THE COLLATERAL AGENT
SECTION 8.1 Duties of the Collateral Agent...............................67
SECTION 8.2 Compensation and Indemnification of Collateral Agent.........68
SECTION 8.3 Representations, Warranties and Covenants
of the Collateral Agent......................................69
SECTION 8.4 Liability of the Collateral Agent............................70
SECTION 8.5 Merger or Consolidation of, or Assumption of the
Obligations of, the Collateral Agent.........................72
SECTION 8.6 Limitation on Liability of the Collateral Agent and Others...73
SECTION 8.7 Indemnification of the Secured Parties.......................74
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ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Term of Agreement..............................................74
SECTION 9.2 Waivers; Amendments............................................74
SECTION 9.3 Notices........................................................75
SECTION 9.4 Governing Law; Submission to Jurisdiction; Integration.........78
SECTION 9.5 Severability; Counterparts.....................................79
SECTION 9.6 Successors and Assigns.........................................79
SECTION 9.7 Waiver of Confidentiality......................................79
SECTION 9.8 Confidentiality Agreement......................................79
SECTION 9.9 No Bankruptcy Petition Against the Company.....................80
SECTION 9.10 No Recourse Against Stockholders, Officers or Directors........80
SECTION 9.11 Further Assurances.............................................81
SECTION 9.12 Exercise of Rights by Insurer..................................81
SECTION 9.13 Characterization of the Transactions Contemplated by the
Agreement; Tax Treatment.......................................81
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EXHIBITS
EXHIBIT A Credit and Collection Policy
EXHIBIT B List of Lock-Box Banks and Lock-Box Accounts
EXHIBIT C Form of Policy
EXHIBIT D Form of Settlement Statement
EXHIBIT E Form of UAFC Withdrawal Notice
EXHIBIT F List of Actions and Suits
EXHIBIT G Schedule of Locations of Records
EXHIBIT H List of Subsidiaries, Divisions and
Tradenames
EXHIBIT I Form of Opinion of Barnes & Thornburg
EXHIBIT J Form of Opinon of Barnes & Thornburg
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SECURITY AGREEMENT
SECURITY AGREEMENT (this "Agreement"), dated as of Septem ber
18, 1998, by and among UNION ACCEPTANCE FUNDING CORPORATION, a Delaware
corporation, as debtor (in such capacity, the "Debtor"), UNION ACCEP TANCE
CORPORATION, an Indiana corporation ("UAC"), individually and in its capacity as
collection agent (in such capacity, the "Collection Agent"), ENTER PRISE FUNDING
CORPORATION, a Delaware corporation (the "Company"), MBIA INSURANCE CORPORATION,
a New York stock insurance company, as financial guaranty insurer (the
"Insurer") and NATIONSBANK, N.A., a national banking association
("NationsBank"), individually and as collateral agent for the Company, the Bank
Investors, and the Insurer (in such capacity, the "Collateral Agent").
PRELIMINARY STATEMENTS
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 interest in certain
retail automotive installment sales contracts;
WHEREAS, pursuant to the Insurance Agreement, the Insurer has
issued its Policy 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 the
Note to pay the principal of and interest on the 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 this
Agreement, the Note, the Note Purchase Agreement and the Insurance Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
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ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
"Acceptable Hedging Arrangement" shall have the meaning
specified in the Insurance Agreement.
"Accrued Interest Component" shall mean, for any Settlement
Period, the Interest Component of all Related Commercial Paper outstanding at
any time during such Settlement Period which has accrued from the first day
through the last day of such Settlement Period, whether or not such Related
Commercial Paper matures during such Settlement Period. For purposes of the
immediately preceding sentence, the portion of the Interest Component of Related
Commercial Paper accrued in a Settlement Period in which Related Commercial
Paper has a stated maturity date that succeeds the last day of such Settlement
Period shall be computed based on the actual number of days that such Related
Commercial Paper was out standing during such Settlement Period.
"Acquisition Subsidiary" shall mean PAC, or any wholly-owned
sub sidiary 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.
"Adjusted LIBOR Rate" means, with respect to any Settlement
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 Settlement Period
in respect of eurocurrency or eurodollar funding, lending or liabilities (or, if
more than one percentage shall be so applicable, the daily average of such
percentage for those days in such Settlement 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
2
<PAGE>
by the Agent to the Federal Deposit Insurance Corporation in respect of
eurocurrency or eurodollar funding, lending or liabilities.
"Administrative Agent" shall mean NationsBank, as
administrative agent.
"Adverse Claim" shall mean a lien, security interest, charge
or encum brance, 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 any Person, any other
Person di rectly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or indirectly, the
power to direct or cause the direction of the management or policies of the
controlled Person, whether through ownership of voting stock, by contract or
otherwise.
"Agent" shall mean NationsBank, as agent for the Company and
the Bank Investors, and its successors and assigns.
"Aggregate Unpaids" shall mean, at any time, an amount equal
to the sum of (i) the aggregate accrued and unpaid Carrying Costs at such time,
(ii) an amount equal to the Company's existing obligations which comprise
Carrying Costs thereafter, (iii) the Net Investment at such time, and (iv) all
other amounts owed (whether due or accrued) hereunder and under the other
Transaction Documents by the Debtor at such time.
"Arrangement Fee" shall mean the fee payable by the Debtor to
the Administrative Agent pursuant to Section 2.5 hereof, the terms of which are
set forth in the Fee Letter.
"Available Funds" shall have the meaning specified in Section
2.3 hereof.
"Bank Investors" shall have the meaning specified in the Note
Pur chase Agreement.
"Base Rate" shall mean, a rate per annum equal to the greater
of (i) the prime rate of interest announced by the Liquidity Provider from time
to time, chang ing when and as said prime rate changes (such rate not
necessarily being the lowest or
3
<PAGE>
best rate charged by the Liquidity Provider) and (ii) 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 transac tions received by the Liquidity
Provider from three Federal funds brokers of recog nized standing selected by it
plus 2.0%.
"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, Indianapolis, Indiana, or Bonita Springs, Florida are
authorized or required by law to close.
"Carrying Costs" shall mean for any Settlement Period the sum
of:
(i) the sum of the dollar amount of the Company's
obligations for such Settlement Period determined on an
accrual basis in accordance with generally accepted
accounting principles consistently applied
(a) to pay interest with respect to the Transferred Interest
pursuant to the provisions of the Liquidity Provider Agreement (such interest to
be calculated based on the Adjusted LIBOR Rate, if available, otherwise to be
calculated at the Base Rate), outstanding at any time during such Settlement
Period accrued from the day of the acquisition of the related Transferred
Interest through the last day of such Settlement Period whether or not such
interest is payable during such Settlement Period;
(b) without duplication of the amounts described in clause (a)
above, to pay interest, calculated at the Base Rate, with respect to amounts
disbursed by the Credit Support Provider in respect of Defaulted Receivables or
in respect of shortfalls between the Assignment Amount obtained by the Company
upon the assignment of the Transferred Interest to the Bank Investors and the
Net Invest ment, outstanding at any time during such Settlement Period accrued
from the first day through the last day of such Settlement Period whether or not
such interest is payable during such Settlement Period;
(c) to pay the Accrued Interest Component of Related
Commercial Paper with respect to any Settlement Period (it being understood that
to the extent the Company has obtained funding under the Liquidity Provider
Agreement
4
<PAGE>
or a Credit Support Agreement, the Company will not obtain duplicative funding
in the commercial paper markets);
(d) to pay the Dealer Fee;
(e) to pay any servicing compensation payable to a successor
Collection Agent appointed pursuant to Section 6.1 of this Agreement;
(f) to reimburse any successor Collection Agent for any
Interest Reserve Advances made by such successor Collection Agent and not previ
ously reimbursed;
(g) any past due amounts not paid in clause (a), (b) and (c)
with respect to prior Settlement Periods;
(h) to pay the costs of the Company with respect to the Yield
Protection Provision, which amounts paid pursuant to this clause (h) shall not
exceed 1.00% per annum of the Net Investment; and
(ii) the Program Fee, the Administrative Fee, and
Liquidity Fee accrued from the first day through the
last day of such Settle ment Period whether or not such
amount is payable during such Settlement Period the sum
of which amounts shall not exceed 0.17% per annum of the
Net Investment plus 0.11% per annum of the Facility
Limit.
During any Settlement 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 (i)(c) and (i)(d) above,
Carrying Costs shall include interest on the daily average Net Investment for
the related Settlement Period at the Adjusted LIBOR Rate, or if such rate is
unavailable, at the Base Rate, or if an Insurer Default and a Termination Event
shall have occurred and be continuing, at the Base Rate plus 2.00%.
"Closing Date" shall mean September 18, 1998.
"Collateral" shall have the meaning specified in Section 2.1
hereof; provided, that the term "Collateral" specifically excludes Modified
Receivables.
"Collateral Agent" shall mean NationsBank, as collateral agent
for the Secured Parties, and its successors and assigns.
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"Collections" shall mean, with respect to any Receivable, all
cash collections and other cash proceeds of such Receivable, including, without
limitation, all Finance Charges, if any, and any refunded portion of extended
warranty protection plan costs or of insurance costs (for example, physical
damage, credit life or disabil ity) included in the original amount financed
under such Receivable, and cash pro ceeds of Related Security with respect to
such Receivable, provided that amounts re ceived in respect of a Receivable
which constitute, in accordance with the Credit and Collection Policy, a payment
of a late payment charge, insufficient funds charge or a prepayment charge will
not be considered a Collection and shall be retained by the Collection Agent and
not deposited into the Collection Account.
"Collection Account" shall mean the account established by the
Collateral Agent, for the benefit of the Secured Parties, pursuant to Section
2.10.
"Collection Agent" shall mean at any time the Person then
authorized pursuant to Section 6.1 to service, administer and collect
Receivables.
"Collection Agent Default" shall have the meaning specified in
Section 6.3.
"Commercial Paper" shall mean the promissory notes of the
Company issued by the Company in the commercial paper market.
"Commitment Termination Date" shall mean September 17, 1999,
or such later date to which the Commitment Termination Date may be extended by
the Debtor, the Agent and the Bank Investors not later than 30 days prior to the
then current Commitment Termination Date.
"Company" shall have the meaning specified in the preamble
hereto.
"Contract" shall mean any and all retail installment sales
contracts or installment notes and security agreements relating to the sale of a
new or used auto mobile, light duty truck or van and other writings related
thereto now existing and hereafter created or acquired by UAC (or in the case of
certain Receivables existing on the Cut-Off Date, created or acquired by PAC or
UAC d/b/a PAC) and assigned from time to time to the Debtor pursuant to the Sale
and Purchase Agreement or the PFC Sale and Purchase Agreement, as applicable.
"Credit and Collection Policy" shall mean the Collection
Agent's credit and collection policy or policies and practices relating to
"prime" and "non-prime"
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automobile installment sales contracts, existing on the date hereof and referred
to in Exhibit A attached hereto, as amended, supplemented or otherwise modified
and in effect from time to time in compliance with Section 5.2(d).
"Credit Support Agreement" shall mean the 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 by the Company of Commercial Paper.
"Credit Support Provider" shall mean the Person or Persons who
will provide credit support to the Company in connection with the issuance by
the Company of Commercial Paper.
"Cut-Off Date" shall mean September 17, 1998.
"Dealer Fee" shall mean the fee payable by the Debtor to the
Collateral Agent, pursuant to Section 2.5 hereof, the terms of which are set
forth in the Fee Letter.
"Debtor" shall mean Union Acceptance Funding Corporation, a
Delaware corporation.
"Defaulted Receivable" shall mean, for any Settlement Period,
a Receivable: (i) as to which any payment (in excess of $10.00), or part thereof
(in excess of $10.00), remains unpaid for 120 days or more as of the last day of
such Settlement Period; (ii) which has been or should have been identified by
the Collec tion Agent as uncollectible in accordance with the Collection Agent's
customary practices on or before the last day of such Settlement Period; or
(iii) as to which the related Financed Vehicle has been repossessed from the
Obligor.
"Delinquent Receivable" shall mean a Receivable: (i) as to
which any payment, or part thereof (provided that such part is in excess of
$10.00), remains unpaid for more than thirty (30) days from the due date for
such payment and (ii) which is not a Defaulted Receivable.
"Determination Date" shall mean, with respect to each
Remittance Date, the second Business Day preceding such Remittance Date.
"Duff & Phelps" shall mean Duff & Phelps Credit Rating
Company.
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"Eligible Institution" shall mean the Collateral Agent or any
other depository institution organized under the laws of the United States or
any one of the States thereof including the District of Columbia, the deposits
in which are insured by the FDIC and which at all times has a short-term
unsecured debt rating of at least "A-1+" and "P-1" from Standard & Poor's and
Moody's, respectively, and of at least "D-1+" from Duff & Phelps, if such
institution is rated by Duff & Phelps, and of at least "F-1+" from Fitch, if
such institution is rated by Fitch.
"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
depository institution or trust company incorporated under the laws of the
United States of America or any state thereof (or any domestic branch or agency
of any foreign bank) and subject to supervision and examination by Federal or
state banking or depository institution authorities; provided, however, that at
the time of the 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 any such obligation whose rating is based on
collateral or on the credit of a Person other than such institution or trust
company) of such depository institution or trust company shall have a credit
rating from Moody's and Standard & Poor's of at least "P-1" and "A-1+",
respectively, and from Duff & Phelps of at least "D-1+", if such investment is
rated by Duff & Phelps, and from Fitch of at least "F-1+", if such investment is
rated by Fitch, 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 Standard & Poor's and Duff & Phelps, if such
investment is rated by Duff & Phelps, and Fitch, if such investment is rated by
Fitch; (iii) certificates of deposit having, at the time of the investment or
contractual commitment to invest therein, a rating from Moody's and Standard &
Poor's of at least "P-1" and "A-1+", respectively, and from Duff & Phelps of at
least "D-1+", if such certificates of deposit are rated by Duff & Phelps, and
from Fitch of at least "F-1", if such certificates of deposit are rated by
Fitch; or (iv) investments in money market funds rated in the highest investment
category, (b) demand deposits in the name of the Secured Parties or the
Collateral Agent on behalf of the Secured Parties in any depository 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
the investment or contractual commitment to invest therein, a credit rating from
Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively, and
from Duff & Phelps of at least "D-1+", if such commer cial paper is rated by
Duff & Phelps, and from Fitch of at least "F-1", if such commer cial paper is
rated by Fitch, (d) Eurodollar time deposits having a credit rating from
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Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively, and
from Duff & Phelps of at least "D-1+", if such deposits are rated by Duff &
Phelps, and from Fitch of at least "F-1", if such deposits are rated by Fitch,
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 the investment therein, a rating
from Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively,
and from Duff & Phelps of at least "D-1+", if such party is rated by Duff &
Phelps, and from Fitch of at least "F-1", if such party is rated by Fitch.
"Eligible Receivable" shall mean, at any time, any Receivable:
(i) (A) which shall have been either (x)
originated by or through a factory authorized dealer, a nationally
recognized rental car outlet, or a nationally recognized used car
superstore, in each case located in the United States and which, to
gether with the Contract related thereto, shall have been validly as
signed by such dealer to an Acquisition Subsidiary or UAC or 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 (other than PAC) or to PFC
if such Receivable had been assigned by such a dealer to PAC or UAC
d/b/a PAC, 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, 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 (other than PAC) or to PFC if
such Receivable had been originated by PAC or UAC d/b/a PAC, 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 or PFC to the Debtor pursuant to the Sale and Purchase Agree ment
or the PFC Sale and Purchase Agreement, as applicable, and to which the
Debtor 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
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holder thereof shall be adequate for the realization against the
collateral of the benefits of the security provided thereby;
(ii) the Obligor of which is recorded in the Collection
Agent's records as having a United States billing address, is
a natural person, and is not a government or a governmental
subdivi sion or agency;
(iii) which is not a Defaulted Receivable at the time of
the initial creation of an interest of the Company therein;
(iv) which is not a Delinquent Receivable at the time of
the initial creation of an interest of the Company therein;
(v) which, according to the Contract related thereto,
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 such level payment)
that fully amortizes the amount financed over the original
term;
(vi) the Contract related thereto shall pro vide for the
calculation of interest payable thereunder under either the
"simple interest" or "Rule of 78's" or the "sum of the
periodic time balances" method;
(vii) the Contract related to which provides for no more
than 84 monthly payments;
(viii) which is an "eligible asset" as defined in Rule
3a-7 under the Investment Company Act of 1940, as amended;
(ix) which is "chattel paper" within the meaning of
Article 9 of the Relevant UCC, and which is secured by a first
priority perfected lien on the related Financed Vehicle, free
and clear of any Adverse Claim or for which all necessary
steps to result in such a first priority perfected lien shall
have been taken;
(x) which is denominated and payable only in United
States dollars in the United States;
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(xi) which arises under a Contract that, to gether with
the Receivable related thereto, is in full force and effect
and constitutes the legal, valid and binding obligation of the
related Obligor enforceable against such Obligor in accordance
with its terms and is not subject to any offset, counterclaim
or other defense at such time;
(xii) which, together with the Contract related thereto,
does not contravene in any material respect any laws, rules or
regulations applicable thereto (including, without limitation,
laws, rules and regulations relating to usury laws, the
Federal Truth-in- Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Re porting Act, the Fair Debt Collection
Practices Act, the Federal Trade Commission Act, the
Magnuson-Moss Warranty Act, Regulations B and Z of the Federal
Reserve Board, various state adaptations of the National
Consumer Act and of the Uniform Consumer Credit Code, and
other consumer credit laws and equal credit opportunity and
disclosure laws) and with respect to which no part of the
Contract related thereto is in violation of any such law, rule
or regulation in any material respect;
(xiii) which (A) satisfies all applicable require ments
of the Credit and Collection Policy and is identified on the
Collection Agent's master servicing records as a "prime" loan
(by code designation as a "type 84" or "type 85" loan) or a
"non-prime" loan (by code designation as a "type 54" or "type
55" loan), (B) arises under a Contract which does not require
the Obligor under such Contract to consent to the transfer of
the rights and duties of the Debtor under such Contract, and
which does not contain a confidentiality provision that
purports to restrict the ability of the Company to exercise
its rights under this Agreement, including, without
limitation, its right to review the Contract, (C) arises under
a Contract with respect to which UAC, any Acquisition
Subsidiary and the Debtor have each performed all obligations
required to be performed by them thereunder, and delivery of
the Financed Vehicle to the related Obligor has occurred, and
(D) complies with such other criteria and requirements as the
Company may from time to time reasonably specify to the Debtor
following sixty (60) days' notice; and
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(xiv) the Obligor of which has been directed to make all
payments to a specified account of the Collection Agent.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and the regulations promulgated
thereunder.
"ERISA Affiliate" means, with respect to any Person, (i) any
corpora tion which is a member of the same controlled group of corporations
(within the meaning of Section 414(b) of the Code (as in effect from time to
time, the "Code")) as such Person; (ii) a trade or business (whether or not
incorporated) under common control (within the meaning of Section 414(c) of the
Code) with such Person; or (iii) a member of the same affiliated service group
(within the meaning of Section 414(n) of the Code) as such Person, any
corporation described in clause (i) above or any trade or business described in
clause (ii) above.
"Event of Bankruptcy", with respect to any Person, shall mean
(i) that such Person shall generally not pay its debts as such debts become due
or shall admit in writing its inability to pay its debts generally or shall make
a general assignment for the benefit of creditors; or any proceeding shall be
instituted by or against such Person seeking to adjudicate it as bankrupt or
insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composi tion of it or its debts under any law
relating to bankruptcy, insolvency or reorganiza tion or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee or other similar official for it or any substantial part of its property
or (ii) if such Person is a corporation, such Person or any Subsidiary shall
take any corporate action to authorize any of the actions set forth in the
preceding clause (i).
"Excess Delinquent Receivables Balance" shall mean an amount,
calculated on the day a Take-Out occurs and for each day until the next Take-Out
occurs, equal to the excess, if any, of (i) the Outstanding Balance of all
Delinquent Receivables at any time of determination over (ii) the product of
2.5% and the Net Receivables Balance (calculated without giving effect to clause
(iv) of the definition thereof) at any time of determination; provided, that if
the Excess Delinquent Receiv ables Balance shall, at any time since the most
recent Take-Out, be less than or equal to zero, the Excess Delinquent
Receivables Balance shall be deemed to be zero from such time until the next
Take-Out shall occur.
"Face Amount" shall mean (i) with respect to Commercial Paper
issued on a discount basis, the face amount stated therein, and (ii) with
respect to
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Commercial Paper which is interest-bearing, the principal amount of and interest
accrued and to accrue on such Commercial Paper to its stated maturity.
"Facility Limit" shall mean $450,000,000.
"Fee Letter" shall mean the letter agreement dated the date
hereof between the Debtor and the Company, as amended, modified or supplemented
from time to time.
"Finance Charges" shall mean, with respect to a Contract, any
finance, interest or similar charges owing by an Obligor or another Person
pursuant to such Contract.
"Financed Vehicle" shall mean, with respect to a Receivable,
any new or used automobile, van or light-duty truck, together with all
accessories thereto, securing the related Obligor's indebtedness thereunder.
"Fitch" shall mean Fitch IBCA, Inc.
"Funding" shall have the meaning specified in the Note
Purchase Agreement.
"Funding Date" shall have the meaning specified in the Note
Purchase Agreement.
"Hedge Proceeds Account" shall have the meaning specified in
Section 2.16(a).
"Hedging Arrangement" shall mean any financial arrangement
obtained by the Collection Agent satisfying the requirements of Section 5.3
hereof and other wise in form and substance reasonably satisfactory to the
Company, the Insurer, and the Administrative Agent, the benefits (but not the
obligations) of which are, on and after the occurrence of a Termination Event,
in favor of the Debtor.
"Initial Funding" shall have the meaning specified in the Note
Purchase Agreement.
"Insurance Agreement" shall mean that certain Insurance
Agreement, dated as of September 18, 1998, among the Collection Agent, the
Debtor, the Collateral Agent and the Insurer.
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"Insurer" shall mean MBIA Insurance Corporation, a New York
stock insurance company.
"Insurer Default" shall mean, at any time, any failure by the
Insurer to make any payment when due under the Insurance Agreement or under any
other insurance policy or financial guaranty insurance policy issued by it.
"Interest Component" shall mean, with respect to Commercial
Paper issued (i) on a discount basis, the portion of the Face Amount of such
Commercial Paper representing the discount incurred in respect thereof and (ii)
on an interest-bearing basis, the interest payable on such Commercial Paper at
its maturity provided, however, that if any component of such rate is a discount
rate in calculating the Interest Component, the rate used to calculate such
component of such rate shall be a rate resulting from converting such discount
rate to an interest bearing equivalent rate per annum.
"Interest Reserve Advance" shall mean, with respect to any
Remit tance Date, the amount, if any (which shall not be less than zero), equal
to (i) the product of (x) the daily weighted average amount on deposit in the
Prefunding Account during the preceding Settlement Period, (y) the Targeted
Interest Rate for such Settlement Period (on a per annum basis) and (z) a
fraction the numerator of which is the number of days in such Settlement Period
and the denominator of which is 360 minus (ii) the amount earned during the
preceding Settlement Period on amounts on deposit in the Prefunding Account.
"Interest Reserve Deposit" shall have the meaning specified in
Section 2.11.
"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 Settlement Period, the
rate determined by NationsBank to be (i) the per annum rate for deposits in U.S.
Dollars for a term of one month which appears on the Telerate Page 3750 Screen
on the day that is two London Business Days prior to the first day of such
Settlement Period except, that if such first day of the Settlement Period is not
a Business Day, then the first preceding day that is a Business Day (rounded
upwards, if necessary, to the near est 1/100,000 of 1%), (ii) if such rate does
not appear on the Telerate Page 3750 Screen, the term "LIBOR Rate" with respect
to that Settlement Period shall be the
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arithmetic mean (rounded upwards, if necessary, to the nearest 1/100,000 of 1%)
of the offered quotations obtained by NationsBank from four major banks in the
London interbank market selected by NationsBank (the "Reference Banks") for
deposits in U.S. Dollars to leading banks in the London interbank market as of
approximately 11:00 a.m. (London time) on the day that is two London Business
Days prior to the first day of such Settlement Period, unless such first day of
the Settlement Period is not a Business Day, in which case, the first preceding
day that is a Business Day or (iii) if fewer than two Reference Banks provide
NationsBank with such quotations, the LIBOR Rate shall be the rate per annum
which NationsBank determines to be the arithmetic mean (rounded upwards, if
necessary, to the nearest 1/100,000 of 1%) of the offered quotations which
leading banks in New York City selected by NationsBank are quoting in the New
York interbank market on such date for deposits in U.S. dollars to the Reference
Banks or; if fewer than two such quotations are avail able, to leading European
and Canadian Banks.
"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, 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 UCC (other than any such financing statement
filed for informational purposes only) or comparable law of any jurisdiction to
evidence any of the foregoing.
"Liquidity Provider 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 by the Company of Commercial Paper.
"Liquidity Provider" shall mean the Person or Persons who
provide liquidity support to the Company in connection with the issuance by the
Company of Commercial Paper.
"Lock-Box Account" shall mean an account or accounts
maintained by the Collection Agent at a Lock-Box Bank for the purpose of
receiving Collections from Receivables.
"Lock-Box Bank" shall mean each of the banks set forth in
Exhibit B hereto and such banks as may be added thereto or deleted therefrom
pursuant to Section 2.6.
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"London Business Day" shall mean 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.
"Majority Investors" shall have the meaning specified in the
Note Purchase Agreement.
"Minimum Required APR" shall mean, as of any date of
determination, the greater of (i) the money market yield of the rate quoted on a
discount basis for commercial paper having a thirty (30) day maturity, as made
available and subse quently published by the Board of Governors of the Federal
Reserve System in H.15(519) under the heading "Commercial Paper" plus 1.40% per
annum and (ii) the current yield to maturity of the United States Treasury
Security having a maturity of two years (or if there is more than one such
security, the average of the yields to maturity thereof) plus 1.63% per annum.
"Modified Receivable" means indebtedness owed to the Debtor by
an Obligor (without giving effect to any transfer under this Agreement) under a
Contract which has been modified and is classified as a type 44, 45, 74 or 75
receivable in the Debtor's records, whether constituting an account, chattel
paper, instrument or general intangible, arising out of or in connection with
the sale of new or used automobiles, vans or light-duty trucks or the rendering
of services by the originating dealer in connection therewith, and includes the
right of payment of any finance charges and other obligations of the Obligor
with respect thereto.
"Moody's" shall mean Moody's Investors Service, Inc.
"NationsBank" shall have the meaning specified in the preamble
hereto.
"Negative Carry" shall mean, with respect to any Prefunding
Date, a percentage equal to (i) for the amount on deposit in the Prefunding
Account by the Company, (a) the money market yield of the rate quoted on a
discount basis for commercial paper having a thirty (30) day maturity, as made
available and subse quently published by the Board of Governors of the Federal
Reserve System in H.15(519) under the heading "Commercial Paper", plus (b)
1.40%, minus (c) the Targeted Interest Rate; (ii) for the amount on deposit in
the Prefunding Account funded by the Bank Investors, (a) the LIBOR Rate, (b)
plus 1.40%, minus (c) the Targeted Interest Rate.
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"Net Asset Test" shall have the meaning specified in the Note
Purchase Agreement.
"Net Investment" shall mean the sum of (i) all amounts paid to
the Debtor for the Initial Funding plus (ii) the cumulative amount of Prefunding
Deposits minus (iii) the aggregate amount released from the Prefunding Account
and applied to reduce the Net Investment pursuant to Section 2.12, minus (iv)
the aggregate amount released from the Prefunding Interest Reserve Account and
applied to reduce the Net Investment pursuant to Section 2.12, minus (v) the sum
of (a) the aggregate amount of Receipts of Principal on deposit in the
Collection Account, plus (b) the aggregate amount of Receipts of Principal which
have been received by the Collection Agent on or prior to any date of
determination but have not yet been deposited in the Collection Account (if such
Receipts of Principal are not so deposited therein within 2 Business Days of the
receipt thereof by the Collection Agent the "Net Investment" shall thereupon be
recalculated, effective as of the original date of determination, without giving
effect to such Receipts of Principal) plus (c) the aggregate amount of Collec
tions received and applied by the Company to reduce such Net Investment pursuant
to Section 2.3, minus (vi) draws on the Policy distributed and applied in
reduction of Net Investment, and minus (vii) the aggregate amount of funds
received and applied to reduce such Net Investment pursuant to Sections 2.7,
2.15 and 2.16; provided that the Net Investment shall be restored in the amount
of any Collections so received and applied if at any time the distribution of
such Collections is rescinded or must other wise be returned for any reason;
provided further, that as to the Insurer, draws made under the Policy will not
reduce the principal amount due under the Note.
"Net Negative Hedging Amounts" shall mean, as of any
Remittance Date, an amount equal to the amount by which (i) the aggregate amount
of losses incurred by the Collection Agent on any Hedging Arrangements during
the related Settlement Period and any prior Settlement Periods exceeds (ii) the
sum of (x) the aggregate amount of gains retained by the Collection Agent on any
Hedging Arrange ments during the related Settlement Period and any prior
Settlement Periods and (y) amounts distributed to the Collection Agent pursuant
to Section 2.3(a)(xiii) on any prior Remittance Date.
"Net Receivables Balance" means at any time the Outstanding
Balance of the Eligible Receivables at such time reduced by the sum of (i) the
amount by which the aggregate Outstanding Balance of Undocumented Receivables
exceeds $15,000,000, plus (ii) the aggregate Outstanding Balance of all Eligible
Receivables which are Defaulted Receivables, plus (iii) the amount, if any, by
which the aggregate outstanding Balance of all Eligible Receivables which are
type 54 or 55 loans (the
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"non-prime" loans) exceeds the product of (x) 5% and (y) the Outstanding Balance
of all Eligible Receivables, plus (iv) the Excess Delinquent Receivables
Balance.
"Net Yield" shall mean, as calculated on each Determination
Date, the product of (i) 12 and (ii) a fraction, the numerator of which is (x)
the Available Funds less the aggregate amount of Carrying Costs accrued during
the related Settlement Period less the aggregate Outstanding Balance of all
Receivables which became Defaulted Receivables during the related Settlement
Period net of the aggregate amount of recoveries received during such Settlement
Period, and the denominator of which is (y) the average daily Net Investment for
such Settlement Period. The Net Yield shall be expressed as a percentage.
"Note" shall have the meaning specified in the Note Purchase
Agree ment.
"Noteholder's Percentage" shall mean an amount equal to 100%
less the product of (i) 2, and (ii) the amount, if any, by which the Target Net
Yield exceeds the Net Yield as of the most recent Determination Date. The
Noteholder's Percentage shall initially equal 100%
"Note Purchase Agreement" shall mean that certain Note
Purchase Agreement, dated as of September 18, 1998, among the Debtor, the
Company, the Bank Investors and the Agent.
"Obligor" shall mean a Person obligated to make payments
pursuant to a Contract.
"Official Body" shall mean any government or political
subdivision or any agency, authority, bureau, central bank, commission,
department or instrumental ity of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.
"Other Transferor" shall have the meaning specified in the
Note Purchase Agreement.
"Outstanding Balance" of a Receivable at any time shall mean
the amount advanced under the related Contract toward the purchase price of the
related Financed Vehicle and related costs minus all Receipts of Principal
received with respect to such Receivable.
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"PAC" shall mean Performance Acceptance Corporation, an
Indiana corporation, and its successors and assigns, including UAC and UAC d/b/a
PAC.
"Person" shall mean any corporation, natural person, firm,
joint venture, partnership, trust, unincorporated organization, enterprise,
government or any department or agency of any government.
"PFC" shall mean Performance Funding Corporation, a Delaware
corporation, and its successors and assigns.
"PFC Sale and Purchase Agreement" shall mean the Purchase and
Assignment Agreement, dated as of February 28, 1998, among the Debtor, as
purchaser, and PFC, as seller, as amended to the date hereof and as amended,
modi fied or supplemented from time to time hereafter.
"Policy" shall mean that certain financial guaranty insurance
policy, substantially in the form attached hereto as Exhibit C.
"Potential Termination Event" shall mean an event which but
for the lapse of time or the giving of notice, or both, would constitute a
Termination Event.
"Prefunding Account" shall mean the account established by the
Collateral Agent, for the benefit of the Secured Parties, pursuant to Section
2.11.
"Prefunding Date" shall mean the 1st calendar day of each
month (or if such day is not a Business Day, the next succeeding Business Day)
and such other dates which are agreed upon by the Debtor and the Agent at least
one Business Day in advance; provided, that there shall in no event be more than
one additional Prefunding Date in any period between any two Remittance Dates
(without Agent approval) and provided, further, that no Prefunding Date shall
occur on and after the Termination Date.
"Prefunding Deposit" shall have the meaning specified in the
Note Purchase Agreement.
"Prefunding Interest Reserve Account" shall mean the account
estab lished by the Collateral Agent, for the benefit of the Secured Parties,
pursuant to Section 2.11.
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"Prefunding Period" shall mean, with respect to any Prefunding
Date, the period from such date to the succeeding Prefunding Date.
"Premium" shall have the meaning specified in the Insurance
Agree ment.
"Proceeds" shall mean "proceeds" as defined in Section
9-306(1) of the Relevant UCC.
"Receipts of Interest" shall mean that portion of the
Collections with respect to the Receivables which are properly designated as
Finance Charges in accordance with the Credit and Collection Policy, together
with (i) any recoveries in respect of Defaulted Receivables and Related Security
with respect thereto, and (ii) amounts considered to be "Receipts of Interest"
pursuant to Sections 2.7, 2.10 and 2.15.
"Receipts of Principal" shall mean all Collections, other than
those designated as Receipts of Interest, together with all amounts considered
to be "Re ceipts of Principal" pursuant to Sections 2.7 and 2.15, provided, that
Collections con stituting a refund of all or any portion of extended warranty
protection plan costs or of insurance costs (for example, physical damage,
credit life or disability) included in the original amount financed under a
Receivable (other than a Defaulted Receivable) shall be considered a Receipt of
Principal.
"Receivable" shall mean indebtedness owed to the Debtor by an
Obligor (without giving effect to any transfer hereunder) under a Contract,
whether constituting an account, chattel paper, instrument or general
intangible, arising out of or in connection with the sale of new or used
automobiles, vans or light-duty trucks or the rendering of services by the
originating dealer in connection therewith, and in cludes 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 and the related Contract pursu ant to
Section 2.7 or Section 2.15 hereof, it shall no longer constitute a Receivable
hereunder. The term "Receivable" specifically excludes Modified Receivables.
"Records" shall mean all Contracts and other documents, books,
records and other information (including, without limitation, computer programs,
tapes, discs, punch cards, data processing software and related property and
rights) maintained with respect to Receivables and the related Obligors.
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"Regulation D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System, as the same may be amended,
supplemented or otherwise modified and is effect from time to time.
"Related Commercial Paper" shall mean Commercial Paper issued
by the Company the proceeds of which were used to acquire, or refinance the
acquisition of, an interest in the Net Investment with respect to the Debtor.
"Related Security" shall mean with respect to any Receivable:
(i) all of the Debtor's interest in the
Financed Vehicles (including repossessed vehicles) or in any document
or writing evidencing any security interest in any Financed Vehicle and
all of the Debtor's interest in all rights to payment under all
insurance contracts with respect to a Financed Vehicle, including,
without limitation, any monies collected from whatever source in
connection with any default of an Obligor with respect to a Financed
Vehicle and any proceeds from claims or refunds of premiums on any
physical damage, lender's single interest, credit life, disability and
hospitaliza tion insurance policies covering Financed Vehicles or
Obligors;
(ii) all of the Debtor's interest in all
other security interests or liens and property subject thereto from
time to time, if any, purporting to secure payment of the Contract
related thereto, whether pursuant to such Contract or otherwise,
together with all financing statements signed by an Obligor and
security agreements describing any collateral securing such Contract;
(iii) all of the Debtor's interest in all
guaran ties, insurance and other agreements or arrangements of whatever
character from time to time supporting or securing payment of such
Receivable, whether pursuant to the Contract related to such Receiv
able or otherwise;
(iv) all of the Debtor's interest in all
rights to payment under all service contracts and other contracts and
agree ments associated with such Receivables and all of the Debtor's
interest in all recourse rights against the dealers (excluding any
rights in any dealer reserve);
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(v) all of the Debtor's interest in all Re
cords, documents and writings evidencing or related to such Receiv
ables or the Contracts; and
(vi) all Proceeds of the foregoing.
"Relevant UCC" shall mean the Uniform Commercial Code as from
time to time in effect in all applicable jurisdictions.
"Remittance Date" shall mean, for each Settlement Period, the
tenth (10th) day of the next succeeding calendar month; provided that if such
day is not a Business Day, then the Remittance Date shall be the next succeeding
Business Day.
"Required Reserve Account Amount" shall mean, at any time of
determination, an amount equal to the product of (a) 3.25% and (b) the Net
Invest ment divided by the Noteholder's Percentage.
"Required Yield Deposit Amounts" shall have the meaning
specified in Section 2.13(a).
"Reserve Account" shall have the meaning specified in Section
2.14 hereof.
"Reserve Account Advance" shall mean any advance made pursuant
to Section 2.3(c) from amounts on deposit in the Reserve Account.
"Reserve Account Guaranty" shall mean the amount available
pursuant to any guaranty of the amount required to be kept in the Reserve
Account pursuant to this Agreement and the other Transaction Documents. Any
Reserve Account Guaranty shall be rated at least investment grade by S&P and
Moody's.
"S&P" shall mean Standard & Poor's Ratings Services, a
Division of the McGraw Hill Companies.
"Sale and Purchase Agreement" shall mean, as applicable,
either or both of (i) the Amended and Restated Sale and Purchase Agreement dated
as of December 23, 1996, between the Debtor, as purchaser, and UAC, as seller,
and (ii) the Amended and Restated Sale and Purchase Agreement dated as of
December 23, 1996, between PFC, as purchaser, and UAC, as seller, each as
amended to the date hereof and as amended, modified or supplemented from time to
time hereafter.
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"Secured Parties" shall mean the Company, the Bank Investors
and the Insurer.
"Securities Intermediary" shall mean NationsBank, and any
other entity acting in the capacity of a "securities intermediary" as defined in
Section 8- 102(14) of the UCC.
"Servicer Advance" shall have the meaning specified in Section
2.3(c).
"Servicing Fee" shall mean, for any Settlement Period, the fee
payable pursuant to Section 2.3 on the related Remittance Date by the Company to
the Col lection Agent, in an amount equal to 1.0% per annum on the amount of the
aggregate Outstanding Balance of the Receivables as of the first day of such
Settlement Period.
"Settlement Period" shall mean any calendar month, provided
that the initial Settlement Period shall commence on the Cut-Off Date and end on
October 31, 1998.
"Settlement Statement" shall mean a report, in substantially
the form of Exhibit D or in such other form as is mutually agreed to by the
Debtor and the Company, furnished by the Collection Agent to the Collateral
Agent, the Agent, Moody's, S&P and the Insurer on each Determination Date
pursuant to Section 2.9.
"Subsidiary" of a Person shall mean any corporation more than
50% of the outstanding voting securities of which, and any partnership more than
50% of the partnership interests of which, shall at any time be owned or
controlled, directly or indirectly, by such Person or by one or more
Subsidiaries of such Person or any simi lar business organization which is so
owned or controlled.
"Take-Out" shall mean the release, pursuant to Section 2.15(a)
or 2.15(d), by the Collateral Agent of Receivables and the Contracts related
thereto. In order to qualify as a "Take-Out", the Outstanding Balance of
Receivables immediately after the Take-Out shall be no more than 25% of the
highest Outstanding Balance of Receivables in existence as of a date not more
than 31 days prior to the Take-Out.
"Targeted Interest Rate" for any Settlement Period shall mean
2.5% or such lower rate set forth in a written notice by the Agent to the Debtor
and the Col lection Agent, such other rate to be effective three (3) Business
Days after the date of such notice.
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"Target Net Yield" shall mean 5.0%
"Termination Date" shall mean the earliest of (i) that
Business Day designated by the Debtor to the Agent as the Termination Date at
any time following 60 days' written notice to the Agent, (ii) the date of
termination of the liquidity commitment of the Liquidity Provider under the
Liquidity Provider Agreement, (iii) the date of termination of the commitment of
the Credit Support Provider under the Credit Support Agreement, (iv) the day on
which a Termination Event occurs pursu ant to Section 7.1, (v) two business days
prior to the Commitment Termination Date, or (vi) September 17, 1999, unless
extended prior to such date pursuant to a Revolv ing Period Extension (as
defined in the Insurance Agreement).
"Termination Event" shall mean an event described in Section
7.1.
"Transaction Documents" shall mean this Agreement, the Note
Purchase Agreement, the Note, the Sale and Purchase Agreement, the Insurance
Agreement, the Policy, the Fee Letter and all other agreements, documents and
instruments delivered pursuant thereto or in connection therewith.
"Transferred Interest" shall mean, at any time of
determination, an undivided interest in the Note.
"UAC" shall mean Union Acceptance Corporation, an Indiana
corpo ration, and its successors and assigns.
"UARC" shall mean Union Acceptance Receivables Corporation, a
Delaware corporation, and its successors and assigns.
"Undocumented Receivable" shall mean any Receivable as to
which, at the time of the assignment of such Receivable and the Contract related
thereto to UAC or an Acquisition Subsidiary by the dealer which originated such
Receivable or at the time of the origination of such Receivable by UAC or such
Acquisition Subsid iary, the Collection Agent shall not have received from the
dealer and the related Obligor all documentation required to be received by the
Collection Agent pursuant to the Credit and Collection Policy.
"Withdrawal Notice" shall have the meaning specified in
Section 2.12(a).
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"Yield Protection Provision" shall mean the compensation of
the Company and the Bank Investors by the Debtor of the Company's and the Bank
Investors' costs due to increased taxes, reserve and funding costs as described
in Section 4.2 of the Note Purchase Agreement.
"Yield Supplement Account" shall mean the account established
by the Collateral Agent, for the benefit of the Company, pursuant to Section
2.13.
SECTION 1.2 Other Terms. Unless the context otherwise
requires, all capi talized terms used herein and not otherwise defined herein
shall have the meanings specified in the Note Purchase Agreement, and shall
include in the singular number the plural and in the plural number the singular.
All accounting terms not specifically defined herein shall be construed in
accordance with generally accepted accounting principles. All terms used in
Article 9 of the Relevant UCC in the State of New York, and not specifically
defined herein, are used herein as defined in such Article 9.
SECTION 1.3 Computation of Time Periods. Unless otherwise
stated in this Agreement, in the computation of a period of time from a
specified date to a later specified date, the word "from" shall mean "from and
including" and the words "to" and "until" each shall mean "to but excluding."
ARTICLE II
GRANT OF SECURITY INTEREST AND SETTLEMENTS
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 obliga tions under the Note, the Note Purchase Agreement, the Insurance
Agreement, this Agreement and the other Transaction Documents, the Debtor hereby
grants to the Collateral Agent, for the benefit of the Secured Parties, without
recourse except as provided herein, a security interest in and continuing Lien
on all of the Debtor's property, in existence on the Cut-Off Date or thereafter
acquired and wherever located, including, without limitation, all of its right,
title and interest in, to and under all accounts, contract rights, general
intangibles, chattel paper, instruments, docu ments, money, cash, deposit
accounts, certificates of deposit, goods, letters of credit, securities,
investment property, financial assets or security entitlements (all of the
foregoing, collectively, the "Collateral"); provided, that once the Company has
released its interest in a Receivable and the related Contract pursuant to
Section 2.7
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or 2.15 hereof, such Receivable and related Contract shall no longer be part of
the Collateral.
In connection with such grant, the Debtor agrees to record and
file, at its own expense, financing statements with respect to the Collateral
now existing and hereafter created meeting the requirements of applicable state
law in such manner and in such jurisdictions as are necessary to perfect the
first priority security interest of the Collateral Agent in the Collateral, 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 Collateral Agent on or prior to the Closing
Date. In addition, the Debtor and the Collection Agent agree to clearly and
unambiguously mark their respective general ledgers and all accounting records
and documents and all computer tapes and records to show that the Collat eral,
including that portion of the Collateral consisting of the Receivables and the
related Contracts, have been pledged to the Collateral Agent hereunder.
SECTION 2.2 Carrying Costs, Fees and Other Costs and Expenses.
Notwithstanding the limitation on recourse under Section 2.1, the Debtor shall
pay, as and when due in accordance with this Agreement, all fees hereunder,
Carrying Costs, all amounts payable pursuant to Article VIII hereof, if any, all
fees specified in the Fee Letter, and the Servicing Fee. On each Remittance
Date, the Debtor shall pay to the Company and the Bank Investors, as applicable,
an amount equal to the accrued and unpaid Carrying Costs for the related
Settlement Period together with, in respect of the Company, an amount equal to
the discount accrued on the Company's Commer cial Paper notes to the extent such
notes were issued in order to fund the Net Invest ment in an amount in excess of
the amount of the Initial Funding or in excess of any deposit made by the
Company to the Prefunding Account. The Debtor shall pay to the Agent, for the
account of the Company, on each day on which Commercial Paper is issued by the
Company, the Dealer Fee. Nothing in this Agreement shall limit in any way the
obligations of the Debtor to pay the amounts set forth in this Section 2.2.
SECTION 2.3 Allocations of Collections; Reserve Account Ad
vances; Servicer Advances.
(a) On each Determination Date, the Collection Agent shall
allocate all Collections received during the preceding Settlement Period as
Receipts of Interest or Receipts of Principal. On each Remittance Date, Receipts
of Interest plus all earnings during the related Settlement Period on amounts on
deposit in the Prefunding Account to the extent not required pursuant to Section
2.11 to be distrib uted to the Collection Agent in reimbursement for previously
advanced Interest
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Reserve Advances plus all amounts deposited in the Prefunding Interest Reserve
Account with respect to the related Settlement Period (together with any
earnings thereon during such Settlement Period) plus any Interest Reserve
Advance made by the Collection Agent on such Remittance Date pursuant to Section
2.11 plus any payments to the Debtor under an Acceptable Hedging Arrangement
plus all amounts to be applied pursuant to Section 2.14(c)(ii)(y) (the aggregate
of such amounts in re spect of any remittance date, the "Available Funds") shall
be applied, without duplica tion, by the Collection Agent as follows:
(i) first, (A) to pay any amounts due under
an Acceptable Hedging Arrangement, and (B) to the Reserve Account, in
the amount of Reserve Account Advances related to such Settle ment
Period;
(ii) second, to the extent of any remaining
Available Funds, to the retention by the Collection Agent of any
Servicer Advances related to such Settlement Period;
(iii) third, to pay to the Collateral Agent
all fees and expenses due pursuant to Section 8.2 hereof;
(iv) fourth, to the extent of any remaining
Available Funds, to the Agent, for the account of the Company and the
Bank Investors, as applicable, an amount equal to all accrued and
unpaid Carrying Costs (exclusive of all amounts payable pursuant to the
Yield Protection Provision) in respect of such Settlement Period and
with respect to any previous Settlement Period to the extent not
previously paid;
(v) fifth, to the extent of any remaining
Available Funds, to the payment of the Agent, for the account of the
Company and the Bank Investors, as applicable, to be applied in
reduction of the Net Investment, of the amount by which the Net
Investment less the quotient of (A) the amount on deposit in the
Prefunding Account and (B) 100% less the quotient of (x) the percent
age used to determine the Required Reserve Account Amount and (y) the
Noteholder's Percentage exceeds the product of the Noteholder's
Percentage and the Net Receivables Balance;
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(vi) sixth, to the extent of any remaining
Available Funds, to the Insurer, the aggregate amount of any previ
ously unreimbursed draws on the Policy, plus accrued interest thereon
at the rate provided in the Insurance Agreement;
(vii) seventh, to the extent of any
remaining Available Funds, to the Insurer, the Premium, including any
overdue Premium, accrued interest thereon plus any amounts owed under
the Policy or the Insurance Agreement;
(viii) eighth, to the extent of any
remaining Available Funds, to the Reserve Account, to the extent
necessary to cause the amount on deposit therein to equal the Required
Reserve Account Amount;
(ix) ninth, to the extent of any remaining
Available Funds, to the Yield Supplement Account to the extent of any
amounts previously withdrawn therefrom pursuant to Section 2.3(c) and
not previously reimbursed to the credit of the Yield Supplement
Account; provided that there shall be no requirement to reimburse such
account for amounts withdrawn therefrom related to any Receiv ables and
the related Contracts with respect to which the Collateral Agent shall
have released its interest therein pursuant to Section 2.7 or Section
2.15;
(x) tenth, to the extent of any remaining
Available Funds, to the payment of the Collection Agent (if the Collec
tion Agent is UAC), of the Servicing Fee for such Settlement Period and
any unreimbursed Interest Reserve Advances made by the Collec tion
Agent and not previously reimbursed;
(xi) eleventh, to the extent of any
remaining Available Funds, on or after the Termination Date, such
remaining Available Funds shall be paid to the Agent, for the account
of the Company and the Bank Investors, as applicable, in reduction of
the Net Investment;
(xii) twelfth, to pay all amounts due under
the Yield Protection Provision;
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(xiii) thirteenth, to the extent of any
remaining Available Funds, to the Collection Agent, in reimbursement
for any Net Negative Hedging Amounts incurred by the Collection Agent
and not previously reimbursed;
(xiv) fourteenth, to the extent of any
remain ing funds, to the Agent, for the account of the Persons entitled
thereto, an amount equal to all other amounts owed under the Note
Purchase Agreement; and
(xv) fifteenth, any remaining Available
Funds shall be paid to the Debtor.
(b) On any Business Day on which Commercial Paper issued in
connection herewith matures, the Collection Agent may apply and remit to the
Agent, in reduction of the Net Investment, any Receipts of Principal received on
or prior to such day and not previously remitted to the Agent in any such case
in an amount not to exceed the principal component of such maturing Commercial
Paper. On each Remittance Date, the Collection Agent shall apply and remit to
the Agent, in reduction of the Net Investment, all Receipts of Principal
received with respect to the prior Settlement Period and not previously remitted
to the Agent pursuant to the preceding sentence.
(c) In the event that, at any time, the Company does not have
sufficient funds at such time to pay Carrying Costs when due, then, in such
event, there shall be made a Reserve Account Advance equal to the amount of such
deficiency, which amount shall be applied to pay such costs and expenses of the
Company; provided, that such Reserve Account Advance shall be made only to the
extent of funds then on deposit in the Reserve Account and shall not include any
amount pursuant to a Reserve Account Guaranty. In the event that any such
Reserve Account Advance is not made by 11:00 a.m. (New York City time) on the
day requested the Collection Agent shall, at the request of the Agent, advance
to the Company an amount equal to such deficiency (each, a "Servicer Advance");
provided, that the Collection Agent shall not be required to make any such
Servicer Advance to the extent that the Collection Agent reasonably believes
that it will not be reimbursed for such Servicer Advance pursuant to Section
2.3(a)(ii) on any subsequent Remit tance Date. In the event that any such
Servicer Advance is not made by 11:00 a.m. (New York City time) on the day
requested, there shall be withdrawn from the Yield Supplement Account an amount
equal to the amount of such deficiency, which amount shall be applied to pay
such costs and expenses of the Company. In the event that any such payment from
the Yield Supplement Account is not made by 11:00 a.m.
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(New York City time) there shall be made a Reserve Account Advance and/or an
advance pursuant to any Reserve Account Guaranty equal to the amount of such
deficiency, which amount shall be applied to pay such costs and expenses of the
Company. In the event that any such Reserve Account Advance and/or advance
pursuant to any Reserve Account Guaranty is not made by 11:00 a.m. (New York
City time) on the day requested by the Collection Agent, there shall be made a
draw under the Policy equal to the amount of such deficiency, which amount shall
be paid directly to the Agent and shall be applied to pay such costs and
expenses of the Company.
SECTION 2.4 Liquidation Settlement Procedures. Following any
date after the Termination Date on which all Aggregate Unpaids have been paid in
full, (i) the Collateral Agent shall be considered to have released its security
interest in and continuing Lien on the Collateral, including all of the
Receivables and Related Security, (ii) the Collection Agent shall pay to the
Debtor any remaining Collections set aside and held by the Collection Agent, and
(iii) 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 security interest in the Collateral, including all of the
Receivables and Related Security and Collections with respect thereto. Any such
documents shall be prepared by or on behalf of the Debtor at the expense of the
Debtor.
SECTION 2.5 Fees. Notwithstanding any limitation on recourse
con tained in this Agreement, the Debtor shall pay, in the manner and at the
time specified in the Fee Letter, the fees specified in the Fee Letter.
SECTION 2.6 Protection of Interest of the Collateral Agent.
The Debtor agrees that from time to time, at its expense, it will promptly
execute and deliver all instruments and documents and take all actions as may be
necessary or as the Collateral Agent may reasonably request in order to perfect
or protect the Collateral or to enable the Collateral Agent to exercise or
enforce any of its rights hereunder. Without limiting the foregoing, the Debtor
will, upon the request of the Collateral Agent, in order to accurately reflect
the security interest of the Collateral Agent in the Collateral, execute and
file such financing or continuation statements or amendments thereto or
assignments thereof (as permitted pursuant to Section 9.6 hereof) as may be
requested by the Collateral Agent and mark its master data pro cessing records
(or to cause such records to be marked) so as to indicate the Collat eral
Agent's security interest in the portion of the Collateral consisting of
Receivables, the related Contracts, the Collections and the Related Security
with respect thereto. The Debtor agrees that it shall take all actions necessary
to cause UAC to similarly
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mark its records to reflect the sale of the Receivables and the Contracts to the
Debtor and the Collateral Agent's security interest in the Receivables, the
related Contracts, the Collections and the Related Security with respect
thereto. The Debtor shall, at its own expense, upon request of the Collateral
Agent, obtain such additional search reports as the Collateral Agent shall
request. To the fullest extent permitted by appli cable law, the Collateral
Agent shall be permitted to sign and file continuation state ments and
amendments thereto and assignments thereof without the Debtor's signa ture.
Carbon, photographic or other reproduction of this Agreement or any financing
statement shall be sufficient as a financing statement. The Debtor shall neither
change its name, identity or corporate structure (within the meaning of Section
9-402(7) of the Relevant UCC as in effect in the State of Florida) nor relocate
its chief executive office or any office where Records are kept unless it shall
have: (i) given the Collat eral Agent and the Insurer at least thirty (30) days
prior notice thereof and (ii) prepared at the Debtor's expense and delivered to
the Collateral Agent all financing statements, instruments and other documents
necessary to preserve and protect the Collateral or requested by the Collateral
Agent or the Insurer in connection with such change or relocation. Any filings
under the Relevant UCC or otherwise that are occa sioned by such change in name
or location shall be made at the expense of the Debtor. On the Closing Date, the
Debtor shall deliver to the Collateral Agent and the Insurer a listing by
account number of the Contracts as of the Cut-Off Date, which listing shall
constitute Schedule A hereto and is hereby incorporated herein by reference. On
the second Business Day after the end of each Settlement Period, the Debtor
shall deliver to the Collateral Agent an updated listing by account number of
the Contracts as of the last day of such Settlement Period (giving effect to any
releases by the Company pursuant to Section 2.7 or Section 2.15) and such
updated list shall thereupon consti tute Schedule A hereto and is hereby
incorporated by reference herein.
(a) The Collection Agent shall instruct all Obligors to cause
all Collections to be deposited directly with a Lock-Box Bank. The Collection
Agent shall not add any bank as a Lock-Box Bank to those listed on Exhibit B
without the consent of the Collateral Agent and the Insurer. The Collection
Agent shall not terminate any bank as a Lock-Box Bank unless the Collateral
Agent and the Insurer shall have received fifteen (15) days' prior notice of
such termination. If the Debtor or the Collection Agent receives any
Collections, the Debtor or the Collection Agent, as applicable, shall
immediately, but in any event within two (2) Business Days of receipt, remit
such Collections to a Lock-Box Account.
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SECTION 2.7 Payments on Receivables; Application of Payments.
If, on any day,
(a) the Outstanding Balance of a Receivable is either (x)
reduced as a result of any defective, rejected or returned goods or services,
any cash discount, credit, rebate, allowance or other dilution factor, any
billing adjustment or other adjustment, or (y) reduced or canceled as a result
of a setoff or offset in respect of any claim by any Person (whether such claim
arises out of the same or a related transaction or an unrelated transaction); or
(b) as to any Undocumented Receivable, all documentation
required to be received after the origination of such Receivable pursuant to the
Credit and Collection Policy has not been received and accepted by the
Collection Agent within twenty (20) days following the date of the initial draft
drawn by the originating dealer on UAC in connection with the origination of
such Receivable; or
(c) any of the representations or warranties in Article III is
no longer true with respect to a Receivable;
then, in any such event, the Collateral Agent shall release its security
interest in and Lien on such Receivable and the related Contract; provided that
if such release would result in the Net Asset Test not being satisfied, then as
a condition precedent to such release the Debtor shall deposit into the
Collection Account an amount equal to the amount which, if applied to the
reduction of the Net Investment, would cause the Net Asset Test to be satisfied.
Such amount shall be applied as a Receipt of Principal pursuant to Section 2.3.
All collections of Finance Charges received with respect to any such released
Receivable through the last day of the Settlement Period in which such
Receivable is released shall continue to constitute Receipts of Interest
hereunder.
SECTION 2.8 Payments and Computations, Etc. All amounts to be
paid or deposited by the Debtor or the Collection Agent hereunder shall be paid
or deposited in accordance with the terms hereof no later than 12:00 noon. (New
York City time) on the day when due in immediately available funds; if such
amounts are payable to the Company or the Bank Investors, they shall be paid or
deposited in the Agent's account indicated in Section 9.3, until otherwise
notified by the Agent, the Company or any Bank Investor; if such amounts are
payable to the Insurer, they shall be paid or deposited in the Insurer's account
indicated in Section 9.3, until otherwise notified by the Insurer. The Debtor
shall, to the extent permitted by law, pay to the applicable Secured Parties
upon demand, interest on all amounts not paid or deposit ed when due to the
Secured Parties hereunder at a rate equal to 2% per annum plus
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the Base Rate. All computations of Carrying Costs, interest and all per annum
fees hereunder shall be made on the basis of a year of 360 days for the actual
number of days elapsed. Any computations of amounts payable by the Debtor
hereunder to any of the Secured Parties, the Liquidity Provider or the Credit
Support Provider shall be binding absent manifest error.
SECTION 2.9 Reports. On or before each Determination Date, the
Collection Agent shall prepare and forward to the Collateral Agent, the Adminis
trative Agent, Moody's, S&P and the Insurer, (i) a Settlement Statement as of
the end of the preceding Settlement Period, (ii) if requested by the Collateral
Agent, the Administrative Agent or the Insurer, a computer tape listing by
Obligor all Receiv ables, together with an aging of such Receivables, and (iii)
such other information as the Collateral Agent, the Administrative Agent or the
Insurer may reasonably request. The Agent shall provide to the Debtor, on the
day prior to each Determination Date, a monthly settlement statement containing
information relating to the amount of each obligation of the Company which
comprises Carrying Costs for the most recent Collection Period and the amount of
interest earnings on all related accounts for such Collection Period.
SECTION 2.10 Collection Account. There shall be established on
the Closing Date and maintained, for the benefit of the Secured Parties, with
the Collateral Agent, a segregated account (the "Collection Account"), bearing a
designa tion clearly indicating that the funds deposited therein are held 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 Collection Account. 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
Collateral Agent shall have the right to direct the transfer of the Collection
Account to an Eligible Institution. The Collection Agent shall remit daily from
the Lock-Box Account, within two (2) Business Days of receipt, to the Collection
Account all Collections received with respect to any Receivables. On each
Remittance Date, all interest and earnings (net of losses and investment
expenses) on funds on deposit in the Collection Account shall be considered to
be Receipts of Interest and shall be distributed hereunder as such. On the date
on which the Net Investment is zero and all amounts payable hereunder by the
Debtor have been paid in full, any funds remaining on deposit in the Collection
Account shall be paid to the Debtor.
(a) Funds on deposit in the Collection Account shall be
invested in Eligible Investments by or at the written direction of the Debtor,
provided
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that if a Termination Event shall have occurred, such investments shall be made
as directed by the Collateral Agent. 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.
(b) The Collateral Agent agrees that it shall not accept for
credit to the Collection Account any investment as to which it has knowledge of
any adverse claim thereto. NationsBank hereby agrees (and any other Securities
Interme diary holding the Collection Account shall so agree) to comply with all
Entitlement Orders (as defined in Section 8-102 of the 1994 Official Text of the
Uniform Com mercial Code) received by it with respect to the Collection Account
from the Collat eral Agent.
(c) Funds on deposit in the Collection Account (other than
investment earnings) shall be invested by the Collateral Agent in Eligible
Investments that will mature so that such funds will be available on the
Remittance Date with respect to the Settlement Period during which such funds
were received. No Eligible Investment may be liquidated or disposed of prior to
its maturity. All proceeds of any such Eligible Investment shall be deposited in
the Collection Account. Investments may be made in the Collection Account on any
date (provided such investments mature in accordance herewith), only after
giving effect to deposits to and withdraw als from the Collection Account on
such date. Realized losses, if any, on amounts invested in such Eligible
Investments shall be charged against investment earnings on amounts on deposit
in the Collection Account
(d) The Debtor shall 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 that is authorized to
provide instructions relating to investments in Eligible Investments in the
Collection Account.
(e) Eligible Investments shall be maintained by the Collat
eral Agent in the Collection Account 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, agrees (and any
other Securities Intermediary holding the Collection 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 Collection Account given to it by any
Person other than the Collateral Agent.
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SECTION 2.11 Prefunding Account; Prefunding Interest Reserve
Account; Interest Reserve Deposits; Interest Reserve Advances; Reimbursements.
(a) There shall be established on the Closing Date and
maintained, for the benefit of the Secured Parties, with the Collateral Agent,
two segregated accounts (the "Prefunding Account" and the "Prefunding Interest
Reserve Account"), each bearing a designation clearly indicating that the funds
deposited therein are held 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 Prefunding
Account and the Prefunding Interest Reserve Account. The Collateral Agent will
maintain the Prefunding Account and the Prefunding Interest Reserve Account at
an Eligible Institution. If the Eligible Institution holding the Prefunding
Account or the Prefunding Interest Reserve Account shall cease to be an Eligible
Institution, the Collateral Agent shall have the right to direct the transfer of
the Prefunding Account or the Prefunding Interest Reserve Account to an Eligible
Institution.
(1) Funds on deposit in the Prefunding Account and the
Prefunding Interest Reserve Account shall be invested by the Collateral Agent in
overnight Eligible Investments by or at the written direction of the Debtor,
provided that if a Termination Event shall have occurred, such investments shall
be made as directed by the Collateral Agent. 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.
(2) The Collateral Agent agrees that it shall not accept for
credit to the Prefunding Account and the Prefunding Interest Reserve Account any
investment as to which it has knowledge of any adverse claim thereto.
NationsBank, hereby agrees (and any other Securities Intermediary holding the
Prefunding Account or the Prefunding Interest 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
Prefunding Account or the Prefunding Interest Reserve Account from the
Collateral Agent.
(3) Funds on deposit in the Prefunding Account and the
Prefunding Interest Reserve Account shall be invested in Eligible Investments
that will mature overnight. No such Eligible Investment may be liquidated or
disposed of prior to its maturity. All proceeds of any such Eligible Investment
shall be deposited in the Prefunding Account or the Prefunding Interest Reserve
Account, as applicable. Investments may be made in either account on any date
(provided such investments
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mature in accordance herewith), only after giving effect to deposits to and
withdraw als from such account on such date. Realized losses, if any, on amounts
invested in Eligible Investments in the Prefunding Account or the Prefunding
Interest Reserve Account shall be charged against investment earnings on amounts
on deposit in the Prefunding Account or the Prefunding Interest Reserve Account,
as applicable.
(4) The Debtor shall 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 that is authorized to
provide instructions relating to investments in Eligible Investments in the
Prefunding Account and the Prefunding Interest Reserve Account.
(5) Eligible Investments shall be maintained in the Prefunding
Account and the Prefunding Interest Reserve Account 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, agrees (and any other Securities Intermediary holding the
Prefunding Account or the Prefunding Interest 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 Prefunding Account or the Prefunding
Interest Reserve Account given to it by any Person other than the Collateral
Agent.
(b) On the Business Day preceding each Prefunding Date, the
Debtor shall deposit in the Prefunding Interest Reserve Account an amount equal
to the product of (i) the Negative Carry for such Prefunding Date, (ii) the
principal component of the amount of Commercial Paper which would be required on
such date to fund the Prefunding Deposit, or if such deposit is to be made by
the Bank Investors, the amount to be advanced by the Bank Investors, and (iii) a
fraction, the numerator of which is the number of days from the Prefunding Date
through the end of the Settlement Period during which such Prefunding Date
occurs and the denom inator of which is 360 (such amount with respect to a
Prefunding Date, the "Interest Reserve Deposit").
(c) On each Remittance Date, the Collection Agent shall
deposit to the Collection Account an amount equal to the Interest Reserve
Advance, if any, for such Remittance Date. In the event that, on any Remittance
Date, the amount earned over the preceding Settlement Period on amounts on
deposit in the Prefunding Account shall exceed an amount equal to the product of
(i) the daily weighted average amount on deposit in the Prefunding Account
during the preceding
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Settlement Period, (y) the Targeted Interest Rate (on a per annum basis) and (z)
a fraction, the numerator of which is the number of days in the related
Settlement Period and the denominator of which is 360, the Collateral Agent
shall release such excess amount from the Prefunding Interest Reserve Account to
the Collection Agent in reimbursement for previously advanced Interest Reserve
Advances or, to the extent no such unreimbursed advances exist, the Collection
Agent shall apply such excess amount as part of Available Funds under Section
2.3(a).
SECTION 2.12 Prefunding Account and Prefunding Interest
Reserve Account Withdrawals.
(a) On any Business Day, upon receipt by the Agent and the
Collateral Agent not later than 11:00 a.m. New York City time of written certif
ication in substantially the form of Exhibit E (a "Withdrawal Notice") from the
Debtor setting forth, among other things, the amount requested to be released
from the Prefunding Account and certifying that (i) after giving effect to the
amount to be funded with respect to such additional Receivables, the Net Asset
Test shall be satisfied, (ii) the amount on deposit in the Reserve Account shall
not be less than the Required Reserve Account Amount (calculated (x) immediately
prior to the related Prefunding Date and (y) as if such Prefunding Deposit shall
have occurred), (iii) the Debtor shall have made any deposit into the Yield
Supplement Account required pursuant to Section 2.13 in connection with such
Receivables, if any, and (iv) the Collection Agent shall be in compliance with
the requirements of Section 5.3 in re spect of such Prefunding Date, the
Collateral Agent shall release to the Debtor the amount requested by the
Collection Agent.
(b) On the last day of each Prefunding Period, all amounts on
deposit in the Prefunding Account (exclusive of earnings thereon) shall be, at
the Debtor's option, either (i) released to the Agent to be applied in reduction
of the Net Investment, or (ii) retained in the Prefunding Account and applied to
reduce the amount of the Prefunding Deposit otherwise required to be made by the
Company or the Bank Investors, as applicable, on the succeeding Prefunding Date.
Notwithstand ing the foregoing however, on the first Remittance Date to occur on
or after the Termination Date, all amounts on deposit, exclusive of earnings
thereon, in the Prefunding Account shall be released to the Agent, for the
account of the Company and the Bank Investors, as applicable, and applied in
reduction of the Net Investment and earnings thereon shall be deposited in the
Collection Account for application as Available Funds.
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(c) On each Remittance Date all amounts deposited in the
Prefunding Interest Reserve Account with respect to the related Settlement
Period (together with any earnings on the Prefunding Interest Reserve Account
during such Settlement Period) shall be deposited in the Collection Account.
SECTION 2.13 Yield Supplement Account, Deposits; Withdrawals.
(a) On the day of the Initial Funding with respect to all
Receivables recorded on the Collection Agent's master servicing records as of
such day and on any Business Day thereafter on which a Receivable is recorded on
the Collection Agent's master servicing records, the Debtor shall deposit into
the Yield Supplement Account for each such Receivable with respect to which the
related Con tract provides for interest to accrue thereunder at a rate less than
the Minimum Re quired APR (determined as of the date of such recordation on the
Collection Agent's master servicing records) an amount (each such amount, a
"Required Yield Deposit Amount") equal to the product of (i) the number of
monthly payments originally required under such Contract and (ii) an amount
equal to (x) the scheduled monthly payment on such Contract which would be
required to be made by the Obligor there under if such Contract had a rate per
annum equal to the Minimum Required APR minus (y) the scheduled monthly payment
on such Contract which would be required to be made by the Obligor thereunder if
such Contract had a rate per annum equal to the rate set forth in such Contract.
Notwithstanding the foregoing, no Required Yield Deposit Amount need be
deposited to the Yield Supplement Account until the total amount of all
undeposited Required Yield Deposit Amounts equals or exceeds $1,000.
(b) There shall be established on the Closing Date and
maintained, for the benefit of the Company and the Bank Investors, with the
Collat eral Agent, a segregated account (the "Yield Supplement Account"),
bearing a desig nation clearly indicating that the funds deposited therein are
held 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 will 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 Collateral Agent shall have the right to direct the
transfer of the Yield Supplement Account to an Eligible Institution.
(1) Funds on deposit in the Yield Supplement Account shall be
invested in overnight Eligible Investments by or at the written
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direction of the Debtor, provided that if a Termination Event shall have
occurred, such investments shall be made as directed by the Collateral Agent.
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 Agree ment.
(2) The Collateral Agent agrees that 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 hereby agrees (and any other
Securities 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.
(3) No Eligible Investment in the Yield Supplement Account may
be liquidated or disposed of prior to its maturity. All proceeds of any such
Eligible Investment shall be deposited in the Yield Supplement Account.
Investments may be made in the Yield Supplement Account on any date (provided
such investments mature in accordance herewith), only after giving effect to
deposits to and withdrawals from such account on such date. Realized losses, if
any, on amounts invested in such Eligible Investments shall be charged against
investment earnings on amounts on deposit in the Yield Supplement Account.
(4) The Debtor shall 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 that is authorized to
provide instructions relating to investments in Eligible Investments in the
Yield Supplement Account.
(5) Eligible Investments in the Yield Supplement Account shall
be maintained by the Collateral Agent in such manner as may be necessary to
maintain the first priority perfected security interest in the Yield Supple ment
Account in favor of the Collateral Agent on behalf of the Secured Parties.
NationsBank agrees (and any other Securities Intermediary holding the Yield
Supple ment 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.
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(c) In the event that Available Funds with respect to any
Remittance Date are insufficient to provide for the payment of the amounts
described in Sections 2.3(a)(ii), (iv) and (v), the Collateral Agent shall make
a withdrawal from the Yield Supplement Account in the amount of such deficiency
and the proceeds from such withdrawal shall be applied by the Collateral Agent
to the required distribu tions and payments. Funds may also be released from the
Yield Supplement Account each month in accordance with Section 2.3(c). On any
day on which the Collateral Agent, pursuant to Section 2.7 or Section 2.15,
releases to the Debtor its security interest in a Contract and related
Receivable with respect to which the Debtor deposited funds in the Yield
Supplement Account pursuant to Section 2.13(a), the amount of such deposit
(together with any earnings thereon) less any amounts released from the Yield
Supplement Account in accordance with Section 2.3(c) shall be released to the
Debtor. Upon the occurrence of a Termination Event, all amounts on deposit in
the Yield Supplement Account shall be released to the Agent, for the account of
the Company and the Bank Investors, as applicable, and applied in reduction of
the Net Investment.
SECTION 2.14 Reserve Account; Withdrawals; Releases; Draws on
Policy.
(a) There shall be established on the Closing Date and
maintained, for the benefit of the Secured Parties, with the Collateral Agent, a
segre gated account (the "Reserve Account"), bearing a designation clearly
indicating that the funds deposited therein are held 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 will maintain the Reserve Account at
an Eligible Institution. If the Eligible Institution holding the Reserve Account
shall cease to be an Eligible Institution, the Collateral Agent shall have the
right to direct the transfer of the Reserve Account to an Eligible Institution.
On each Funding Date and each Prefunding Date, the Debtor shall deposit (or
cause to be withheld from proceeds from the issuance of Related Commercial
Paper) to the credit of the Reserve Account an amount equal to an amount
necessary to fund the Reserve Account to the Required Reserve Account Amount.
The amount of any Reserve Account Guaranty shall be counted toward the amount of
funds available in the Reserve Account.
(1) Funds on deposit in the Reserve 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, such investments shall be made
as directed by the Collateral Agent. Any such written directions shall specify
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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.
(2) The Collateral Agent agrees that it shall not accept for
credit to the Reserve Account any investment as to which it has knowledge of any
adverse claim thereto. NationsBank hereby agrees (and any other Securities
Intermediary holding the Reserve Account shall so agree) to comply with all
Entitle ment 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.
(3) No Eligible Investment in the Reserve Account may be
liquidated or disposed of prior to its maturity. All proceeds of any such
Eligible Investment shall be deposited in the Reserve Account. Investments may
be made in the Reserve Account on any date (provided such investments mature in
accordance herewith), only after giving effect to deposits to and withdrawals
from such account on such date. Realized losses, if any, on amounts invested in
such Eligible Investments shall be charged against investment earnings on
amounts on deposit in the Reserve Account, as applicable.
(4) The Debtor shall 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 that is authorized to
provide instructions relating to investments in Eligible Investments in the
Reserve Account.
(5) 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 agrees (and any other Securities 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.
(b) Funds on deposit in the Reserve Account shall be invested
by the Collateral Agent in Eligible Investments with maturities such that all
funds on deposit in the Reserve Account will be available on the next succeeding
Remittance Date following such investment. The Collateral Agent shall maintain
possession of the negotiable instruments or securities, if any, evidencing the
Eligible Investments from the time of purchase thereof until the time of sale or
maturity. Such
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investments shall be held in the name of the Collateral Agent, for the benefit
of the Secured Parties.
(c) In the event that Available Funds with respect to any
Remittance Date and any withdrawals from the Yield Supplement Account are
insufficient to provide for the payment of the amounts described in Sections
2.3(a)(ii), (iv) and (v), the Collateral Agent shall make a withdrawal from the
Reserve Account in the amount of such deficiency and the proceeds from such
withdrawal shall be applied by the Collateral Agent to the required
distributions and payments. Funds may also be released from the Reserve Account
each month in accordance with Section 2.3(c). To the extent that amounts
available in the Reserve Account are insufficient to cover such costs and the
Debtor fails to make a deposit to the Reserve Account in the amount of such
shortfall, the Agent shall make a demand for payment under the Policy in
accordance with its terms.
(i) In the event that on any Remittance Date or day on which a
Take-Out occurs after giving effect to clause (c)(i) above, the amount on
deposit in the Reserve Account (calculated as of the related Determination Date
or the date of the Take-Out, as applicable) exceeds the Required Reserve Account
Amount, the Collateral Agent shall (x) if no Termination Event shall have
occurred, release to the Debtor an amount equal to the excess of the amount on
deposit in the Reserve Account over the Required Reserve Account Amount and (y)
if a Termina tion Event shall have occurred, apply as part of Available Funds
pursuant to Section 2.3 an amount equal to the excess of the amount on deposit
in the Reserve Account over the Required Reserve Account Amount.
(ii) After the occurrence of the Termination Date upon the
earlier of (i) the day on which the Net Investment is zero and the Secured
Parties shall have received all Aggregate Unpaids and (ii) the day on which the
aggregate Outstanding Balance of the Receivables shall be zero, the Collateral
Agent shall release to the Debtor all amounts on deposit in the Reserve Account.
SECTION 2.15 Optional Release.
(a) On any Business Day, the Debtor shall have the right to
require the Collateral Agent to release its security interest in and its Lien on
the Con tracts and the related Receivables (excluding any Contracts and related
Receivables booked after the cut-off date applicable to the structured finance
transaction estab lished by or on behalf of the Debtor or an affiliate, to which
the released Contracts and related Receivables will be subject) on the terms and
conditions set forth herein.
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It shall be a condition precedent to any such release that (i) the Debtor shall
pay to the Company and the Bank Investors, as applicable, an amount equal to the
amount necessary to cause the Net Asset Test to be satisfied after giving effect
to the pro posed release, (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 com ponent subject to the funding period utilized by
the Bank Investors and the Liquidity Provider to fund such portion of the Net
Investment, as applicable and (y) be at least $5,000,000, (iii) the Debtor 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 Bank Investors or the Liquidity
Provider with respect to their respective interests 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 Debtor shall have given the Agent, the Collateral Agent and the Insurer
at least ten (10) days prior written notice of its intention to request release
with respect to such Contracts and Receivables, (v) after giving effect to such
release the amount on deposit in the Reserve Account shall be at least equal to
the Required Reserve Account Amount, and (vi) all amounts due and owing to the
Insurer from the Debtor shall have been paid in full. It is the intention of the
parties that the Debtor shall pay to the Agent, for the benefit of the Company
and the Bank Investors, as applicable, and the Collection Account, as
applicable, such amounts as are required under this Section on the closing date
of such structured finance transaction.
The amount described in clause (i) above upon receipt by the
Agent, for the benefit of the Company and the Bank Investors, as applicable,
shall be applied in reduction of the Net Investment. From the amount described
in clause (iii) above an amount equal to unreimbursed Servicer Advances shall be
distributed to the Collection Agent and the remainder of such amounts shall be
remitted to the Agent, for the benefit of the Company and the Bank Investors, as
applicable.
The Debtor shall also be obligated to pay to the Collateral
Agent (i) an amount equal to $5,000 as an administrative fee in connection with
any such assign ment and (ii) the reasonable legal fees and expenses of the
Collateral Agent and the Secured Parties arising in connection with any such
assignment.
Upon the deposit to the Collection Account and the payment by
the Debtor of the amounts described in this Section, the Collateral Agent shall
execute
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and deliver to the Debtor, at the Debtor's expense, such documents or
instruments as are necessary to terminate the Collateral Agent's security
interest in the Receivables and the Contracts related thereto. Any such
documents shall be prepared by or on behalf of the Debtor.
(b) In connection with a Take-Out, the Debtor shall have the
right, from time to time thereafter (but not more frequently than once per
calendar week), on the maturity date of any Commercial Paper note issued by the
Company to fund the Net Investment or upon the termination of any funding period
utilized by the Liquidity Provider or the Bank Investors, as applicable, to
require the Collateral Agent to release its security interest in and Lien on
specified Contracts and the related Receivables, provided that (x) such
Contracts and related Receivables are to be assigned or sold by the Debtor,
directly or indirectly, to a structured finance vehicle established by or on
behalf of the Debtor or an affiliate, in connection with an asset-
securitization or other structured financing having a prefunding (or similar)
feature, (y) the aggregate Outstanding Balance of such Receivables shall be (i)
not greater than the principal component of such maturing Commercial Paper or
the principal component subject to such funding period, as applicable and (ii)
at least $5,000,000 and (z) the Debtor shall have given the Agent, the
Collateral Agent and the Insurer at least seven (7) days prior written notice of
its intention to effect a release with respect to such Contracts and
Receivables. Any such release shall be in consideration for the deposit by the
Debtor into the Collection Account of an amount equal to the sum of (i) the
Outstanding Balance of such Receivables on the day of such assignment plus (ii)
all accrued and unpaid interest thereon (whether or not due thereunder) at the
rate set forth in the related Contracts to such date of assignment. The amount
described in clause (i) above shall be allocated and applied on such day
(whether or not a Remit tance Date) as described in Section 2.3(b) as a Receipt
of Principal, and the amount described in clause (ii) above shall be applied on
such day (whether or not a Remit tance Date) in the order of priorities set
forth in Section 2.3(a) as a Receipt of Interest (in which case "Settlement
Period" as used in said Section 2.3(a) shall be considered to be the period from
the last date of the previous Settlement Period to the date on which the amounts
required to be paid under this Section 2.15(b) are paid). The Debtor shall also
be obligated to pay to the Agent (i) an amount equal to $2,500 as an
administrative fee in connection with any such assignment and (ii) the
reasonable legal fees and expenses of the Company, the Collateral Agent, the
Bank Investors and the Administrative Agent incurred in connection with any such
release. Upon the deposit to the Collection Account and the payment by the
Debtor 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
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Collateral Agent's interest in the Receivables and the Contracts related
thereto. Any such documents shall be prepared by or on behalf of the Debtor.
(c) On any Business Day, the Debtor shall have the right to
require the Collateral Agent to release its security interest in and its Lien on
specified Contracts and the related Receivables on the terms and conditions set
forth herein. It shall be a condition precedent to any such release that,
immediately after such release, (i) the Debtor shall pay to the Company and the
Bank Investors, as applicable, an amount equal to the amount necessary to cause
the Net Asset Test to be satisfied calculated after giving effect to the
proposed release, (ii) after giving effect to such release, the amount on
deposit in the Reserve Account shall be at least equal to the Required Reserve
Account Amount, and (iii) all amounts due and owing to the Insurer from the
Debtor shall have been paid in full.
(d) On any Business Day, the Debtor shall have the right to
require the Collateral Agent to release its security interest in and Lien on all
of the Contracts and the related Receivables on the terms and conditions set
forth herein. It shall be condition precedent to any such release that (i) the
Debtor shall pay to the Agent, for the benefit of the Company and the Bank
Investors, as applicable, an amount equal to the Net Investment at the time of
such release, (ii) the Debtor shall pay to the Agent, for the benefit of the
Company and the Bank Investors, as applica ble, an amount equal to all interest
costs associated with the Company's Commercial Paper issued to fund the Net
Investment through the date of maturity or all interest costs associated with
all funding periods utilized by the Bank Investors for the Liquidity Provider
with respect to its interest in the Contracts, related Receivables and
Transferred Interest, as applicable, as well as all Carrying Costs accrued
through the date of such release and all other costs which constitute Carrying
Costs which will accrue after such date, (iii) the Debtor shall have given the
Collateral Agent, the Administrative Agent and the Insurer at least thirty (30)
days prior written notice of its intention to effect such a release the
Contracts and Receivables, and (iv) all amounts due and owing to the Insurer
from the Debtor shall have been paid in full.
SECTION 2.16 Hedging Amounts.
(a) There shall be established on the Closing Date and
maintained, for the benefit of the Secured Parties, with the Collateral Agent, a
segre gated account (the "Hedge Proceeds Account"), bearing a designation
clearly indicat ing that the funds deposited therein are held 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 Hedge Proceeds
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Account. The Collateral Agent will maintain the Hedge Proceeds Account at an
Eligible Institution. If the Eligible Institution holding the Hedge Proceeds
Account shall cease to be an Eligible Institution, the Collateral Agent shall
have the right to direct the transfer of the Hedge Proceeds Account to an
Eligible Institution. Funds on deposit in the Hedge Proceeds Account shall be
invested by the Collateral Agent in overnight Eligible Investments.
(1) Funds on deposit in the Hedge Proceeds
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, such investments shall be made as directed by the
Collateral Agent. 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.
(2) The Collateral Agent agrees that it
shall not accept for credit to the Hedge Proceeds Account any
investment as to which it has knowledge of any adverse claim thereto.
NationsBank hereby agrees (and any other Securities Intermediary
holding the Hedge Proceeds 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
Hedge Proceeds Account from the Collateral Agent.
(3) No Eligible Investment held in the Hedge
Proceeds Account may be liquidated or disposed of prior to its
maturity. All pro ceeds of any such Eligible Investment shall be
deposited in the Hedge Proceeds Account. Investments may be made in the
Hedge Proceeds Account on any date (provided such investments mature in
accordance herewith), only after giving effect to deposits to and
withdrawals from such account on such date. Realized losses, if any, on
amounts invested in such Eligible Investments shall be charged against
investment earnings on amounts on deposit in the Hedge Proceeds
Account.
(4) The Debtor shall 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 that is authorized to provide instructions relating to
investments in Eligible Investments in the Hedge Proceeds Account.
(5) Eligible Investments shall be maintained
in the Hedge Proceeds Accounts by the Collateral Agent in such manner
as may be neces sary to maintain the first priority perfected security
interest in favor of the Collateral
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Agent on behalf of the Secured Parties. NationsBank, agrees (and any other
Securi ties 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 Hedge Proceeds Account given to it by any Person other
than the Collateral Agent.
(b) On and after the occurrence of any
Termination Event or in the event of the receipt of any proceeds
received by the Collection Agent pursuant to any Hedging Arrangement
and immediately thereafter Hedging Arrange ments which satisfy the
requirements of Section 5.3 are not in place, the Collection Agent, for
the benefit of the Debtor, shall remit to the Collateral Agent for
deposit into the Hedge Proceeds Account any proceeds received by the
Collection Agent of any Hedging Arrangement. Such amounts shall be held
by the Collateral Agent as security for the repayment to the Company,
the Bank Investors and the Insurer, as applicable, of the Net
Investment and the Aggregate Unpaids. At any time after the deposit of
such amounts to the credit of the Hedge Proceeds Account, the
Collateral Agent may apply such amounts either (i) to reduce the Net
Investment, (ii) to provide for the payment to the Company, the Bank
Investors and the Insurer, as applicable, of the Aggregate Unpaids, or
(iii) to purchase an interest rate hedge acceptable to the Insurer.
Upon the termination of this Agreement, provided that the Net
Investment shall be zero and all other Aggregate Unpaids shall have
been paid in full, the Collat eral Agent shall release to the Debtor
any amounts remaining on deposit in the Hedge Proceeds Account.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Debtor. The
Debtor represents and warrants to the Collateral Agent and the Secured Parties
that:
(a) Corporate Existence and Power. The
Debtor 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 material govern mental 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 Debtor of this Agree ment and the other Transaction Documents
are within the Debtor'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 (except as
contemplated by Section 2.6), 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 Debtor or of any
agreement, judgment, injunction, order, decree or other instrument
binding upon the Debtor or result in the creation or imposition of any
lien on assets of the Debtor (except as contemplated by Section 2.6),
or require the consent or approval of, or the filing of any notice or
other documentation with, any governmental authority or other Person
(except as contemplated by Section 2.6).
(c) Binding Effect. Each of this Agreement
and the other Transaction Documents constitutes the legal, valid and
binding obligation of the Debtor, enforceable in accordance with their
respective terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors.
(d) Perfection. Immediately preceding each
Funding, the Debtor shall be the owner of all of the Receivables, free
and clear of all liens, encumbrances, security interests, preferences
or other security arrangement of any kind or nature whatsoever, except
as permitted by this Agreement and the other Transaction Documents. On
or prior to each Funding and each day on which a Receivable is sold to
the Debtor by UAC pursuant to the Sale and Purchase Agree ment, all
financing statements and other documents required to be recorded or
filed in order to perfect and protect (i) the Debtor's interest in the
Receivables, the Contracts related thereto, the Related Security with
respect thereto and all Proceeds thereof against all creditors of and
purchasers from UAC, PFC or any Acquisition Subsidiary, and (ii) the
Collateral Agent's interest in the Collateral against all creditors of
and purchasers from the Debtor, and all filing fees and taxes, if any,
payable in connection with such filings shall have been paid in full.
(e) Accuracy of Information. All information
heretofore furnished by the Debtor (including without limitation, the
Settlement Statements, any reports delivered pursuant to Section 2.9
and UAC's financial statements) to the Collateral Agent, the Secured
Parties, the Administrative Agent or any of the other Persons party
hereto for purposes of or in connection with this Agreement or any
transaction contemplated hereby is, and all such information hereafter
furnished by the Debtor to any such Person will be, true and accurate
in every material respect, on the date such information is stated or
certified.
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(f) Tax Status. All tax returns (federal,
state and local) required to be filed with respect to the Debtor have
been filed (which filings may be made by an Affiliate of the Debtor on
a consolidated basis covering the Debtor 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 Debtor (or
in the event consolidated returns have been filed, with respect to the
Persons subject to such returns).
(g) Action, Suits. Except as set forth in
Exhibit F, there are no actions, suits or proceedings pending, or to
the knowledge of the Debtor threatened, against or affecting the Debtor
or any Affiliate of the Debtor or their respective properties, in or
before any court, arbitrator or other body, which may have a material
adverse effect on the Debtor's ability to perform its obligations
hereunder or under the Sale and Purchase Agreement.
(h) Use of Proceeds. The proceeds of any
Funding will be used by the Debtor to (a) acquire the Receivables, the
Contracts related thereto and the Related Security with respect thereto
from UAC pursuant to the Sale and Pur chase Agreement, (b) to pay down
debt in connection with the purchase of the Receivables and Contracts
pursuant to the Sale and Purchase Agreement, or (c) to make
distributions constituting a return of capital.
(i) 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 9.3 hereof and the offices
where the Debtor keeps all its Records, are located at the address(es)
described on Exhibit G or such other locations notified to the Company
in accordance with Section 2.6 in jurisdictions where all action
required by Section 2.6 has been taken and completed.
(j) Good Title. Upon each Funding and on
each day on which a Receivable and related Contract is sold to the
Debtor by UAC pursuant to the Sale and Purchase Agreement, the
Collateral Agent shall acquire a valid and perfected first priority
security interest in each Receivable and related Contract that exists
on the date of such Funding and sale and in the Related Security and
Collections with respect thereto free and clear of any Adverse Claim.
(k) Tradenames, Etc. As of the date hereof:
(i) the Debtor has only the subsidiaries and divisions listed on
Exhibit H hereto; and (ii) the Debtor has, within the last five (5)
years, operated only under the tradenames identified in Exhibit H
hereto, and, within the last five (5) years, has not changed its name,
merged
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with or into or consolidated with any other corporation or been the subject of
any proceeding under Title 11, United States Code (Bankruptcy), except as
disclosed in Exhibit H hereto.
(l) Nature of Receivables. Each Receivable
represented by the Debtor as an Eligible Receivable hereunder or in any
report, document or instru ment delivered hereunder or in connection
with the other Transaction Documents is an Eligible Receivable at the
time of such representation.
(m) Coverage; Amount of Receivables. The Net Asset Test is
currently satisfied. As of September 17, 1998, the aggregate Outstanding Balance
of the Receivables in existence was $86,193,823.44 and the aggregate Outstanding
Balance of all Eligible Receivables was $85,808,215.61.
(n) No Termination Event. No event has occurred and is
continuing and no condition exists which constitutes a Termination Event or a
Poten tial Termination Event.
(o) Not an Investment Company. The Debtor is not an "in
vestment company" within the meaning of the Investment Company Act of 1940, as
amended, or is exempt from all provisions of such Act.
(p) ERISA. The Debtor is in compliance in all material
respects with ERISA and no lien in favor of the Pension Benefit Guaranty Corpora
tion on any of the Receivables shall exist.
(q) Lock-Box Accounts. The names and addresses of all the
Lock-Box Banks, together with the account numbers of the Lock-Box Accounts at
such Lock-Box Banks, are specified in Exhibit B hereto (or at such other Lock-
Box Banks and/or with such other Lock-Box Accounts as have been notified to the
Administrative Agent). All Obligors have been instructed to make payment to a
Lock-Box Account. (r) Insurance Policies. At the time of the sale of each
Receivable and related Contract by UAC to the Debtor pursuant to the Sale and
Purchase Agreement, each Financed Vehicle is required to be covered by physical
damage and liability insurance obtained by the related Obligor at least in the
amount required by the related Contract, and each such required insurance policy
is required to name UAC as loss payee and is required to be in full force and
effect.
(s) Year 2000 Compliance. The Debtor (i) has initiated a
review and assessment of all areas within its and each of its Subsidiaries'
business and
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operations (including those affected by suppliers, vendors and customers) that
could be adversely affected by the "Year 2000 Problem" (that is, the risk that
computer applications used by the Debtor or any of its Subsidiaries (or
suppliers, vendors and customers) may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) is in the process of developing a plan and
timeline for addressing the Year 2000 Problem on a timely basis, and (iii) will
implement that plan in accordance with that timetable. Based on the foregoing,
the Debtor believes that all computer applications (including those of its
suppliers, vendors and customers) that are material to its or any of its
Subsidiaries' business and operations are reasonably expected on a timely basis
to be able to perform properly date-sensitive functions for all dates before and
after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent
that a failure to do so could not be reasonably expected to have a material
adverse effect on the Debtor or on the transaction documented under this
Agreement, or to result in a Termination Event.
The Debtor (i) has completed a review and assessment of all
computer applications (including, but not limited to those of its suppliers,
vendors, customers, and any third party servicers), which are related to or
involved in the origination, collection, management or servicing of the
Receivables (the "Receivables Systems") and (ii) has identified any of such
Receivables Systems which are "mission critical" operations (i.e. those which
jeopardize the viability of the Debtor's business if not Year 2000 Compliant).
The Debtor will implement a plan to ensure that all "mission critical"
operations of the Receivables Systems are Year 2000 Compliant or will be Year
2000 Compliant on or before June 30, 1999, and thereafter.
The costs of all assessment, remediation, testing and
integration related to the Debtor's plan for becoming Year 2000 Compliant will
not have a material adverse effect on the financial condition or operations of
the Debtor.
Any document, instrument, certificate or notice delivered to
the Company by the Debtor hereunder shall be deemed a representation and
warranty by the Debtor.
SECTION 3.2 Representations and Warranties of the Collection
Agent. The Collection Agent represents and warrants to the Collateral Agent and
the Secured Parties that:
(a) Corporate Existence and Power. The Collection Agent is a
corporation duly organized and validly existing under the laws of its
jurisdiction
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of incorporation and has all corporate power and all 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 Collection Agent of this Agreement and the other Transaction
Documents are within the Collection Agent'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 (except as contemplated by Section 2.6), 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 Collection Agent or of any agreement, judgment, injunction, order,
decree or other instrument binding upon the Collection Agent or result
in the creation or imposition of any lien on assets of the Collection
Agent or any of its Subsidiaries (except as contemplated by Section
2.6), or require the consent or approval of, or the filing of any
notice or other documentation with, any governmental authority or other
Person (except as contemplated by Section 2.6).
(c) Binding Effect. This Agreement
constitutes the legal, valid and binding obligation of the Collection
Agent, enforceable 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 Collection Agent to the Collateral Agent,
the Secured Parties or the Administrative Agent for purposes of or in
connection with this Agreement or any transaction contemplated hereby
is, and all such information hereafter furnished by the Collection
Agent to the Collateral Agent, the Secured Parties or the
Administrative Agent will be, true and accurate in every material
respect, on the date such informa tion is stated or certified.
(e) Credit and Collection Policy. Since June
30, 1998, (except for any changes as received by the Administrative
Agent in writing), there have been no material changes in the Credit
and Collection Policy; since such date, no material adverse change has
occurred in the overall rate of collection of the Receiv ables.
(f) Collections and Servicing. Since June
30, 1998, there has been no material adverse change in the ability of
UAC, as Collection Agent hereunder, to service and collect the
Receivables.
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(g) Year 2000 Compliance. The Collection
Agent (i) has initiated a review and assessment of all areas within its
and each of its Subsidiaries' business and operations (including those
affected by suppliers, vendors and custom ers) that could be adversely
affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by the Collection Agent or any of its Subsidiaries
(or suppliers, vendors and customers) may be unable to recognize and
perform properly date-sensitive functions involving certain dates prior
to and any date after December 31, 1999), (ii) is in the process of
developing a plan and timeline for addressing the Year 2000 Problem on
a timely basis, and (iii) will implement that plan in accordance with
that timetable. Based on the foregoing, the Collateral Agent believes
that all computer applications (including those of its suppliers,
vendors and customers) that are material to its or any of its
Subsidiaries' business and operations are reasonably expected on a
timely basis to be able to perform properly date-sensitive functions
for all dates before and after January 1, 2000 (that is, be "Year 2000
Compliant"), except to the extent that a failure to do so could not be
reasonably expected to have a material adverse effect on the Collateral
Agent or on the transaction documented under this Agreement, or to
result in a Termination Event.
The Collateral Agent (i) has completed a review and assessment
of all computer applications (including, but not limited to those of its
suppliers, vendors, customers, and any third party servicers), which are related
to or involved in the origination, collection, management or servicing of the
Receivables (the "Receivables Systems") and (ii) has identified any of such
Receivables Systems which are "mission critical" operations (i.e. those which
jeopardize the viability of the Collection Agent's business if not Year 2000
Compliant). The Collection Agent will implement a plan to ensure that all
"mission critical" operations of the Receivables Systems are Year 2000 Compliant
or will be Year 2000 Compliant on or before June 30, 1999, and thereaf ter.
The costs of all assessment, remediation, testing and
integration related to the Collection Agent's plan for becoming Year 2000
Compliant will not have a material adverse effect on the financial condition or
operations of the Collec tion Agent.
Any document, instrument, certificate or notice delivered by
the Collection Agent to the Collateral Agent, the Secured Parties hereunder
shall be deemed a representation and warranty by the Collection Agent.
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SECTION 3.3 Reaffirmation of Representations and Warranties.
On each Determination Date, Remittance Date and day on which a Funding is made,
each of the Debtor and the Collection Agent, shall be deemed to have certified
that all of its respective representations and warranties described in Sections
3.1 and 3.2 are correct on and as of such day as though made on and as of such
day.
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ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.1 Conditions to Effectiveness. This Agreement shall
become effective on the first day on which all of the following conditions have
been satisfied:
(a) A Certificate of the Secretary of the
Debtor certifying (i) the names and signatures of the officers and
other agents authorized on its behalf to execute this Agreement and the
other Transaction Documents and any other documents to be delivered by
it hereunder or thereunder (on which Certificate the Collateral Agent
and the Secured Parties may conclusively rely until such time as the
Collateral Agent and the Secured Parties shall receive from the Debtor
a revised Certificate meeting the requirements of this clause (a)(i)),
(ii) a copy of the Debtor's Certificate of Incorporation, as amended to
the date hereof, certified by the Secretary of State of the State of
Delaware, (iii) a copy of the Debtor's By-laws, as amended to the date
hereof, (iv) a copy of resolutions of the Debtor's Board of Directors
approv ing the transactions contemplated hereby and (v) a certificate
of the Secretary of State of the State of Delaware certifying the
Debtor's good standing.
(b) A Certificate of the Secretary of the
Collection Agent certifying (i) the names and signatures of the
officers authorized on its behalf to execute this Agreement and any
other documents to be delivered by it hereunder (on which Certificate
the Collateral Agent and the Secured Parties may conclusively rely
until such time as the Collateral Agent and Secured Parties shall
receive from the Collection Agent a revised Certificate meeting the
requirements of this clause (a)(i)), (ii) a copy of the Collection
Agent's Articles of Incorporation, as amended to the date hereof,
certified by the Secretary of State of the State of Indiana, (iii) a
copy of the Collection Agent's By-laws, as amended to the date hereof,
(iv) a copy of resolutions of the Collection Agent's Board of Directors
approving the transactions contemplated hereby and (v) a certificate of
the Secretary of State of the State of Indiana certifying the
Collection Agent's existence.
(c) Copies of proper financing statements
(Form UCC-1), naming UAC as the debtor in favor of the Debtor as
secured party and the Collateral Agent, for the benefit of the Secured
Parties, as assignee of the secured party or other similar instruments
or documents as may be necessary or in the reasonable opinion of the
Collateral Agent desirable under the Relevant UCC to perfect the
Debtor's
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security interest in the Receivables, Related Security and Collections, free and
clear of any Adverse Claim.
(d) Copies of proper financing statements
(Form UCC-1), dated a date reasonably near to the date of the Initial
Funding naming the Debtor as the debtor in favor of the Collateral
Agent, for the benefit of the Secured Parties, or other similar
instruments or documents as may be necessary or in the reasonable
opinion of the Collateral Agent desirable under the Relevant UCC to
perfect the Collateral Agent's security interest in the Collateral,
including all Receivables, Related Security and Collections, free and
clear of any Adverse Claim.
(e) Copies of proper financing statements
(Form UCC-3), if any, necessary under the Relevant UCC to terminate all
security interests and other rights of any person in the Collateral,
including the Receivables, Related Security and Collections, previously
granted by the Debtor.
(f) Certified copies of request for
information or copies (Form UCC-11) (or a similar search report
certified by parties acceptable to the Collateral Agent) dated a date
reasonably near the date of the Initial Funding listing all effective
financing statements which name the Debtor (under its present name and
any previous name) as debtor and which are filed in jurisdictions in
which the filings were made pursuant to item (e) above together with
copies of such financing state ments (none of which shall cover any
Receivables or Contracts).
(g) Opinions of Barnes & Thornburg, special
counsel to the Debtor and the Collection Agent, covering the matters
set forth in (i) Exhibit I hereto, and (ii) Exhibit J hereto.
(h) An opinion of Barrett & McNagny, special
counsel to the Debtor and the Collection Agent, covering matters
relating to Florida law.
(i) A list setting forth all Receivables and
the Outstanding Balances thereon as of the close of business on the
Cut-Off Date and such other infor mation as the Collateral Agent or any
of the Secured Parties may reasonably request.
(j) An executed copy of the Fee Letter.
(k) The Note, duly executed by the Debtor
and appropri ately completed.
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(l) A Termination and Release Agreement, dated as of September
18, 1998, among the Company, the Debtor and UAC, terminating the Transfer and
Administration Agreement, dated as of June 27, 1995 (as amended to the date
hereof), among the Company, the Debtor and UAC.
(m) A Termination and Release Agreement,
dated as of September 18, 1998, among the Company, the Debtor and UAC
terminating the Transfer and Administration Agreement, dated as of
August 24, 1995 (as amended to the date hereof), among the Company, PFC
and UAC.
(n) The Arrangement Fee in accordance with
Section 2.5.
(o) Such other documents as the Collateral
Agent or the Secured Parties shall reasonably request.
ARTICLE V
COVENANTS
SECTION 5.1 Affirmative Covenants of the Debtor and UAC. At
all times from the date hereof to the later to occur of (i) the Termination Date
or (ii) the date on which the Net Investment is zero, unless the Secured Parties
shall otherwise consent in writing:
(a) Financial Reporting. The Debtor and UAC
each will maintain, for itself and each Subsidiary, a system of
accounting established and administered in accordance with generally
accepted accounting principles, and UAC (or, in the case of the first
sentence of clauses (iii), (iv), and clause (ix), the Debtor) will
furnish to the Administrative Agent, the Collateral Agent and the
Insurer:
(i) Annual Reporting. Within ninety (90)
days after the close of each of its fiscal years, audited
financial state ments, prepared in accordance with generally
accepted accounting principles on a consolidated basis for
itself and its Subsidiaries, includ ing 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
Administrative Agent, the Collateral
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Agent, and the Insurer) 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 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.
(ii) Quarterly Reporting. Within forty-five
(45) days after the close of the first three quarterly periods
of each of its fiscal years, for itself and its Subsidiaries,
consolidated unaudited balance sheets as at the close of each
such period and consolidated re lated 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 its chief financial officer.
(iii) Compliance Certificate. Concurrently
with the delivery by UAC of the financial statements required
hereun der, a compliance certificate signed by its treasurer
or vice president stating that no Termination Event or
Potential Termination Event ex ists, or if any Termination
Event or Potential Termination Event exists, stating the
nature and status thereof. On and after the date of any change
in ownership of UAC contemplated by Section 5.2(i), together
with the financial statements hereunder, a compliance
certificate signed by the chief financial officer of UAC
showing the computation of, and showing compliance with, each
of the quarterly financial tests or conditions set forth in
Section 5.2(i).
(iv) Notice of Termination Events or Poten
tial Termination Events. As soon as possible and in any event
within two (2) days after the occurrence of each Termination
Event or each Potential Termination Event, a statement of the
treasurer or vice president of the Debtor setting forth
details of such Termination Event or Potential Termination
Event and the action which the Debtor pro poses to take with
respect thereto.
(v) Change in Credit and Collection Policy
and Debt Ratings. Within ten (10) days after the date any
material change in or amendment to the Credit and Collection
Policy is made, a
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copy of the Credit and Collection Policy then in effect
indicating such change or amendment.
(vi) Credit and Collection Policy. Upon
request by the Collateral Agent or any Secured Party, a
complete copy of the Credit and Collection Policy then in
effect.
(vii) Blue Book. Within forty-five (45) days
after the close of the quarterly period of each of its fiscal
years, a copy of the UAC Quarterly Statistical Update (a/k/a/
UAC's "blue book").
(viii) Green Book. Within forty-five (45)
days after the close of the quarterly period of each of its
fiscal years, a copy of the Union Acceptance Corporation Tier
II Quarterly Statistical Update (a/k/a UAC's "green book") or
the equivalent information in some other written form.
(ix) ERISA. Promptly after the filing or
receiving thereof, copies of all reports and notices with
respect to any Reportable Event (as defined in Article IV of
ERISA) which the Debtor, UAC or any ERISA Affiliate of the
Debtor or UAC files under ERISA with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation or the U.S.
Department of Labor or which the Debtor, UAC or any ERISA
Affiliates of the Debtor or UAC receives from the Internal
Revenue Service, the Pension Benefit Guaranty Corporation or
the U.S. Department of Labor.
(x) Other Information. Such other informa
tion (including non-financial information) as the
Administrative Agent, the Collateral Agent or any Secured
Party may from time to time rea sonably request.
(b) Conduct of Business. The Debtor will and UAC will (x)
carry on and conduct its business in substantially the same manner and in
substan tially the same or related fields of enterprise (including, in the case
of UAC, consumer finance activities) as it is presently conducted and do all
things necessary to remain duly incorporated, validly existing and in good
standing as a domestic corporation in its jurisdiction of incorporation and (y)
maintain all requisite authority to conduct its business in each jurisdiction in
which its business is conducted.
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(c) Compliance with Laws. The Debtor will and UAC will comply
in all material respects with all laws, rules, regulations, orders, writs, judg
ments, injunctions, decrees or awards to which it may be subject.
(d) Furnishing of Information and Inspection of Records. The
Debtor will furnish to the Collateral Agent and the Secured Parties from time to
time such information with respect to the Receivables as the Collateral Agent or
any Secured Party may reasonably request, including, without limitation,
listings identi fying the Obligor and the Outstanding Balance for each
Receivable. Upon at least two (2) Business Days prior notice, the Debtor and UAC
will during regular business hours permit the Collateral Agent or any Secured
Party, or their agents or representa tives, (i) to examine and make copies of
and abstracts from all Records and (ii) to visit the offices and properties of
the Debtor and UAC for the purpose of examining such Records, and to discuss
matters relating to Receivables or the Debtor's or UAC's performance hereunder
or under the Sale and Purchase Agreement with any of the officers, employees or
independent public accountants of the Debtor or UAC having knowledge of such
matters.
(e) Keeping of Records and Books of Account. The Debtor and
UAC (consistent with its role as Collection Agent) will maintain and implement
administrative and operating procedures (including, without limitation, an
ability to recreate records evidencing 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 (in cluding, without limitation, records adequate
to permit the daily identification of each new Receivable and all Collections of
and adjustments to each existing Receivable). The Debtor and UAC will give the
Collateral Agent, the Insurer, Moody's and S&P notice of any material change in
the administrative and operating procedures referred to in the previous
sentence.
(f) Performance and Compliance with Receivables and Contracts.
The Debtor and UAC will at their expense timely and fully perform and comply
with all material provisions, covenants and other promises required to be
observed by it under the Contracts related to the Receivables.
(g) Credit and Collection Policies. UAC will comply in all
material respects with the Credit and Collection Policy in regard to each
Receivable and the related Contract.
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(h) Collections. The Debtor and UAC shall instruct all
Obligors to cause all Collections to be deposited directly to a Lock-Box
Account.
(i) Collections Received. The Debtor and UAC shall hold in
trust, and deposit, immediately, but in any event not later than two (2)
Business Days of its receipt thereof, to a Lock-Box Account all Collections
received from time to time by them.
(j) Separate Business. The Debtor shall at all times (a) to
the extent the Debtor's office is located in the offices 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 liabil ities, 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 mainte nance 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
Affil iate 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.
(k) Corporate Documents. The Debtor shall only amend, alter,
change or repeal Articles III, IV, V, VI, and XI of its Certificate of Incorpora
tion as in effect on the date hereof with the prior written consent of the
Administra tive Agent.
(l) Year 2000 Compliance. Each of the Debtor and UAC will
promptly notify the Administrative Agent and the Insurer in the event the Debtor
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or UAC discovers or determines that any computer application (including those of
its suppliers, vendors and customers) (i) that is necessary for the origination,
collection, management, or servicing of the Receivables will not be Year 2000
Compliant on or before June 30, 1999 and thereafter, (ii) that is otherwise
material to its or any of its Subsidiaries' business and operations will not be
Year 2000 Compliant on a timely basis, except to the extent that, in the case of
(ii) above, such failure could not reasonably be expected (x) to have a material
adverse effect on the Debtor or UAC or on the transaction documented under this
Agreement, or (y) to result in a Termination Event, or (iii) notwithstanding the
foregoing, that is necessary for "mission critical" operations will not be Year
2000 Compliant on or before June 30, 1999.
Further, each of the Debtor and UAC will deliver
simultaneously with any quarterly or annual financial statements or reports to
be delivered under the Agreement, a letter, report, certificate or statement
signed by the appropriate officer that no material event, problems or conditions
have occurred which in the opinion of management would (i) prevent or materially
delay the Debtor's or UAC's plan to become Year 2000 Compliant or (ii) cause or
be likely to cause the Debtor's or UAC's representations and warranties with
respect to being or becoming Year 2000 Compli ant to no longer be true.
SECTION 5.2 Negative Covenants of Debtor and UAC. During the
term of this Agreement, unless the Secured Parties shall otherwise consent in
writing:
(a) No Sales, Liens, Etc. Except as otherwise provided herein,
neither the Debtor nor UAC will sell, assign (by operation of law or other wise)
or otherwise dispose of, or create or suffer to exist any Adverse Claim upon (or
the filing of any financing statement) or with respect to, any Receivable or
related Contract, or upon or with respect to any account which concentrates in a
Lock-Box Bank to which any Collections of any Receivable are sent, or assign any
right to re ceive income in respect thereof.
(b) No Extension or Amendment of Receivables. Except as
otherwise permitted in Section 6.2, neither the Debtor nor UAC will extend,
amend or otherwise modify the terms of any Receivable, or amend, modify or waive
any term or condition of any Contract related thereto.
(c) No Amendment of Sale and Purchase Agreement. The Debtor
shall not amend or otherwise modify the Sale and Purchase Agreement with out the
prior written consent of the Secured Parties.
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(d) No Change in Business or Credit and Collection Policy.
Neither the Debtor nor UAC shall, without the prior written consent of the
Agent, make any change in the character of its business or in the Credit and
Collection Policy, which change would, in either case (i) impair the
collectibility of any Receiv able or (ii) change the write-off policy in effect
as of the Closing Date, with respect to the Receivables and the Contracts.
(e) Sale of Assets, Etc. Neither the Debtor nor UAC will sell,
lease or transfer all or substantially all of its assets to any other person,
provided, however, that no such sale shall be deemed to occur solely as a result
of a Take-Out or solely as a result of the sale of Contracts and related
Receivables which are released to the Debtor pursuant to Section 2.15(c) and
2.15(d).
(f) Change in Payment Instructions to Obligors. Neither the
Debtor nor UAC nor the Collection Agent will add or terminate any bank as a
Lock-Box Bank or any account as a Lock-Box Account to or from those listed in
Exhibit B hereto or make any change in its instructions to Obligors regarding
pay ments to be made to any Lock-Box Account, unless (i) such instructions are
to deposit such payments to another existing Lock-Box Account or (ii) the
Collateral Agent and the Administrative Agent shall have received written notice
of such addi tion, termination or change at least 30 days prior thereto.
(g) Change of Name, Etc. The Debtor will not change its name,
identity or structure or its chief executive office, unless at least 30 days
prior to the effective date of any such change the Debtor delivers to the
Collateral Agent UCC financing statements, executed by the Debtor necessary to
reflect such change and to continue the perfection of the Collateral Agent's
security interest in the Receivables.
(h) No Mergers, Etc. Neither the Debtor nor UAC will (i)
consolidate or merge with or into any other Person, or (ii) sell, lease or
transfer all or substantially all of its assets to any other person, unless the
Debtor or UAC, respec tively, is the surviving entity.
(i) Sale Treatment. Neither the Debtor nor UAC will account
for (including for accounting and tax purposes), or otherwise treat, the
transactions contemplated by the Sale and Purchase Agreement in any manner other
than as a sale of Receivables by UAC to the Debtor.
(j) Other Debt. Except as provided for herein, the Debtor will
not create, incur, assume or suffer to exist any indebtedness whether current or
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funded, or any other liability other than (i) indebtedness of the Debtor
representing fees, expenses and indemnities arising hereunder or under the Sale
and Purchase Agreement for the purchase price of the Receivables under the Sale
and Purchase Agreement, and (ii) other indebtedness incurred in the ordinary
course of its business in an amount not to exceed $9,500 (except for
indebtedness incurred in connection with the repurchase of Receivables from
UARC) at any time outstanding.
SECTION 5.3 Hedging Arrangements. The Collection Agent shall
(i) at or prior to the time of any Funding, provide to the Administrative Agent,
the Collateral Agent and the Insurer an officer's certificate stating that the
Collection Agent has Hedging Arrangements in place satisfying the conditions of
this Section 5.3 as set forth below and after January 1, 1999, qualifies as an
Acceptable Hedging Arrangement (as defined in the Insurance Agreement), and (ii)
in connection with any Settlement Statement provided hereunder, provide an
executed copy of all existing Hedging Arrangements, which Hedging Arrangements
shall be satisfactory to the Administrative Agent, the Collateral Agent and the
Insurer, and with respect to which at any time after the occurrence of a
Termination Event the Debtor shall be the bene ficiary, in respect of an
aggregate notional amount at least equal to the Net Invest ment. The form and
structure and counterparty to each Hedging Arrangement shall be acceptable to
the Administrative Agent, the Collateral Agent and the Insurer and must be in
full force and effect at all times during which the Net Investment is greater
than zero (however such required amount may be reduced for the period of time be
tween the pricing and the funding of a structured financing utilizing
receivables released to the Debtor pursuant to Section 2.15 by the aggregate
Outstanding Balance of such Receivables).
ARTICLE VI
ADMINISTRATION AND COLLECTIONS
SECTION 6.1 Appointment of Collection Agent. The servicing,
administering and collection of the Receivables shall be conducted by such
Person (the "Collection Agent") so designated from time to time in accordance
with this Section 6.1. Until the Collateral Agent gives notice to UAC of the
designation of a new Collection Agent, UAC is hereby designated as, and hereby
agrees to perform the duties and obligations of, the Collection Agent pursuant
to the terms hereof. The Collateral Agent, upon the written request of the
Insurer shall, or may, with the consent of the Insurer, upon the occurrence of a
Collection Agent Default or any other Termination Event, designate as Collection
Agent any Person (including itself)
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acceptable to the Insurer to succeed UAC or any successor Collection Agent, on
the condition in each case that any such Person so designated shall agree to
perform the duties and obligations of the Collection Agent pursuant to the terms
hereof, but in any event the Company shall notify Moody's and S&P of any
Collection Agent Default. The Company may notify any Obligor of its security
interest in the Contracts and the related Receivables.
SECTION 6.2 Duties of Collection Agent.
(a) The Collection Agent 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 and
Collection Policy. Each of the Debtor, the Company, each Bank Investor and the
Insurer hereby appoints as its Agent the Collection Agent, from time to time
designated pursuant to Section 6.1, to enforce its respective rights and
interests in and under the Receivables, the Related Security and the Contracts.
The Collection Agent shall remit daily, within two (2) Business Days of receipt,
to the Collection Account all Collections received with respect to any
Receivables. The Collection Agent shall segregate and deposit to the Agent's,
the Company's, the Bank Investor's or the Insurer's account, as applicable, such
Person's allocable share of Collections of Receivables when required pursuant to
Article II hereof. So long as no Termination Event shall have occurred and be
con tinuing, the Collection Agent may, unless otherwise required by law, in
accordance with the Credit and Collection Policy, extend the maturity of
Receivables as the Collection Agent may determine to be appropriate to maximize
Collections thereof. The Debtor shall hold in trust for the Secured Parties in
accordance with their security interest, all Records which evidence or relate to
Receivables or Related Security. In the event that a successor Collection Agent
is appointed by the Company, upon the direction or with the consent of the
Insurer, the Debtor shall deliver to the Collection Agent and the Collection
Agent shall hold in trust for the Debtor and the Secured Parties in accordance
with their respective interests, all Records which evidence or relate to
Receivables or Related Security. Notwithstanding anything to the contrary
contained herein, the Collateral Agent shall have the absolute and unlimited
right to direct the Collection Agent (whether the Collection Agent is the Debtor
or any other Person) to commence or settle any legal action to enforce
collection of any Receiv able or to foreclose upon or repossess any Related
Security.
(b) The Collection Agent shall, as soon as practicable fol
lowing receipt thereof, turn over to the Debtor any collections of any
indebtedness of any Obligor which is not a Receivable. If UAC or any affiliate
thereof is not the Col lection Agent, the Collection Agent, by giving three (3)
Business Days' prior written notice to the Collateral Agent, the Agent and the
Insurer, 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 110%
of the reasonable and appropriate out-of-pocket costs and expenses of such
Collection Agent incurred in connection with the perfor mance of its obligations
hereunder as documented to the reasonable satisfaction of the Collateral Agent,
the Agent and the Insurer. The Collection Agent, if other than the Debtor, 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.
(c) On or before ninety (90) days after the end of each fiscal
year of the Collection Agent, beginning with the fiscal year ending June 30,
1999, the Collection Agent shall cause a firm of independent public accountants
(who may also render other services to the Collection Agent or the Debtor) to
furnish a report on applying agreed upon procedures to the Collateral Agent to
the effect that they have (i) compared the information contained in the
Settlement Statements and Withdrawal Notices delivered during such fiscal year,
based on a sample size provided by the Agent, with the information contained in
the Contracts and the Collection Agent's records and computer systems for such
period, (ii) verified the Net Receiv ables Balance as of the end of each
Settlement Period during such fiscal year, and (iii) verified that a sample of
Receivables treated by the Collection Agent 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 Collection Agent's records and computer system used in servic ing 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 report.
(d) Notwithstanding anything to the contrary contained in this
Article VI, the Collection Agent, if not the Debtor, shall have no obligation to
collect, enforce or take any other action described in this Article VI with
respect to any Receivable that is not included in the Collateral other than to
deliver to the Debtor the Collections and documents with respect to any such
Receivable as de scribed in Section 6.2(b).
(e) In the event that a Take-Out does not occur at least once
in any period of sixteen (16) consecutive calendar weeks, the Collateral Agent,
the Company or the Insurer shall have the right to conduct (or to cause its
accoun tants or other third parties to conduct) an audit of the Collection
Agent's records (including all Records and Contracts) and servicing, reporting
and collection proce dures.
SECTION 6.3 Collection Agent Defaults. The occurrence of any
one or more of the following events shall constitute a Collection Agent Default:
(a) any representation, warranty, certification or statement
made by the Collection Agent (including UAC, if it is the Collection Agent) in
this Agreement or in any other document delivered pursuant hereto shall prove to
have been incorrect in any material respect when made or deemed made; or
(b) the Collection Agent shall default in the performance of
any payment, covenant or undertaking hereunder; or
(c) any Event of Bankruptcy shall occur with respect to the
Collection Agent or any Subsidiary of Collection Agent.
SECTION 6.4 Rights After Designation of New Collection Agent.
At any time following the designation of a Collection Agent (other than UAC)
pursuant to Section 6.1:
(i) The Agent or the Insurer may direct that
payment of all amounts payable under any Receivable be made
directly to the Collateral Agent and the Insurer, as
applicable, or their respec tive designees.
(ii) The Debtor shall, at the Agent's or the
Insurer's request and at the Debtor's expense, give notice of
the Collat eral 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 Agent's or
the Insurer's request, (A) assemble all of the Records, and
shall make the same available to the Collateral Agent and the
Insurer at a place se lected by the Collateral Agent and the
Insurer or their respective designees, and (B) segregate all
cash, checks and other instruments received by it from time to
time constituting Collections of Receivables in a manner
acceptable to the Collateral Agent and the Insurer and shall,
promptly upon receipt, remit all such cash, checks and instru
ments, 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 Debtor necessary or desirable, in
the determination of the Collateral Agent, to collect all
amounts due under any and all Receiv ables and Related
Security with respect thereto, including, without limitation,
endorsing the Debtor's name on checks and other instru ments
representing Collections and enforcing such Receivables and
the related Contracts.
SECTION 6.5 Responsibilities of the Debtor. Anything herein to
the contrary notwithstanding, the Debtor shall (i) perform all of its
obligations under the Contracts related to the Receivables to the same extent as
if interests in such Receiv ables had not been pledged 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 or related
Contracts, nor shall any of them be obligated to perform any of the obliga tions
of the Debtor thereunder.
ARTICLE VII
TERMINATION EVENTS
SECTION 7.1 Termination Events. The occurrence of any one or
more of the following events shall constitute a Termination Event:
(a) any representation, warranty,
certification or statement made by the Debtor or UAC in this
Agreement, the Sale and Purchase Agreement or in any other
Transaction Document shall prove to have been incorrect in any
material respect when made or deemed made;
(b) the Debtor or UAC shall default in the
performance of (i) any payment obligation hereunder or under
the Sale and Purchase Agreement or (ii) any other covenant or
undertaking hereunder or under the Sale and Purchase
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Agreement which in the case of this clause (ii) shall remain
unremedied for five (5) days; or
(c) any Event of Bankruptcy shall occur with
respect to the Debtor or the Collection Agent or any
Subsidiary of either of them; or
(d) a Collection Agent Default shall have
occurred or for any reason UAC is not the Collection Agent; or
(e) the Collection Agent shall at any time
not be in compliance with the requirements of Section 5.3; or
(f) the Collateral Agent shall, for any
reason, fail to have a valid and perfected first priority
security interest in the Receivables and Related Security and
Collections with respect thereto, free and clear of any
Adverse Claim; or
(g) either of the Debtor or the Collection
Agent shall con solidate or merge with or into any other
Person whereby it is not the surviving entity; or
(h) there shall have occurred any material
adverse change in the operations of the Debtor or the
Collection Agent since the Closing Date, or any other event
shall have occurred which materially affects the Debtor's or
the Collection Agent's ability to either collect the
Receivables or to perform under this Agreement, the Sale and
Purchase Agreement or any other Transaction Document; or
(i) the Liquidity Provider or the Credit
Support Provider shall have given notice that an event of
default has occurred and is continuing under its agreements
with the Company; or
(j) the Commercial Paper issued by the
Company shall not be rated at least "A-2" by S&P and at least
"P-2" by Moody's; or
(k) (i) the Net Investment minus amounts on
deposit in the Prefunding Account shall at any time exceed the
Net Receivables Balance, or (ii) the Net Asset Test is not
satisfied; or
(l) a Take-Out shall not occur at least once
in any period of six consecutive calendar months; or
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(m) the Net Yield as of any Determination
Date is less than 2.00%;
(n) a draw is made under the Policy or an
Insurer Default has occurred and is continuing;
(o) the Insurer shall have given notice that
an event of default has occurred and is continuing under the
Insurance Agreement;
(p) the term of the Policy is not of the
term required by the Company (which term shall be at least
equal to the term of the latest maturing Receivable in the
facility plus 90 days); and
(q) the sum of the (i) amount on deposit in
the Reserve Account and (ii) the amount available pursuant to
any Reserve Account Guaranty is less than the Required Reserve
Account Amount for two (2) consecutive Business Days.
SECTION 7.2 Termination. If a Termination Event occurs
hereunder and is continuing, the Collateral Agent, at the written direction of
the Insurer shall, or the Collateral Agent may, with the consent of the Insurer,
in either case by notice to the Debtor, (i) if UAC is the Collection Agent at
the time, terminate UAC as Collec tion Agent hereunder, or (ii) declare any date
as the date upon which the Note shall become due and payable, and, subject to
the limitations on recourse set forth in Section 2.1 hereof and Section 6.8 of
the Note Purchase Agreement, the Collateral Agent shall have all of the rights
and remedies provided to a secured creditor or a purchaser of chattel paper
under the Relevant UCC by applicable law in respect thereto (including, but not
limited to, initiating foreclosure and/or liquidation proceed ings with respect
to all of the Receivables and Contracts or any portion thereof). In addition,
the Agent shall have the right to designate the Base Rate plus, if an Insurer
Default shall have occurred, 2%, to be applicable to the Net Investment (except
in the case of a Termination Event described under clauses (i) and (j) above, in
which case the Adjusted LIBOR Rate or the Base Rate, as applicable, shall be
applicable), and the Company shall have the right to cease issuing Commercial
Paper in order to maintain the Net Investment and may assign to the Bank
Investors all of its right, title and interest hereunder.
No waiver of any Termination Event or Potential Termination
Event shall be effective without the prior written consent of the Insurer.
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If the Note is declared due and payable in accordance with
this Section 7.2, the Collateral Agent shall, at the direction of the Insurer,
and may, with the consent of the Insurer, do any one or more of the following:
(i) take all necessary action to foreclose
upon the Collateral;
(ii) retain in satisfaction of any amounts
owing from 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;
(iii) subject to the limitations on recourse
set forth in Section 2.1 hereof and Section 6.8 of the Note Purchase
Agreement, pursue any available remedy by proceeding 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
or 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 contained in this Agreement to be observed or performed by
the Debtor; or
(iv) subject to the limitations on recourse
set forth in Section 2.1 hereof and Section 6.8 of the Note Purchase
Agreement, exercise any remedies of a secured party under the Uni form
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
The Debtor and the Collection Agent agree that they shall take
all actions (including reliening of the certificates of title or other title
documents in the name of the Collateral Agent on behalf of the Secured Parties)
and execute all documents as may be necessary or requested by the Collateral
Agent to perfect its interest in the Collateral, including, without limitation,
to perfect the Collateral Agent's security interest in the Financed Vehicles.
The Debtor and UAC hereby grant
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to the Collateral Agent, on behalf of the Secured Parties, a power of attorney
to act in their place and stead to take all actions as may be necessary to
perfect the Collateral Agent's security interest in the Financed Vehicles. Each
of UAC and the Debtor acknowledge that such power of attorney is irrevocable and
is coupled with an interest. In connection with any sale of the Receivables by
the Collateral Agent after the occurrence of a Termination Event, the Debtor
shall have, for a period of five (5) Business Days after notice of such proposed
sale from or on behalf of the Secured Parties, the right to repurchase the
Receivables and related Contracts for a price, payable in immediately available
funds, in an amount equal to the Aggregate Unpaids.
SECTION 7.3 Proceeds. The proceeds from the sale, disposition
or liquidation of the Receivables pursuant to Section 7.2 above shall be treated
as Collections on the Receivables and shall be allocated and deposited in
accordance with the provisions governing allocations set forth herein.
ARTICLE VIII
THE COLLATERAL AGENT
SECTION 8.1 Duties of the Collateral Agent. The Secured
Parties hereby appoint NationsBank to act solely on their behalf as Collateral
Agent hereun der, and NationsBank hereby accepts such appointment. The
Collateral Agent, both prior to the occurrence of a Termination Event hereunder
and after a Termination 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 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
Collection Agent 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 to gether 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 provi sions of Article II hereof.
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The Collateral Agent shall only resign if it shall (i) become
incapable of acting as Collateral Agent in accordance with the terms of this
Agreement, (ii) be adjudicated insolvent or bankrupt or otherwise become subject
to any bankruptcy, insolvency, reorganization or liquidation proceeding, (iii)
be no longer qualified as the Collateral Agent as such term is defined in the
agreement governing its responsibility as Collateral Agent or otherwise be
subject to replacement pursuant to or such agreement governing its
responsibility as Collateral Agent or (iv) materially breach any of the
provisions of this Agreement or provided, further, that, without the consent of
the Agent and the Insurer, such resignation shall not be effective until a
successor Collateral Agent acceptable to the Insurer shall have accepted
appointment as Collat eral Agent hereunder and shall have agreed to be bound by
the terms of this Agree ment.
Except as otherwise provided herein, the Collateral Agent
shall not resign from the obligations and duties hereby imposed on it except
upon determina tion 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 Collateral Agent
and the Secured Parties. 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 8.2. No resignation of the Collateral Agent shall become effective until
a suc cessor Collateral Agent approved by the Agent and the Insurer and the
successor Collateral Agent shall have assumed the responsibilities and
obligations of the Collat eral Agent hereunder.
This Agreement shall be administered in the Corporate Trust
Office of the Collateral Agent. The Collateral Agent shall maintain fidelity
bond coverage insuring against losses through wrongdoing of its officers and
employees who are involved in the administration of Collections covering such
actions and in such amounts as the Collateral Agent believes to be reasonable in
light of industry stan dards from time to time.
SECTION 8.2 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 (i) securities
transaction charges not waived due to the Collateral Agent's receipt of a
payment from a financial institution with respect to certain Eligible
Investments, as specified by the Debtor and
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(ii) the compensation and expenses of its counsel and agents) pursuant to a
separate letter agreement between the Collateral Agent and the Debtor. All such
amounts shall be payable from funds available therefor in accordance with
Section 2.3(a)(iii) hereof with any increase in such amounts to be approved by
the Insurer. Subject to the terms of such letter agreement, the Collateral Agent
shall be required to pay the ex penses 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 from a failure to comply therewith).
(a) 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. All such amounts shall be payable in
accordance with Section 2.3(a)(iii) hereof. The provisions of this Section 8.2
shall survive the termination of this Agreement.
SECTION 8.3 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 accepting their interest in the Receivables.
(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 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 and any other Transactions Documents to which the
Collateral Agent is a party have been duly authorized by the Collateral Agent by
all necessary corporate action on the part of the Collateral Agent.
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(c) Binding Obligation. This Agreement and the other
Transaction Documents to which the Collateral Agent is a party each constitutes
a legal, valid and binding obligation of the Collateral Agent, enforceable in
accordance with their respective 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 delivery by the Collateral
Agent of this Agreement and the other Transaction Documents to which the
Collateral Agent is a party, and the performance of the transactions
contemplated by this Agreement and the other Transaction Documents and the
fulfillment of the terms hereof and thereof 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 8.4 Liability of the Collateral Agent.
(a) The Collateral Agent shall be liable in accordance here
with 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.
(b) The Collateral Agent shall not be liable for an error of
judgment made in good faith by a Trust Officer, 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.
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(d) The Collateral Agent shall not be charged with knowl edge
of any Termination Event unless a Trust Officer assigned to the Collateral
Agent's Corporate Trust Office obtains actual knowledge of such event or the
Collat eral Agent receives written notice of such event from the Debtor, the
Company, any Bank Investor, the Insurer or the Agent, as the case may be.
(e) Without limiting the generality of this Section 8.4, the
Collateral Agent shall have no duty (i) to see to any recording, filing or
depositing of this Agreement or any other Transaction Document or any financing
statement or continuation statement evidencing a security interest in the
Receivables or the Financed Vehicles, 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 Financed Vehicles 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 Collection Agent 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 Financed Vehicles at any time or ascertain or
inquire as to the performance or observance of any of the Debtor's or the
Collection Agent's repre sentations, warranties or covenants or the Collection
Agent's duties and obligations as Collection Agent and as custodian of books,
records, files and computer records relating to the Receivables.
(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 Collection Agent
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
Settle ment Statement, certificate of auditors, or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order,
appraisal, bond or other paper or
72
<PAGE>
document reasonably believed by it to be genuine and to have been signed or pre
sented 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 Agree ment, at the request, order or direction of the Agent pursuant to
the provisions of this Agreement, unless the Agent 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 (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 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 and before
the Collateral Agent has received notice of such Termination Event and after the
waiver of any Termination 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.
73
<PAGE>
(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 respon sible for any misconduct or negligence of any such Agent or custodian
appointed with due care by it hereunder.
SECTION 8.5 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:
(i) the corporation formed by such consoli dation 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
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 8.5 and that all conditions precedent herein provided
for relating to such transaction have been complied with.
SECTION 8.6 Limitation on Liability of the Collateral Agent
and Others. The directors, officers, employees or agents of the Collateral Agent
shall not be under any liability to the Agent, any Secured Party or any other
Person hereunder or pursuant to any document delivered hereunder, it being
expressly understood that all such liability is expressly waived and released as
a condition of, and as consider ation for, the execution of this Agreement;
provided, however, that this provision shall not protect the directors,
officers, employees and agents of the Collateral Agent against any liability
which would otherwise be imposed by reason of willful misfea sance, bad faith or
gross negligence in the performance of duties or by reason of reck less
disregard of obligations and duties hereunder. Except as provided in Section
8.4, the Collateral Agent shall not be under any liability to any Secured Party
or any other
74
<PAGE>
Person for any action taken or for refraining from the taking of any action in
its capacity as Collateral Agent pursuant to this Agreement whether arising from
express or implied duties under this Agreement; provided, however, that this
provision shall not protect the Collateral Agent against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the perfor mance of duties or by reason of reckless disregard of
obligations and duties hereun der. The Collateral Agent may rely in good faith
on any document of any kind prima facie properly executed and submitted by any
Person respecting any matters arising hereunder. The Collateral Agent shall not
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its duties to administer the Collections and the Collection
Account in accordance with this Agreement which in its reasonable opinion may
involve it in any expense or liability.
SECTION 8.7 Indemnification of the Secured Parties. The
Collateral Agent shall indemnify and hold harmless the Agent and the Secured
Parties from and against any loss, liability, expense, damage or injury suffered
or sustained by reason of willful misfeasance, bad faith, or gross negligence in
the performance of the duties of the Collateral Agent or by reason of reckless
disregard of obligations and duties of the Collateral Agent hereunder or by
reason of the acts, omissions or alleged acts or omissions of the Collateral
Agent pursuant to this Agreement. The provisions of this indemnity shall run
directly to and be enforceable by an injured party subject to the limitations
hereof.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Term of Agreement. This Agreement shall terminate
following the Termination Date when the Net Investment has been reduced to zero,
all accrued Carrying Costs have been paid in full and all other Aggregate
Unpaids have been paid in full; provided, however, that (i) the rights and
remedies of the Collateral Agent and the Secured Parties with respect to any
representation and warranty made or deemed to be made by the Debtor or UAC
pursuant to this Agree ment, (ii) the indemnification and payment provisions of
Article VIII, and (iii) the agreement set forth in Section 9.9, shall be
continuing and shall survive any termina tion of this Agreement.
75
<PAGE>
SECTION 9.2 Waivers; Amendments. (a) No failure or delay on
the part of the Collateral Agent or any of the Secured Parties in exercising any
power, right or remedy under this Agreement shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power, right or remedy
preclude any other further exercise thereof or the exercise of any other power,
right or remedy. The rights and remedies herein provided shall be cumulative and
nonexclusive of any rights or remedies provided by law.
(b) Any provision of this Agreement may be amended or waived
if, but only if, such amendment is in writing and is signed by the Debtor, the
Collection Agent, the Insurer and the Majority Investors (and, if Article VI or
the rights or duties of the Collateral Agent are affected thereby, by the
Collateral Agent); provided, that no such amendment or waiver shall, unless
signed by each Bank Investor directly affected thereby, (i) increase the
Commitment of a Bank Investor, (ii) reduce the Net Investment or rate of
interest to accrue thereon or any fees or other amounts payable hereunder, (iii)
postpone any date fixed for the payment of any scheduled distribution in respect
of the Net Investment or interest with respect thereto or any fees or other
amounts payable hereunder or for termination of any Commitment, (iv) change the
percentage of the Commitments or the number of Bank Investors, which shall be
required for the Bank Investors or any of them to take any action under this
Section or any other provision of this Agreement, (v) extend or permit the
extension of the Commitment Termination Date, (vi) 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, (vii) increase the Servicing Fee to
a percentage greater than 1.0% per annum of the aggregate Outstanding Balance of
the Receivables as of the first day of the related Settlement Period, (viii)
modify any provisions of this Agreement or the Sale and Purchase Agreement
relating to the timing of payments required to be made by the Issuer or UAC or
the application of the proceeds of such payments, or (ix) provide for the
appointment of any Person (other than the Agent) as a successor Collection
Agent. In the event the Collateral Agent requests the Com pany's or a Bank
Investor's consent pursuant to the foregoing provisions and the Collateral 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 hereunder) shall be disregarded in determining whether the
Collateral Agent shall have obtained sufficient consent hereunder.
76
<PAGE>
SECTION 9.3 Notices. Except as provided below, all communica
tions and notices provided for hereunder shall be in writing (including bank
wire, telex, telecopy or electronic facsimile transmission or similar writing)
and shall be given to the other party at its address or telecopy number set
forth below or at such other address or telecopy number as such party may
hereafter specify for the purposes of notice to such party. Each such notice or
other communication shall be effective (i) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section and
confirmation is received, (ii) if given by mail 3 Business Days following such
posting, or (iii) if given by any other shall mean, when received at the address
specified in this Section. Notice to Moody's and S&P will be provided for all
waivers, consents, approvals, amendments and extensions with respect to or under
the Transaction Documents. Each of the Debtor and the Collection Agent agrees to
deliver promptly to the Collateral Agent, for distribution to each of the
Secured Parties, a written confirmation of each telephonic notice signed by an
authorized officer of Debtor or the Collection Agent, as applicable. However,
the ab sence of such confirmation shall not affect the validity of such notice.
If the written confirmation differs in any material respect from the action
taken by the Company, the records of the Company shall govern absent manifest
error.
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 10218
Telephone: (212) 236-7200
Telecopy: (212) 236-7584
Payment Information:
Bankers Trust Company
ABA# 021001033
Account# 01419647
Reference Enterprise Funding - UAC
(with a copy to the Administrative Agent)
If to the Debtor:
UNION ACCEPTANCE FUNDING CORPORATION
9240 Bonita Beach Road, Suite 1109-C
77
<PAGE>
Bonita Springs, Florida 34135-4250
Attn: Leeanne W. Graziani, Vice President
Telephone: (941) 948-1852
Telecopy: (941) 948-1855
Payment Information:
Union Federal Savings Bank
of Indianapolis
ABA #: 2740-7048-4
Account #: 590070304
Reference: Nations Line
If to UAC:
UNION ACCEPTANCE CORPORATION
250 North Shadeland Avenue
Indianapolis, Indiana 46219
Attn: Ashley Vukovits, Finance Officer
Telephone: (317) 231-2717
Telecopy: (317) 231-7926
If to the Collateral Agent:
NATIONSBANK, N.A.
NationsBank Corporate Center--10th Floor
Charlotte, North Carolina 28255
Attention: Michelle M. Heath--
Investment Banking
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
If to the Administrative Agent:
NATIONSBANK, N.A.
NationsBank Corporate Center--10th Floor
Charlotte, North Carolina 28255
Attention: Michelle M. Heath--
Investment Banking
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
78
<PAGE>
If the to Insurer:
MBIA INSURANCE CORPORATION
113 King Street
Armonk, New York 10504
Attn: Insured Portfolio Management - SF
Telephone: (914) 273-4949
Telecopy: (914) 765-3163
Payment Information: MBIA Insurance Corporation
ABA #: 021-000-021
Account #: 910-2-721728
Reference: UAFC Enterprise Auto WH
If the to Agent:
NATIONSBANK, N.A.
NationsBank Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28255
NC1-007-10-07
Telephone: (704) 386-7922
Telecopy: (704) 388-9169
Payment Information: NationsBank, N.A.
ABA #: 053000196
Account #: 1093601650000
Reference: UAC
If to S&P:
STANDARD & POOR'S RATINGS SERVICES
25 Broadway
New York, New York 10004-1064
Attention: Michael Bilello
Telephone: (212) 208-5531
Telecopy: (212) 208-0030
If to Moody's:
MOODY'S INVESTORS SERVICE
79
<PAGE>
99 Church Street, 4th Floor
New York, New York 10007
Attention: Marc Cohen
Telephone: (212) 553-4898
Telecopy: (212) 553-3856
SECTION 9.4 Governing Law; Submission to Jurisdiction;
Integration.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York. Each of the Debtor, UAC and
the Collection Agent hereby submits to the nonexclusive jurisdiction of the
United States District Court for the Southern District of New York and of any
New York State court sitting in The City of New York for purposes of all legal
proceedings arising out of or relating to this agreement or the transactions
contemplated hereby. Each of the Debtor, UAC and the Collection Agent hereby
irrevocably waives, to the fullest extent it may effectively do so, any
objection which it may now or hereafter have to the laying of the venue of any
such proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum. Nothing in
this Section 9.4 shall affect the right of the Company to bring any action or
proceeding against the Debtor, UAC or the Collection Agent or their respective
properties in the courts of other jurisdictions.
(b) This Agreement contains the final and complete integration
of all prior expressions by the parties hereto with respect to the subject
matter hereof and shall constitute the entire Agreement between the parties
hereto with respect to the subject matter hereof superseding all prior oral or
written understandings.
SECTION 9.5 Severability; Counterparts. This Agreement 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
Agreement. 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 unen forceable such provision in any
other jurisdiction.
80
<PAGE>
SECTION 9.6 Successors and Assigns.
(a) This Agreement shall be binding on the parties hereto and
their respective successors and assigns; provided, however, that neither the
Debtor, UAC nor the Collection Agent may assign any of its rights or delegate
any of its duties hereunder without the prior written consent of the Collateral
Agent and the Insurer. No provision of this Agreement shall in any manner
restrict the ability of the Collateral Agent to assign, participate, grant
security interests in, or otherwise transfer any portion of the Collateral.
(b) Each of the Debtor and UAC hereby agrees and con sents to
the assignment by the Company from time to time of all or any part of its rights
under, interest in and title to this Agreement and the Note to any Liquidity Pro
vider.
SECTION 9.7 Waiver of Confidentiality. Each of the Debtor and
UAC hereby consents to the disclosure of any non-public information with respect
to it received by the Company or the Administrative Agent to any of the Company,
any nationally recognized rating agency rating the Company's commercial paper,
the Administrative Agent, the Insurer, the Liquidity Provider or the Credit
Support Provider in relation to this Agreement.
SECTION 9.8 Confidentiality Agreement. Each of the Debtor and
UAC hereby agrees that it will not disclose the contents of this Agreement or
any other proprietary or confidential information of any of the Secured Parties,
the Collateral Agent, the Administrative Agent, the Liquidity Provider or the
Credit Support Provider to any other Person except (i) its auditors and
attorneys, employees or financial advisors (other than any commercial bank) and
any nationally recognized rating agency, provided such auditors, attorneys,
employees, financial advisors or rating agencies are informed of the highly
confidential nature of such information or (ii) as otherwise required by
applicable law, under the Securities Exchange Act of 1934, as amended, in
connection with an offering of securities issued by the Debtor or an Affiliate
thereof, or order of a court of competent jurisdiction (provided, however, that
no such disclosure shall occur without the prior review by the Administrative
Agent of the material to be disclosed).
81
<PAGE>
SECTION 9.9 No Bankruptcy Petition Against the Company. Each
of the Debtor, UAC, the Insurer and the Collection Agent hereby covenants and
agrees that, prior to the date which is one year and one day after the payment
in full of all outstanding Commercial Paper or other indebtedness of the Company
(or, if the Net Investment (or any portion thereof) has been assigned to a
Conduit Assignee, one year and one day after the payment in full of all
Commercial Paper issued by such Conduit Assignee), it will not institute
against, or join any other Person in instituting against, the Company any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings
or other similar proceeding under the laws of the United States or any state of
the United States.
SECTION 9.10 No Recourse Against Stockholders, Officers or
Directors. Notwithstanding anything to the contrary contained in this Agreement,
the obligations of the Company under this Agreement and all other Transaction
Docu ments are solely the corporate obligations of the Company and shall be
payable solely from the assets of the Company in excess of funds necessary to
pay matured and maturing Commercial Paper. No recourse under any obligation,
covenant or agree ment of the Company contained in this Agreement shall be had
against Merrill Lynch Money Markets Inc. (or any affiliate thereof), or any
stockholder, officer or director of the Company, as such, by the enforcement of
any assessment or by any legal or equitable proceeding, by virtue of any statute
or otherwise; it being expressly agreed and understood that this Agreement is
solely a corporate obligation of the Company, and that no personal liability
whatsoever shall attach to or be incurred by Merrill Lynch Money Markets Inc.
(or any affiliate thereof), or the stockholders, officers or directors of the
Company, as such, or any of them, under or by reason of any of the obligations,
covenants or agreements of the Company contained in this Agreement, or implied
therefrom, and that any and all personal liability for breaches by the Company
of any of such obligations, covenants or agreements, either at common law or at
equity, or by statute or constitution, of Merrill Lynch Money Markets Inc. (or
any affiliate thereof) and every such stockholder, officer or director of the
Company is hereby expressly waived as a condition of and consideration for the
execution of this Agreement.
SECTION 9.11 Further Assurances. The Debtor agrees to do such
further acts and things and to execute and deliver to the Secured Parties, the
Adminis trative Agent or the Collateral Agent such additional assignments,
agreements, powers and instruments as are required by the Collateral Agent or
the Insurer to carry into effect the purposes of this Agreement or to better
assure and confirm unto the Collateral Agent or the Insurer its rights, powers
and remedies hereunder.
82
<PAGE>
SECTION 9.12 Exercise of Rights by Insurer. All rights granted
to the Insurer pursuant to this Agreement shall terminate during the pendency of
a payment default by the Insurer under the Policy or during the pendency of a
Surety Insolvency (as defined in the Insurance Agreement as in effect on the
date hereof) and during such time the Insurer's rights may be exercised by the
Collateral Agent or Company, provided, however, the Insurer's rights shall be
reinstated in full, immedi ately upon the cure of such default.
SECTION 9.13 Characterization of the Transactions Contemplated
by the Agreement; Tax Treatment. The parties hereto agree that this Agreement
shall constitute a security agreement under applicable law. The Debtor hereby
assigns to the Collateral Agent, for the benefit of the Secured Parties, all of
its rights to pay ment (i) under the Sale and Purchase Agreement and the PFC
Sale and Purchase Agreement with respect to the Receivables and with respect to
any obligations there under of UAC or PFC, as applicable, with respect to the
Receivables and (ii) under or in connection with any Hedging Arrangement. The
Collateral Agent agrees that upon any release of a Receivable or Contract to the
Debtor, the Collateral Agent shall be deemed to have released its security
interest therein and reassigned to the Debtor all of the Collateral Agent's
rights under the Sale and Purchase Agreement or the PFC Sale and Purchase
Agreement, as applicable, with respect to such Receivable or Con tract. The
Debtor agrees that neither it nor the Collection Agent shall give any con sent
or waiver required or permitted to be given under the Sale and Purchase Agree
ment with respect to the Receivables or the Contracts without the prior consent
of either the Collateral Agent, the Administrative Agent or the Insurer.
(a) Each of the parties hereto agrees to treat the transac
tions contemplated by this Agreement as a financing for federal income tax
purposes and further agree to file on a timely basis all federal and other
income tax returns consistent with such treatment.
83
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Security Agreement as of the date first written above.
ENTERPRISE FUNDING CORPORATION,
as Company
By: _______________________________
Name:
Title:
UNION ACCEPTANCE FUNDING
CORPORATION, as Debtor
By: _______________________________
Name:
Title:
UNION ACCEPTANCE CORPORATION,
individually and as Collection Agent
By: _______________________________
Name:
Title:
MBIA INSURANCE CORPORATION,
as Insurer
By: _______________________________
Name:
Title:
84
Exhibit 21
Subsidiaries of the Registrant
Subsidiary State of Incorporation
Performance Funding Corporation Delaware
Performance Securitization Corporation Delaware
UAC Securitization Corporation Delaware
Union Acceptance Funding Corporation Delaware
UAC Boat Funding Corp. Delaware
UAC Finance Corp. Indiana
Circle City Car Company Indiana
Union Acceptance Receivables Corporation Delaware
<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, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000927790
<NAME> Union Acceptance Corporaton
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 93,435
<SECURITIES> 0
<RECEIVABLES> 121,220
<ALLOWANCES> (1,916)
<INVENTORY> 0
<CURRENT-ASSETS> 212,739
<PP&E> 11,410
<DEPRECIATION> (3,489)
<TOTAL-ASSETS> 411,533
<CURRENT-LIABILITIES> 25,362
<BONDS> 303,698
<COMMON> 58,360
0
0
<OTHER-SE> 24,113
<TOTAL-LIABILITY-AND-EQUITY> 411,533
<SALES> 0
<TOTAL-REVENUES> 52,025
<CGS> 0
<TOTAL-COSTS> 35,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,050
<INTEREST-EXPENSE> 26,107
<INCOME-PRETAX> (17,678)
<INCOME-TAX> (7,856)
<INCOME-CONTINUING> (9,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,822)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
