-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UfLy9U6J1kWPra+2/TQqZWan0kj1RgGKWiLpvsnFWj6wPSxhHRJG/FZ0DhS2uF9j JSMF0PPsLF191+ygbEEgJw== 0000908834-96-000190.txt : 19961001 0000908834-96-000190.hdr.sgml : 19961001 ACCESSION NUMBER: 0000908834-96-000190 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION ACCEPTANCE CORP CENTRAL INDEX KEY: 0000927790 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 351908796 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26412 FILM NUMBER: 96636469 BUSINESS ADDRESS: STREET 1: 250 NORTH SHADELAND AVENUE CITY: INDIANAPOLIS STATE: IN ZIP: 46219 BUSINESS PHONE: 3172316400 MAIL ADDRESS: STREET 1: 45 NORTH PENNSYLVANIA CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-K 1 UAC FORM 10-K FOR YEAR ENDED 6/30/96 ================================================================================ FORM 10-K United States Securities and Exchange Commission Washington, D.C. 20549 (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1996 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _____ to _____ Commission File Number: 0-26412 UNION ACCEPTANCE CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1908796 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 250 N. Shadeland Avenue, Indianapolis, IN 46219 ----------------------------------------- ----- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 317-231-6400 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Class A Common Stock, without par value Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405, Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the 3,979,692 shares of the issuer's Class A Common Stock held by non-affiliates, as of September 25, 1996, was $73,126,840.50. There is no trading market for the issuer's Class B Common Stock. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The number of shares of Class A Common Stock of the Registrant, without par value, outstanding as of September 25, 1996, was 4,011,358 shares. The number of shares of Class B Common Stock of the Registrant, without par value, as of such date was 9,200,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders are incorporated into Part III. Exhibit Index on Page 50 Page 1 of _____ ================================================================================ 1 UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES FORM 10-K INDEX PART I Page Item 1. Business..................................................... 3 Item 2. Properties................................................... 18 Item 3. Legal Proceedings............................................ 18 Item 4. Submission of Matters to a Vote of Security Holders.......... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 18 Item 6. Selected Consolidated Financial Data......................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 20 Item 8. Financial Statements and Supplementary Data.................. 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 48 PART III Item 10. Directors and Executive Officers of the Registrant........... 48 Item 11. Executive Compensation....................................... 48 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 48 Item 13. Certain Relationships and Related Transactions............... 48 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................... 48 SIGNATURES............................................................. 49 2 PART I Item 1. Business Note: Certain capitalized terms used but not otherwise defined in this report are defined in the "Glossary" set forth at the conclusion of "Item I, Business." Unless otherwise indicated, references to the "Company" through fiscal 1995 and before the Spin-off refer to the conduct of the business by the Union Division and Union Acceptance Corporation ("UAC") and Subsidiaries as a combined business. References to the "Company" following consummation of the Spin-off by Union Federal Savings Bank of Indianapolis of the Company refer to UAC and Subsidiaries. Overview The Company is a specialized finance company engaged in acquiring and servicing automobile retail installment sales contracts originated by dealerships affiliated with major domestic and foreign manufacturers. The Company focuses its efforts on acquiring loans on late model used and, to a lesser extent, new automobiles made to purchasers who exhibit a favorable credit profile ("Prime lending"). The Company also began operating a "Non-prime lending program" in the fall of 1994, to fund loans to borrowers with adequate credit quality who would not qualify for the Company's Prime lending program. The Company's focus, however, remains on Prime lending; Non-prime loan acquisitions accounted for only 3.5% of all loan acquisitions during fiscal 1996. The Non-prime lending program operates within the same dealer network as the Prime lending operations. The Company currently acquires loans in 45 major metropolitan areas in 25 states from over 2,500 manufacturer-franchised auto dealerships nationwide. The Company was incorporated in Indiana in December 1993, as a subsidiary of Union Federal Savings Bank of Indianapolis ("Union Federal"), which is a federally-chartered savings bank, and a wholly-owned subsidiary of Union Holding Company, Inc., an Indiana Corporation. Union Federal entered the indirect automobile finance business in 1986. On August 7, 1995, the Spin-off of the Company by Union Federal was consummated concurrently with the Company's initial public offering of 4,000,000 shares of its Class A Common Stock. The Company headquarters are located at 250 North Shadeland Avenue, Indianapolis, Indiana, 46219, and its telephone number is (317) 231-6400. See "Item 2, Properties." Market and Competition Based on the Company's knowledge and research with respect to the automobile and finance industry, manufacturer-franchised dealers in the United States sold approximately 16.0 million used automobiles at retail in 1995 at an average price of $11,600 for a total sales volume of approximately $185.6 billion. Based on its knowledge of the industry, the Company believes that dealership finance departments typically originate or direct the origination of approximately 45%, or $83.5 billion in 1995, of the financing of used car loans. The Company believes that it currently funds less than 1.0% of dealer-directed used-car financing in the United States. Competition in the field of financing retail automobile sales is intense. The auto finance market is highly fragmented and historically has been serviced by a variety of financial entities including the captive finance affiliates of major automotive manufacturers, banks, savings associations, independent finance companies, credit unions and leasing companies. Providers of retail automobile financing have traditionally competed on the basis of interest rates charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to the dealers and customers. In seeking to establish itself as one of the principal financing sources at the dealerships it serves, the Company competes predominantly on the basis of providing a high level of dealer service (including evening and weekend hours and quick application response time), offering flexible loan terms, and developing strong relationships with dealerships. While the Company seeks to offer rates that are competitive in each of its markets, the Company does not currently seek to compete by offering the lowest rates or by accepting lower quality credit (although its Non-prime lending program competes in a lower credit-quality market segment). 3 The Company's competition varies among its geographic markets. In the Prime lending market segment, the Company has experienced its most intense competition in the Midwest, particularly in Indiana and Ohio. The Company's primary competitors for Prime loans are regional banks and the captive finance affiliates of major automotive manufacturers. Competition in the Non-prime sector comes predominantly from independent finance companies. Dealer Marketing and Service The Company has entered into dealer agreements with over 2,500 retail automobile dealers in 45 major metropolitan markets in 25 states. The Company's objective is to enter into dealer agreements with a broad spectrum of large domestic and foreign automotive manufacturer-franchised dealerships in targeted major metropolitan areas. The Company believes that manufacturer-franchised dealerships are most likely to provide the Company with loans that meet the Company's underwriting standards. No individual dealer nor group of affiliated dealers accounted for more than 3.0% of the Company's loan purchases during the fiscal year ended June 30, 1996. The Company's ability to acquire a high volume of Prime loans depends to a large extent on its ability to establish and maintain relationships with dealerships and to induce finance managers to offer customer loan applications to the Company. The Company's marketing and loan purchasing staff emphasizes dealer service and conveniently accommodating dealers' needs for customer financing. The Company believes its loan purchasing operations are structured to be more responsive to these needs than the operations of its competitors. The Company believes that by responding rapidly to loan applications it is more likely to be the first financing source to indicate acceptance of a loan and, therefore, is more likely to receive the loan for purchase. With that in mind, the Company has developed the capacity to process a large volume of loan applications rapidly. The Company's average response time to loan applications during fiscal 1996 was under 45 minutes. In June 1996, the Company upgraded its loan application processing system which will further improve application processing efficiencies. The new system is able to handle larger volumes of applications while maintaining rapid response times. Although the Company's loan purchasing process is highly automated, the Company maintains a strong commitment to personalized dealer service. Sales representatives and credit buyers are in frequent contact with dealership personnel. Management believes that this personal contact and follow-through on the part of the Company's employees builds strong relations and maximizes loan acquisition volume from individual dealerships. The Company's credit scoring models and centralized purchasing assure dealers that the Company applies consistent purchasing standards and is a reliable financing source. The Company's willingness to offer longer-term loans (with lower monthly payments) and to advance larger amounts (relative to collateral value) to qualified borrowers, especially on used cars, also enhances the dealers' ability to offer desired financing terms to customers. The Company extends loans up to 84 months on new cars and 78 months on used cars. Over 65% of the loans acquired during the year had terms in excess of 60 months. The Company has regional or field sales representatives who give the Company a presence in local markets. Company sales representatives generally have auto dealer finance or sales backgrounds and are generally recruited from within the markets they serve. The Company believes this helps to establish rapport and credibility with dealership personnel. The sales representatives are in frequent contact with the Company's dealers and are available to receive and respond to comments and complaints and to explain new programs and forms. A portion of the sales representatives' compensation is commissions based on the volume of loans from their territories that are approved and funded by the Company, and, in some cases, may be based on new dealer agreements obtained in new markets. However, the sales representatives have no authority to approve credit applications. When approaching a new dealer, the Company sales representatives explain the Company's programs and describe the ways the dealer can expect more timely and reliable service from the Company than that provided by other financing sources. Dealers who decide to establish a relationship with the Company are provided with a dealer agreement and supplied with copies of the Company's forms for all loan documentation and forms of drafts (which authorized dealer personnel submit for payment of the amount of each purchase). Also, many new dealer agreements include provisions for ACH("Automated Clearing House"). ACH agreements provide for the electronic transfer of funds to individual dealer accounts for the purchase amount of loans originated by the dealers and purchased by the Company. The Company is encouraging the use of ACH payment as 4 opposed to drafts with all of its new dealers, and is making attempts to convert its existing dealer base to ACH as well. Currently, over 25% of the Company's dealers have ACH agreements in place. The Company's representatives train dealer personnel in the proper completion and use of the Company's documentation. The dealer agreement provides the standard terms upon which the Company purchases loans from dealers, contains representations and warranties of the dealer and prescribes the calculation of the Dealer Premium. Loan Origination and Purchasing Retail automobile buyers are customarily directed to a dealer's finance and insurance department to finalize their purchase agreements and to review potential financing sources and rates available from the dealer. If the customer elects to pursue financing at the dealership, an application is taken for submission to the dealer's financing sources. Typically, a dealer submits the purchaser's application to more than one financing source for review. The dealership finance manager decides which source will finance the automobile purchase based upon the rates being offered, the Dealer Premium, the terms for approval and other factors (such as incentives offered by the lender.) The Company believes that its rapid response to an application coupled with its commitment to dealer service, and flexibility in terms enhances the likelihood that the dealership will direct the loan to the Company, even though the Company may not offer the lowest rate available. See "Item 1. Business -- Market and Competition." Generally, on a monthly basis, the Company quotes rates at which it will buy loans from dealers (the "Buy Rate"). Buy Rates are based on several factors including the age of the car and the term of the loan. The Company sets rates generally with a view to maintaining a predetermined spread above the relevant treasury security, based on the weighted average expected life of the loans being acquired. The Company publishes different Buy Rates in different markets depending on its assessment of competitive conditions. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition." Centralization of loan purchasing at the Company's Indianapolis headquarters enables the Company to assure uniform application of underwriting criteria. It also enables the Company to respond very rapidly to a large volume of loan applications with a high level of efficiency. Upon receiving applications by facsimile transmission, certain data are entered into the Company's computer system and the application is assigned to a credit buyer. The Company's computer system obtains a credit bureau report, applies the Credit Scoring model and generates summary credit analysis for the credit buyer. The credit buyer then analyzes the application data, the summary data, and the credit bureau report and sends a response by facsimile transmission to the dealer. Approximately 65% of the Company's credit buyers have prior business experience with auto dealerships, many as dealership finance managers. The Company believes this common experience tends to strengthen their relationships with dealers and enhances dealers' respect for their credit decisions. The Company also frequently arranges for its credit buyers to visit dealers and their finance managers, both to develop dealer rapport and to maintain awareness of local economic trends. The commission component of a credit buyer's compensation is based on the volume of applications processed, rapid response time, and low rates of overriding credit score rejections of loans, without regard to approval or rejection of the loans. The Company's computerized Credit Scoring system utilizes a customized Credit Scoring model developed by an independent firm to evaluate an applicant's credit profile. The Company continually evaluates its scoring methodologies and makes adjustments based on its experience. At the end of fiscal 1996, the Company reevaluated its scorecard model. The scorecard was performing well within management's expectations; however, through this process the Company was able to identify several improvements to the existing model. Additional criteria were identified as strong predictors with respect to credit quality. Management believes that the upgraded version is more powerful and has greater predictive value, and as a result, implemented the new version in all of its markets beginning in July 1996. The Company's purchasing philosophy generally focuses on acquiring high quality credits and not solely on generating volume. The quality of the Company's loan purchasing is due in large part to the experience, training and judgment of the credit buyers. While the Company employs computerized Credit Scoring, credit buyers have limited discretion to override the approval indicated by the Credit Scoring system. In addition, the credit buyers have 5 limited discretion, in appropriate circumstances and with the approval of a senior credit buyer, to override the scoring system on the "low side" and accept a loan with an otherwise insufficient score if the borrower's credit history and other credentials justify approval. The prior experience of most of the Company's credit buyers as dealership finance managers is valuable, not only in assuring sound credit analysis, but also in protecting the Company from attempts by dealers or their customers to obtain approval of unacceptable credits. Management monitors and regularly audits credit buyers' decisions. The Company tracks the delinquency and charge-off rates of all loans purchased by each individual credit buyer. Of the 635,057 Prime loan applications received from dealerships in the year ended June 30, 1996, the Company approved approximately 20.7% unconditionally and approximately 15.3% with conditions. Of the approved and conditionally approved loans, approximately 31.1% were ultimately acquired. In fiscal 1996, the Company acquired approximately $994.8 million in Prime loans. If the Company approves a loan and is selected to provide the financing, the automobile buyer enters into a simple-interest retail installment sales contract with the dealer or a simple-interest installment loan and security interest contract with the Company, generally on the Company's form (although the Company acquires some precomputed interest installment sale contracts in California). The retail sales contract includes an assignment of the loan to the Company. In Ohio, because of regulatory provisions, the Company enters into the contract directly with the borrower. In connection with the loan acquisition and the preparation of Company forms, in many states the Company charges the borrower a loan origination fee. The use of generic contracts forms has become more prevalent during fiscal 1996. Dealerships in some markets utilize a generic state-approved contract (as opposed to the Company's contract form). Most of the generic forms do not include provisions for origination fees. When the dealer has completed and mailed the Company's loan documents and taken actions required to perfect the security interest on the vehicle, authorized dealer personnel may complete and remit a Company-supplied draft for payment of the amount financed. Because the Company provides forms of drafts to dealers in advance of particular loan acquisitions, it assumes the risk that such drafts may be used fraudulently, with corresponding loss to the Company. Historically, the Company has not sustained any material losses due to such uses but there is no assurance that such losses will not occur. For dealers that participate in the ACH program, ACH system payments are made only after all loan documentation has been received, and the loan has been recorded on the Company's system. The use of ACH payments greatly reduces the Company's risk of fraudulent draft use, and also presents a cash flow benefit as the loans are not funded until they are booked by the Company. The Company does not utilize dealer drafts in its Non-prime lending program (the "PAC Program"). Dealers quote loan rates to customers at an average of approximately 1.80% - 2.00% over the Buy Rate. This difference, in most states, represents compensation to the dealership in the form of a Dealer Premium paid by the Company, in addition to the amount financed. See "Glossary." The Dealer Premium is paid to the dealer each month for all loans acquired from the dealer during the preceding month. In most cases, the dealer is paid the entire Dealer Premium in advance, and if the loan is prepaid or defaults at any time prior to its scheduled maturity date, the amount of the premium is prorated and the portion allocated to the remaining scheduled term is reimbursable to the Company as an offset against the premiums to be paid with respect to subsequent loans through the dealer's reserve account. In some cases, the Company may advance only a portion of the Dealer Premium, with an offset against the dealer only if the loan is prepaid or defaults within a limited period of time, regardless of the length of the term. In Ohio, because the Company enters into installment loan contracts directly with dealers' customers, it pays the dealer a referral fee based on a percentage of the note amount. From time to time the Company may adjust its Dealer Premium payment methods based on management's assessment of the market. The Company does not pay a Dealer Premium to dealers in its PAC Program, as described below. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." 6 Geographic Expansion The following table sets forth certain information concerning the markets in which the Company is operating or has previously operated its Prime business.
Loans Acquired For The At June 30,1996 Twelve Months Ended ----------------------------- Date June 30, Servicing Number Of Market Established 1996 1995 Portfolio Dealers ------ ----------- -------- -------- --------- ------------- (Dollars In Thousands) Indiana ................................... Jan-86 $ 38,755 $ 30,148 $ 83,190 107 Dayton/Cincinnati, OH ..................... Apr-88 9,287 20,662 23,729 155 Cleveland, OH ............................. Apr-88 6,744 3,324 15,293 52 Kentucky .................................. Jan-90 --- --- 1,253 Discontinued Columbus, OH .............................. Sep-90 42,092 36,848 86,096 67 Phoenix, AZ ............................... Jun-91 55,955 45,138 107,675 71 Denver/Colorado Springs, CO ............... Dec-91 31,984 23,124 48,868 70 Kansas City, MO/KS ........................ Jan-92 21,075 16,404 45,800 64 Dallas/Ft. Worth/Lubbock, TX .............. Jun-92 65,862 59,303 118,959 84 Minneapolis, MN ........................... Aug-92 -- -- 3,038 Discontinued Salt Lake City, UT ........................ Sep-92 -- -- 168 Discontinued Oklahoma City/Tulsa, OK ................... Oct-92 60,022 62,083 114,166 68 Beaumont/Houston, TX ...................... Dec-92 48,232 48,861 87,765 75 San Antonio/Austin, TX .................... Jan-93 3,460 39,080 70,828 76 Clearwater/Tampa/St. Petersburg, FL ....... Apr-93 35,888 34,542 64,385 64 Charlotte/Gastonia, NC .................... Jul-93 60,999 56,217 89,806 40 Raleigh /Durham/Wilminton, NC ............. Jul-93 23,550 20,445 34,564 35 Winston/Salem/Hickory, NC ................. Jul-93 28,581 28,564 45,624 42 St. Louis, MO ............................. Sep-93 7,128 7,982 16,597 29 Atlanta, GA ............................... Apr-94 20,151 27,932 33,932 61 Richmond, VA .............................. May-94 3,640 2,969 4,836 26 Norfolk/Virginia Beach, VA ................ May-94 51,221 45,449 69,028 64 Greenville, SC ............................ Jul-94 10,032 9,697 14,117 23 Des Moines, IA ............................ Aug-94 5,320 1,812 5,704 6 Chicago, IL ............................... Sep-94 83,877 66,683 104,821 169 Sacramento, CA ............................ Nov-94 17,217 11,723 22,640 68 Council Bluffs/Omaha, IA/NE ............... Nov-94 7,307 1,464 7,217 27 Jacksonville, FL .......................... Dec-94 7,612 4,967 9,498 25 Orlando, FL ............................... Dec-94 5,264 6,082 8,272 21 West Palm Beach, FL ....................... Dec-94 5,967 7,230 9,677 44 Albuquerque/Sante Fe, NM .................. Dec-94 11,492 7,022 13,283 23 Los Angeles/Bakersfield, CA ............... Jan-95 75,597 29,422 83,354 209 Fresno/Modesto/Merced, CA ................. Jan-95 4,676 4,239 6,684 18 San Francisco, CA ......................... Feb-95 12,490 3,282 10,570 99 Milwaukee, WI ............................. Apr-95 16,138 2,588 14,542 62 Green Bay, WI ............................. Apr-95 1,869 --- 1,670 6 Portland/Vancouver, OR/WA ................. Jun-95 11,469 --- 9,228 67 Tallahassee, FL ........................... Jul-95 561 --- 491 6 Columbia, SC .............................. Jul-95 2,948 --- 2,497 8 Seattle, WA ............................... Jul-95 7,414 --- 6,633 62 Quad Cities, IA/IL ........................ Sep-95 3,937 --- 3,349 37 San Diego, CA ............................. Oct-95 19,240 --- 17,060 82 Savannah/Charleston, GA/SC ................ Nov-95 3,025 --- 2,816 33 Bethesda (D.C.)/Alexandria, MD/VA ......... Nov-95 19,882 --- 17,702 72 Baltimore, MD ............................. Jan-96 1,364 --- 1,339 24 Chattanooga/Knoxville/Memphis/Nashville, TN Feb-96 6,704 6,599 39 Detroit/Grand Rapids, MI .................. May-96 2,869 --- 2,859 28 Pittsburgh/Philadelphia, PA ............... May-96 317 --- 316 15 -------- -------- ---------- ----- TOTAL ..................... $994,834 $766,972 $1,548,538 2,523 ======== ======== ========== =====
7 The Company intends to continue its strategy of expanding into new markets. In considering potential markets for expansion, the Company carefully reviews the regulatory and competitive environment and economic and demographic factors such as the number of auto registrations and dealerships in the metropolitan area. Because the Company is highly centralized, the incremental cost of entering new markets is relatively low and it can enter new markets quite rapidly. Alternatively, the Company's centralized operations give it the ability to vacate a market quickly and without great expense, if competitive or other factors arise in the market that make it no longer suitable for the Company's operations. The Company formerly purchased loans in cities in Kentucky, Minnesota and Utah but subsequently chose to terminate its operations in these markets. The Company's level of loan acquisitions in particular metropolitan areas may fluctuate significantly over time depending on competitive conditions and other factors in those markets. Non-prime lending program The Company began operating the Non-prime program in the fall of 1994, to fund loans to borrowers with adequate credit quality who would not qualify for the Company's Prime lending program. The Company operates the Non-prime program under the name "Performance Acceptance Corporation (PAC)." Non-prime operations, which are centralized at the Company's principal offices, are substantially similar to the Company's Prime lending operations in many respects. The Non-prime program, however, features more extensive credit review and verification. Also, greater emphasis is placed on income and employment stability, the borrower's ability to afford monthly payments and loan-to-value ratios and other collateral-based lending standards. The Company does not offer as prompt a response to Non-prime loan applications as it offers on Prime program applications to permit it to conduct more extensive credit checking. None of the Company's credit buyers are responsible for both Prime and Non-prime loan acquisition in the same market. A loan application rejected for the Company's Prime lending program must be resubmitted by the dealer to the Non-prime program to be reconsidered for purchase. The Company's collection and repossession procedures relating to Non-prime loans provide for more rapid response to late payments, and include additional arrangements in order to facilitate repossessions at an earlier stage of delinquency than is customary in the Prime lending program. The Company, under the name "Performance Acceptance Corporation," commenced Non-prime loan acquisitions in Indiana and has since expanded the Program into 21 of the Company's existing major metropolitan markets at dealerships affiliated with the Company's Prime lending program. Of the 85,751 loan applications received from dealerships through the Non-prime program in the year ended June 30, 1996, the Company approved approximately 6.1% unconditionally and approximately 13.3% with conditions. Of the approved and conditionally approved loans, approximately 17.3% were ultimately acquired. In fiscal 1996, the Company acquired approximately $36.0 million in Non-prime loans. The Company purchases Non-prime loans at face value at an appropriate interest rate generally in the range of 6.00% to 8.00% above the rate at which it purchases loans in its Prime lending program. The Company expects that Non-prime loans will experience higher default rates than those historically experienced by the Company with respect to its Prime lending operations, but will also earn higher interest rates. The Company does not, however, pay Dealer Premiums to dealers in connection with the acquisition of Non-prime loans, which reduces its cash flow requirements for Non-prime operations. Since September, 1995, Non-prime loan acquisitions have been funded through a separate $50 million Non-prime Warehouse Facility through Performance Funding Corporation ("PFC"), a wholly-owned Company subsidiary. The Company, through its wholly-owned, special-purpose subsidiary, Performance Securitization Corporation ("PSC"), effected its first securitization of Non-prime loans in March 1996. The following table describes the composition of the Company's Non-prime lending servicing portfolio at June 30, 1996:
Non-Prime Auto Portfolio At June 30, 1996 --------------------------------------------------------------------------- Percent of Weighted Aggregate Aggregate Aggregate Average Average Weighted Number of Principal Principal Loan Remaining Average Loans Balance Balance Balance Term (1) Rate --------- --------- --------- --------- ---------- --------- (dollars in thousands, except average balances) New auto / van ....... 667 $ 9,943 21.1% $14,907 62.65 18.63% Used auto / van ...... 3,400 $37,119 78.9% $10,917 55.23 20.11% ----- ------- ----- Total ............. 4,067 $47,062 100.0% $11,572 56.79 19.80% ===== ======= ===== Loans held for sale... 1,243 $15,512 33.0% $12,479 63.28 19.70% Securitized loans .... 2,824 $31,550 67.0% $11,172 53.61 19.85% ----- ------- ----- Total ............. 4,067 $47,062 100.0% $11,572 56.79 19.80% ===== ======= =====
- ----------- (1) Terms are shown in months. Loan Processing and Customer Service When original loan documents and the dealer's draft (after deposit through the dealer's bank) arrive at the Company's headquarters, they are processed onto the Company's servicing system. In the case of a loan submitted under the ACH program, the original loan documents are received by the Company, and the loan is processed in much the same way as a loan in which the dealer has completed a draft. Once the loan is processed, the Company's computer system triggers an ACH payment to the dealer. The Company's operations computer network interfaces with its loan approval system to retrieve the information entered when the borrower's application was received, saving time on data entry with respect to loan processing. The system transmits new loans daily to the Company's outside data processing servicer. Twice weekly, this servicer sends data on all new accounts to the Company's document service agency which generates payment coupon books and sends them directly to the borrower. Customer payments are sent directly to a lockbox. The Company has a separate remote outsourcing agreement with a data processing servicer. Under the agreement, the data processing service conducts a wide array of applications in both batch and on-line modes, and it provides interfacing with a number of Company-developed systems. The service also provides off-site data storage at its data centers. The Company provides much of the hardware to facilitate the on-line transmission of data, which is routed through different data centers to provide redundancy in the event of a power failure. The Customer Service Department utilizes an automated voice response system which allows customers to access standard account information as well as general information 24 hours a day, seven days a week. This system directs a total of approximately thirty thousand calls per month. Approximately 40% of the total calls are handled entirely by the automated system. This system provides many efficiencies for the Company and is user-friendly and convenient for customers. Loan Servicing and Servicing Portfolio Under the terms of its Warehouse Facilities and securitization transactions, the Company acts as servicer or subservicer with respect to the related automobile loans. The Company receives monthly servicing fees; the contractual fee, typically one percent per annum on the outstanding principal balance of the securitzed loans, is paid to the Company through the securitized trusts. The Company services the loan pools by collecting payments due from borrowers and remitting payments to the pool trustee in accordance with the terms of the servicing agreement. The Company maintains computerized records with respect to each loan to record all receipts and disbursements and prepares related reports. As servicer, the Company is obligated to monitor collections and collect delinquent accounts and use diligence to obtain current payment of accounts. In addition to these administrative duties, the Company will be obligated as servicer or subservicer of securitization trusts to indemnify the trustee against certain liabilities and replace credit enhancement in the unlikely event of the termination or removal of a letter of credit. In addition to servicing securitized loans, the Company also services a portfolio of Union Federal fixed and variable rate loans on mobile homes, boats and autos, which portfolio was approximately $3.6 million at June 30, 1996. 9 At June 30, 1996, the Prime servicing portfolio, including the principal balance of auto loans held for sale and securitized auto loans, was over $1.5 billion in aggregate principal balance. Approximately 73% of the servicing portfolio, as of June 30, 1996, represented financing of used vehicles; the remainder represented financing of new vehicles. The Company's loans consist primarily of simple-interest contracts which provide for equal monthly payments (as well as precomputed loans acquired in California). As payments are received under a simple-interest contract, the interest accrued to date is paid first and the remaining payment is applied to reduce the unpaid principal balance. In the case of a liquidation or repossession, amounts recovered are applied first to the expenses of repossession and then to unpaid principal. The following tables describe the composition of the Company's Prime lending servicing portfolio at June 30, 1996.
Prime Auto Portfolio At June 30, 1996 ------------------------------------------------------------------------------------------- Percent of Weighted Aggregate Aggregate Aggregate Average Average Weighted Number of Principal Principal Loan Remaining Average Loans Balance Balance Balance Term (1) Rate (dollars in thousands, except average balances) New auto / van ............. 31,491 $ 413,675 26.7% $ 13,136 58.1 12.26% Used auto / van ............ 116,231 $1,134,863 73.3% $ 9,764 54.4 13.19% ------- ---------- ----- Total ................... 147,722 $1,548,538 100% $ 10,483 55.4 12.94% ======= ========== ===== Loans held for sale ........ 16,257 $ 228,391 14.7% $ 14,049 69.2 13.24% Other loans serviced(2)..... 131,465 $1,320,147 85.3% $ 10,042 53.0 12.89% ------- ---------- ----- Total ................... 147,722 $1,548,538 100.0% $ 10,483 55.4 12.94% ======= ========== =====
- ------------ (1) Terms are shown in months. (2) Amounts include, prime fixed rate auto loans securitized under trusts as well as a small portfolio of prime fixed rate auto loans serviced under agreements with Union Federal (approximately $217,000). Delinquency, Collection and Repossession The Company seeks to maintain low levels of delinquency and net charge-offs first by ensuring and monitoring the integrity of its credit purchasing. The Company tracks the delinquency rate of all loans approved by each credit buyer to provide each credit buyer with an incentive to maintain loan quality. The Company also seeks to limit delinquency and charge-offs through highly automated and efficient collection and repossession procedures. The collections area is highly automated and is supported by a separate computerized collections system provided by the Company's data processing servicer and an automatic telephone dialing system. Delinquent borrowers are contacted by phone, mail and/or telegram. Notices to delinquent borrowers are dispatched automatically by computer when loans are 7 days delinquent. The collections area operates during regular business hours, weekday evenings, and on Saturdays. Consistent with the growth of its servicing portfolio, including its Non-prime program, the Company more than doubled its collection staff during fiscal 1996. The Company utilizes an automatic, computer-controlled multiple telephone line system which dials phone numbers of delinquent borrowers from a file of records extracted from the Company's database. The system typically generates 500-1,000 calls per hour and allows the Company to prioritize calls based on a wide variety of factors. Once a call has been placed, the system monitors the call and transfers the call to a collector if it has reached a live human voice. The Company provides incentive bonuses to its collections personnel based on the volume and promptness of payments collected from delinquent borrowers. After delinquent borrowers fail to respond to the Company or to fulfill oral commitments made to bring their loans current, the Company repossesses the automobile securing the loan. Repossessions are effected for the Company by an independent auto auction company which reconditions the repossessed autos and sells them for the Company. For cars repossessed in central Indiana, the Company holds and reconditions the automobiles at an Indianapolis location owned by the Company. It sells these automobiles through a central Indiana auto auction. A number of regulatory considerations affect the timing and manner of repossession and liquidation. See "Item 1. Business--Regulation." 10 The decision to repossess is generally made after a loan is at least 90 days but no more than 120 days delinquent, absent extraordinary circumstances, such as bankruptcy or refusal to pay, requiring earlier action. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Delinquency and Credit Loss Experience." Financing and Sale of Automobile Loans Loan Funding. The Company had historically financed the acquisition of automobile loans through short-term funding made available by Union Federal and through the securitization of pools of loans. Since the "Spin-off" in August 1995, the Company relies upon external sources to provide financing for its loan purchases, Dealer Premiums and other ongoing cash requirements. In addition to the net proceeds of the Company's initial public offering and the Senior and Senior Subordinated Notes, the Company utilizes a $350 million Prime Warehouse Facility to provide such funding and a $50 million Non-prime Warehouse Facility to fund Non-prime loan acquisitions. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." Hedging. Because the auto loans purchased by the Company are fixed-rate loans, the Company bears the risk of interest-rate increases during the period between the setting of the Buy Rate for the acquisition of loans and their sale in a securitization transaction. In order to mitigate this risk, the Company employs a hedging strategy in which it executes short sales of U.S. Treasury securities having a maturity approximating the average maturity of loans to be acquired during the relevant period. The Company's hedging strategy is an integral part of its practice of periodically securitizing loans. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" for a discussion of hedging risks and related issues. Securitizations. The Company sells its loans in securitization transactions to increase the Company's liquidity, to provide for redeployment of capital and to reduce risks associated with interest rate fluctuations. The Company applies the net proceeds from securitization transactions to repay amounts owed to short-term financing sources, thereby making such sources available for future loan purchases. The Company currently plans to continue securitizing pools of loans, generally on a quarterly basis. Since 1988, the Company has securitized approximately $3.5 billion in auto loan receivables in 22 public offerings and one private placement of Asset-backed Securities summarized below. In each of the public offerings, the senior Asset-backed Securities have been rated "AAA" or its equivalent by one or more rating agencies including Standard & Poor's Corporation, Moody's Investors Service and Fitch Investors Service, Inc. Such ratings are not recommendations of the rating agencies to invest in the securitizations and may be modified or withdrawn by them at any time. 11 Securitization Transactions
Remaining Balance Weighted Original at June 30, Average Loan Certificate Gross Net Securitization Amount 1996 Rate Rate Spread (1) Spread (2) -------------- ------ ---- ---- ---- ---------- ---------- (dollars in thousands) 1996-C UACSC Auto Trust $310,999 --- 13.26% 6.44% 6.82% 5.11% 1996-B UACSC Auto Trust $245,102 $229,685 12.96% 6.45% 6.51% 5.58% 1996-A UACSC Auto Trust $203,048 $171,842 13.13% 5.40% 7.73% 5.68% 1995-D UACSC Auto Trust $205,550 $162,850 13.74% 5.97% 7.77% 6.04% 1995-C UACSC Auto Trust $236,410 $162,822 14.08% 6.42% 7.65% 6.12% 1995-B UACSC Grantor Trust $220,426 $135,812 13.91% 6.61% 7.30% 4.88% 1995-A UACSC Grantor Trust $173,482 $96,198 13.22% 7.77% 5.45% 3.88% 1994-D UFSB Grantor Trust $114,070 $58,021 12.51% 7.69% 4.82% 3.91% 1994-C UFSB Grantor Trust $150,725 $61,106 12.05% 6.77% 5.28% 4.04% 1994-B UFSB Grantor Trust $142,613 $57,502 10.74% 6.46% 4.28% 3.54% 1994-A UFSB Grantor Trust $119,960 $39,664 9.98% 5.08% 4.90% 3.60% 1993-C UFSB Auto Trust $141,811 $43,596 11.00% 4.88% 6.12% 4.82% 1993-B UFSB Auto Trust $212,719 $53,132 11.50% 4.45% 7.05% 5.31% 1993-A UFSB Grantor Trust $133,091 $23,180 11.49% 4.53% 6.96% 4.96% 1992-C UFSB Grantor Trust $119,280 $14,684 11.64% 5.80% 5.84% 4.48% 1992-B UFSB Grantor Trust $116,266 $9,836 12.39% 4.90% 7.49% 5.49% 1992-A UFSB Grantor Trust $103,619 --- 13.66% 6.70% 6.96% 5.80% 1991-B UFSB Grantor Trust $106,612 --- 13.64% 7.15% 6.49% 4.94% 1991-A UFSB Grantor Trust $150,436 --- 12.52% 8.40% 4.12% 2.25% 1989-B UFSB Grantor Trust $66,469 --- 14.09% Variable 0.00 2.82% 1989-A UFSB Grantor Trust $113,080 --- 13.24% 8.75% 4.49% 1.97% 1988 UFSB Grantor Trust $105,179 --- 12.73% 9.50% 3.23% 1.71% ---------- ---------- Total Prime Securitized Trusts $3,490,947 $1,319,930 1996-1 PSC Grantor Trust (3) $34,488 $31,550 19.87% 6.87% 13.00% 8.79% ---------- ---------- Grand Total...................$3,525,435 $1,351,480 ========== ==========
- ------------ (1) Difference between weighted average loan rate and Certificate Rate. (2) Difference between weighted average loan rate and Certificate Rate, net of upfront costs, servicing fees, ongoing letter of credit and trustee fees, and the hedging gain or loss. (3) In March 1996, the Company effected its first Non-prime securitization (1996-1 PSC Grantor Trust) In securitization transactions, the Company transfers automobile loans to a newly-formed trust, which issues one or more classes of fixed-rate Certificates to investors (the "Certificateholders"). Through the 1994-A Grantor Trust, the Certificates were generally credit-enhanced by a letter of credit from an independent financial institution. The letter of credit provided Certificateholders with additional assurance, to the extent of the amount of the letter of credit, that their receipt of required payments from the pool would not be adversely affected by loan losses. Typically, the letter of credit was obtained in the amount, represented as a percentage of the pool, necessary to obtain the desired investment grade ratings for the Certificates. The Company has subsequently employed the use of subordinated classes of Certificates as a credit enhancement device. Additionally, surety bonds have been utilized as additional credit enhancements in several of the Company's recent securitizations. These credit enhancement features allow the offered Certificates to achieve the desired investment grade rating. In future securitizations, the Company may employ any of the above devices or may employ alternative credit enhancement devices. Gains from the sale of loans in securitization transactions have historically provided a significant portion of the net earnings of the Company and are likely to continue to represent a significant portion of the Company's net earnings. If the Company were unable to securitize loans in a financial reporting period, the Company could incur a significant decline in net earnings for such period. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- General." Commencing with the 1995-A Grantor Trust, the Company has effected securitizations through a wholly-owned special-purpose subsidiary, UAC Securitization Corporation. Its Non-prime securitization was effected through Performance Securitization Corporation, also a wholly-owned special purpose subsidiary. In the future, the Company may pursue alternative structures for securitizations, such as an owners' trust structure in which the securitization trust issues both Certificates and debt securities, and the Company will continue to assess other structured financing alternatives which may enable it to fund loans and/or deploy its capital with greater efficiency or at lower cost. 12 Employees The Company employs personnel experienced in all areas of loan acquisition, documentation, collection and administration. Currently, the Company has 337 full-time employees and 33 part-time employees, including 72 full-time and 7 part-time employees in the operations department, 130 full-time and 25 part-time employees in the collection department, 57 full-time employees in loan purchasing and 41 full-time accounting, systems and administrative employees. In addition, the Company had 38 sales representatives who reside and work in the Company's loan purchasing market areas at such date. None of the employees is covered by a collective bargaining agreement. Regulation The Company's operations are subject to regulation, supervision, and licensing under various federal, state and local statutes, ordinances, and regulations. The Company's business operations are conducted primarily in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Missouri, Nebraska, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin and, accordingly, the laws and regulations of such states govern the Company's operations conducted in those states. The Company is required to be, and is, licensed as a sales finance company in Arizona, Florida, Illinois, Maryland, Michigan, Missouri, Nebraska, New Mexico, North Carolina, Pennsylvania and Wisconsin. In Colorado, Indiana, Iowa and Texas, the Company has either filed the necessary notifications or registered to accept assignments of installment sale contracts, and in Ohio, the Company is licensed to make direct loans. As the Company expands its operations into additional states, it will be required to comply with the laws of those states. Security Interests in Vehicles. Installment sale contracts such as those purchased by the Company evidence the credit sale of automobiles, light trucks and vans by dealers to obligors. The contracts and the installment loan and security agreements also constitute personal property security agreements and include grants of security interests in the vehicles under the Uniform Commercial Code ("UCC"). Perfection of security interests in the vehicles is generally governed by the motor vehicle registration laws of the state in which the vehicle is located. In the states in which the Company currently purchases loans, a security interest in a vehicle is perfected by notation of the secured party's lien on the vehicle's certificate of title. For loans originally purchased by Union Federal, it is shown as lienholder on the certificate of title. UAFC is generally shown as lienholder on the certificates of title for vehicles securing Prime loans the Company has purchased, while PFC is designated as lienholder for vehicles securing loans purchased through the Non-prime program. The Company's loan documents prohibit the sale or transfer of the financed vehicle without the Company's consent. As subservicer for securitizations completed by the Union Division, the Company is obligated to take appropriate steps, at its own expense, to maintain perfection of security interests in financed vehicles. In securitization transactions, the Company assigns its security interest in financed vehicles to the trustee for the securitization trust. Because of administrative inconvenience and expense, amended certificates of title are not obtained reflecting the trustee's interest. It is possible that failure to obtain amended certificates of title could in certain circumstances adversely affect the Company's ability as servicer to recover the collateral value of the vehicle on behalf of the securitization trust. Net Excess Servicing Cash Flows from the securitized pool to the Company could be adversely affected to that extent. The Company has not, however, experienced any significant problems enforcing liens on financed vehicles securing loans it has securitized. Under the laws of most states, including all of the states in which the Company purchases loans, the perfected security interest in a vehicle continues for at least four months after a vehicle is moved to a new state. Most states require surrender of a certificate of title to re-register a vehicle. Since UAFC, Union Federal or PFC, as the case may be, will have its lien noted on the certificates of title, in most cases it, as lienholder, will have the opportunity to re-perfect its security interest in the state of relocation. In states that do not require a certificate of title for registration of a motor vehicle, re-registration could defeat perfection. To date, the Company has not experienced any significant problems enforcing its lien on re-registered vehicles. 13 Under the laws of most states, liens for vehicle repairs and unpaid taxes take priority over a perfected security interest. Liens for repairs or taxes could arise at any time during the term of a loan without notice to the Company. Repossession and Resale. In the event of a default by vehicle purchasers, a self-help repossession remedy is available under the UCC in all states in which the Company purchases loans (except Wisconsin) as long as the repossession can be accomplished without a breach of the peace. In cases where the obligor objects or raises a defense to repossession, or if otherwise required by applicable state law, a court order must be obtained from the appropriate state court. In the event of default by the obligor, some jurisdictions require that the obligor be notified of the default and be given an opportunity to cure the default prior to repossession. Generally, the right of reinstatement may be exercised on a limited number of occasions in any one-year period. The UCC and other state laws require the secured party to provide the obligor with reasonable notice of any sale of the collateral. The obligor generally has the right to redeem the collateral prior to actual sale by paying the secured party the unpaid principal balance of the obligation plus reasonable repossession and related expenses and, in some states, reasonable attorneys' fees. The proceeds of resale generally are applied first to the expenses of resale and repossession and then to the satisfaction of the indebtedness. If the net proceeds do not cover the amount of the indebtedness, a deficiency judgment may be sought. However, the deficiency judgment would be a personal judgment against the obligor for the shortfall, and a defaulting obligor normally has very little capital or sources of income available following repossession. In addition to the laws limiting or prohibiting deficiency judgments, equitable limitations and numerous other statutory provisions including federal bankruptcy laws and related state laws may interfere with or affect the ability of a lender to realize upon collateral or enforce a deficiency judgment. For example, in a Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a lender from repossessing an automobile, or reduce the amount of the secured indebtedness to the market value of the automobile at the time of bankruptcy, leaving the party providing financing as a general unsecured creditor for the remainder of the indebtedness. A bankruptcy court may also reduce the monthly payments due under a contract or change the rate of interest and time of repayment of the indebtedness. Consumer Protection Laws. Numerous federal and state consumer protection laws and related regulations impose substantial requirements upon lenders and servicers involved in consumer finance. These laws include the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z, state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code and state motor vehicle retail installment sales acts, retail installment sales acts, and other similar laws. Also, state laws impose finance charge ceilings and other restrictions on consumer transactions and require contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In some cases, this liability could affect the Company's ability to enforce automobile loans it purchases. The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission (the "FTC Rule"), the provisions of which are generally duplicated by the Uniform Consumer Credit Code, other state statutes, or the common laws in certain states, has the effect of subjecting a seller (and certain related lenders and their assignees) in a consumer credit transaction and any assignee of the seller to all claims and defenses which the obligor in the transaction could assert against the seller of the goods. Liability under the FTC Rule is limited to the amounts paid by the obligor under the contract, and the holder of the contract may also be unable to collect any balance remaining due thereunder from the obligor. Most of the loans purchased by the Company are subject to the requirements of the FTC Rule. Accordingly, the Company (or the trust to which a loan is assigned in a securitization), as holder of the loan, will be subject to any claims or defenses that the purchaser of the related financed vehicle may assert against the seller of the vehicle. Such claims are generally limited to a maximum liability equal to the amounts paid by the obligor on the loan. 14 The laws of certain states grant to the purchasers of vehicles certain rights of rescission under so-called "lemon laws". Under such statutes, purchasers of motor vehicles might be able to seek recoveries from, or assert defenses against, the Company. The dealer selling a loan to the Company will warrant that the completion of each loan document and the sale of the vehicle to the borrower complies with all requirements of law in all material respects. Accordingly, if a borrower has a claim against the Company for violation of any law and such claim materially and adversely affects the Company's interest in a loan, such violation often constitutes a breach of the dealer's warranties under the dealer agreement and related assignment and would create an obligation of the dealer to repurchase the loan unless the breach is cured. 15 GLOSSARY Asset-backed Securities - A general reference to securities, such as Certificates, that are backed by financial assets, such as automobile loans or leases, credit card or trade receivables, home equity loans or equipment. Business Transfer - The transfer of certain assets related to the Union Division from Union Federal to the Company and the assumption of certain related liabilities by the Company. Buy Rate - A rate quoted by the Company to dealers, generally on a monthly basis, at which the Company will buy loans. Certificates - Asset-backed Securities representing fractional beneficial interests or indebtedness issued to investors by a trust that purchases a pool of loans in a Securitization. Such securities are generally fixed-rate securities payable solely from cash flows from the pooled receivables. Credit Facilities - Certain external financing arrangements negotiated by the Company with an independent financial institution consisting of a $350 million Warehouse facility (the "Prime Warehouse Facility") to fund the Company's Prime loan acquisitions and a $50 million Non-prime Warehouse facility (the "Non-prime Facility") to fund loan acquisitions through its Non-prime lending program, Credit Scoring - The process of utilizing standard models in the loan acquisition process to evaluate an applicant's credit profile to arrive at an estimate of the associated credit risk based on statistical evaluation of several common characteristics that bear on credit worthiness and their correlation with credit risk. Dealer Premium - The amount paid to the dealer for the purchase of a loan above the principal amount financed. In states other than Ohio, the Dealer Premium is based upon the finance charge that would be paid on the loan if it earned interest at a rate equal to the difference between the contract rate and the Company's periodically published buy rate. The difference in rates averages approximately 2%. Dealer Premiums paid to Ohio dealers in the form of referral fees are calculated as the product of the principal amount of the loan and a periodically adjusted referral rate set forth on the Company's rate sheets for loans with similar terms, note rate and age of collateral. All or a portion of a Dealer Premium may be paid in advance at the time the loan is acquired, subject to being charged back against the dealer if that loan prepays or defaults. The Dealer Premium is generally advanced to the dealer in the month following purchase of the loan, creating the Dealer Premium asset. An amortized portion of such advance, depending on the dealer agreement, is recoverable from the dealer if the loan is prepaid or defaults. When loans are sold, the related Dealer Premium is expensed and a Dealer Premium rebate asset is established equal to the estimated amount recoverable from dealers due to prepayments and defaults. Actual rebate experience is analyzed by the Company on a monthly basis. Excess Servicing - The present value of Future Servicing Cash Flows to be distributed to the Company by a Securitization trust as determined in accordance with Statement of Financial Accounting Standards No. 65 ("SFAS 65"). Excess Servicing represents the present value of Future Servicing Cash Flows earned on each trust as determined in accordance with SFAS 65. Future Servicing Cash Flows represent the difference between the coupon rate on the loans and the pass-through rate to the investors in the securitized pool in excess of a normal servicing fee, typically one percent, and any other continuing costs such as trustee, surety or letter of credit fees. To determine Excess Servicing, the Future Servicing Cash flows are first estimated using an assumed rate of prepayment that is intended to be conservative relative to historical experience and then discounted at a market rate commensurate with the risk associated with this type of investment. Excess Servicing is then reduced by a credit loss provision based upon historical experience and deemed adequate to cover net losses over the life of the trust. The loss provision is calculated using a discount rate commensurate with a risk-free investment of similar maturity in accordance with Emerging Issues Task Force announcement 92-2. Excess Servicing also includes the estimated Dealer Premium Rebates recorded in conjunction with the securitization. Excess Servicing cashflows reduce the Excess Servicing asset over the life of the securitization. The discounted portion of Excess Servicing is accreted to income on a monthly basis. Periodically, the Company reviews the assumptions utilized in determining Excess Servicing. Should the present value of Future Servicing Cash Flows prove to be insufficient to recover the capitalized amount, a charge to servicing income would be made in accordance with SFAS 65. To date the Company has not recorded any such charges. The Company assesses the valuation of the Dealer Premium Rebate component of Excess Servicing monthly. Deficiencies, if any, would be charged against servicing income. Dealer Premium Rebates received in excess of original estimates are recognized as servicing income as received. Excess Dealer Premium Rebates received during fiscal 1996 totaled $2.8 million. Accrued interest through the date of securitization is also classified as a component of Excess Servicing. These amounts represent monies that will be returned to the Company through the securitized trusts. 16 Future Servicing Cashflows - The difference between the coupon rate paid on securitized loans and the sum of the yield to Certificate holders of a securitized loan pool, an annual servicing fee, typically one percent, and other expenses of the Securitization trust. Gain on Sales of Loans - The Gain on Sales of Loans is equal to Excess Servicing less any difference between the aggregate principal balance of loans and the net proceeds from the securitization and the prepaid Dealer Premium, adjusted by the gain or loss on related hedging transactions. The securitizations are usually sold at or close to the principal balance of the loans included therein. The costs of securitization consist of issuance expenses and the underwriter's discount. Non-prime Warehouse Facility - See definition of Credit Facilities, above. Non-prime lending - The Company's practice of acquiring loans made to borrowers who generally would not be eligible for credit under Prime lending. Loans are acquired from automotive dealers under a dealer agreement that provides for the acquisition of loans at par without provision for payment of any Dealer Premium. A Non-prime borrower is characterized as a borrower with some credit problems in his or her past which have subsequently been resolved and who has reestablished an acceptable payment history. To finance a new or late-model used car, the Non-prime borrower may not qualify for a loan from a captive finance subsidiary, but may access credit through non-traditional finance sources. Pooling - The accumulation of a group of loans to create a package of receivables for sale through a trust to investors in a Securitization. Prime lending - The Company's practice of acquiring loans made to borrowers, generally with high quality credit, through an automotive dealer under a dealer agreement that provides for the acquisition of loans at par plus the payment of a Dealer Premium to the dealer. A Prime borrower has a credit history with no or few minor defaults and can finance a new car purchase through a bank, a captive finance subsidiary of an automobile manufacturer or an independent finance company that focuses on Prime credit. Prime Warehouse Facility - See definition of Credit Facilities, above. Securitization - The process through which loans and other receivables are pooled and sold to a trust which issues Certificates to investors. Senior Notes - Unsecured Senior Notes of the Company in the original aggregate principal amount of $110 million due 2002, issued by the Company in connection with the Spin-off and the Company's initial public offering in August 1995. Senior Subordinated Notes- Unsecured Senior Subordinated Notes of the Company in the aggregate principal amount of $46 million due 2003, issued April 1996. Spin-off - The pro rata distribution of the 9,200,000 shares of Class B Common Stock formerly held by Union Federal to UHC and from UHC to the shareholders of UHC, immediately prior to consummation of the Company's initial public offering in August 1995. Spread Account - A cash collateral account or spread account maintained by the trustee of a securitization trust into which Future Servicing Cash Flows are deposited initially, to protect Certificateholders (and any provider of third-party credit enhancement) against credit losses. The terms of the account, which vary with each securitization, state a maximum balance, expressed as a percentage of the current principal balance. Generally, the initial cash deposit, if required, is funded by the Company from the securitization proceeds and is expressed as a percentage of the original balance. The initial deposit amount is typically less than the minimum balance ("floor"). The "floor" amount required is determined based on the original principal balance. Excess Servicing cash flows from the pool of loans, net of credit losses, are credited to the account and retained until the account balance reaches the maximum balance. The Company accrues these cash flows as servicing income and establishes the Spread Account on the balance sheet. Once the maximum balance is attained, excess servicing cash flows and any surplus in the Spread Account are remitted to the Company. Should the interest and principal collected by the trust be less than the required payments to the Certificateholders, the shortfall is funded from the Spread Account and Future Servicing Cash Flows are retained until the maximum balance is reestablished. Any remaining Spread Account balance is released to the Company upon termination of the securitization. There is no recourse to the Company for loan losses beyond the balance in the Spread Account and Future Servicing Cash Flows from the trust. Union Division - The indirect automobile lending business conducted as a division of Union Federal through fiscal 1994. Warehouse - A method whereby loans are financed by financial institutions on a short-term basis. In a Warehouse arrangement, loans are accumulated or pooled on a daily or less frequent basis and assigned or pledged as collateral for short-term borrowings until they are sold in a Securitization. 17 Item 2. Properties The Company's operations are centered in a commercial office building owned by Waterfield Mortgage Company, Inc. ("Waterfield," a Company affiliate) in Indianapolis, Indiana. The Company occupies office space of 115,555 square feet under leases with Waterfield. The Company sublets a portion of the building to two other tenants (one of which in Union Federal). In addition, the Company leases a garage of 5,000 square feet for vehicle reconditioning and remarketing, an office of 500 square feet and a 75-car lot located in Beech Grove, Indiana, from an independent party. These facilities are used to recondition and sell the financed vehicles repossessed by the Company in central Indiana. Item 3. Legal Proceedings The Company is party to litigation in the ordinary course of business, generally involving liability claims by borrowers under the consumer protection laws described above. The Company does not expect any pending proceeding, either individually or collectively, to have a material adverse effect on the Company or its results of operations. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company commenced its initial public offering of Class A Common Stock on August 7, 1995 concurrently with the Spin-off by Union Federal of the Company. Shares of Class A Common Stock are quoted on the Nasdaq Stock Market's National Market under the symbol "UACA." The following table sets forth the high and low sales price per share of Class A Common Stock for each quarter in fiscal 1996: Fiscal Year Ended June 30, 1996 High Low -------------------------------- ---- --------- First Quarter 19 1/2 16 Second Quarter 21 1/4 14 Third Quarter 17 11 3/4 Fourth Quarter 16 3/4 13 1/2 As of September 16, 1996, there were 126 holders of record of the Company's Class A Common Stock and 8 persons holding Class B Common Stock of the Company of record. The Company estimates that its Class A Common Stock is owned beneficially by approximately 2,100 persons. There is no market for Class B Common Stock, and management has no plans to list the Class B Common Stock on Nasdaq or any exchange. The Company currently intends to retain earnings for use on the operation and expansion of its business and therefore does not anticipate paying cash dividends on Class A Common Stock or Class B Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend, among other things, upon earnings, capital requirements, any financing agreement covenants and the financial condition of the Company. In addition, provisions of the Senior and Senior Subordinated Notes limit distributions to shareholders. Item 6. Selected Consolidated Financial Data The following table sets forth certain selected financial information reflecting the operations and financial condition of the Company for each year in the five year period ended June 30, 1996. This data should be read in conjunction with the Company's consolidated financial statements and related notes thereto and "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" included herein. 18
Year Ended June 30, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Income Statement Data: Interest income ........................................... $ 34,160 $ 18,638 $ 14,260 $ 11,378 $ 8,997 Interest expense(1) ....................................... 22,275 12,961 7,769 7,177 7,227 ---------- ---------- ---------- ---------- ---------- Net interest margin ..................................... 11,885 5,677 6,491 4,201 1,770 Provision for credit losses ............................... 2,875 1,074 484 436 626 ---------- ---------- ---------- ---------- ---------- 9,010 4,603 6,007 3,765 1,144 Gain on sales of loans .................................... 30,357 8,684 4,643 5,502 7,293 Servicing fees, net ....................................... 16,926 14,628 11,570 7,149 3,988 Other revenue ............................................. 3,096 2,783 2,735 1,995 1,695 ---------- ---------- ---------- ---------- ---------- Total revenues ....................................... 59,389 30,698 24,955 18,411 14,120 Operating expenses ........................................ 23,841 14,913 8,995 7,055 5,331 ---------- ---------- ---------- ---------- ---------- Earnings before provision for income taxes .............. 35,548 15,785 15,960 11,356 8,789 Provision for income taxes .............................. 14,406 6,396 6,384 4,542 3,516 ---------- ---------- ---------- ---------- ---------- Net earnings ......................................... $ 21,142 $ 9,389 $ 9,576 $ 6,814 $ 5,273 ========== ========== ========== ========== ========== Operating Data: Prime auto receivables acquired ........................... $ 994,834 $ 766,972 $ 614,627 $ 435,227 $ 252,223 Non-prime auto receivables acquired ....................... 36,030 21,511 -- -- -- Marine receivables acquired ............................... 50 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total receivables acquired (dollars 000's) ........... $1,030,914 $ 788,483 $ 614,627 $ 435,227 $ 252,223 Prime auto receivables acquired ........................... 71,070 58,409 49,307 38,360 25,327 Non-prime auto receivables acquired ....................... 2,870 1,770 -- -- -- Marine receivables acquired ............................... 6 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total receivables acquired (number of loans) ......... 73,946 60,179 49,307 38,360 25,327 Prime auto loans securitized .............................. $ 890,110 $ 658,703 $ 617,103 $ 368,638 $ 210,231 Non-prime auto loans securitized .......................... 34,488 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total auto loans securitized ......................... $ 924,598 $ 658,703 $ 617,103 $ 368,638 $ 210,231 Ratio of operating expenses as a % of average servicing portfolio ............................. 1.73% 1.49% 1.21% 1.42% 1.47% Servicing fees, net, as a % of operating expenses ................................................ 71.0% 98.1% 128.60% 101.30% 74.80% Prime net losses as a % of avg. servicing portfolio ....... 1.58% 1.36% 0.69% 0.64% 0.85% Non-prime net losses as a % of avg. servicing portfolio ... 2.37% 2.97% N/A N/A N/A Prime delinquencies of 30 days or more as a % of servicing portfolio (at period end) ............. 1.84% 1.40% 1.40% 0.93% 1.16% Non-prime delinquencies of 30 days or more as a % of servicing portfolio (at period end) ............. 3.35% 1.25% N/A N/A N/A At June 30, 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Balance Sheet Data(2): Loans, net ................................................ $ 259,290 $ 201,022 $ 96,101 $ 134,678 $ 98,823 Excess servicing .......................................... 83,434 60,662 41,265 31,575 17,970 Spread accounts ........................................... 63,590 57,414 37,333 24,052 17,649 Total assets .............................................. 451,195 349,283 181,516 196,242 139,163 Due to Union Federal ...................................... -- 338,958 177,577 171,896 125,199 Amounts due under warehouse facilities .................... 187,756 -- -- -- -- Long-term debt ............................................ 156,000 -- -- -- -- Total shareholder equity(3) ............................... 78,624 2 2 -- -- Other Data: Prime auto servicing portfolio ............................ $1,548,538 $1,159,349 $ 843,245 $ 581,858 $ 393,826 Non-prime auto servicing portfolio ........................ 47,062 19,858 -- -- -- Other receivables serviced ................................ 3,470 5,203 -- -- -- ---------- ---------- ---------- ---------- ---------- Total servicing portfolio ............................ $1,599,070 $1,184,410 $ 843,245 $ 581,858 $ 393,826 Average Prime auto servicing portfolio .................... 1,343,770 982,875 744,149 496,758 362,991 Average Non-prime auto servicing portfolio ................ 33,124 9,448 -- -- -- Other receivables average servicing portfolio ............. 4,222 6,643 -- -- -- ---------- ---------- ---------- ---------- ---------- Total average servicing portfolio .................... $1,381,116 $ 998,966 $ 744,149 $ 496,758 $ 362,991 Number of Prime auto loans serviced (at period end) ....... 147,722 117,837 91,837 71,301 56,403 Number of Non-prime auto loans serviced (at period end) ... 4,067 1,687 -- -- -- Number of Other loans serviced (at period end) ............ 543 836 -- -- -- ---------- ---------- ---------- ---------- ---------- Total number of loans serviced (at period end) ....... 152,332 120,360 91,837 71,301 56,403 Number of dealers ......................................... 2,523 1,604 884 831 648 Number of employees (full-time equivalents) ............... 313 215 142 115 93
- ------------- (1) Interest expense for the years ended June 30, 1992, 1993, 1994 and 1995, was based upon the average monthly balance "Due to Union Federal" at Union Federal's all-inclusive cost of funds. (2) All balance sheet amounts, except the amounts "Due to Union Federal", represent actual recorded assets and liabilities of the Company's business. The amount Due to Union Federal includes division funding by Union Federal as well as inter-company funding. (3) The consolidated financial statements reflect no allocation of Union Federal's historical equity. Earnings of the Company are transferred to Union Federal through the Due to Union Federal account at June 30, 1992, 1993, 1994, and 1995. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Note: Certain capitalized terms used but not otherwise defined in this report are defined in the "Glossary" set forth at the conclusion of "Item 1. Business." General The Company derives substantially all of its earnings from the purchase, securitization and servicing of automobile loans originated by dealerships affiliated with major domestic and foreign manufacturers. To fund the purchase of loans prior to securitization, the Company utilizes revolving warehouse credit facilities, discussed in "Liquidity and Capital Resources." Through securitizations, the Company periodically pools and sells loans to a trust which issues Certificates to investors representing pro-rata interests in the loans sold. When the Company sells loans in a securitization, it records a gain (or loss) on the sale of loans and establishes excess servicing as an asset. Excess servicing cashflows are received over the life of the related securitization. See the "Glossary" for definitions of accounting terms pertaining to securitizations. The following table illustrates changes in the Company's total loan acquisition volume and information with respect to Gain on Sales of Loans and Securitizations during the past eight quarters. More complete quarterly statements of earnings information is set forth in Note 14 of the Consolidated Financial Statements.
Selected Quarterly Financial Information Quarters in the Fiscal Year ended June 30, 1996 ----------------------------------------------------- First Second Third Fourth --------- --------- ----------- ----------- (dollars in thousands) Loans acquired .......... $ 239,794 $ 205,686 $ 256,510 $ 328,924 Gain (loss) on Sales of Loans ........... 6,724 8,483 7,760 7,390 Servicing portfolio at period end ...... 1,278,805 1,344,914 1,445,517 1,599,070 Selected Securitization Data: 1995-C 1995-D 1996-A/1996-1 1996-B Original amount ......... 236,410 205,550 203,048/34,488 245,102 Weighted avg ............ loan rate .......... 14.08% 13.74% 13.13%/19.87% 12.96% Certificate rate ........ 6.42% 5.97% 5.40%/6.87% 6.45% Gross spread (1) ........ 7.65% 7.77% 7.73%/13.00% 6.51% Net spread (2) .......... 6.12% 6.04% 5.68%/8.79% 5.58%
1995 ----------------------------------------------------- First Second Third Fourth --------- --------- ----------- ----------- (dollars in thousands) Loans acquired .......... $ 145,695 $ 154,441 $ 251,596 $ 236,751 Gain (loss) on Sales of Loans ........... 1,336 1,208 1,181 4,959 Servicing portfolio at period end ...... 894,559 947,549 1,081,788 1,184,410 Selected Securitization Data: 1994-C 1994-D(4) 1995-A 1995-B Original amount ......... $ 142,444 $ 122,351 $ 173,482 $ 220,426 Weighted avg ............ loan rate .......... 12.04% 12.49% 13.22% 13.91% Certificate rate ........ 6.78% 7.63% 7.77% 6.61% Gross spread (1) ........ 5.26% 4.86% 5.45% 7.30% Net spread (2) .......... 4.04% 3.92% 3.88% 4.88%
- ----------- (1) Difference between weighted average loan rate and Certificate Rate. (2) Difference between weighted average loan rate and Certificate Rate, net of upfront costs, servicing fees, ongoing surety bond and trustee fees, and hedging gains or losses. (3) Two securitizations were effected in the third quarter of fiscal 1995 - UACSC 1996-A (Prime) and PSC 1996-1 (Non-prime). (4) Includes $8.28 million in prefunding under the 1994-C Grantor Trust transferred in the second quarter of fiscal 1995. Acquisition Volume. The Company currently acquires loans in 45 major metropolitan areas in 25 states from over 2,500 manufacturer-franchised auto dealerships. The Company acquires loans on automobiles made to borrowers who exhibit a favorable credit profile ("Prime lending") and, since October 1994, to borrowers with adequate credit quality who would not qualify for a loan under the Company's Prime lending program ("Non-prime lending"). Loan acquisitions continue to be stronger than in corresponding periods of prior fiscal years. Loan acquisition volume remained relatively level between the third quarter of fiscal 1995 and the third quarter of fiscal 1996, but experienced a large increase in the fourth quarter of fiscal 1996. Although the Company continued its market expansion throughout the fiscal year, it has also made some strategic changes with respect to pricing and underwriting, including an increase in cut-off scores in several of its existing markets. This strategy was employed in order to improve the average quality of the contracts being purchased. Management continues to focus on controlled growth, recognizing that the underlying credit quality of the portfolio is one of the most important factors associated with long-term profitability. 20 The Company's loan acquisitions increased 30.7% to $1,030.9 million for the year ended June 30, 1996, from $788.5 million in fiscal 1995. The increase resulted primarily from improved market penetration in many markets as well as the Company's continued geographic expansion. Additionally, growth in the Non-prime business contributed to overall loan acquisition growth. Non-prime loan acquisitions totaled $36.0 million for the year ended June 30, 1996, compared to $21.5 million fiscal 1995. The Company's servicing portfolio increased 35.0% to nearly $1.6 billion at June 30, 1996, compared to $1.2 billion at June 30, 1995. Serviced loans increased as a result of the increased loan acquisition volume in excess of loan repayments. The volume of loans sold in securitizations increased to $924.6 million for the year ended June 30, 1996, from $658.7 million for the prior year. The increased volume of loans securitized is a result of both the increased volume in Prime loan acquisitions and the securitization of the Non-prime portfolio in the third quarter of fiscal 1996. Gross and Net Spreads. Market interest rates have been lower in fiscal 1996 as compared to the corresponding periods of fiscal 1995. Market rates experienced a downward trend beginning in the fourth quarter of fiscal 1995 through the third quarter of fiscal 1996. Rates began to rebound in the third and fourth quarters of fiscal 1996; however, still lower than those in the prior year. Because changes in loan rates on automobile loans tend to lag behind fluctuations in market rates of interest, the decrease in market rates throughout most of fiscal 1996 resulted in improved net spreads on the Prime securitizations compared to the same periods of fiscal 1995. Gross spread is defined as the difference between the weighted average loan rate and the Certificate rate. Net spread is defined as gross spread less servicing fees, upfront costs, ongoing credit enhancement fees and trustee fees, and hedging gains or losses. Prime loan rates also decreased steadily over the first three quarters. Despite decreasing Prime loan rates, the gross spreads were stronger in the first three quarters of fiscal 1996 than in corresponding periods of fiscal 1995 due to the downward-moving market rates. Fourth quarter gross spreads were adversely affected by a sharp increase in market rates; however, the Company's hedging strategy preserved the net spread on the fourth quarter securitization. Although the market (Certificate) rate rose by 105 basis points from the third to fourth quarter, the net spread decreased only slightly to 5.58% compared to 5.68% in the third quarter. Net spreads have experienced slight compressions throughout the fiscal year. However, the net spreads are significantly higher than those in fiscal 1995. The Company realized a net spread of 8.79% on its first Non-prime securitization effected in March 1996. Looking ahead, management is currently targeting net spreads of 5.00% to 5.50% on Prime securitizations (assuming a pricing spread for Asset-backed Certificates over the two-year treasury note of 50 basis points) for fiscal 1997. Management believes that by targeting a spread of 7.00% to 7.50% between loan rates and the two-year treasury rate that the net spread targets can be achieved. Although management believes these spreads can be achieved, material factors affecting the net spreads are difficult to predict and could cause management's projections to be materially inaccurate. These include current market conditions with respect to market interest rates and demand for Asset-backed Securities generally, and for Certificates representing interests in Securitizations sponsored by the Company. See -- "Discussion of Forward-Looking Statements," below. Gain on Sales of Loans. Gain on Sales of Loans continues to be a significant element of the Company's net earnings. The gain on sales of loans is affected by several factors, but is primarily affected by the amount of loans securitized and the net spread. The Company adjusts its pricing frequently and employs a hedging strategy to help ensure an adequate net spread in the ensuing securitization, while mitigating the risks of increasing interest rates and the volatility in net spreads. 21 Results of Operations The following table illustrates the Company's financial results for the past eight fiscal quarters. More complete earnings information can be found in the Consolidated Financial Statements and the Notes thereto.
Selected Quarterly Financial Information Quarters in the Fiscal Year ended June 30, ----------------------------------------------------------------------------------------------- 1996 1995 ------------------------------------------ ------------------------------------------- First Second Third Fourth First Second Third Fourth ------- ------- ------ ------ -------- ------ ------- ------ (dollars in thousands) Interest on loans ............ $6,946 $7,232 $6,732 $7,802 $2,476 $2,503 $4,072 $5,651 Interest on spread accounts and restricted cash......... 1,370 1,386 1,317 1,375 734 866 1,068 1,268 Interest expense ............. 5,289 5,556 5,359 6,071 2,257 2,590 3,733 4,381 Provision for credit losses .......... 1,150 300 600 825 0.00 160 304 610 Gain on sales of loans ............... 6,724 8,483 7,760 7,390 1,336 1,208 1,181 4,959 Servicing fees, net .......... 3,966 2,584 4,796 5,580 3,275 3,193 4,288 3,872 Other revenues ............... 750 724 798 824 650 632 768 733 Operating expenses ........... 4,719 5,602 6,658 6,862 3,230 3,431 3,503 4,749 Net earnings ................. $5,116 $5,246 $5,313 $5,467 $1,774 $1,320 $2,284 $4,011
Years Ended June 30, 1996 and 1995 Net Interest Margin. Net interest margin increased 95.7% to $9.0 million for the year ended June 30, 1996, compared to $4.6 million for fiscal 1995. Increased Prime loan volume, growth in the Non-prime portfolio, and modification of the securitization structure during fiscal 1996 contributed to increased net interest margin. Interest on Loans. Interest on loans increased 95.3% to $28.7 million for the year ended June 30, 1996, compared to $14.7 million for last year. The increase in interest income resulted, in part, from an increase in the average monthly balance of loans held for sale to $186.6 million for the year ended June 30, 1996, from $127.1 million for fiscal 1995, which was a result of increased loan acquisitions during the year. The Non-prime portfolio also contributed to the increase in interest income. The Company carried an average of over $22.2 million in Non-prime receivables held for sale during the year which produced over $4.4 million in interest income. Further, the current method with respect to securitization structure has increased the amount of interest income recognized relative to prior periods. The change in the securitization structure has significantly impacted both interest income and servicing fees, net. All of the fiscal 1996 Prime securitizations were structured such that the Company continued to earn interest income from the cut-off date through the closing date (approximately 13-22 days), and therefore, earned servicing fees only after the closing date. In all previous securitizations, the Company began earning servicing fees beginning on the cut-off date. As a result, the Company reports more interest income and less servicing fee income, and records a lower gain on sale. An estimated additional $6.1 million in interest on loans was recognized during fiscal 1996, due to the new securitization structure. The structure was altered in accordance with provisions of the agreements evidencing the Prime Warehouse Facility and the Non-prime Warehouse Facility, which require that the Company collect and remit interest on loans from cut-off date to closing of a securitization transaction to the warehouse provider. The Company continues to pay interest on the amount financed with respect to warehoused loans until closing. Interest Earned on Spread Accounts and Restricted Cash. Interest earned on Spread Accounts and Restricted Cash increased 38.4% to $5.4 million for the year ended June 30, 1996, compared to $3.9 million for the year ended June 30, 1995. The increase is a result of increased average balances due to additional securitizations during the year. The average balance of these accounts were $108.8 million in fiscal 1996, compared to $68.2 million in fiscal 1995. Earnings on spread accounts relative to the growth in the securitized servicing portfolio were somewhat decreased as a result of the structuring of the fiscal 1996 securitizations whereby additional credit enhancements were utilized in lieu of initial spread account deposits. Additionally interest earned on these accounts were somewhat lower in fiscal 1996 compared to fiscal 1995 as market rates of interest declined throughout the latter half of fiscal 1995 and the first half of fiscal 1996. 22 Interest Expense. Interest expense increased 71.9% to $22.3 million for the year ended June 30, 1996, from $13.0 million for the year ended June 30, 1995. The increase was a result of both an increased average cost of funds, and increased average outstanding borrowings. The average cost of funds increased to 7.72% for the year ended June 30, 1996, from 5.60% for the year ended June 30, 1995. The increase in cost of funds is a result of the Company obtaining alternative financing sources after its Spin-off from Union Federal in August of 1995. Included in current year interest expense is the amortization of upfront borrowing fees paid in conjunction with the establishment of the Prime and Non-prime Warehouse Facilities ("Warehouse Facilities"). The agreements provided for an initial term of one year, and must be renewed annually; therefore, the total upfront fees paid to establish the Facilities were amortized during fiscal 1996. Upfront fees related to the Warehouse Facilities totaled approximately $1.5 million. The fees paid to secure the Warehouse Facilities are non-recurring in nature; the renewal of such agreements do not require the payment of additional fees. Average outstanding borrowings increased to $288.4 million for the year ended June 30, 1996, from $231.4 million for the year ended June 30, 1995. Provision for Credit Losses. Provision for credit losses increased to $2.9 million for the year ended June 30, 1996, compared to $1.1 million for the year ended June 30, 1995. A large portion, $1.1 million, of that provision was related to the newer Non-prime portfolio. The additional provision related to the Non-prime portfolio is a result of both the time period the Non-prime portfolio is held prior to securitization, as well as the increased level of credit risk associated with the Non-prime loans as compared to the Prime loans. Management believes that the provision represents conservative estimates of potential losses on loans held for sale. Gain on Sales of Loans. Gain on Sales of Loans increased 249.6% to $30.4 million for the year ended June 30, 1996, from $8.7 million for fiscal 1995. The increase in gain was mainly due to improved net spreads as well as increased volume of Prime loans securitized. The weighted average loan rate on the Prime securitized loans was 13.48% while the weighted average certificate rate was 6.09%. The weighted average gross and net spreads on the fiscal 1996 loan sales were 7.38% and 5.85%, respectively, compared to 5.92% and 4.26% fiscal 1995. These spreads earned the Company a $29.5 million gain in 1996 after net hedging losses of approximately $2.6 million. The Company securitized $890.1 million in Prime loans and $34.5 million in Non-prime loans in fiscal 1996, compared to $658.7 million in Prime loans in fiscal 1995. Additionally, the Company completed its first Non-prime securitization during the third quarter of 1996. Approximately $34.5 million in Non-prime automobile receivables were securitized in a private placement that earned the Company nearly $850,000 after a $112,000 hedging loss. The weighted average loan rate on the Non-prime portfolio securitized was 19.87% while the weighted average certificate rate was 6.87%. The gross and net spreads on the sale were 13.00% and 8.79%, respectively. Servicing Fees, Net. Servicing fees increased 15.7% to $16.9 million for the year ended June 30, 1996, compared to $14.6 million for the year ended June 30, 1995. Although the average securitized portfolio has increased significantly, servicing fees have not. Servicing fees, net as a percentage of the average securitized servicing portfolio decreased to 1.42% for fiscal 1996, from 1.71% in fiscal 1995. The decrease in servicing fees relative to the average securitized portfolio resulted primarily from the modified securitization structure, as discussed above. Servicing fees on all fiscal 1996 Prime securitizations were not earned until after the closing date of the securitization transaction. The net effect is that interest on loans was earned for an additional 13-22 days, and servicing fee income was not earned for 13-22 days for each of the fiscal 1996 Prime securitizations. Additionally, the Company recognized somewhat smaller gains under this structure. Because additional interest income was earned on the loans to be securitized, those loans will generate lower Future Excess Servicing Cashflows after the securitization. The net present value of these future cash flows is recorded as an Excess Servicing asset as a component of the gain calculation. The Company's ratio of servicing fees, net to operating expenses was 71.0% and 98.1% for the years ending June 30, 1996, and 1995, respectively. Although the securitization structure discussed above impacted this ratio, the growth of the Non-prime program has also impacted this ratio. Because the Non-prime receivables had not been securitized until recently (March 1996), the Company earned no servicing fees on this portfolio. The impact of the additional costs to acquire and service these loans were offset by increased interest spreads earned on the Non-prime portfolio. Increased salaries and benefits also affected this ratio. The Company has added significantly to its collections staff over the past several quarters in response to and in anticipation of continued growth in the servicing portfolio. Additional support staff in systems 23 and accounting have also been added, as well as additional levels of management needed to support the Company's growth. Other Revenues. Other revenues increased 11.2% to $3.1 million for the year ended June 30, 1996, from $2.8 for the year ended June 30, 1995. The increase for the year resulted primarily from increases in late charge fee income. Salaries and Benefits Expense. Salaries and benefits increased 81.0% to $12.0 million for the year ended June 30, 1996, from $6.6 million for the year ended June 30, 1995. This increase resulted primarily from increased full-time equivalent ("FTE") employees. Average FTE's for the year ended June 30, 1996, were 270 compared to 169 for the year ended June 30, 1995. The Company has experienced growth in credit, sales and operations, collections, and support. These increases are in response to, and in anticipation of continued expansion and loan acquisition growth, as well as a growing servicing portfolio. Additional levels of management and support staff have been added to ensure efficiency in operations as the Company's acquisition volume and servicing portfolio continues to grow. Increases in salary and benefit expense were also due to increased profitability-based incentives during the year ended June 30, 1996. Other Expense. Other expense increased 43.0% to $11.9 million for the year ended June, 1996, from $8.3 million for the year ended June 30, 1995. Other operating expenses include occupancy and equipment costs, outside and professional services, loan expenses, promotional expenses, travel, office supplies and other. Many of these expenses vary directly with increased loan acquisition volume and the increased size of the servicing portfolio. Both loan acquisition volume and the servicing portfolio were increased during the year ended June 30, 1996, compared to the year ended June 30, 1995. Occupancy and equipment costs were increased as a result of the Company's move to its new headquarters in fiscal 1996. The employee growth experienced by the Company required both additional square footage and furniture and equipment. The Company also updated its phone system in conjunction with the move to its new headquarters. The Company obtained new equipment through an operating lease, and implemented a voice messaging system. The Company also replaced its collections system, incurring a loss on the disposal of the former system. Additionally, increased telephone usage resulting from an increase in collections staff and collection hours contributed to increased office expense. Net Earnings. Net earnings more than doubled to $21.1 million for the year ended June 30, 1996, compared to $9.4 million for the year ended June 30, 1995. Years Ended June 30, 1995 and 1994 The Company's total loan acquisition volume increased 28.3% to $788.5 million for the year ended June 30, 1995, from $614.6 million for the year ended June 30, 1994. The increases resulted primarily from the Company's geographic expansion. Additionally, the Company generated $21.5 million in Non-prime loan acquisitions. The Company's total servicing portfolio increased 40.5% to nearly $1.2 billion at June 30, 1995, from $843.2 million at June 30, 1994. Serviced loans increased as a result of the increased loan acquisition volume in excess of loan repayments. The volume of loans sold in securitizations increased to $658.7 million for the year ended June 30, 1995, from $617.1 million for the year ended June 30, 1994. Net Interest Margin. Net interest margin decreased 32.4% to $4.6 million for the year ended June 30, 1995 from $6.0 million for the year ended June 30, 1994. Interest on Loans. Interest on loans increased 17.5% to $14.7 million for the year ended June 30, 1995, from $12.5 million for the year ended June 30, 1994. The increase resulted primarily from an increase in the weighted average yield on the loans to 11.51% for the year ended June 30, 1995, from 10.14% for the year ended June 30, 1994. Interest Expense. Interest expense increased to $13.0 million in fiscal 1995 from $7.8 million in 1994. The increase was attributable to an increase in the average balance due to Union Federal to $231.4 million in fiscal 1995, from $174.2 million in fiscal 1994, and an increase in the average cost of funds to 5.60% in fiscal 1995 compared to 4.46% in fiscal 1994. 24 Gain on Sale of Loans. Gain on Sale of Loans increased 87.0% to $8.7 million for the year ended June 30, 1995, from $4.6 million for the year ended June 30, 1994. The increase was attributable to increased gross spreads. The weighted average gross spread for the securitizations during the year ended June 30, 1995, increased to 5.92% from 5.78% for the securitizations during the year ended June 30, 1994. The volume of loans sold in the year ended June 30, 1995, increased as compared to the year ended June 30, 1994. Approximately $41.6 million or 6.3% more loans were sold during the year ended June 30, 1995, as compared to the year ended June 30, 1994. Servicing Fees. Servicing fees increased 26.4% to $14.6 million for the year ended June 30, 1995, from $11.6 million for the year ended June 30, 1994. The increase in servicing fees resulted from an increase in the average securitized loan balances outstanding to $855.2 million for the year ended June 30, 1995, from $589.0 million for the year ended June 30, 1994. Other Revenues. Other revenues increased slightly to $2.8 million for the year ended June 30, 1995, from $2.7 million for the year ended June 30, 1994. The increase resulted primarily from an increase of $110,000 in late charges. Salaries and Benefits Expense. Salaries and benefits increased 52.6% to $6.6 million for the year ended June 30, 1995 from $4.3 million for the year ended June 30, 1994. This increase resulted primarily from an increase in average FTE's to 169 for the year ended June 30, 1995 from 111 for the year ended June 30, 1994. Other Expense. Other expense increased 78.1% to $8.3 million for the year ended June 30, 1995, from $4.7 million for the year ended June 30, 1994. The increase was partially due to an $800,000 non-recurring charge for commitment fees and legal expenses relating to a secured borrowing facility, which was being negotiated and was intended to provide funding for the Excess Servicing and Spread Account assets. The Company was able to obtain financing for such assets on more favorable terms through the private placement of Senior Notes due 2002 and, as a result, terminated negotiations for such secured credit facility. The increase was also due to increases in credit report fees, service bureau expenses and other expenses associated with loan purchasing and servicing. Net Earnings. Net earnings decreased to $9.4 million for the year ended June 30, 1995, from $9.6 million for the year ended June 30, 1994. Delinquency and Credit Loss Experience Set forth below is certain information concerning the experience of UAC pertaining to delinquencies, and net losses on the Prime fixed rate retail automobile, light truck and van receivables serviced by the Company. There can be no assurance that future delinquency, and net loss experience on the receivables will be comparable to that set forth below.
Prime Delinquency Experience At June 30, -------------------------------------------------------------------------------------------------- 1996 1995 1994 --------------------------- -------------------------- --------------------------- (Dollars in thousands) Number of Number of Number of Loans Amount Loans Amount Loans Amount ----- ------ ----- ------ ----- ------ Servicing portfolio .......... 147,722 $1,548,538 117,837 $1,159,349 91,837 $ 843,245 Delinquencies 30-59 days .............. 1,602 17,030 1,169 12,097 907 8,389 60-89 days .............. 694 7,629 377 4,124 213 2,118 90 days or more ......... 333 3,811 -- -- 137 1,324 Total delinquencies .......... 2,629 28,470 1,546 16,221 1,257 11,831 Total delinquencies as a percent of servicing portfolio....... 1.78% 1.84% 1.31% 1.40% 1.37% 1.40%
25 As indicated in the above table, delinquency rates based upon outstanding loan balances of accounts 30 days past due and over increased to 1.84% at June 30, 1996 from 1.40% at June 30, 1995 for the Prime lending portfolio. The primary reason for the increase in delinquencies is that the Company changed the way that it measures and reports delinquencies beginning with the quarter ended September 30, 1995. Beginning with such quarter, the Company began to include in the delinquency calculations the accounts of customers who had filed for personal bankruptcy, but whose cases have not been resolved. Previously, these accounts were not included in the delinquency figures, since the Company could not take any action to rectify them until the bankruptcy court resolved each case. If the historical methods of measuring and reporting delinquencies had been used, the Company estimates that the June 30, 1996 delinquency rate would have been approximately 1.46%. Non-prime Delinquency Experience At June 30, ------------------------------------------------ 1996 1995 -------------------- -------------------- (Dollars in thousands) Number of Number of Loans Amount Loans Amount ----- ------ ----- ------ Servicing portfolio ......... 4,067 $47,062 1,687 $19,858 Delinquencies 30-59 days ............. 94 1,120 18 215 60-89 days ............. 40 455 1 17 90 days or more ........ -- -- 1 17 Total delinquencies ......... 134 $ 1,575 20 $ 249 Total delinquencies as a percent of servicing portfolio...... 3.29% 3.35% 1.19% 1.25% Non-prime portfolio delinquency was 3.35% based on outstanding loan balances of accounts 30 days past due and over at June 30, 1996, compared to 1.25% at June 30, 1995. The Company began acquiring Non-prime loans in October 1994. The increase is consistent with management's expectations, and the somewhat greater credit risk associated The following tables set forth information concerning the Company's experience pertaining to gross charge-offs, recoveries and net losses for its servicing portfolio. There is generally no recourse to dealers under any of the terms of the loans in the servicing portfolio, except to the extent of representations and warranties made by dealers in connection with such loans.
Prime Credit Loss Experience For the year ended June 30, ----------------------------------------------------------------------------- 1996 1995 1994 --------------------- ---------------------- --------------------- Number Number Number of Loans Amount of Loans Amount of Loans Amount --------- ---------- -------- -------- -------- ---------- (Dollars in thousands) Avg. servicing portfolio ........... 132,363 $1,343,770 104,455 $ 982,875 83,673 $ 744,149 Gross charge-offs ...... 3,663 40,815 3,493 28,628 1,404 12,094 Recoveries ............. 19,543 15,258 6,946 ---------- ---------- ---------- Net losses ............. 21,272 13,370 5,148 ========== ========== ========== Gross charge-offs as a % of avg ....... servicing portfolio . 2.77% 3.04% 3.34% 2.91% 1.68% 1.63% Recoveries as a % of gross charge-offs 47.88% 53.30% 57.43% Net losses as a % of avg. servicing portfolio .......... 1.58% 1.36% 0.69%
26 As indicated in the table above, credit losses as a percentage of the average Prime servicing portfolio increased to 1.58% for the year ended June 30, 1996, compared to 1.36% for the year ended June 30, 1995. The primary reason for the recent rise in credit losses and a contributing factor in the increase in delinquencies is the loans the Company acquired during 1994 and early 1995 which have proven to be of lower credit quality than loans the Company acquired prior to 1994 and after the first quarter of fiscal 1995. The Company has determined that many of these lower quality loans resulted from "low-side overrides" which are loans made to customers whose credit scores were below the Company's minimums, but which were made as a result of the credit analyst's judgment that the loans were acceptable. The low side override loans have had higher rates of delinquency and loss. Credit analyst discretion for making low side override loans has been reduced. The Company also believes that the actual mix of loans purchased during 1994 may have been of somewhat lower average credit quality as a result of competitive pricing pressures which permitted higher quality borrowers to obtain lower cost loans from others. Loans made during this period are nearing the end of the peak period for delinquencies and credit losses which the Company believes to be nine to sixteen months from the date of closing. Non-prime Credit Loss Experience For the year ended June 30, ---------------------------------------------------- 1996 1995 ------------------- ------------------------ Number Number of Loans Amount of Loans Amount -------- ------ -------- ------ (dollars in thousands) Avg. servicing portfolio ........... 2,869 $33,124 797 $ 9,448 Gross charge-offs ...... 136 1,455 27 333 Recoveries ............. 670 146 ----- ----- Net losses ............. 785 187 ===== ===== Gross charge-offs as a % of avg ....... servicing portfolio . 4.74 4.39% 5.08% 5.29% (1) Recoveries as a % of gross charge-offs 46.07% 43.87% Net losses as a % of avg. servicing portfolio .......... 2.37% 2.97% (1) - ---------------- (1) Non-prime loans were only outstanding for eight (8) months. Therefore, the percentages reflect an annualized calculation. Non-prime credit losses are well within management's expectations. Non-prime credit loss and delinquency performance is being closely monitored as this portfolio becomes more seasoned. Overall, the Company has taken a number of steps to improve its collection efforts over the last several quarters. It has more than doubled the staffing level in its collection department since June 30, 1995. It has installed an improved version of its collection system in its new headquarters, allowing its collectors to be more productive. For example, the number of outbound credit collection stations at its headquarters has been increased from 14 to 50. In addition, UAC revised its repossession policy in September 1995 to repossess accounts by 120 days past due, rather than after 60 days. UAC found that when it switched, in April 1995, to begin repossessions after 60 days, losses increased because some vehicles were repossessed from customers that otherwise had the ability to make payments. Other changes intended to enhance credit quality include the reduction in low side overrides mentioned above as well as the increase in cutoff scores in any individual metropolitan area where credit losses were running at a rate greater than 2.50% over the life of the loans. Provisions are made for expected loan losses in conjunction with each loan sale. The allowance for loan loss is inherent in the excess servicing asset recorded upon sale. Management believes that the allowance for losses on securitized loans represents a conservative estimate of potential losses. The allowance for loan loss as a percentage of outstanding securitized loans was 3.22% and 2.29% at June 30, 1996 and 1995, respectively. 27 Financial Condition Loans, Net and Servicing Portfolio. Loans, net includes the principal balance of loans held for sale, net of unearned discount and allowance for credit losses, loans in process, and dealer premiums. Loans, net increased to $259.3 million at June 30, 1996, from $201.0 million at June 30, 1995. This increase was due primarily to the increase in loans acquired in the fourth quarter of fiscal 1996 as compared to the fourth quarter of fiscal 1995. Loan acquisitions were $328.9 million during the fourth quarter of fiscal 1996, compared to $236.8 million in the fourth quarter of fiscal 1995. Allowance for credit losses increased nearly $650,000 from June 30, 1995. The Company serviced $1.4 billion and $992.8 million in securitized loans and the total servicing portfolio was $1.6 billion and $1.2 billion as of June 30, 1996, and June 30, 1995, respectively. Excess Servicing. Excess Servicing increased to $83.4 million as of June 30, 1996, from $60.6 million as of June 30, 1995. This balance increased by the amounts capitalized upon consummation of the various Prime and Non-prime securitizations related to the future value of estimated excess cashflows (including estimated dealer premium rebates). Structuring of the fiscal 1996 Prime securitizations included the sale of "interest only strips" which generated more cash from the sale, but served to reduce the Excess Servicing assets recorded in conjunction with the sale. The amounts capitalized were offset by actual Excess Servicing Cashflows received over the year ended June 30, 1996. Allowance for losses on securitized loans is included as a component of the Excess Servicing asset. At June, 1996, the allowances related to both Prime and Non-prime securitized loans totaled $43.5 million or 3.22% of the total securitized loan portfolio compared to $22.8 million or 2.29% at June 30, 1995. Accrued interest due the Company at the cutoff date on securitized loan pools is also included as a component of Excess Servicing. Spread Accounts. Spread Accounts increased to $63.6 million at June 30, 1996, from $57.4 million at June 30, 1995. This balance was increased by the initial deposit made upon securitization of the UACSC 1995-C Auto Trust and PSC 1996-1 Grantor Trust, and subsequent deposits of Excess Servicing Cashflows, and has been reduced by any withdrawal of funds from the Spread Accounts. Withdrawals of spread account funds are made when the balance of the Spread Accounts are in excess of the requirements stipulated in the servicing agreement. No initial spread account deposits were made in connection with the last three Prime transactions as a result of the structuring which utilized alternative credit enhancements in lieu of initial spread account deposits. Warehouse Credit Facilities, Senior and Senior Subordinated Notes. Amounts "Due to Union Federal" represented the Company's share of borrowings from Union Federal prior to consummation of the Company's initial public offering on August 7, 1995. The Warehouse Credit Facilities and Senior Notes constituted the Company's primary funding sources beginning in August of 1995. The Company issued, in a private placement, $46.0 million in Senior Subordinated Notes in April 1996. The balance of the Warehouse Credit Facilities and the Senior and Senior Subordinated Notes was $343.8 million at June 30, 1996, compared to $339.0 million "Due to Union Federal" at June 30, 1995. The amount "Due to Union Federal" was paid or otherwise eliminated upon consummation of the Company's initial public offering. See "Liquidity and Capital Resources." Liquidity and Capital Resources Sources and Uses of Cash in Operations. The Company's business requires significant amounts of cash to support operations. Its primary uses of cash include (i) purchases and financing of loans, (ii) payment of Dealer Premiums, (iii) securitization costs including cash held in Spread Accounts and similar cash collateral accounts under revolving Warehouse Credit Facilities, (iv) servicer advances of payments on securitized loans pursuant to securitization trusts, (v) losses on hedging transactions realized in connection with the closing of securitization transactions where interest rates have declined during the period covered by the hedge, (vi) operating expenses, (vii) interest expense and (viii) payment of income taxes. The Company's sources of cash from operations include (i) standard servicing fees, generally 1.0% per annum of the Prime securitized portfolio, (ii) Excess Servicing Cash Flows, (iii) Dealer Premium Rebates, (iv) gains on hedging transactions realized in connection with the closing of securitization transactions where interest rates have increased during the periods covered by the hedge, (v) interest income, (vi) sales of loans in securitization transactions and (vii) sale of interest-only strips. Net cash used by operating activities decreased to $55.8 million for the year ended June 30, 1996, from a use of $140.9 million for the year ended June 30, 1995, 28 which was primarily attributable to an increase in loan sales relative to loans acquired, and the structuring of the fiscal 1996 securitization transactions. Proceeds from sale of interest-only strips generated $26.7 million in additional cash at securitization. Alternative securitization structuring with respect to initial spread account deposit requirements also contributed to improved liquidity. Additionally, the Company has been able to defer a portion of the Gain on sales of loans for tax purposes. The Company realized a $5.3 million cash benefit by doing so during fiscal 1996. Dealer premium rebates received in excess of the original estimates are recorded as servicing fees when received. Excess rebates received during fiscal 1996, were approximately $2.8 million compared to $3.2 million for fiscal 1995. Hedging. Hedging transactions may represent a source or a use of cash during a given period depending on the change in interest rates. During fiscal 1996, hedging transactions have required a net use of cash of $2.7 million. Financing Activities and Warehouse Credit Facilities. Cash flows from financing activities historically (until August 1995) related entirely to changes in the level of borrowing from Union Federal. The decrease in cash provided by financing activities for fiscal 1996, corresponds to the decrease in borrowings as a result of the Company's Spin-off and initial public offering whereby the Company paid, or otherwise eliminated, all outstanding amounts due to its former parent, Union Federal. The offering generated $58.0 million in proceeds to the Company. Prior to the Company's initial public offering, the Company was dependent upon financing from Union Federal, which, as a savings bank, has multiple sources of funds, including federally insured deposits and Federal Home Loan Bank advances. Such financing is no longer available to the Company, which has substantial capital requirements to support its ongoing operations and anticipated growth. The Company's sources of liquidity are currently funds from operations, securitizations and external financing not related to Union Federal. Historically, the Company has used the securitization of loan pools as its primary source of long-term funding, and intends to continue to do so. Securitization transactions enable the Company to improve its liquidity, to recognize gains from the sales of the loan pools while maintaining the servicing rights to the loans, and to control interest rate risk by matching the repayment of amounts due to investors in the securitizations with the actual cash flows from the securitized assets. The Company has borrowing arrangements with an independent financial institution for the Prime Warehouse Facility of up to $350.0 million and a similar Non-prime Warehouse Facility of up to $50.0 million. The Prime Warehouse Facility provides funding for loan acquisitions at a purchase price of 98.0% of the outstanding principal balance of eligible loans at the time of purchase to the extent allocable to loans which, upon acquisition, provided for 72 monthly payments or less. Additional funding is provided for eligible loans with greater than 72 monthly payments at a purchase price of 96.0% of the outstanding principal balance. The advance rate may be reduced to as low as 92.0% (72 monthly payments and less) and 86.0% (greater than 72 monthly payments) if certain financial tests are not met, and/or if a securitization has not been effected in the preceding sixteen weeks. The Non-prime Warehouse Facility provides funding for loan acquisitions at a purchase price of 80.0% of the outstanding principal balance of eligible loans at the time of purchase. The Company also issued $110.0 million in Senior Notes in connection with the Spin-off of the Company by Union Federal and the Company's initial public offering, and completed a private placement of $46.0 million in 9.99% Senior Subordinated Notes in April 1996. Between securitization transactions, the Company relies primarily on the revolving Warehouse Credit Facilities to fund ongoing loan acquisitions (not including Dealer Premiums). In addition to loan acquisition funding, the Company also requires substantial capital on an ongoing basis to fund the advances of Dealer Premiums, securitization costs, servicing obligations and other cash requirements described above. The Company's ability to borrow under the credit facilities is dependent upon its compliance with the terms and conditions thereof. The Company's ability to obtain successor facilities or similar financing will depend on, among other things, the willingness of financial institutions to participate in funding automobile financing businesses and the Company's financial condition and results of operations. Moreover, the Company's growth may be inhibited, at least temporarily, if the Company is not able to obtain additional funding through these or other facilities or if it is unable to satisfy the conditions to borrowing under the credit facilities. 29 To accommodate its anticipated cash and liquidity requirements for the near term, the Company determined during the third quarter to seek additional capital and, toward that end, completed its private placement of Senior Subordinated Notes in April 1996. The securities carry a seven-year bullet maturity and were rated BBB- by Fitch Investors Service L.P. The additional debt will affect the Company's weighted average cost of funds as well as the interest expense recognized in future periods. The proceeds of the sale of the securities will be used to enhance liquidity and fund the Company's continued nationwide expansion. Management believes that the proceeds from the Company's initial public offering, the Senior Notes, the Senior Subordinated Notes, the other credit facilities described above, future earnings, and periodic securitization of loans should provide the necessary capital and liquidity for its operations during the remainder of calendar 1996. The period during which its existing capital resources will continue to be sufficient will, however, be affected by the factors described above affecting the Company's cash requirements. A number of these factors are difficult to predict, including particularly the cash-effect of hedging transactions, the availability of outside credit enhancement in securitizations or other financing transactions and other factors affecting the net cash provided by securitizations. Depending on the Company's ongoing cash and liquidity requirements, market conditions and investor interest, the Company may seek to issue additional debt or equity securities in the near term. The sale of additional equity, including Class A Common Stock or preferred stock, would dilute the interests of current shareholders. Discussion of Forward-Looking Statements The above discussions contain forward-looking statements made by the Company regarding its results of operations, cash flow needs and liquidity, loan acquisition volume, target spreads and other aspects of its business. Similar forward-looking statements may be made by the Company from time to time. Such forward-looking statements are subject to a number of important factors that cannot be predicted with certainty and which could cause such forward-looking statements to be materially inaccurate. Among these factors are the following: Capital Requirements and Availability. The Company requires substantial amounts of cash to support its business and growth as described above. Its cash requirements can vary depending on the cash-effect of hedging transactions, the availability of external credit enhancement in securitizations or other financing transactions and the other factors that affect the net cash provided by securitizations (at closing and over time) as well as the percentage of principal amount of loans acquired for which the Company can obtain Warehouse financing. The Company's ability to meet these ongoing cash and liquidity requirements depends on several factors. First is the Company's ability to effect periodic securitizations of its loan portfolio and the terms of such securitizations which are dependent on market factors generally, changes in interest rates, demand for asset-backed securities and the Certificates offered in the Company's securitizations particularly. Another important factor is the Company's ability to continue to comply with the terms of its senior and senior subordinated notes and Warehouse facilities and/or its ability to obtain funding to replace and/or supplement such facilities should it become necessary to do so. The Company's ability to obtain successor facilities or similar financing will depend on, amount other things, the willingness of financial institutions to participate in funding automobile financing businesses and the Company's financial condition and results of operations. Moreover, the Company's growth may be inhibited, at least temporarily, if the Company is not able to obtain additional funding through these or other facilities or if it is unable to satisfy the conditions to borrowing under the Credit Facilities. Loan Acquisition Volume, Spread and Growth. Many factors affect the Company's loan acquisition volume and spread, which have significant impact on the Company's earnings. Volume is affected by overall demand for new and used automobiles in the economy generally, the willingness of automobile dealers to forward prospective borrowers' loan applications to the Company, as well as the number of qualified borrowers whose loans are approved and whose loans are ultimately acquired by the Company. Competition can significantly impact both acquisition volume and the note rate at which loans are originated. Competition in the Company's business enerally is intense. The Buy Rate offered by the Company is a significant competitive factor. A competitor offering a lower Buy Rate may be more likely to acquire a loan. The continued growth of the Company's servicing portfolio will depend significantly on the receptivity to the Company's program of new dealers in existing markets as well as new markets and the continued stability of the Company's relationships with its existing dealer network. 30 Interest Rate Risk. The Company's sources of funds generally have variable rates of interest and its loan portfolio bears interest at fixed rates. It therefore bears interest rate risk on loans until they are securitized and employs a hedging strategy to mitigate this risk. There is no assurance that its strategy will completely offset changes in interest rates. In particular, such strategy depends on management's estimates of loan acquisition volume. Loan Losses and Prepayment Rates. The Company bears the primary risk of losses due to defaults in its servicing portfolio. Default and loan loss rates are impacted by general economic factors that affect borrowers' ability to continue to make timely payments on their indebtedness. Prepayments on loans in the servicing portfolio reduce the size of the portfolio and reduce the Company's servicing income. The Gain on Sale of Loans in connection with each securitization transaction and the amount of Excess Servicing recognized in each transaction reflect deductions for estimates of future defaults and prepayments. The carrying value of Excess Servicing may be adjusted periodically to reflect differences between estimated and actual credit losses and prepayments on past securitizations. The Company's results of operations could be adversely affected if default or prepayment rates on securitized loans substantially exceed the estimated levels. Regulation. The Company's business is subject to numerous federal and state consumer protection laws and regulations, which, among other things; (i) require the Company to obtain and maintain certain licenses and qualifications; (ii) limit the interest rates, fees and other charges the Company is allowed to charge; (iii) limit or prescribe certain other terms of the Company's contracts; (iv) require specified disclosures; and (v) define the Company's rights to repossess and sell collateral. Changes in existing laws or regulations, or in the interpretation thereof, or the promulgation of any additional laws or regulation could have an adverse effect on the Company's business. Other Matters The Company completed its move to its new headquarters at 250 North Shadeland Avenue, Indianapolis, Indiana 46219. It is leasing the building of approximately 115,000 square feet from Waterfield Mortgage Company, Inc., which is controlled by Richard D. Waterfield, a Company director and its controlling shareholder. The Company is also subleasing a portion of the building to Union Federal. During June of 1996, the Company began acquiring fixed-rate marine receivables from dealers in Indiana. The Company has acquired marine receivables in the past, and currently services a small marine portfolio for Union Federal. The Union Division had ceased its marine acquisition business in November 1991 to focus its efforts on the expansion of its auto markets and dealer base. With the success of its nationwide expansion with respect to the auto lending business, the Company intends to capitalize on its market presence with its existing employees to establish dealer relationships with local marine dealerships. During July of 1996, the Company began servicing receivables under agreements with individual dealerships. These agreements provide for the servicing of dealer originated loans for a servicing fee, but do not currently entail any advances by the Company for the purchase of the vehicle. The Company, however, may consider partial funding of loans in conjunction with dealer servicing in the future. As a part of its ongoing development of its business plan, the Company is researching the possibilities of engaging in other finance-related businesses such as leasing, and other non-auto consumer lending. Additionally, the Company is researching the possibility of expanding its dealer base to include nationally recognized used rental car outlets which are not manufacturer-franchised dealerships. Based on this research, the Company may expand its current operations to include some or all of the above finance-related businesses. It is management's philosophy to search continually for new products and markets to grow and expand the Company in order to maximize profits and shareholder value. 31 Item 8. Financial Statements and Supplementary Data [LETTERHEAD OF KPMG PEAT MARWICK LLP] Independent Auditors' Report The Board of Directors Union Acceptance Corporation: We have audited the accompanying consolidated balance sheets of the Union Acceptance Corporation and Subsidiaries as of June 30, 1996 and 1995, the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended June 30, 1996 and the related consolidated statement of shareholders' equity for the year ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Union Acceptance Corporation and Subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Indianapolis, Indiana July 30, 1996 32 UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 30, 1996 and 1995 (in thousands, except share data)
================================================================================================================= Assets 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Cash $ 13,459 9,483 Restricted cash 14,789 8,855 Loans, net 259,290 201,022 Accrued interest receivable 2,127 1,508 Furniture and equipment, net 2,026 1,347 Excess servicing 83,434 60,622 Spread accounts 63,590 57,414 Other assets 12,480 9,032 - ----------------------------------------------------------------------------------------------------------------- Total Assets $451,195 349,283 ================================================================================================================= Liabilities - ----------------------------------------------------------------------------------------------------------------- Due to Union Federal -- 338,958 Amounts due under warehouse facilities 187,756 -- Long-term debt 156,000 -- Accrued interest payable 5,820 -- Amounts due to trusts 7,931 5,901 Dealer premiums payable 3,381 3,255 Other payables and accrued expenses 3,326 1,167 Deferred income tax payable 8,357 -- - ----------------------------------------------------------------------------------------------------------------- Total Liabilities 372,571 349,281 - ----------------------------------------------------------------------------------------------------------------- Shareholders' Equity - ----------------------------------------------------------------------------------------------------------------- Preferred Stock, without par value, authorized 10,000,000 shares; none issued and outstanding -- -- Class A Common Stock, without par value, authorized 30,000,000 shares; 4,011,358 and 1 shares issued and outstanding at June 30, 1996 and June 30, 1995, respectively 58,180 1 Class B Common Stock, without par value, authorized 20,000,000 shares; 9,200,000 and 1 shares issued and outstanding at June 30, 1996 and June 30, 1995, respectively -- 1 Retained earnings 20,444 -- - ----------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 78,624 2 - ----------------------------------------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $451,195 349,283 =================================================================================================================
See accompanying notes to consolidated financial statements. 33 UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years ended June 30, 1996, 1995 and 1994 (in thousands, except share data)
==================================================================================================== 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Interest on loans $ 28,712 14,702 12,515 Interest on spread accounts and restricted cash 5,448 3,936 1,745 - ---------------------------------------------------------------------------------------------------- Total interest income 34,160 18,638 14,260 Interest expense 22,275 12,961 7,769 - ---------------------------------------------------------------------------------------------------- Net interest margin 11,885 5,677 6,491 Provision for credit losses 2,875 1,074 484 - ---------------------------------------------------------------------------------------------------- Net interest margin after provision 9,010 4,603 6,007 Gain on sales of loans 30,357 8,684 4,643 Servicing fees, net 16,926 14,628 11,570 Other 3,096 2,783 2,735 - ---------------------------------------------------------------------------------------------------- Total revenues 59,389 30,698 24,955 - ---------------------------------------------------------------------------------------------------- Salaries and benefits 11,985 6,622 4,340 Other 11,856 8,291 4,655 - ---------------------------------------------------------------------------------------------------- Total operating expenses 23,841 14,913 8,995 - ---------------------------------------------------------------------------------------------------- Earnings before provision for income taxes 35,548 15,785 15,960 Provision for income taxes 14,406 6,396 6,384 - ---------------------------------------------------------------------------------------------------- Net earnings $ 21,142 9,389 9,576 ==================================================================================================== Net earnings per common share $ 1.60 N/A N/A ==================================================================================================== Weighted average number of common shares outstanding 13,209,378 N/A N/A ====================================================================================================
See accompanying notes to consolidated financial statements. 34 UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1996, 1995 and 1994 (in thousands)
========================================================================================================== 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 21,142 9,389 9,576 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Gain on sales of loans (37,900) (16,935) (7,504) Dealer premiums paid in excess of dealer premium rebates received on loans held for sale (50,059) (35,245) (34,264) Return of excess servicing cashflows 37,871 30,049 26,084 Provision for credit losses 2,875 1,074 484 Spread accounts (6,176) (20,081) (13,281) Amortization and depreciation 4,395 2,049 1,726 Restricted cash (5,934) (7,734) (755) Other assets and accrued interest receivable (6,788) (6,745) (1,588) Amounts due to trusts 2,030 3,761 326 Other payables and accrued expenses 14,281 939 (19,104) Loan originations in excess of liquidations (982,800) (760,091) (583,036) Securitization of loans held for sale 924,598 658,703 617,103 Proceeds on sale of interest only strip 26,686 -- 8,623 - ---------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (55,779) (140,867) 4,390 - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of fixed assets (1,347) (995) (497) - ---------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in Due to Union Federal, including regulatory equity distribution (337,423) 151,992 (3,895) Net change in warehouse credit facilities 187,756 -- -- Proceeds from issuance of senior notes 110,000 -- -- Proceeds from issuance of senior subordinated notes 46,000 -- -- Payment of borrowing fees (3,231) (647) -- Net proceeds from issuance of common stock 58,000 -- 2 - ---------------------------------------------------------------------------------------------------------- Net cash provided (used) from financing activities 61,102 151,345 (3,893) - ---------------------------------------------------------------------------------------------------------- Change in cash 3,976 9,483 -- Cash, beginning of year 9,483 -- -- - ---------------------------------------------------------------------------------------------------------- Cash, end of year $ 13,459 9,483 -- ========================================================================================================== Supplemental disclosures of cash flow information: Income taxes paid $ 10,680 6,396 6,384 ========================================================================================================== Interest paid $ 15,648 12,961 7,769 ==========================================================================================================
35 See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity For the year ended June 30, 1996 (in thousands, except share data)
Number of Common Stock Shares Outstanding Total -------------------------- Common Retained Shareholders' Class A Class B Stock Earnings Equity - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1995 1 1 $ 2 -- 2 Issuance of common stock through initial public offering 4,000,000 9,200,000 58,000 -- 58,000 Regulatory equity distributions related to spin-off (1) (1) (2) (698) (700) Grant of common stock 11,358 -- 180 -- 180 Net earnings -- -- -- 21,142 21,142 - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1996 4,011,358 9,200,000 $ 58,180 20,444 78,624 ========================================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1996, 1995 and 1994 (1) Summary of Significant Accounting Policies Basis of Presentation Union Acceptance Corporation and Subsidiaries ("UAC" or the "Company"), formerly a Division of Union Federal Savings Bank of Indianapolis (the "Union Division"), specializes in the acquisition, sale and servicing of retail installment loans (primarily automobile loans) acquired from a network of over 2,500 manufacturer-franchised dealerships in 25 states from whom such loans are regularly purchased. Loans acquired are subsequently sold to investors through asset-backed securitization transactions. In contemplation of a public offering to sell common stock, UAC was formed as a wholly-owned subsidiary of Union Federal Savings Bank of Indianapolis ("Union Federal") in December 1993. During 1995, Union Acceptance Funding Corporation, UAC Securitization Corporation, Performance Funding Corporation and Performance Securitization Corporation were formed as wholly-owned subsidiaries of UAC and selected assets and operations of the Union Division were transferred to UAC. In August of 1995, the Company completed an initial public 36 offering simultaneously with a tax free spin-off from its parent, Union Federal. During 1996, UAC Boat Funding Corp. was formed as a wholly-owned subsidiary of UAC. The accompanying consolidated financial statements include the accounts of UAC and Subsidiaries and the Union Division prior to the transfer and spin-off. All significant intercompany accounts and transactions have been eliminated in the consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with those in the general practice of the consumer finance industry. The consolidated financial statements reflect no allocation of Union Federal's historical equity. Earnings of the Company were transferred to Union Federal through the Due to Union Federal account prior to the spin-off. Cash The Company considers all significant investments with a maturity of three months or less when purchased to be cash equivalents. Restricted Cash Restricted cash primarily consists of funds held in reserve accounts in compliance with the terms of the Warehouse Facility Agreements. Loans, Net All loans in the Company's prime and non-prime portfolios are held for sale through securitizations and include automobile, light-truck, van, and marine loans including dealer premiums (on prime loans). Such loans are packaged and sold through asset-backed securitization transactions and are carried at their principal amount outstanding (amortized cost), net of unearned discount. Loan production is hedged periodically to such time as the next securitization is estimated to occur. Interest on these loans is accrued and credited to interest income based upon the daily principal amount outstanding. The Company provides an allowance for credit losses from the date of origination to the date of securitization. The allowance is shown as a reduction to loans. Accrued Interest Receivable Accrued interest receivable represents interest earned but not collected on loans held for sale. Furniture and Equipment Furniture and equipment are recorded at cost. Depreciation is determined on accelerated methods over the estimated useful lives of the respective assets. Dealer Premiums and Dealer Premium Rebates Dealer premiums are incentives paid to dealers in connection with the acquisition of loans. Incentives paid to dealers are deferred in accordance with Statement of Financial Accounting Standards ("SFAS") No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. Unamortized deferred costs are considered a portion of the basis of the loans held for sale and are included as a component of the subsequent gain or loss upon sale of the related loans. A portion of the amounts paid to dealers for participation are refundable to the Company in the event of prepayment or default. An estimate for the refundable amount is established as an asset (dealer premium rebates) as a component of the gain or loss upon the sale of the loans. Estimates for dealer premium rebates are based on the historical experience of the incentive plans. Dealer premium rebates in excess of original estimates are recorded as servicing fees, net as received. See "Servicing Fees, Net" below. Dealer premiums are included in loans, net and dealer premium rebates are recorded as a component of excess servicing. 37 Excess Servicing Excess servicing is capitalized upon each securitization and represents the difference between the coupon rate of the loans sold and the certificate rate to the investors less the contractual servicing fee, typically one percent, and other ongoing fees discounted at a market rate. Excess servicing is reduced by a credit loss provision which is deemed adequate to cover net losses over the life of the respective securitization. Credit loss provisions are based on historical loss rates of previous securitizations and the loan composition of the securitization. Credit loss provisions are discounted at rates commensurate with a risk free investment of similar maturity. Excess servicing includes accrued interest due UAC but not yet collected through date of sale on securitized loans and estimated dealer premium rebates. Excess servicing is reduced by the excess cash flows as received over the life of the securitization. The Company records a discount related to excess servicing at sale which is accreted to income over the expected life of the securitized pool. Prepayment assumptions are utilized to project future cash flows based on historical experience. Prepayment assumptions and credit loss provisions are periodically reviewed with deficiencies, if any, in the present value of the future cash flows, using the original discount rate, charged to operations through servicing fees, net. Spread Accounts These accounts are intended to protect the securitization investors and any letter of credit provider or credit enhancer against credit losses. The initial deposit, if required, and net excess servicing cash flows earned are retained for each securitization until the spread account balance increases to a specified percentage of the pool balance. Funds in excess of specified percentages are remitted to the Company over the remaining life of the securitization. Should the spread account be insufficient to cover losses, each trust is further supported by additional credit enhancements. Selected trusts are secured by either a letter of credit or surety bond provided by a financial institution. Other trusts have been formed with a "senior-sub structure" whereby the senior certificate holders are protected against losses by having their interests senior to the subordinate certificate holders' interests. Subordinated certificate holders assume a slightly greater risk, but earn a higher yield on the certificates. For each trust, there is no recourse to the Company beyond the balance in the spread account or the trust's future earnings. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Tax expense has been computed assuming the Company was a stand-alone entity (prior to spin-off). Amounts Due to Trusts Amounts due to trusts represent monies collected but not paid to the trustee for principal and interest remittances as well as recovery payments in respect of securitized loans. All amounts collected by the Company are remitted to the trustee within two business days, and subsequently distributed by the trustee to the investors, the servicer, and credit enhancers on a monthly basis. Gain on Sales of Loans Gain on sales of loans represent the difference between the sale proceeds less the principal balance of the loans; less dealer premiums after reduction for future dealer premium rebates, and expenses of sale; plus the present value of expected cash flows related to the excess spread, net of a credit loss provision and hedging gains and losses. Gains are credited to operations at the closing of each securitization. The Company retains the servicing rights on the loans sold. 38 Servicing Fees, Net Servicing fees, net include the contractual fee, typically one percent, earned from each trust plus the accretion of discounted excess servicing, plus excess dealer premium rebates, less any valuation adjustments. See Dealer Premiums and Dealer Premium Rebates, above. Hedging Loan production is hedged periodically to such time as the next securitization is estimated to occur. Securitizations of the prime portfolio occur approximately every three months. The primary hedging vehicle is a short sale of the two-year Treasury Note. At such time as a securitization is committed, the hedge is covered by the purchase of a like volume of two-year Treasury Notes. Gains or losses on the hedge are recognized concurrently with the gain or loss at securitization. Incentive Stock Plan In connection with the initial public offering, the Company adopted an incentive stock plan (the "Plan") which permits the issuance of 500,000 shares of Class A Common Stock to directors and key employees. Under the terms of the Plan, 275,000 options were granted at an issue price of $16 per share upon consummation of the Company's initial public offering. Such options vest equally over a 5-year period commencing on the date of the initial public offering. Options may be granted with the exercise prices at the fair market value at the date of grant, except that non-qualified options may be granted with the exercise prices not less than 85% of the fair market value at the date of grant. During 1996, no stock options were exercisable or exercised, and at June 30, 1996, there were 277,575 shares under option at an average exercise price of $16.04 per share. The Plan provides for automatic annual grants of shares to each non-employee director with a value of $15,000. To date 11,358 shares of common stock have been granted to non-employee directors at the fair market value on the date of grant in accordance with the Plan. Earnings Per Share The initial public offering was completed on August 7, 1995. Earnings per share for the year ended June 30, 1996, were computed by dividing net earnings by the average common shares outstanding during the period. Shares outstanding from August 7, 1995, through September 30, 1995, were assumed to be outstanding for the entire three months ended September 30, 1995. The effect of unexercised stock options on earnings per share is anti-dilutive and has not been included in the calculation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform to the 1996 presentation. 39 (2) Loans, Net Loans, net are as follows (in thousands, except average loan balance) at: June 30, ----------------------- 1996 1995 - -------------------------------------------------------------------------------- Principal balance of prime loans held for sale, net of unearned discount $ 228,391 166,581 Principal balance of non-prime loans held for sale 15,512 19,858 Principal balance of marine loans held for sale 50 -- Loans in process 5,363 6,904 Dealer premiums 11,073 8,132 Allowance for credit losses (1,099) (453) - -------------------------------------------------------------------------------- $ 259,290 201,022 ================================================================================ Weighted average interest rate (prime) 13.24% 14.12% Weighted average interest rate (non-prime) 19.70 20.02 Average loan balance (prime) $ 14,049 11,246 Average loan balance (non-prime) 12,479 11,771 ================================================================================ Allowance for credit losses on loans held for sale (in thousands, prime and non-prime): Year ended June 30, ---------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Balance at the beginning of the period $ 453 171 125 Charge-offs (4,556) (2,605) (1,019) Recoveries 2,327 1,813 581 Provision for credit losses 2,875 1,074 484 - -------------------------------------------------------------------------------- Balance at the end of the period $ 1,099 453 171 ================================================================================ 40 The geographic concentration of loans serviced are as follows: Percent of Total June 30, ------------------------ State 1996 1995 - -------------------------------------------------------------------------------- Texas 18.2% 19.9% North Carolina 11.2 9.8 California 8.8 3.8 Ohio 8.0 11.6 Oklahoma 7.2 9.2 Arizona 6.9 9.1 Illinois 6.7 4.9 Florida 6.1 6.2 Indiana 5.8 8.0 Virginia 5.5 3.6 Colorado 3.2 3.8 Missouri 3.0 4.2 Georgia 2.2 2.2 South Carolina 1.2 0.7 Wisconsin 1.0 0.2 Kansas 0.9 1.3 Iowa 0.9 0.2 New Mexico 0.8 0.5 Washington 0.5 0.0 Oregon 0.5 0.0 Maryland 0.4 0.0 Tennessee 0.4 0.0 Minnesota 0.2 0.5 Michigan 0.2 0.0 Kentucky 0.1 0.3 Nebraska 0.1 0.0 - -------------------------------------------------------------------------------- 100.0% 100.0% ================================================================================ Loans serviced are as follows (in thousands) at: June 30, ------------------------- 1996 1995 - -------------------------------------------------------------------------------- Loans held for sale Prime (net of unearned discount) $ 228,391 166,581 Non-prime 15,512 19,858 Marine 50 -- - -------------------------------------------------------------------------------- 243,953 186,439 Securitized loans Prime 1,319,930 992,768 Non-prime 31,550 -- - -------------------------------------------------------------------------------- 1,351,480 992,768 Other loans serviced 3,637 5,203 - -------------------------------------------------------------------------------- $1,599,070 1,184,410 ================================================================================ 41 (2) Loans, Net (continued) Notional amounts and unrealized gains/(losses) related to outstanding hedges follow (in thousands) at:
June 30, ----------------------- 1996 1995 - ---------------------------------------------------------------------------------------- Notional amounts outstanding $ 415,000 293,500 Unrealized gains/(losses) on hedging transactions (711) (1,918)
Notional amounts of $340 million, $55 million and $20 million were closed or expected to be closed in August 1996, November 1996 and December 1996, respectively, for amounts outstanding at June 30, 1996, and $252 million and $42 million in August 1995 and November 1995, respectively, for the amount outstanding at June 30, 1995. Hedging realized gains/(losses) follow (in thousands): Year ended June 30, ------------------------------------ 1996 1995 1994 - -------------------------------------------------------------------------------- Realized gains/(losses) $ (2,733) (5,515) 477 ================================================================================ (3) Furniture and Equipment Furniture and equipment are as follows (in thousands) at: June 30, ----------------------- 1996 1995 - -------------------------------------------------------------------------------- Furniture and equipment $ 3,858 3,086 Accumulated depreciation (1,832) (1,739) - -------------------------------------------------------------------------------- $ 2,026 1,347 - -------------------------------------------------------------------------------- (4) Excess Servicing Excess servicing is as follows (in thousands) at:
June 30, ----------------------------- 1996 1995 - -------------------------------------------------------------------------------------------- Estimated value of excess servicing cash flows, net of estimated prepayments $ 112,564 76,274 Allowance for estimated credit losses on securitized loans (43,516) (22,766) Discount to present value (9,535) (6,680) - -------------------------------------------------------------------------------------------- 59,513 46,828 Accrued interest on securitized loans 10,454 6,207 Estimated dealer premium rebates 13,467 7,587 - -------------------------------------------------------------------------------------------- $ 83,434 60,622 ============================================================================================ Outstanding balance of loans serviced through securitized trusts $ 1,351,480 992,768 Allowance for estimated credit losses as a percentage of securitized loans serviced 3.22% 2.29% - --------------------------------------------------------------------------------------------
42 (4) Excess Servicing (continued) Excess servicing activity is as follows (in thousands):
Year ended June 30, ------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Balance at beginning of period $ 60,622 41,265 31,575 Amounts capitalized (including estimated dealer rebates) 56,436 47,693 34,193 Change in accrued interest on securitized loans 4,247 1,713 1,581 Return of excess cash flows, net of present value effect (37,871) (30,049) (26,084) - ------------------------------------------------------------------------------------------------- Balance at end of period $ 83,434 60,622 41,265 =================================================================================================
(5) Spread Accounts The weighted average yield on spread accounts was 5.32% and 6.07% at June 30, 1996 and 1995, respectively. (6) Other Assets Other assets are as follows (in thousands) at: June 30, -------------------- 1996 1995 - -------------------------------------------------------------------------------- Accrued servicing fees $ 5,131 4,644 Deferred borrowing fees 2,173 647 Repossessed assets 1,716 1,301 Other 3,460 2,440 - -------------------------------------------------------------------------------- $12,480 9,032 ================================================================================ (7) Due to Union Federal and Interest Expense Interest expense for the periods presented was calculated using Union Federal's cost of funds rate applied to the monthly average outstanding balance of amounts due to Union Federal. Information related to the amount due to Union Federal is as follows (in thousands): Year ended June 30, ----------------------- 1995 1994 - -------------------------------------------------------------------------------- Average balance due to Union Federal $ 231,446 174,193 Maximum amount outstanding 394,616 266,086 ================================================================================ June 30, ----------------------- 1995 1994 - -------------------------------------------------------------------------------- Average cost of funds for the year ended: 5.60% 4.46% Cost of funds at: 6.33% 4.76% ================================================================================ 43 (8) Amounts Due Under Warehouse Facilities At June 30, 1996, the Company, through its wholly-owned special-purpose subsidiaries, had borrowing arrangements with a financial institution which provided for two Warehouse Facilities with an aggregate borrowing capacity of $400 million. Borrowings under these facilities are collateralized by certain loans held for sale. There are separate Facilities for the funding of prime and non-prime loan acquisitions. Outstanding borrowings at June 30, 1996 for the two facilities were approximately $188,000,000. The weighted average cost of funds for the year ended June 30, 1996 was 7.21%. The cost of funds includes a variable interest rate on the outstanding commercial paper, fees on the used and unused portions of the Facilities, and the amortization of prepaid (upfront) warehouse fees. The largest portion of the cost of funds related to the Warehouse Facilities is the variable rate interest on the commercial paper issued by the financing conduit. The weighted average commercial paper rate on outstanding issues at June 30, 1996 was 5.40%. Upfront warehouse fees are non-recurring costs related to the initial set-up of the Facilities. These initial fees totaled approximately $1.5 million, and were fully amortized during fiscal 1996. The Warehouse Facilities Agreements specify a term of one year and are renewable annually. Both the prime and non-prime Warehouse Facilities have been renewed for an additional year, and expire in June and July 1997, respectively. (9) Long-term Debt In connection with the Company's initial public offering, the Company issued, in a private placement, $110 million principal amount of 8.53% Senior Notes due 2002. Interest on the Senior Notes is payable semi-annually on February 1 and August 1 of each year, commencing February 1, 1996. The Senior Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. In April 1996, the Company issued $46 million in a private placement 9.99% Senior Subordinated Notes due 2003. Interest on the Senior Subordinated Notes is payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing June 30, 1996. The Senior Subordinated Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. 44 (10) Other Revenue and Expenses Other revenue and expenses follow (in thousands): Year ended June 30, ------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Other revenues: Late charges $ 1,922 1,447 1,337 Origination fees 1,072 1,210 1,263 Other 102 126 135 - -------------------------------------------------------------------------------- $ 3,096 2,783 2,735 ================================================================================ Other expenses: Outside services 2,515 1,492 949 Office, telephone and postage 2,207 1,158 729 Loan processing 2,202 1,841 1,029 Occupancy 891 396 321 Equipment 839 511 474 Other 3,202 2,893 1,153 - -------------------------------------------------------------------------------- $11,856 8,291 4,655 - -------------------------------------------------------------------------------- (11) Income Taxes The composition of income taxes follows (in thousands): Year ended June 30, ---------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Current expense $ 9,096 6,458 25,512 Deferred expense (benefit) 5,310 (62) (19,128) - -------------------------------------------------------------------------------- $14,406 6,396 6,384 ================================================================================ The effective tax rate for the year ended June 30, 1996, is 40.5%. Income taxes were allocated using statutory federal and state rates which resulted in effective income tax rate of 40.5% and 40.0% for the years ended June 30, 1995 and 1994, respectively. Year ended June 30, --------------------- 1996 1995 - -------------------------------------------------------------------------------- Deferred tax assets: Allowance for credit losses $ 445 -- Allowance for excess servicing losses 912 -- - -------------------------------------------------------------------------------- 1,357 -- - -------------------------------------------------------------------------------- Deferred tax liabilities: Excess servicing 5,349 -- Mark to market - excess servicing 4,365 -- - -------------------------------------------------------------------------------- 9,714 -- - -------------------------------------------------------------------------------- Deferred income tax payable $8,357 -- ================================================================================ 45 The Company settled net deferred tax liabilities with Union Federal for amounts claimed on Union Federal's fiscal 1995 tax return during fiscal 1996. Net deferred tax liabilities assumed by the Company were $3,047. (12) Estimated Fair Value of Financial Instruments Loans held for sale - Cost approximates fair value as loans are sold shortly after origination. Accrued interest receivable - Cost approximates fair value. Excess servicing - Cost approximates fair value. Amount determined based upon discounting future cash flows at market rates using historical prepayment speeds and loss provisions. Spread accounts - Cost approximates fair value as the interest rate earned is at a variable rate. Repossessed assets - Cost approximates fair market value. All liabilities, except long-term debt - Cost approximates fair value. Long-term debt - Carrying amount of $156,000,000 at June 30, 1996 has been calculated to have a fair value of $151,000,000 by discounting the scheduled loan payments to maturity using rates that are believed to be currently available for debt of similar terms and maturities. (13) Commitments and Contingencies Future minimum payments under noncancelable operating leases on premises and equipment with terms of one year or more as of June 30, 1996 are as follows: 1997 $1,216,702 1998 1,217,049 1999 1,130,911 2000 976,833 2001 911,321 Thereafter 1,670,755 - -------------------------------------------------------------------------------- Total $ 7,123,571 ================================================================================ These agreements include, in certain cases, various renewal options and contingent rental agreements. Rental expense for premises and equipment amounted to $645,494 for the year ended June 30, 1996. The premises' lease is with a company owned by the majority shareholders of UAC. The Company is also involved as a party to certain immaterial legal proceedings incidental to its business. Management of the Company believes that the outcome of such proceedings will not have a material effect upon its business or financial condition. 46 (14) Quarterly Financial Information (unaudited) Quarterly financial information is as follows (in thousands, except share data):
- ------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth Total - ------------------------------------------------------------------------------------------------------------------------ Year ended June 30, 1996 Interest on loans $ 6,946 7,232 6,732 7,802 28,712 Interest on spread accounts and restricted cash 1,370 1,386 1,317 1,375 5,448 Interest expense 5,289 5,556 5,359 6,071 22,275 Provision for credit losses on loans held for sale 1,150 300 600 825 2,875 - ------------------------------------------------------------------------------------------------------------------------ Net interest margin after provision 1,877 2,762 2,090 2,281 9,010 Gain on sales of loans 6,724 8,483 7,760 7,390 30,357 Servicing fees, net 3,966 2,584 4,796 5,580 16,926 Other revenues 750 724 798 824 3,096 - ------------------------------------------------------------------------------------------------------------------------ Total revenues 13,317 14,553 15,444 16,075 59,389 Salaries and benefits 2,321 3,059 3,232 3,373 11,985 Other expenses 2,398 2,543 3,426 3,48 911,856 - ------------------------------------------------------------------------------------------------------------------------ Operating expenses 4,719 5,602 6,658 6,862 23,841 Provision for income taxes 3,482 3,705 3,473 3,746 14,406 - ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 5,116 5,246 5,313 5,467 21,142 ======================================================================================================================== Earnings per share $ .39 .40 .40 .41 1.60 Weighted average common shares outstanding 13,205,622 13,209,173 13,211,358 13,211,358 13,209,378 ======================================================================================================================== Year ended June 30, 1995 Interest on loans $ 2,476 2,503 4,072 5,651 14,702 Interest on spread accounts and restricted cash 734 866 1,068 1,268 3,936 Interest expense 2,257 2,590 3,733 4,381 12,961 Provision for credit losses on loans held for sale _ 160 304 610 1,074 - ------------------------------------------------------------------------------------------------------------------------ Net interest margin after provision 953 619 1,103 1,928 4,603 Gain on sales of loans 1,336 1,208 1,181 4,959 8,684 Servicing fees, net 3,275 3,193 4,288 3,872 14,628 Other revenues 650 632 768 733 2,783 - ------------------------------------------------------------------------------------------------------------------------ Total revenues 6,214 5,652 7,340 11,492 30,698 Salaries and benefits 1,372 1,499 1,805 1,946 6,622 Other expenses 1,858 1,932 1,698 2,803 8,291 - ------------------------------------------------------------------------------------------------------------------------ Operating expenses 3,230 3,431 3,503 4,749 14,913 Provision for income taxes 2,210 901 1,553 2,732 6,396 - ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 1,774 1,320 2,284 4,011 9,389 - ------------------------------------------------------------------------------------------------------------------------
47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item with respect to directors is incorporated by re ference to pages 3 and 5 of the Company's 1996 Proxy Statement for its 1996 Annual Shareholder Meeting (the "1996 Proxy Statement"). Item 11. Executive Compensation Only the information required by this item to be included with this report is incorporated by reference to pages 7 and 8 of the 1996 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference to pages 2 and 3 of the 1996 Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated by reference to pages 9 and 10 of the 1996 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) List the following documents filed as part of the report: Financial Statements -- Included Under Item 8: Report of KPMG Peat Marwick, LLP, Independent Auditors Consolidated Balance Sheets as of June 30, 1996 and 1995 Consolidated Statements of Earnings for the Years Ended June 30, 1996, 1995, 1994 Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995, 1994 Consolidated Statement of Shareholders' Equity for the Year Ended June 30, 1996 (b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the quarter ended June 30, 1996 (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on pages 50 and 52. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNION ACCEPTANCE CORPORATION September 27, 1996 By: /S/ John M. Stainbrook ------------------------- John M. Stainbrook President Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- (1) Principal Executive Officer: ) ) /s/ John M. Stainbrook President ) ------------------------------------ ) John M. Stainbrook ) ) (2) Principal Financial/ ) Accounting Officer: ) ) Vice President, ) /s/ Rick A. Brown Treasurer and ) ----------------------------------- Chief Financial ) Officer ) ) (3) A Majority of the ) Board of Directors: ) ) /s/ Howard L. Chapman Director ) ----------------------------------- ) Howard L. Chapman ) ) /s/ John M. Davis Director ) September 27, 1996 John M. Davis ) ) /s/ Fred M. Fehsenfeld Director ) ----------------------------------- ) Fred M. Fehsenfeld ) ) Director ) ----------------------------------- ) Donald A. Sherman ) ) /s/ John M. Stainbrook Director ) ----------------------------------- ) John M. Stainbrook ) ) /s/ Jerry D. Von Deylen Director ) ----------------------------------- ) Jerry D. Von Deylen ) ) Director ) ----------------------------------- ) Richard D. Waterfield ) ) /s/ Thomas M. West Director ) ----------------------------------- ) Thomas M. West 49 EXHIBIT INDEX Exhibit No. Description Page (Ex. No. Cross Reference) - ------------------------------------------------------------------------------- 3.1 Registrant's Articles of Incorporation, as amended and * restated. 3.2 Registrant's Code of By-Laws, as amended and restated. * 3.3 Form of Share Certificate for Class A Common Stock. * 4.1 Articles V and VI of the Registrant's Articles of Incorporation respecting the terms * of shares of Common Stock, are incorporated by reference to the Registrant's Articles of Incorporation filed hereunder as Exhibit 3.1 4.2 Article III - "Shareholder Meetings," Article VI - * "Certificates for Shares," Article VII - "Corporate Books and Records - Section 3" and Article X - "Control Share Acquisitions Statute" of the Registrant's Code of By-Laws are incorporated by reference to the Registrant's Restated Code of By-Laws filed herewith as Exhibit 3.2. 4.3 Transfer and Administration Agreement among Enterprise * Funding Corporation, Union Acceptance Funding Corporation and Union Acceptance Corporation, dated as of June 27, 1995. 4.3(a) Amendment No. 1 to Transfer and Administration Agreement *** dated September 8, 1995 4.3(b) Amendment No. 2 to Transfer and Administration Agreement *** dated September 29, 1995 4.3(c) Letter Agreement regarding Transfer and Administration ____ Agreement dated November 13, 1995 4.3(d) Amendment No. 3 to Transfer and Administration Agreement ____ dated March 1, 1996 4.3(e) Letter Agreement regarding Transfer and Administration ____ Agreement dated May 30, 1996 4.3(f) Amendment No. 4 to Transfer and Administration Agreement ____ dated September 5, 1996 4.4 Note Purchase Agreement between Union Acceptance Corporation ** and certain lenders dated as of August 7, 1995. 4.4(a) Amendment No. 1 to Note Purchase Agreement dated November **** 22, 1995 4.5 Transfer and Administration Agreement among Enterprise * Funding Corporation, Performance Funding Corporation and Union Acceptance Corporation, dated as of July 24, 1995. 4.5(a) Amendment No. 1 to Transfer and Administration Agreement **** dated September 8, 1995 4.5(b) Letter Agreement regarding Transfer and Administration ____ Agreement dated October 12, 1995 4.5(c) Amendment No. 2 to Transfer and Administration Agreement ____ dated May 10, 1996 4.5(d) Letter Agreement regarding Transfer and Administration ____ Agreement dated July 11, 1996 4.5(e) Letter Agreement regarding Transfer and Administration ____ Agreement dated August 20, 1996 4.6 Note Purchase Agreement dated as of April 3, 1996 among *****(4.1) Union Acceptance Corporation and several purchasers of Senior Subordinated Notes due 2003 9(a) Voting Trust Agreement among Richard D. Waterfield, as * trustee, and certain existing shareholders of Union Holding Company, Inc., dated June 10, 1994. 9(b) First Amendment to Voting Trust Agreement dated June 1, * 1995. 10.1 Interim Assignment and Assumption Agreement by and among * Union Federal Savings Bank of Indianapolis, Union Acceptance Corporation and Union Acceptance Funding Corporation dated June 29, 1994. 10.2 Plan of Business Transfer, Financing and Distribution by and * among Union Acceptance Corporation, Union Federal Savings Bank of Indianapolis and Union Holding Company, Inc. as of June 29, 1994. 10.2 (a) First Amendment to Plan of Business Transfer dated as of * December 31, 1994. 10.2 (b) Second Amendment to Plan of Business Transfer dated as * of June 1, 1995. 10.2 (c) General Instrument of Transfer, Assignment and * Assumption Agreement dated as of January 1, 1995 between Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation. 10.3 Lease Agreement by and between Union Federal Savings Bank of * Indianapolis and Union Acceptance Corporation dated December 8, 1994. 50 10.4 Lease Agreement by and between Union Federal Savings Bank of * Indianapolis and Union Acceptance Funding Corporation dated December 8, 1994. 10.5 Remittance Processing Agreement by and between Union Federal Savings Bank of Indianapolis and Union Acceptance * Corporation dated June 29, 1994. 10.6 Mail and Printing Services Agreement by and between Union * Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.7 Telephone Equipment Lease Agreement by and between Union * Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.8 Telecommunications Agreement by and between Union Federal * Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.9 Communications Equipment and Software License by and between * Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.10 Software License and Maintenance Agreement by and between * Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.11 Loan Servicing Agreement by and between Union Federal * Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.12 General Subservicing Agreement by and between Union Federal * Savings Bank of Indianapolis and Union Acceptance Corporation dated as of January 1, 1995. 10.13 Loan Collection Agreement by and between Union Federal * Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.14 Letter respecting Terms of Bank Accounts from Union Federal * Savings Bank of Indianapolis to Union Acceptance Corporation dated May 25, 1994. 10.15 Supplement to Account Agreement Re: Drafts by and between * Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.16 Tax Allocation Agreement by and between Union Holding * Company, Inc. and its subsidiaries dated February 1, 1991, as amended. 10.17 Sale and Purchase Agreement by and between Union Acceptance * Corporation and Union Acceptance Funding Corporation dated as of April 1, 1994. 10.18 Form of Remote Outsourcing Agreement by and between * Systematics Financial Services, Inc. and Union Acceptance Corporation. 10.18(a) Letter Agreement by and among Systematics Financial * Services, Inc., Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated July 13, 1994 respecting Provision of Data Processing Services. 10.18(b) Memorandum respecting Billing Procedure in connection with * Remote Outsourcing Agreement from Systematics System Financial Services, Inc. to Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated October 25, 1994. 10.19 Union Acceptance Corporation Annual Bonus Plan For Senior *(10.23) Officers. 51 10.20 Union Acceptance Corporation Incentive Stock Plan. *(10.24) 10.21 Letter respecting Access to Records from Union Acceptance *(10.25) Corporation to Union Federal Savings Bank of Indianapolis dated September 13, 1994. 10.22 Letter Agreement by and between Union Federal Savings Bank *(10.26) of Indianapolis and Union Acceptance Corporation dated December 14, 1994 amending and initiating terms of certain Inter-Company Agreements. 10.23 Letter respecting terms and conditions of bank accounts from *(10.27) Union Federal Savings Bank of Indianapolis to Union Acceptance Corporation dated December 16, 1994. 10.24 Lease Agreement between Waterfield Mortgage Company, **** Incorporated, and Union Acceptance Corporation dated as of November 1, 1995 10.25 Purchase Agreement among Union Acceptance Funding ***** Corporation, Union (10.1) Acceptance Corporation and Union Federal Savings Bank of Indianapolis dated as of January 18, 1996 10.26 Sublease Agreement between Union Acceptance Corporation and _____ Union Federal Savings Bank of Indianapolis dated as of August 1, 1996 21 Subsidiaries of the Registrant _____ 23 Consent of KPMG Peat Marwick LLP. _____ 27 Financial Data Schedule _____ - -------------------- * Incorporated by reference to the exhibit bearing the corresponding exhibit number (or the exhibit number indicated above in the right hand column) to Registrant's Registration Statement on Form S-1 (Reg. No. 33-82254). ** Incorporated by reference to the exhibit bearing the corresponding exhibit number (or the exhibit number indicated above in the right hand column) to Registrant's Form 10-K for the year ended June 30, 1995. *** Incorporated by reference to the exhibit bearing the corresponding exhibit number (or the exhibit number indicated above in the right hand column) to Registrant's Form 10-Q for the quarter ended September 30, 1995. **** Incorporated by reference to the exhibit bearing the corresponding exhibit number (or the exhibit number indicated above in the right hand column) to Registrant's Form 10-Q for the quarter ended December 31, 1995. ***** Incorporated by reference to the exhibit bearing the corresponding exhibit number (or the exhibit number indicated above in the right hand column) to Registrant's Form 10-Q for the quarter ended March 31, 1996. 52 EX-4.3(C) 2 ADMINISTATION AGREEMENT Exhibit 4.3(c) ENTERPRISE FUNDING CORPORATION c/o MERRILL LYNCH MONEY MARKETS INC. World Financial Center - South Tower 225 Liberty Street New York, New York 10281 November 13, 1995 Ms. Cindy Whitaker Union Acceptance Funding Corporation 45 North Pennsylvania Street, Lower Level Indianapolis, Indiana 46204 Dear Cindy: This letter is to confirm our agreement to amend the Transfer and Administration Agreement between Union Acceptance Corporation (the "Collection Agent"), Union Acceptance Funding Corporation (the "Transferor") and Enterprise Funding Corporation (the "Company") dated June 27, 1995 and as amended to date. This letter agreement shall be effective November 17, 1995. The Transfer and Administration Agreement shall be amended as follows: In Section 1.1, the final clause of the definition of "Net Receivable Balance" shall be amended to read "then the percentage specified in clause (i) above shall be 10% or a greater percentage as agreed upon by the Transferor, the Collection Agent, and the Company on the date that either event specified in clause (A) or clause (B) above is announced and to be effective as of the closing date of such Securitized Pool." The Transferor hereby represents and warrants that the representations and warranties of the Transferor set forth in Section 3.1 of the Transfer and Administration Agreement are true and correct as of the date hereof (except those representations and warranties set forth therein which specifically relate to an earlier date). All other terms and conditions of the Agreement not amended by this letter agreement shall remain unchanged and in full force and effect. If this letter correctly sets forth our agreement, please sign the enclosed duplicate original and return to Michelle M. Heath, NationsBank Investment Banking, NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by November 17th, 1995. Sincerely, ENTERPRISE FUNDING CORPORATION By: /s/ Thomas S. Dunstan Name: Thomas S. Dunstan Title: Vice President Accepted and Agreed: UNION ACCEPTANCE FUNDING CORPORATION as Transferor By: /s/ Cynthia F. Whitaker Name: Cynthia F. Whitaker Title: Vice President and Secretary Date: UNION ACCEPTANCE CORPORATION as Collection Agent By: /s/ John M. Stainbrook Name: John M. Stainbrook Title: President Date: -2- EX-4.3(D) 3 AMENDMENT NO. 3 ADMINISTATION AGREEMENT Exhibit 4.3(d) AMENDMENT NUMBER 3 TO TRANSFER AND ADMINISTRATION AGREEMENT AMENDMENT NUMBER 3 TO TRANSFER AND ADMINISTRATION AGREEMENT (this "Amendment"), dated as of March 1, 1996 between UNION ACCEPTANCE FUNDING CORPORATION, a Delaware corporation, as transferor (in such capacity, the "Transferor"), UNION ACCEPTANCE CORPORATION, an Indiana corporation, as collection agent (in such capacity, the "Collection Agent"), and ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "Company") amending that certain Transfer and Administration Agreement dated as of June 27, 1995, as amended as of September 8, 1995 and September 29, 1995 (the "Transfer and Administration Agreement"). WHEREAS, the Transferor and the Company have agreed to make certain amendments to the Transfer and Administration Agreement. NOW, THEREFORE, the parties hereby agree as follows: SECTION 1. Defined Terms. As used in this Amendment and except as otherwise provided in this Section 1, capitalized terms shall have the same meanings assigned thereto in the Transfer and Administration Agreement: SECTION 2. Amendment to Definition of Net Receivables Balance. The percentage appearing in clause (i) of the definition of "Net Receivables Balance" (i.e., 25%) is hereby deleted and replaced with "35%". SECTION 3. Amendment to Definition of Transfer Percentage. The percentage appearing in clause (y) of the definition of "Transfer Percentage" in respect of Contracts which upon origination provided for more than 72 monthly payments (i.e. 90%) is hereby deleted and replaced with "86%". SECTION 4. Exhibit A. Exhibit A attached to Amendment Number 2 dated as of September 29, 1995 was intended by the parties to have been added at such time to the Transfer and Administration Agreement as Exhibit A thereto. Such Exhibit A is hereby replaced in its entirety with Exhibit A attached hereto, and such exhibit is hereby added to the Transfer and Administration Agreement as Exhibit A thereto. SECTION 5. Amendment to Section 2.2(b). Section 2.2(b) of the.Transfer and Administration Agreement ("Subsequent Transfers") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(b) Subsequent Transfers. On any Business Day occurring after the Initial Transfer under Section 2.2(a) and prior to the Termination Date, the Transferor may request a release of funds from the Prefunding Account in an amount not to exceed the Transfer Price on such day of any Receivable with respect to which the Transferor has requested funding hereunder, provided, that no funds shall be released from the Prefunding Account to the extent that (i) after giving effect to such release the Net Investment (less amounts on deposit in the Prefunding Account) shall exceed the sum of (x) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 92% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments), (ii) the Transferor shall not have made any deposit into the Yield Supplement Account required pursuant to Section 2.15, or (iii) the Collection Agent is not in compliance with Section 5.3 hereof." SECTION 6. Amendment to Section 2.13(a). Section 2.13(a) of the Transfer and Administration Agreement ("Prefunding Account; Prefunding Interest Reserve Account; Interest Reserve Deposits, Interest Reserve Advances; Reimbursements") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(a) On the Business Day prior to each Prefunding Date, the Transferor shall provide the Company and the Administrative Agent with a written notice in substantially the form of Exhibit O (a "Prefunding Notice") setting forth the Transferor's reasonable best estimate of the aggregate amount of Receivables projected to be acquired or originated by UAC and purchased by the Transferor pursuant to the Sale and Purchase Agreement during the period from the second succeeding Business Day to and including the next succeeding Prefunding Date. The Company agrees that on the related Prefunding Date, provided that (i) no Potential Termination Event has occurred, (ii) the Transferor shall have made the Interest Reserve Deposit to the Prefunding Interest Reserve Account as required by Section 2.13(c) on such day, (iii) after giving effect to any such deposit the Net Investment would not exceed the Maximum Net Investment, (iv) after giving effect to such deposit, the Net Investment (less amounts on deposit in the Prefunding Account) shall not exceed the sum of (x) 98%; of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 92% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments), (v) the Collection Agent shall be in compliance with the requirements of Section 5.3 in respect of such Prefunding Date, and (vi) the Company shall be able to obtain funds therefor in the commercial paper market, the Company shall deposit in the Prefunding Account an amount equal to the product of (i) the percentage then being applied pursuant to the definition of "Transfer Price" and (ii) the aggregate -2- amount of Receivables so projected to be acquired or originated (such product, the "Prefunding Deposit")." SECTION 7. Amendment to Section 2.14(a). Section 2.14(a) of the Transfer and Administration Agreement ("Prefunding Account and Prefunding Interest Reserve Account Withdrawals") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(a) On each Business Day during any Prefunding Period during which Incremental Transfers are to occur, upon receipt by the Administrative Agent and the Collateral Agent not later than 11:00 a.m. New York City time of written certification in substantially the form of Exhibit N (a "Withdrawal Notice") from the Transferor setting forth, among other things, the amount requested to be released from the Prefunding Account and certifying that (i) after giving effect to the payment of the Transfer Price with respect to such additional Receivables, the Net Investment (minus amounts on deposit in the Prefunding Account) shall not exceed the sum of (i) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 92% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments), (ii) the Transferor shall have made any deposit into the Yield Supplement Account required pursuant to Section 2.15 in connection with such Receivables, if any, (iii) the Collection Agent shall be in compliance with the requirements of Section 5.3 in respect of such Prefunding Date, and (iv) that the amount to be released from the Prefunding Account does not exceed the aggregate Transfer Price in respect of such Receivables, the Collateral Agent shall release to the Transferor the amount requested by the Collection Agent." SECTION 5. Amendment to Section 3.1(m). Effective as of the date hereof, Section 3.1(m) of the Transfer and Administration Agreement ("Coverage; Amount of Receivables") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(m) Coverage; Amount of Receivables. The Net Investment (minus amounts on deposit in the Prefunding Account) does not exceed the sum of (i) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 92% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments). As of May 31, 1995, the aggregate Outstanding Balance of the Receivables in existence was $77,140,973.81 and the aggregate Outstanding Balance of all Eligible Receivables was $75,350,988.50. -3- SECTION 9. Amendment to Section 7.1(k). Section 7.1(k) of the Transfer and Administration Agreement ("Termination Events") is hereby deleted in its entirety and replaced with the following (solely for convenience of reference, the revised language in this subsection is italicized): "(k) (i) the Net Investment minus amounts on deposit in the Prefunding Account shall at any time exceed the Net Receivables Balance, or (ii) the Net Investment minus amounts on deposit in the Prefunding Account shall at any time exceed the sum of (x) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 92% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments) for a period of two (2) or more consecutive days; or" SECTION 10. Limited Scope. This amendment is specific to the circumstances described above and does not imply any future amendment or waiver of rights allocated to the Company, the Transferor, Union Acceptance Corporation, the Collection Agent, the Administrative Agent or the Collateral Agent under the Transfer and Administration Agreement. SECTION 11. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 12. Severability: Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. Any provisions of this Amendment which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 13. Ratification. Except as expressly affected by the provisions hereof, the Transfer and Administration Agreement as amended shall remain in full force and effect in accordance with its terms and ratified and confirmed by the parties hereto. On and after the date hereof, each reference in the Transfer and Administration Agreement to "this Agreement", "hereunder", "herein" or words of like import shall mean and be a reference to the Transfer and Administration Agreement as amended by this Amendment. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -4- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment Number 3 as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Company By: /s/ John R. Bulger Name: John R. Bulger Title: Vice President UNION ACCEPTANCE FUNDING CORPORATION, as Transferor By: /s/ Cynthia F. Whitaker Name: Cynthia F. Whitaker Title: Vice President and Secretary UNION ACCEPTANCE CORPORATION, as Collection Agent By: /s/ John M. Stainbrook Name: John M. Stainbrook Title: President -5- Exhibit A Actual Loss Percentage Transfer Percentage Per Contract Number of Monthly Payments 72 or less +72 Less than 93.0% 98% 92% 93.0% to 95.9% 96% 90% 96.0% to 97.9% 94% 88% 98.0% to 100% 92% 86% More than 100% 0% -6- EX-4.3(E) 4 CONFIRMING LETTER Exhibit 4.3(e) ENTERPRISE FUNDING CORPORATION c/o MERRILL LYNCH MONEY MARKETS INC. World Financial Center - South Tower 225 Liberty Street New York, New York 10281 May 30, 1996 Ms. Cindy Whitaker Union Acceptance Funding Corporation 45 North Pennsylvania Street, Lower Level Indianapolis, Indiana 46204 Dear Cindy: This letter is to confirm our agreement to amend the Transfer and Administration Agreement between Union Acceptance Corporation (the "Collection Agent"), Union Acceptance Funding Corporation (the "Transferor") and Enterprise Funding Corporation (the "Company") dated June 27, 1995 and as amended to date. The Transfer and Administration Agreement shall be amended as follows: In Section 1.1, the definition of "Termination Date" shall be amended so that "June 25, 1996" contained in clause (v) of the definition shall read "June 25, 1997". The Transferor hereby represents and warrants that the representations and warranties of the Transferor set forth in Section 3.1 of the Transfer and Administration Agreement are true and correct as of the date hereof (except those representations and warranties set forth therein which specifically relate to an earlier date). All other terms and conditions of the Agreement not amended by this letter agreement shall remain unchanged and in full force and effect. If this letter correctly sets forth our agreement, please sign the enclosed duplicate originals and return to Suzy Edmiston, NationsBank Investment Banking, NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by May 31, 1996. Sincerely, ENTERPRISE FUNDING CORPORATION By: /s/K. Carter Harris Name: K. Carter Harris Title: Vice President Accepted and Agreed: UNION ACCEPTANCE FUNDING UNION ACCEPTANCE CORPORATION CORPORATION, as Transferor as Collection Agent By: /s/Cynthia F. Whitaker By: /s/John M. Stainbrook Name: Cynthia F. Whitaker Name: John M. Stainbrook Title: Vice President and Secretary Title: President Date: Date: -2- EX-4.3(F) 5 ADMINISTATION AGREEMENT Exhibit 4.3(f) AMENDMENT NUMBER 4 TO TRANSFER AND ADMINISTRATION AGREEMENT AMENDMENT NUMBER 4 TO TRANSFER AND ADMINISTRATION AGREEMENT (this "Amendment"), dated as of September 5, 1996 between UNION ACCEPTANCE FUNDING CORPORATION, a Delaware corporation, as transferor (in such capacity, the "Transferor"), UNION ACCEPTANCE CORPORATION, an Indiana corporation, as collection agent (in such capacity, the "Collection Agent"), and ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "Company") amending that certain Transfer and Administration Agreement dated as of June 27, 1995, as amended as of September 8, 1995, September 29, 1995 and March 1, 1996 (the "Transfer and Administration Agreement"). WHEREAS, the Transferor and the Company have agreed to make certain amendments to the Transfer and Administration Agreement. NOW, THEREFORE, the parties hereby agree as follows: SECTION 1. Defined Terms. As used in this Amendment and except as otherwise provided in this Section 1, capitalized terms shall have the same meanings assigned thereto in the Transfer and Administration Agreement: SECTION 2. Amendment to Definition of Net Receivables Balance. The percentage appearing in clause (i) of the definition of "Net Receivables Balance" (i.e., 35%) is hereby deleted and replaced with "60%". SECTION 3. Amendment to Definition of Transfer Percentage. The percentage appearing in clause (y) of the definition of "Transfer Percentage" in respect of Contracts which upon origination provided for more than 72 monthly payments (i.e. 86%) is hereby deleted and replaced with "84%". SECTION 4. Exhibit A. Exhibit A to the Transfer and Administration Agreement is hereby replaced in its entirety with Exhibit A attached hereto. SECTION 5. Amendment to Section 2.2(b) Section 2.2(b) of the Transfer and Administration Agreement ("Subsequent Transfers") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(b) Subsequent Transfers. On any Business Day occurring after the Initial Transfer under Section 2.2(a) and prior to the Termination Date, the Transferor may request a release of funds from the Prefunding Account in an -3- amount not to exceed the Transfer Price on such day of any Receivable with respect to which the Transferor has requested funding hereunder, provided, that no funds shall be released from the Prefunding Account to the extent that (i) after giving effect to such release the Net Investment (less amounts on deposit in the Prefunding Account) shall exceed the sum of (x) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 90% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments), (ii) the Transferor shall not have made any deposit into the Yield Supplement Account required pursuant to Section 2.15, or (iii) the Collection Agent is not in compliance with Section 5.3 hereof." SECTION 6. Amendment to Section 2.13(a) Section 2.13(a) of the Transfer and Administration Agreement ("Prefunding Account; Prefunding Interest Reserve Account; Interest Reserve Deposits; Interest Reserve Advances; Reimbursements") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(a) On the Business Day prior to each Prefunding Date, the Transferor shall provide the Company and the Administrative Agent with a written notice in substantially the form of Exhibit O (a "Prefunding Notice") setting forth the Transferor's reasonable best estimate of the aggregate amount of Receivables projected to be acquired or originated by UAC and purchased by the Transferor pursuant to the Sale and Purchase Agreement during the period from the second succeeding Business Day to and including the next succeeding Prefunding Date. The Company agrees that on the related Prefunding Date, provided that (i) no Potential Termination Event has occurred, (ii) the Transferor shall have made the Interest Reserve Deposit to the Prefunding Interest Reserve Account as required by Section 2.13(c) on such day, (iii) after giving effect to any such deposit the Net Investment would not exceed the Maximum Net Investment, (iv) after giving effect to such deposit, the Net Investment (less amounts on deposit in the Prefunding Account) shall not exceed the sum of (x) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 90% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments), (v) the Collection Agent shall be in compliance with the requirements of Section 5.3 in respect of such Prefunding Date, and (vi) the Company shall be able to obtain funds therefor in the commercial paper market, the Company shall deposit in the Prefunding Account an amount equal to the product of (i) the percentage then being applied pursuant to the definition of "Transfer Price" and (ii) the aggregate amount of Receiv- -4- ables so projected to be acquired or originated (such product, the "Prefunding Deposit")." SECTION 7. Amendment to Section 2.14(a) Section 2.14(a) of the Transfer and Administration Agreement ("Prefunding Account and Prefunding Interest Reserve Account Withdrawals") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(a) On each Business Day during any Prefunding Period during which Incremental Transfers are to occur, upon receipt by the Administrative Agent and the Collateral Agent not later than 11:00 a.m. New York City time of written certification in substantially the form of Exhibit N (a "Withdrawal Notice") from the Transferor setting forth, among other things, the amount requested to be released from the Prefunding Account and certifying that (i) after giving effect to the payment of the Transfer Price with respect to such additional Receivables, the Net Investment (minus amounts on deposit in the Prefunding Account) shall not exceed the sum of (x) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 90% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments), (ii) the Transferor shall have made any deposit into the Yield Supplement Account required pursuant to Section 2.15 in connection with such Receivables, if any, (iii) the Collection Agent shall be in compliance with the requirements of Section 5.3 in respect of such Prefunding Date, and (iv) that the amount to be released from the Prefunding Account does not exceed the aggregate Transfer Price in respect of such Receivables, the Collateral Agent shall release to the Transferor the amount requested by the Collection Agent." SECTION 8. Amendment to Section 3.1(m). Effective as of the date hereof, Section 3.1(m) of the Transfer and Administration Agreement ("Coverage; Amount of Receivables") is hereby deleted in its entirety and replaced with the following text (solely for convenience of reference, the revised language in this subsection is italicized): "(m) Coverage; Amount of Receivables. The Net Investment (minus amounts on deposit in the Prefunding Account) does not exceed the sum of (x) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 90% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments). As of May 31, 1995, the aggregate Outstanding Balance of the Receivables in existence was $77,140,973.81 and the aggregate Outstanding Balance of all Eligible Receivables was $75,350,988.50. -5- SECTION 9. Amendment to Section 7.1(k). Section 7.1(k) of the Transfer and Administration Agreement ("Termination Events") is hereby deleted in its entirety and replaced with the following (solely for convenience of reference, the revised language in this subsection is italicized): "(k) (i) the Net Investment minus amounts on deposit in the Prefunding Account shall at any time exceed the Net Receivables Balance, or (ii) the Net Investment minus amounts on deposit in the Prefunding Account shall at any time exceed the sum of (x) 98% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for 72 monthly payments or less) and (y) 90% of the Net Receivables Balance (to the extent allocable to Contracts which upon origination provided for more than 72 monthly payments) for a period of two (2) or more consecutive days; or" SECTION 10. Limited Scope. This amendment is specific to the circumstances described above and does not imply any future amendment or waiver of rights allocated to the Company, the Transferor, Union Acceptance Corporation, the Collection Agent, the Administrative Agent or the Collateral Agent under the Transfer and Administration Agreement. SECTION 11. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 12. Severability; Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. Any provisions of this Amendment which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 13. Ratification. Except as expressly affected by the provisions hereof, the Transfer and Administration Agreement as amended shall remain in full force and effect in accordance with its terms and ratified and confirmed by the parties hereto. On and after the date hereof, each reference in the Transfer and Administration Agreement to "this Agreement", "hereunder", "herein" or words of like import shall mean and be a reference to the Transfer and Administration Agreement as amended by this Amendment. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -6- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment Number 4 as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Company By: /s/ Stuart Cutler Name: Stuart Cutler Title: Vice President UNION ACCEPTANCE FUNDING CORPORATION, as Transferor By: /s/ Rich A. Brown Name: Rich A. Brown Title: Vice President UNION ACCEPTANCE CORPORATION, as Collection Agent By: /s/ John Stainbrook Name: John Stainbrook Title: President -7- Exhibit A Actual Loss Percentage Transfer Percentage Per Contract Number of Monthly Payments 72 or less +72 Less than 93.0% 98% 90% 93.0% to 95.9% 96% 88% 96.0% to 97.9% 94% 86% 98.0% to 100% 92% 84% More than 100% 0% -8- EX-4.5(B) 6 ADMINISTATION AGREEMENT Exhibit 4.5(b) ENTERPRISE FUNDING CORPORATION c/o MERRILL LYNCH MONEY MARKETS INC. World Financial Center - South Tower 225 Liberty Street New York, New York 10281 October 12, 1995 Ms. Cindy Whitaker Performance Funding Corporation 45 North Pennsylvania Street, Lower Level Indianapolis, Indiana 46204 Dear Cindy: This letter is to confirm our agreement to amend the Transfer and Administration Agreement between Union Acceptance Corporation (the "Collection Agent"), Performance Funding Corporation (the "Transferor") and Enterprise Funding Corporation (the "Company") dated July 24, 1995 and as amended to date. This letter agreement shall be effective as of today. The Transfer and Administration Agreement shall be amended as follows: In Section 7.1(q), the reference to "in any period of six consecutive calendar months" shall be amended to read "prior to March 31, 1996 and thereafter within any period of six consecutive calendar months following the date of the preceding Take-Out". The Transferor hereby represents and warrants that the representations and warranties of the Transferor set forth in Section 3.1 of the Transfer and Administration Agreement are true and correct as of the date hereof (except those representations and warranties set forth therein which specifically relate to an earlier date). All other terms and conditions of the Agreement not amended by this letter agreement shall remain unchanged and in full force and effect. If this letter correctly sets forth our agreement, please sign the enclosed duplicate original and return to Michelle M. Heath, NationsBank Investment Banking, NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by October 20, 1995. Sincerely, ENTERPRISE FUNDING CORPORATION By: /s/ Thomas S. Dunstan Name: Thomas S. Dunstan Title: Vice President Accepted and Agreed: UNION ACCEPTANCE CORPORATION By: /s/ John M. Stainbrook Name: John M. Stainbrook Title: President Date: PERFORMANCE FUNDING CORPORATION By: /s/ Cynthia F. Whitaker Name: Cynthia F. Whitaker Title: Vice President and Secretary Date: -2- EX-4.5(C) 7 AMENDMENT NO. 2 - TRANSFER AND ADMINISTRATION Exhibit 4.5(c) AMENDMENT NUMBER 2 TO TRANSFER AND ADMINISTRATION AGREEMENT AMENDMENT NUMBER 2 TO TRANSFER AND ADMINISTRATION AGREEMENT (this "Amendment"), dated as of May 10, 1996 between PERFORMANCE FUNDING CORPORATION, a Delaware corporation, as transferor (in such capacity, the "Transferor"), UNION ACCEPTANCE CORPORATION, an Indiana corporation, in its individual capacity and as collection agent (in such capacity, the "Collection Agent"), and ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "Company") amending that certain Transfer and Administration Agreement dated as of July 24, 1995 among the parties hereto, as amended by Amendment No. 1 dated as of September 8. 1995 (the "Transfer and Administration Agreement"). WHEREAS, the Transferor and the Company have agreed to make certain amendments to the Transfer and Administration Agreement. NOW, THEREFORE, the parties hereby agree as follows: SECTION 1. Defined Terms. As used in this Amendment, capitalized term shall have the same meanings assigned thereto in the Transfer and Administration Agreement. SECTION 2. Amendment to Definition of "Net Receivables Balance". The definition of "Net Receivables Balance" is hereby deleted in its entirety and replaced with the following (solely for convenience of reference, the revised provision in this definition is italicized): "Net Receivables Balance" means at any time the Outstanding Balance of the Eligible Receivables at such time reduced by the sum of (i) the amount by which the aggregate Outstanding Balance of Eligible Receivables the Contracts related to which upon origination provide for more than 60 monthly payments exceeds 80% of the aggregate Outstanding Balance of Eligible Receivables, plus (ii) the amount by which the aggregate Outstanding Balance of Eligible Receivables originated by any one dealer exceeds 3% of the Outstanding Balance of Eligible Receivables (except that the aggregate Outstanding Balance of Eligible Receivables originated by Ricart Ford may exceed 3% but not exceed 5% of the Outstanding Balance of Eligible Receivables), plus (iii) the aggregate Outstanding Balance of all Eligible Receivables which are Defaulted Receivables." SECTION 3. Limited Scope. This amendment is specific to the circumstances described above and does not imply any future amendment or waiver of rights allocated to the Company, the Transferor, Union Acceptance Corporation, the Collection Agent, the Administrative Agent or the Collateral Agent under the Transfer and Administration Agreement. SECTION 4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 5. Severability. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when Taken together shall constitute one and the same instrument. Any provisions of this Amendment which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 6. Ratification. Except as expressly affected by the provisions hereof, the Transfer and Administration Agreement as amended shall remain in full force and effect in accordance with its terms and ratified and confirmed by the parties hereto. On and after the date hereof, each reference in the Transfer and Administration Agreement to "this Agreement", "hereunder", "herein" or words of like import shall mean and be a reference to the Transfer and Administration Agreement as amended by this Amendment. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -2- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment Number 2 as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Company By: /s/ Stuart Cutler Name: Stuart Cutler Title: Vice President PERFORMANCE FUNDING CORPORATION, as Transferor By: /s/ Cynthia F. Whitaker Name: Cynthia F. Whitaker Title: Vice President UNION ACCEPTANCE CORPORATION, as Collection Agent By: /s/ John M. Stainbrook Name: John M. Stainbrook Title: President -3- EX-4.5(D) 8 CONFIRMING LETTER Exhibit 4.5(d) ENTERPRISE FUNDING CORPORATION c/o MERRILL LYNCH MONEY MARKETS INC. World Financial Center - South Tower 225 Liberty Street New York, New York 10281 July 11, 1995 Ms. Cindy Whitaker Performance Funding Corporation 45 North Pennsylvania Street, Lower Level Indianapolis, Indiana 46204 Dear Cindy: This letter is to confirm our agreement to amend the Transfer and Administration Agreement ("TAA") between Union Acceptance Corporation (the "Collection Agent"), Performance Funding Corporation (the "Transferor") and Enterprise Funding Corporation (the "Company") dated July 24, 1995 and as amended to date. The TAA shall be amended as follows: In Section 1.1, the definition of "Termination Date" shall be amended so that "July 18, 1996" contained in clause (v) of the definition shall read "July 18, 1997". The Transferor hereby represents and warrants that the representations and warranties of the Transferor set forth in Section 3.1 of the Transfer and Administration Agreement are true and correct as of the date hereof (except those representations and warranties set forth therein which specifically relate to an earlier date), All other terms and conditions of the Agreement not amended by this letter agreement shall remain unchanged and in full force and effect. If this letter correctly sets forth our agreement, please sign the enclosed duplicate originals and return to Suzy Edmiston, NationsBank Investment Banking, NationsBank Corporate Center, 10th Floor, Charlotte, North Carolina 28255 by July 16, 1996. Sincerely, ENTERPRISE, FUNDING CORPORATION By: /s/ K. Carter Harris Name: K. Carter Harris Title: Vice President Accepted and Agreed: PERFORMANCE FUNDING UNION ACCEPTANCE CORPORATION CORPORATION, as Transferor as Collection Agent By: /s/Rick A. Brown By: /s/John M. Stainbrook Name: Rick A. Brown Name: John M. Stainbrook Title: Treasurer Title: President Date: Date: -2- EX-4.5(E) 9 CONFIRMING LETTER Exhibit 4.5(e) ENTERPRISE FUNDING CORPORATION c/o MERRILL LYNCH MONEY MARKETS INC. World Financial Center - South Tower 225 Liberty Street New York, New York 10281 August 20, 1996 Ms. Melanie Otto Performance Funding Corporation 250 North Shadeland Avenue Indianapolis, Indiana 46219 Dear Melanie: This letter is to confirm our agreement to amend the Transfer and Administration Agreement (the "Agreement") between Union Acceptance Corporation (the "Collection Agent), Performance Funding Corporation (the "Transferor") and Enterprise Funding Corporation (the "Company") dated July 24, 1995 and as amended to date. The Agreement shall be amended as follows and shall be effective as of today: In Section 7.1(q) (as amended on October 12, 1995), the reference to "prior to March 31, 1996 and thereafter within any period of six consecutive calendar months following the date of the preceding Take-Out" shall be amended to read "after March 31, 1996 and prior to December 31, 1996, and thereafter within any.period of six consecutive calendar months following the date of the preceding Take-Out". The Transferor hereby represents and warrants that the representations and warranties of the Transferor set forth in Section 31 of the Transfer and Administration Agreement are true and correct as of the date hereof (except those representations and warranties set forth therein which specifically relate to an earlier date). All other terms and conditions of the Agreement not amended by this letter agreement shall remain unchanged and in full force and effect. If this letter correctly sets forth our agreement, please sign the enclosed duplicate original and return to Suzy Edmiston, NationsBank Investment Banking, NationsBank Corporate Center, 10th Floor. Charlotte. North Carolina 282,55 by August 30, 1996. Sincerely, ENTERPRISE CORPORATION By: /s/ Stuart L. Cutler Name: Stuart L. Cutler Title: Vice President Accepted and Agreed: UNION ACCEPTANCE CORPORATION PERFORMANCE FUNDING CORPORATION By: /s/ John M. Stainbrook By: /s/ Rick A. Brown Name: John M. Stainbrook Name: Rick A. Brown Title: President Title: Vice President -2- EX-10.26 10 SUBLEASE BETWEEN UAC AND UFSB OF INDIANAPOLIS SUBLEASE BY AND BETWEEN UNION ACCEPTANCE CORPORATION, AN INDIANA CORPORATION LANDLORD AND UNION FEDERAL SAVINGS BANK OF INDIANAPOLIS, A FEDERAL SAVINGS BANK TENANT DATED August 1, 1996 TABLE OF CONTENTS PARAGRAPH PAGE PARAGRAPH 1: TERMS AND DEFINITIONS.......................................1 PARAGRAPH 2: EXHIBITS...........................................2 PARAGRAPH 3: CONSENT............................................2 PARAGRAPH 4: COMMENCEMENT AND POSSESSION........................2 PARAGRAPH 6: RENT...............................................2 PARAGRAPH 7: HOLDOVER TENANCY...................................3 PARAGRAPH 8: TENANT'S ALTERATIONS...............................3 PARAGRAPH 9: CERTAIN IMPROVEMENTS: .............................4 PARAGRAPH 10: PROJECT SERVICES..................................4 PARAGRAPH 11: INTERRUPTION OF SERVICES..........................5 PARAGRAPH 12: USE OF LEASED PREMISES............................5 PARAGRAPH 13: SIGNS AND GRAPHICS................................6 PARAGRAPH 14: ENVIRONMENTAL PROVISIONS..........................6 PARAGRAPH 15: INSURANCE AND WAIVER OF SUBROGATION...............7 PARAGRAPH 16: REPAIRS...........................................8 PARAGRAPH 17: ENCUMBRANCES; ASSIGNMENT AND SUBLETTING...........9 PARAGRAPH 18: ADDITIONAL RIGHTS RESERVED TO THE LANDLORD...............................10 PARAGRAPH 19: LANDLORD'S REPRESENTATIONS.......................10 PARAGRAPH 20: CASUALTY AND UNTENANTABILITY.....................10 -i- PARAGRAPH 21: CONDEMNATION.....................................11 PARAGRAPH 22: WAIVER OF CERTAIN CLAIMS.........................11 PARAGRAPH 23: LIMITATION OF LANDLORD'S LIABILITY...............12 PARAGRAPH 24: TENANT'S DEFAULT.................................12 PARAGRAPH 25: REMEDIES OF LANDLORD.............................12 PARAGRAPH 26: ADVANCES AND INTEREST............................14 PARAGRAPH 27: [RESERVED].......................................14 PARAGRAPH 28: SURRENDER OF LEASED PREMISES.....................14 PARAGRAPH 29: INDEMNIFICATION..................................14 PARAGRAPH 30: SEVERABILITY.....................................15 PARAGRAPH 31: WAIVER...........................................15 PARAGRAPH 32: ESTOPPEL.........................................15 PARAGRAPH 33: SUBORDINATION, ATTORNMENT AND NONDISTURBANCE............................16 PARAGRAPH 34: QUIET ENJOYMENT..................................16 PARAGRAPH 35: ATTORNEYS' FEES..................................16 PARAGRAPH 36: FORCE MAJEURE....................................16 PARAGRAPH 37: APPLICABLE LAW...................................17 PARAGRAPH 38: BINDING EFFECT; GENDER...........................17 PARAGRAPH 39: TIME.............................................17 PARAGRAPH 40: WAIVER OF JURY TRIAL.............................17 PARAGRAPH 41: HEADINGS.........................................17 PARAGRAPH 42: BROKERS..........................................17 -ii- PARAGRAPH 43: ENTIRE AGREEMENT.................................17 PARAGRAPH 44: NOTICES..........................................18 PARAGRAPH 45: RECORDATION......................................18 PARAGRAPH 46: OPTION TO RENEW..................................18 -iii- SUBLEASE OF PREMISES This Sublease of Premises (the "Sublease") is made between UNION ACCEPTANCE CORPORATION, an Indiana corporation ("Landlord"), and UNION FEDERAL SAVINGS BANK OF INDIANAPOLIS, a Federal savings bank ("Tenant"). Landlord leases to Tenant and Tenant leases from Landlord the Leased Premises, subject to the following terms and conditions: PARAGRAPH 1: TERMS AND DEFINITIONS: The following terms and definitions shall be applied uniformly throughout the Lease: A. Building shall mean the structure and all real property underlying such structure and contiguous thereto held under common ownership which is described on Exhibit A and more generally located at 250 North Shadeland Avenue, Indianapolis, Indiana. B. Leased Premises shall mean portions of the ground floor of the Building, as described in Exhibit B. C. Lease Commencement Date shall mean August 1, 1996. D. Tenant's Rentable Square Footage shall mean 1,534 square feet of office space. E. Lease Expiration Date shall mean April 30, 2003, or the expiration date of any renewal period. F. Term shall mean the period commencing with Lease Commencement Date and ending with the Lease Expiration Date. G. Base Rent shall mean $2,556.67 per month for the Term. H. Permitted Purpose shall mean branch banking center and storage. I. Authorized Number of Parking Spaces shall mean 25 spaces at no cost to Tenant. J. Landlord's Notice Address: Union Acceptance Corporation, 250 North Shadeland Avenue, Indianapolis, Indiana 46219 - Attention: President - Fax: (317) 231- 7926. K. Tenant's Mailing Address: Union Federal Savings Bank of Indianapolis, 45 North Pennsylvania Street, Indianapolis, Indiana 46204 - Attention: Lonnie Frauhiger - Fax: (317) 269-4780. L. Master Lease shall mean that certain Lease and Agreement dated as of November 1, 1995, by and between Landlord and Waterfield Mortgage Company, Incorporated. PARAGRAPH 2: EXHIBITS: The exhibits listed below are attached and incorporated into this Sublease by reference. The terms of schedules, exhibits, and typewritten addenda, if any, attached to this Sublease shall control over any inconsistent provisions in this Sublease. Exhibits: A. Legal description of Building B. Schematic floor plan C. Cleaning services D. Tenant estoppel certification E. Subordination, Non-Disturbance and Attornment Agreement F. Signage specifications PARAGRAPH 3: CONSENT: Notwithstanding any other provision of this Sublease, all consents and approvals to be given by Landlord or Tenant, as the case may be, shall not be unreasonably or arbitrarily withheld, and shall be timely made. PARAGRAPH 4: COMMENCEMENT AND POSSESSION: Subject to the terms and conditions herein, the Term, the Rent (as hereinafter defined) and the possession of the Leased Premises by Tenant shall commence on the Lease Commencement Date. Tenant's occupancy of the Leased Premises shall not be construed to relieve Landlord of its responsibility to remedy, correct, replace, reconstruct or repair any deviation, deficiency, or defect in the work or in the materials or equipment furnished by Landlord without cost to Tenant. PARAGRAPH 5: SUBORDINATION TO MASTER LEASE: This Sublease is subject in all respects to the terms and conditions of the Master Lease relating to the Property. Tenant covenants and agrees with Landlord that it will observe and perform each of the covenants and agreements, and shall abide and be bound by each of the terms and provisions of the Master Lease (except the covenants for the payment of rent, real estate taxes and insurance premiums thereunder) and shall take no action, or fail to take any action, that would constitute a default by the Landlord thereunder. Tenant acknowledges that it has received a copy of the Master Lease. In the event of a conflict between the terms and conditions of the Master Lease and (i) the rights of Tenant or (ii) the obligations of Landlord hereunder, the Master Lease shall prevail. Tenant shall have no greater rights under this Sublease with respect to the Property than Landlord has as lessee under the Master Lease. PARAGRAPH 6: RENT: Beginning on the Lease Commencement Date, Tenant shall pay each monthly installment of Base Rent in advance on or before the first calendar day of -2- each month. Monthly installments for any fractional calendar month, at the beginning or end of the Term, shall be prorated based on the number of days in the month. Base Rent together with all other amounts payable by Tenant to Landlord under this Sublease, shall be sometimes referred to collectively as "Rent". Tenant shall pay all Rent to: Landlord at the address prescribed above for notices, Attention: Rick A. Brown, Treasurer, or as may be hereafter specified by Landlord. If Tenant fails to make any payment of Rent within five (5) days after the payment is due, then Tenant shall pay a late charge of four percent (4%) of the amount of the payment per month from the date when due. Such late charge shall constitute Rent, and shall be paid with the next monthly installment of Rent coming due. Such late charge shall be in addition to, and not in lieu of, all other rights and remedies provided to Landlord in this Sublease. PARAGRAPH 7: HOLDOVER TENANCY: If Tenant shall holdover without permission after the expiration of the Term, Tenant shall be deemed to occupy the Leased Premises as a tenant from month-to-month, which tenancy may be terminated by thirty (30) days written notice. During such tenancy, Tenant agrees to pay to Landlord an amount equal to one hundred fifty percent (150%) of the monthly Base Rent in effect during the last month of the Term and to be bound by all of the terms, conditions and covenants herein specified or the holdover shall be deemed a default under Paragraph 24 of this Sublease. Landlord may exercise all of its rights and remedies as a result of Tenant's failure to deliver possession of the Leased Premises to Landlord when required under this Sublease for the period of such holdover. PARAGRAPH 8: TENANT'S ALTERATIONS: Other than as set forth in Paragraph 9, Tenant shall not make any alterations, additions or improvements (collectively referred to as "Tenant's Alterations") in or to the Leased Premises without first obtaining the written consent of Landlord, which consent may be withheld at Landlord's discretion. All Tenant's Alterations shall be done in accordance with all laws, ordinances, and rules and regulations of any federal, state, county, municipal, or other public authority having jurisdiction over the Leased Premises. Tenant shall use qualified contractors approved by Landlord and all work must be done in a good and workmanlike manner and conform with the standard of the Building. Tenant may, at its option, remove any Tenant's Alterations prior to its return of possession of the Leased Premises to Landlord pursuant to the terms of this Sublease, so long as Tenant restores the Leased Premises to its original condition prior to the installation of such Tenant's Alterations, subject to ordinary wear and tear and damage by fire and other insured casualty excepted. As of the Lease Commencement Date, there are no Tenant Alterations that Tenant will remove prior to its return of possession of the Leased Premises, except those listed on Schedule 1 hereto. Any mechanic's lien filed against the Leased Premises or the Building for work claimed to have been done or materials claimed to have been furnished to Tenant shall be discharged by Tenant within thirty (30) days from the date of receipt of notice of the lien. For the purposes hereof, the bonding of such lien by a reputable casualty or insurance company reasonably satisfactory to Landlord shall be deemed the equivalent of a discharge -3- of any such lien. Should any action, suit, or proceeding be brought upon any such lien for the enforcement or foreclosure of the same, Tenant shall defend Landlord therein, by counsel reasonably satisfactory to Landlord, and pay any damages and satisfy and discharge any judgment entered therein against Landlord. Tenant shall indemnify and hold Landlord harmless from any injury, damage, cost or loss sustained by persons or property as a result of any defect in the design, material or workmanship of Tenant Alterations. PARAGRAPH 9: CERTAIN IMPROVEMENTS: Landlord acknowledges that Tenant has, with Landlord's consent, constructed improvements to the Leased Premises and adjacent areas to meet the Tenant's requirements, including the construction of a drive-up teller facility and additional parking area. Landlord acknowledges that such improvements have been constructed in compliance with Paragraph 8. Landlord and tenant agree that Tenant's costs to construct such improvements was $316,045, of which $203,640 has been or will be reimbursed by Landlord to Tenant at or about the time this Sublease is executed by the parties hereto. Neither Landlord nor Tenant owes the other any additional funds in respect of such improvements. PARAGRAPH 10: PROJECT SERVICES: Landlord shall furnish Project Services, as defined herein, in the manner generally provided in first class office buildings in the local metropolitan area, including, but not limited to: A. Utility Services: Electricity; hot and cold water; sewer; refuse and rubbish removal; lighting, and bulb, tube, lamp and ballast replacement; and heating, ventilation and air conditioning. Should Tenant, in Landlord's reasonable judgment, use additional, unusual or excessive Utility Services, Landlord reserves the right to charge Tenant for the portion of Utility Services which is unusual or excessive, in Landlord's reasonable discretion. B. Maintenance Services: Maintenance of all interior and exterior areas including parking areas and the roof. Services include, but are not limited to, lighting, landscaping, cleaning, painting, window washing, and snow plowing. C. Janitorial Services: Listed on Exhibit C ("Cleaning Services"). D. Elevator Service: During normal business hours (if the Building contains an elevator or elevators for the use of Tenant). There shall also be at least one elevator available twenty-four hours a day. The services described in paragraphs A. through D. above shall be collectively referred to as "Project Services." The costs of Project Services shall be part of Base Rent. Unless otherwise indicated, Project Services shall be furnished 7:00 a.m. to 7:00 p.m., Monday through Friday, and until 1:00 p.m. on Saturdays, excluding the following holidays: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and -4- Christmas Day. If requested by Tenant with twenty-four (24) hours prior notice, Landlord will make available any Project Services for an additional hourly fee agreed to by Landlord and Tenant. PARAGRAPH 11: INTERRUPTION OF SERVICES: Notwithstanding any other provisions of this Sublease, if any of the Project Services to be provided by Landlord are suspended or interrupted for any reason other than the default, willful acts, negligence or recklessness of Tenant or its agents, employees, visitors, customers or invitees for a period of more than two (2) consecutive business days, Rent due hereunder shall abate equitably in direct proportion to the amount of the Leased Premises that are unusable by Tenant, until such time as Project Services are restored to the Leased Premises. PARAGRAPH 12: USE OF LEASED PREMISES: Tenant agrees to: A. Use the Leased Premises for the Permitted Purpose and for no other purpose. B. Use the Leased Premises in compliance with all laws, ordinances, regulations or rules applicable to the Leased Premises and all requirements of the carriers of insurance covering the Building. However, so long as it uses the Leased Premises for the Permitted Purpose, Tenant shall not be obligated to make any changes to the Leased Premises due to laws, ordinances, regulations or rules, unless such changes are required as a result of Tenant's Alterations. C. Not do or permit anything to be done in or about the Leased Premises, or bring or keep anything in the Leased Premises that may increase Landlord's fire and extended coverage insurance premium, damage the Building or the Leased Premises, constitute waste, constitute an immoral purpose, be a nuisance, public or private, or menace or other disturbance to tenants of adjoining premises or anyone else. D. Observe, perform and abide by such reasonable rules and regulations for the use and occupation of the Leased Premises promulgated by Landlord from time to time. E. Maintain and supply its own security personnel and equipment. Due to the nature of Tenant's use as a banking center, it is expressly agreed that Landlord shall not be liable for loss to Tenant, its agents, employees, customers and visitors arising out of robbery, theft, burglary, or damage or injury to persons or property caused by persons gaining access to the Leased Premises, provided that such access was not gained as a result of the negligence, intentional act or willful misconduct of Landlord, its agents or employees. Tenant agrees to indemnify, release and hold harmless Landlord from any claim, loss, cost, damage, cause of action, award or other expense (including reasonable attorneys' fees) arising out of or related to such claims, provided that such claim did not arise as a result of the negligence, intentional act or willful misconduct of Landlord, its agents or employees. -5- PARAGRAPH 13: SIGNS AND GRAPHICS: Except as agreed to in Exhibit F, Tenant shall not place or permit any lettering, sign, advertisement, notice or object on the windows or doors or on the outside of the perimeter walls of the Leased Premises, unless Landlord has given prior written consent. Any sign or lettering not approved by Landlord may be removed by Landlord and the cost of such removal and any necessary repair shall be paid for by Tenant. PARAGRAPH 14: ENVIRONMENTAL PROVISIONS: A. "Hazardous Materials" include substances (i) which require remediation under any Environmental Laws; or (ii) which are or become defined as a "hazardous waste," "hazardous substance," "pollutant" or "contaminant" under any Environmental Laws; or (iii) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic or mutagenic; or (iv) which contain petroleum hydrocarbons, polychlorinated biphenyls, asbestos, asbestos containing materials or urea formaldehyde. B. "Environmental Laws" mean all applicable present and future statutes, regulations, rules, ordinances, codes, permits or orders of all governmental agencies, departments, commissions, boards, bureaus, or instrumentalities of the United States, states and their political subdivisions and all applicable judicial, administrative and regulatory decrees and judgments relating to the protection of public health or safety or of the environment. C. "Environmental Damages" means all claims, judgments, losses, penalties, fines, liabilities, encumbrances, liens, costs and reasonable expenses of investigation, defense or good faith settlement resulting from violations of Environmental Laws, and including, without limitation: (i) damages for personal injury and injury to property or natural resources; (ii) reasonable fees and disbursements of attorneys, consultants, contractors, experts and laboratories; and (iii) costs of any cleanup, remediation, removal, response, abatement, containment, closure, restoration or monitoring work required by any Environmental Law and other costs reasonably necessary to restore full economic use of the Leased Premises. D. Tenant agrees to indemnify, defend, reimburse and hold Landlord harmless against any Environmental Damages incurred by Landlord arising from Tenant's breach of subparagraph E below or for any cause of action, claim, loss, damage, or expense incurred by Landlord due to the act or omission of Tenant which results in a breach of the environmental indemnification contained in Section 7(c) of the Master Lease. The obligations of Tenant in this paragraph shall survive the termination of this Sublease and the discharge of all other obligations owed by the parties to each other under this Sublease. Notwithstanding anything else contained herein to the contrary, Landlord's indemnity does not apply to any damages to Tenant arising out of a condition which was present on the Lease Commencement Date. -6- E. Landlord and Tenant shall (i) comply with all Environmental Laws; (ii) not cause or permit any Hazardous Materials to be treated, stored, disposed of, generated, or used in the Leased Premises, provided, however, that Landlord and Tenant may each store, use or dispose of products customarily found in offices and used in connection with operation and maintenance of property if each complies with all Environmental Laws and does not contaminate the Leased Premises or environment; and (iii) promptly after receipt, deliver to the other party a copy of any communication concerning any past or present, actual or potential violation of Environmental Laws or liability of either party for Environmental Damages. PARAGRAPH 15: INSURANCE AND WAIVER OF SUBROGATION: Landlord agrees that throughout the Term it will insure the Building (but not the contents of the Leased Premises and excluding any property which Tenant is obligated to insure hereunder) for its full replacement cost against loss due to fire and other casualties included in standard extended coverage (all risk) insurance. In addition, Landlord will maintain public liability insurance. Throughout the Term, Tenant will, at its own expense, maintain: (a) comprehensive general liability insurance with respect to the Leased Premises and Tenant's activities in the Leased Premises and the Building, providing bodily injury and property damage coverage, in amounts no less than: A. $1,000,000 with respect to bodily injury or death to any one person; B. $1,000,000 with respect to property damage or other loss arising out of any one occurrence. C. $2,000,000 with respect to bodily injury, death or property damage arising out of any one occurrence; Tenant shall be required to increase its insurance limits from time to time as may reasonably be required by Landlord consistent with coverage on properties similarly constructed, occupied and maintained. Such liability insurance shall be primary and not contributing to any insurance available to Landlord and Landlord's insurance shall be in excess thereto. In no event shall the limits of such insurance be considered as limiting the liability of Tenant under this Lease. (b) During any construction activity undertaken pursuant to Paragraphs 8 and 9 hereof, Tenant shall also maintain Builders Risk insurance insuring perils covered by the causes of loss - special form (all risk) for the value of the Improvements and for the value of any further alterations and/or additions made to the Leased Premises. -7- (c) Workers' compensation insurance in accordance with statutory law and employers' liability insurance with a limit of not less than $500,000 per employee and $500,000 per occurrence. (d) Such other insurance as Landlord may, from time to time, reasonably require, or which may, from time to time, be required under the Master Lease so long as such other insurance is customarily required to be carried on similar properties. The policies required to be maintained by Tenant shall be with companies having a rating of not less than A with a financial class of at least X in the most current issue of Best's Insurance Reports. Insurers shall be licensed to do business in the State of Indiana and domiciled in the USA. Any deductible amounts under any insurance policies required hereunder shall not exceed $1,000. Certificates of insurance shall be delivered to Landlord prior to the commencement date and annually thereafter at least thirty (30) days prior to the expiration date of the old policy. Tenant shall have the right to provide insurance coverage which it is obligated to carry pursuant to the terms hereof in a blanket policy, provided such blanket policy expressly affords coverage to the Leased Premises and to Landlord as required by this Sublease. Tenant agrees that Landlord and Waterfield Mortgage Company, Incorporated and any Permitted Beneficiaries (as defined in the Master Lease) will be additional insureds under the applicable policies. Tenant's policies of insurance shall provide that they may not be cancelled or modified without at least a thirty (30) days advance notice to Landlord. Tenant and Landlord release each other and waive any right of recovery against each other for loss or damage to the waiving party or its respective property, which occurs in or about the Leased Premises, whether due to the negligence of either party, its agents, employees, officers, contractors, licensees, invitees or otherwise, to the extent that such loss or damage is insured against under the terms of standard fire and extended coverage insurance policies but only to the extent of such proceeds. Tenant and Landlord agree that all policies of insurance obtained by either of them in connection with the Leased Premises shall contain appropriate waiver of subrogation clauses. Landlord shall also be entitled to recover as damages for the uninsured amount of any loss, to the extent of any deficiency in the insurance policies limits and damages, and costs and expenses of suit suffered or incurred by reason of or damage to, or destruction of the Leased Premises, occurring during any period when the Tenant may have self-insured or failed or neglected to obtain the required insurance. PARAGRAPH 16: REPAIRS: Tenant shall be responsible for and shall indemnify and hold Landlord harmless for any damages to the Building or the Leased Premises caused by the negligence or willful acts of its agents, employees, customers, invitees or occupants. Any such damages shall be repaired by Tenant to the satisfaction of Landlord or Landlord shall have the right to make such repairs itself and charge the cost thereof to Tenant as additional Rent. Subject to Tenant's obligations set forth in the preceding sentence, Landlord shall, at its expense, maintain and keep in repair the Building and Leased -8- Premises including both exterior, interior, parking lots, driveways, sidewalks, drive-up teller canopy and all structural parts, fixtures, wiring, plumbing, heating, water pipes, plastering and flooring therein, except installed equipment and fixtures provided by Tenant including those listed on Schedule 1 hereto. Without limiting the foregoing, Landlord agrees to keep heating plant, electrical and water connections and facilities and air conditioning in first class operating condition and available for continuous use. If Landlord shall fail to initiate repairs to the Leased Premises or to other portions of the Building which directly affect the Leased Premises as required by this Paragraph 16 within 30 days of receipt of written notice from Tenant, Tenant may make such repairs and offset the reasonable cost of same against future rental payments owed to Landlord hereunder, unless the repairs are of a type which cannot be repaired within 30 days and Landlord has undertaken to make such repairs in the first 30 days following such notice. PARAGRAPH 17: ENCUMBRANCES; ASSIGNMENT AND SUBLETTING: Neither this Sublease nor the Term hereby demised shall be mortgaged, pledged or hypothecated by Tenant, nor shall Tenant mortgage, pledge or otherwise encumber its interest in this Sublease or the rents payable hereunder. Any mortgage, pledge, or encumbrance in violation of this Section 17 shall be void. Tenant shall not assign, sublet or encumber, in whole or in part, all or any part of the Leased Premises, without the prior written consent of Landlord. Tenant may, however, without consent of Landlord but with notice to Landlord, assign or sublet the Leased Premises to its parent, subsidiary or affiliate. Tenant shall, at the time Tenant requests consent of Landlord, deliver to Landlord such information in writing as Landlord may reasonably require respecting the proposed assignee or subtenant including, without limitation, the name, address, nature of business, ownership, financial responsibility and standing of such proposed assignee or subtenant and the terms of the proposed assignment or subletting, and Landlord shall have fifteen (15) days after receipt of all required information to elect one of the following: (a) consent to such proposed assignment or sublease; (b) refuse such consent; or (c) elect to terminate this Sublease, or, in the case of a partial sublease, terminate this Sublease as to the portion of the Leased Premises proposed to be sublet. If Landlord elects to exercise its right to terminate this Sublease or a portion hereof under a proposed assignment or subletting, Tenant shall have the right within ten (10) days following receipt of written notice of Landlord's election to withdraw its request for Landlord's consent, in which event Landlord's termination notice shall be null and void, and the Lease shall remain in full force and effect. No assigning or subletting by Tenant shall relieve Tenant of any obligation under this Sublease, including Tenant's obligation to pay Rent. Any purported assignment or subletting contrary to the provisions hereof without consent shall be void. The consent by Landlord to any assignment or subletting shall not constitute a waiver of the necessity for such consent to any subsequent assignment or subletting. -9- If for any assignment or sublease, Tenant receives rent or other consideration in excess of the Rent in this Sublease, or in the case of the sublease of a portion of the Leased Premises, in excess of such Rent fairly allocable to such portion, Tenant shall pay to Landlord within ten (10) days after its receipt, as Rent, fifty percent (50%) of the excess of each such payment less Tenant's cost for (i) brokerage commissions then customary in the market; (ii) reasonable marketing expenses; and (iii) reasonable alterations (tenant improvements) approved in advance by Landlord. Landlord may sell, assign or transfer its interest in this Sublease to any party at any time upon receipt of Tenant's written consent, which consent will not be unreasonably withheld, provided, however, that Landlord may at any time sell, assign or transfer its interest herein to any wholly owned subsidiary of Landlord or to Waterfield Mortgage Company, Incorporated without the consent of Tenant. PARAGRAPH 18: ADDITIONAL RIGHTS RESERVED TO THE LANDLORD: Without notice and without liability to Tenant or without effecting an eviction or disturbance of Tenant's use or possession, Landlord shall have the right to (a) grant utility easements or other easements in, or replat, subdivide or make other changes in the legal status of the land underlying or contiguous with the Building as Landlord shall deem appropriate in its sole discretion, provided such changes do not substantially interfere with Tenant's use of the Leased Premises for the Permitted Purpose; (b) enter the Leased Premises at reasonable times and upon reasonable notice and at any time in the event of an emergency to inspect or repair the Leased Premises or the Building and to perform any acts related to the safety, protection, reletting, sale or improvement of the Leased Premises or the Building or to enter the Leased Premises to perform janitorial services; (c) change the name or street address of the Building; (d) install and maintain signs on and in the Building; and (e) make such rules and regulations as, in the sole judgment of Landlord, may be needed from time to time for the safety of the tenants, the care and cleanliness of the Leased Premises and the Building and the preservation of good order therein, so long as such rules and regulations are equitably enforced against all other tenants. PARAGRAPH 19: LANDLORD'S REPRESENTATIONS: Landlord represents that the heating and air conditioning systems, plumbing, hot water heater, electrical systems, and any other systems equipment, fixture or property presently existing or to be installed in the Leased Premises by Landlord (specifically excluding the Improvements and Tenant's Alterations) will be in compliance with all local building codes, in good working order and that the roof will be free from leaks upon Lease Commencement Date. PARAGRAPH 20: CASUALTY AND UNTENANTABILITY: If the Leased Premises or the Building is damaged or destroyed by fire or any other casualty, cause, or condition, or if the common areas in the Building are damaged to such an extent as to substantially interfere with Tenant's use of the Leased Premises, and that damage or destruction cannot be repaired within One Hundred Eighty (180) days, Landlord or Tenant may, by written notice -10- to the other party given within thirty (30) days after such damage, terminate this Sublease. The termination shall be effective as of the date of such damage. Unless this Sublease is terminated as provided above and to the extent insurance proceeds are made available to Landlord pursuant to the Master Lease, Landlord shall proceed with due diligence to restore, repair and replace the Leased Premises and Building to the same condition as they were in as of the Lease Commencement Date, subject to compliance with all existing codes at the time of reconstruction and from and after the date of such damage to the date of completion of the repairs, replacements and restorations, a just proportion of the Rent shall abate according to the extent the full use and enjoyment of the Leased Premises are rendered impracticable by reason of such damage. Landlord shall be under no duty to restore any of Tenant's Alterations. Notwithstanding any other provision of this Sublease, should the Leased Premises or any portion thereof be rendered untenantable for any reason, except for the negligence or intentional acts of Tenant, and the untenantability continues for a period of more than One Hundred Eighty (180) days, Tenant shall have the right to declare the Lease null and void. This declaration of nullity shall not affect any other rights Tenant may have pursuant to the terms of the Lease. PARAGRAPH 21: CONDEMNATION: If a material portion of the Leased Premises or access to the Leased Premises is taken by the power of eminent domain and if the remainder is inadequate for carrying out the Permitted Purpose and appropriate accommodations cannot be made, then both Landlord and Tenant shall have the option to cancel this Sublease as of the effective date of condemnation. Tenant hereby irrevocably assigns to Landlord any award or payment to which Tenant may be or become entitled with respect to the taking of the Leased Premises or any part thereof (except as to Tenant's trade fixtures, personal property and moving expenses), by condemnation or other eminent domain proceedings pursuant to any law, general or special, or by reason of the temporary taking of the use or occupancy of the Leased Premises or any part thereof, by any governmental authority, whether the same shall be paid or payable in respect of Tenant's leasehold interest hereunder or otherwise. If the parties elect not to terminate the Lease as provided above, then: (i) there shall be an equitable adjustment of Rent for the balance of the Term, in direct proportion to the amount of the Leased Premises so taken; and (ii) Landlord shall repair any damage to the Leased Premises caused by such taking to the extent condemnation proceeds are made available to Landlord pursuant to the Master Lease for such purpose. PARAGRAPH 22: WAIVER OF CERTAIN CLAIMS: Tenant, to the extent permitted by law, waives all claims it may have against Landlord and against Landlord's agents and employees for any damages sustained by Tenant or by any occupant of the Leased Premises, or by any other person, resulting from any cause arising at any time unless such damages are wholly unrelated to this Sublease and to Tenant's occupancy and use of the Leased -11- Premises, or are caused by the negligence, willful misconduct or breach of this Sublease by Landlord, its agents, employees and contractors. PARAGRAPH 23: LIMITATION OF LANDLORD'S LIABILITY: The obligations of Landlord under this Sublease do not constitute personal obligations of the individual partners, shareholders, directors, officers, employees or agents of Landlord, and Tenant shall look solely to Landlord's interest in the Building, if any, and to no other assets of Landlord for satisfaction of any liability in respect of this Sublease. Tenant will not seek recourse against the individual partners, shareholders, directors, officers, employees or agents of Landlord or any of their personal assets for such satisfaction. PARAGRAPH 24: TENANT'S DEFAULT: It shall be a "Tenant's Default" if Tenant shall (a) fail to pay any monthly installment of Base Rent, or any other sum payable hereunder within five (5) days after written notification that such sum is past due; (b) violate or fail to perform any of the other covenants or agreements herein made by Tenant, and such violation or failure shall continue for fifteen (15) days after written notice thereof to Tenant by Landlord, except that if within the fifteen (15) day period Tenant commences and thereafter proceeds diligently to remedy the violation or failure within a reasonable period of time not to exceed ninety (90) days from the receipt of notice, then Tenant shall not be in default hereunder; (c) make or have made (or if any guarantor shall make or have made) any false or misleading representation, warranty or covenant herein or in any notice, certificate, demand, request or other instrument delivered in connection herewith; (d) make a general assignment for the benefit of its creditors or file a petition for bankruptcy or other reorganization, liquidation, dissolution or similar relief; (e) fail to have dismissed within sixty (60) days of filing a proceeding filed against Tenant seeking any relief mentioned in (d) above; or (f) have a trustee, receiver or liquidator appointed for Tenant or a substantial part of its property. PARAGRAPH 25: REMEDIES OF LANDLORD: Upon the occurrence of a Tenant's Default, Landlord may, at its option, in addition to any other remedy or right it has hereunder, at law or at equity: (a) Re-enter the Leased Premises, without demand or notice, and resume possession by an action in law or equity or by force or otherwise and without being liable in trespass or for any damages and without terminating this Lease. Landlord may remove all persons and property from the Leased Premises and such property may be removed and stored at the cost of Tenant. (b) Terminate this Lease at any time upon the date specified in a notice to Tenant. Tenant's liability for damages shall survive such termination. Upon termination such damages recoverable by Landlord from Tenant shall, at Landlord's option, be either an amount equal to "Liquidated Damages" or an amount equal to "Indemnity Payments". -12- "Liquidated Damages" means an amount equal to the excess of the rentals provided for in this Lease that would have been payable hereunder by Tenant, had this Lease not so terminated, for the period commencing with such termination and ending with the date set for the expiration of the original term granted ("Unexpired Term"), over the reasonable rental value of the Leased Premises for the Unexpired Term. "Indemnity Payments" means an amount equal to the rent and other payments provided for in this Lease that would have become due and owing hereunder from time to time during the Unexpired Term plus the cost and expenses paid or incurred by Landlord from time to time in connection with: (1) Obtaining possession of the Leased Premises; (2) Removal and storage of Tenant's or other occupant's property; (3) Care, maintenance and repair of the Leased Premises while vacant; (4) Reletting the whole or any part of the Leased Premises while vacant; (5) Making all repairs, alterations and improvements required to be made by Tenant hereunder and of performing all covenants of Tenant relating to the condition of the Leased Premises, less the rent and other payments, if any, actually collected and allocable to the Leased Premises or to the portions thereof relet by Landlord. Tenant shall on demand make Indemnity Payments monthly and Landlord may sue for all Indemnity Payments as they accrue. (c) Without terminating this Lease, relet the Leased Premises without the same being deemed an acceptance of a surrender of this Lease nor a waiver of Landlord's rights or remedies and Landlord shall be entitled to Indemnity Payments from Tenant. Any reletting by Landlord may be for a period equal to or less than, or extending beyond the remainder of, the original term, for the whole or any part of the Leased Premises, separately or with other premises, for any sum, to any lessee, and for any use Landlord deems appropriate. B. Upon the occurrence of any of the following: (a) The filing of a voluntary petition in bankruptcy by Tenant; -13- (b) The filing of a petition or answer by Tenant seeking a reorganization, arrangement, composition, readjustment, liquidation, dissolution or other relief of the same or different kind under any provision of the Bankruptcy Act; (c) An adjudication of Tenant as a bankrupt or insolvent; or (d) The appointment of a trustee, receiver, guardian, conservator or liquidator of Tenant with respect to all or substantially all of its property; this Lease shall terminate ipso facto as of such occurrence and the Leased Premises shall be surrendered as required by Paragraph 28. Tenant's liability for damages shall survive such termination and Landlord shall be entitled to recover an amount equal to Liquidated Damages or an amount equal to the maximum allowed by any statute or rule of law governing the proceedings in which such amount is sought, whichever is less. The remedies granted to Landlord herein shall be cumulative and shall not exclude any other remedy allowed by law or in equity, except as provided herein, and shall not prevent the enforcement of any claim Landlord may have against Tenant. PARAGRAPH 26: ADVANCES AND INTEREST: If Landlord in curing Tenant's Default or otherwise pursuant hereto is compelled to pay or elects to pay any sum of money or do any acts which will require the payment of any sum of money for or on behalf of Tenant (including any amounts incurred in obtaining any insurance coverages which Tenant has failed to obtain in accordance with Section 15 hereof), the sum so paid or incurred shall be reimbursed by Tenant upon demand by Landlord and shall constitute Rent. All sums as to which Tenant is in default of payment shall bear interest at the rate of ten percent (10%) per annum until paid. PARAGRAPH 27: [RESERVED]. PARAGRAPH 28: SURRENDER OF LEASED PREMISES: Upon the Lease Expiration Date or other termination of this Sublease, Tenant shall surrender the Leased Premises to Landlord in good condition, normal wear and tear and damage by fire or other insured casualty excepted. Tenant shall have the right, but not the obligation, to remove all fixtures, (excluding Tenant's Alterations and any Improvements) installed or paid for by Tenant so long as Tenant restores the Leased Premises to its original condition prior to the installation of such fixtures or improvements, subject to ordinary wear and tear and damage by fire or other insured casualty. All Tenant's Alterations and the Improvements, except those listed on Schedule 1 hereto, shall become the property of Landlord upon the expiration or sooner termination of the Lease. PARAGRAPH 29: INDEMNIFICATION. (a) Tenant shall hold Landlord harmless and indemnified against any liability (including all reasonable expenses and attorneys' fees incurred by or imposed on Landlord in connection therewith) for injury or death to any -14- person or damage to any property in or upon the Leased Premises and any loading and service areas allocated to the use of Tenant, including the person and property of Tenant and its employees and all persons in the Leased Premises or the Building at his or their invitation, provided that such liability does not arise as a result of the negligence, intentional act or willful misconduct of Landlord, its agents or employees. Tenant shall also indemnify Landlord from all liabilities (including all reasonable expenses and attorneys' fees incurred by or imposed on Landlord in connection therewith) to the public and to other tenants in the Building arising from any acts or omissions of Tenant. (b) Landlord shall hold Tenant harmless and indemnified against any liability (including all reasonable expenses and attorneys' fees incurred by or imposed on Tenant in connection therewith) for injury or death to any person or damage to any property in or upon the Building except the Leased Premises and except also any loading and service areas available for the use of Tenant, including the person and property of Landlord and its employees and all persons in any part of the Building other than the Leased Premises at his or their invitation, provided that such liability does not arise as a result of the negligence, intentional acts or willful misconduct of Tenant, its agents or employees. PARAGRAPH 30: SEVERABILITY: The parties intend this Sublease to be legally valid and enforceable in accordance with all of its terms to the fullest extent permitted by law. If any term hereof shall be invalid or unenforceable, the parties agree that such term shall be stricken from this Sublease to the extent unenforceable, the same as if it never had been contained herein. Such invalidity or unenforceability shall not extend to any other term of this Sublease, and the remaining terms hereof shall continue in effect to the fullest extent permitted by law. PARAGRAPH 31: WAIVER: The waiver of either party hereto of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Sublease, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. The subsequent payment of Rent hereunder by Tenant shall not be deemed to be a waiver of any preceding breach by Landlord of any term, covenant or condition of this Sublease, regardless of Tenant's knowledge of such preceding breach at the time of payment of such Rent. No covenant, term or condition of this Sublease shall be deemed to have been waived by either party, unless such waiver is acknowledged in writing by such party. PARAGRAPH 32: ESTOPPEL: Tenant shall, within thirty (30) days after written request from Landlord, execute and deliver to Landlord in the form attached as Exhibit D a written statement certifying that the Lease is unmodified and in full force and effect, or that the Lease is in full force and effect as modified and listing the instruments of modification; the -15- dates to which the rents and charges have been paid; and, to the best of Tenant's knowledge, whether or not Landlord is in default hereunder and, if so, specifying the nature of the default, and such other factual matters as may be reasonably requested by Landlord. PARAGRAPH 33: SUBORDINATION, ATTORNMENT AND NONDISTURBANCE: Tenant covenants and agrees that this Sublease is subject and subordinate to any mortgage which may now or hereafter encumber the Leased Premises or the Building, and to all renewals, modifications, consolidations, replacements and extensions thereof. This clause shall be self operative and no further instrument of subordination need be requested by any mortgagee ("Lender"). However, Tenant will execute, if requested by Landlord or Lender, the Subordination, Non-Disturbance and Attornment Agreement attached hereto as Exhibit E. In the event of the enforcement by the Lender of the remedies provided for by law or by such mortgage and the mortgagee has elected not to terminate the Lease by way of foreclosure, Tenant will become the Tenant of, and attorn to, such successor in interest without change in the terms or other provisions of this Sublease. Notwithstanding any other provision contained herein, this paragraph shall not result in an interference with Tenant's Permitted Use and occupancy of the Leased Premises or Tenant's rights hereunder. Tenant agrees to give to Lender, by registered mail, a copy of any notice of default served upon landlord by Tenant. Tenant agrees that Lender shall have the same time frame given to Landlord under the Sublease to cure any default not cured by Landlord. Lender's cure shall commence after time frames provided in the Sublease for Landlord's cure have passed. If such default cannot be cured by Lender within the time periods prescribed in the Lease, Lender shall have such additional time as may be necessary to cure the default if Lender has commenced and is diligently pursuing the remedies necessary to cure such default, in which event such right, if any, as Tenant might otherwise have to terminate the Lease shall not be exercised while such remedies are being so diligently pursued. PARAGRAPH 34: QUIET ENJOYMENT: If and so long as Tenant pays all Rent and keeps and performs each and every term, covenant and condition herein contained on the part of Tenant to be kept and performed, Tenant shall quietly enjoy the Leased Premises without hindrance by Landlord. PARAGRAPH 35: ATTORNEYS' FEES: If the services of an attorney are required by any party to secure the performance under the Lease or otherwise upon the breach or default of the other party to the Lease, each party shall be responsible for its own legal fees. If a judicial remedy is necessary to enforce or interpret any provision of the Lease, the prevailing party shall be entitled to reasonable attorneys' fees, costs and other expenses, in addition to any other relief to which such prevailing party may be entitled. PARAGRAPH 36: FORCE MAJEURE: If either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature -16- beyond the reasonable control of, and not attributable to negligence or foreseeable events, the party delayed in performing work or doing acts required under the terms of this Sublease, then performance of such act shall be excused for the period of the delay and the period for the performance of such act shall be extended for a period equivalent to the period of such delay. PARAGRAPH 37: APPLICABLE LAW: This Sublease shall be construed according to the laws of the State of Indiana. PARAGRAPH 38: BINDING EFFECT; GENDER: This Sublease shall be binding upon and inure to the benefit of the parties and their successors and assigns. It is understood and agreed that the terms "Landlord" and "Tenant" and verbs and pronouns in the singular number are uniformly used throughout this Sublease regardless of gender, number or fact of incorporation of the parties hereto. PARAGRAPH 39: TIME: Time is of the essence of this Sublease. PARAGRAPH 40: WAIVER OF JURY TRIAL: Landlord and Tenant each hereby waives all right to trial by jury in any claim, action, proceeding or counterclaim by either party against the other on any matters arising out of or in any way connected with this Sublease, the relationship of Landlord and Tenant and/or Tenant's use or occupancy of the Leased Premises. PARAGRAPH 41: HEADINGS: The headings in this Sublease are included for convenience only and shall not be taken into consideration in any construction or interpretation of this Sublease or any of its provisions. PARAGRAPH 42: BROKERS: Landlord and Tenant each represent to the other that each has not had any dealing with any broker, agent or finder in connection with this Sublease except those set forth in Paragraph 1(L), if any, whose compensation shall be paid by Landlord, and Landlord and Tenant each agrees to hold the other harmless from and indemnify the other against any cost, expense, or liability for any compensation, commission, fee charge or damages, including reasonable attorneys' fees, as a result of any claim of any other broker, agent or finder claiming under or through the indemnifying party with respect to this Sublease or the negotiation of this Sublease. PARAGRAPH 43: ENTIRE AGREEMENT: This Sublease and the exhibits and addenda attached set forth all the covenants, promises, agreements, representations, conditions, statements and understandings between Landlord and Tenant concerning the Leased Premises and the Building. This Sublease shall not be amended or modified except in writing signed by both parties. Failure to exercise any right in one or more instances shall not be construed as a waiver of the right to strict performance or as an amendment to this Sublease. -17- PARAGRAPH 44: NOTICES: Any notice or demand provided for or given pursuant to this Sublease shall be in writing and served on the parties at the addresses listed in Paragraph 1(M) and Paragraph 1(N). Any notice shall be either (a) personally delivered to the addressed set forth above, in which case it shall be deemed delivered on the date of delivery to the addressee; or (b) sent by registered or certified mail/return receipt requested, in which case it shall be deemed delivered three (3) business days after deposited in the U.S. Mail; (c) sent by a nationally recognized overnight courier, in which case it shall be deemed delivered one (1) business day after deposit with such courier; or (d) sent by telecommunication ("Fax") in which case it shall be deemed delivered on the day sent, provided an original is received by the addressee by a nationally recognized overnight courier within one (1) business day of the Fax. The addresses and Fax numbers listed in Paragraphs 1(M) and 1(N) may be changed by written notice to the other parties, provided, however, that no notice of a change of address or Fax number shall be effective until date of delivery of such notice. Copies of notice are for informational purposes only and a failure to give or receive copies of any notice shall not be deemed a failure to give notice. PARAGRAPH 45: RECORDATION: Both Landlord and Tenant shall have the right but not the obligation to record a memorandum of lease in a recordable form setting forth the interest of the parties, the description of the leasehold interest, the term of the Lease including any options and other matters mutually agreeable. It is agreed that the memorandum of lease shall contain no information or representation concerning the Rent or other financial obligations or conditions of the Lease. If the disclosure of any such financial information is required in order to record the memorandum of lease, then neither Landlord nor Tenant shall have the right to record such a memorandum. The memorandum of lease shall be prepared by and the costs of recordation shall be paid by the party requesting the recordation thereof. PARAGRAPH 46: OPTION TO RENEW: Tenant shall have the option to renew and extend the Lease Expiration Date for two additional periods of five years, only if and to the extent the Master Lease is or will be in effect for such additional period(s). To exercise the renewal option(s), Tenant shall deliver written notice at least twelve months prior to the respective Lease Expiration Date(s), as extended in the case of the first renewal period. All terms and conditions herein shall apply to the renewal periods, except that the Base Rent for the first renewal period shall be $3,068.00 and the Base Rent for the second renewal period shall be $3,579.33. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] -18- LANDLORD: TENANT: UNION ACCEPTANCE CORPORATION UNION FEDERAL SAVINGS BANK OF INDIANAPOLIS By: /s/ John M. Stainbrook By: /s/ Lonnie Frauhiger ------------------------ ---------------------- (Signature) (Signature) Its: President Its: Senior Vice President (Title) (Title) -19- EX-21 11 SUBSIDIARIES OF UNION ACCEPTANCE CORPORATION Exhibit 21 Subsidiaries of the Registrant Subsidiary State of Incorporation Performance Funding Corporation Delaware Performance Securitization Corporation Delaware UAC Boat Funding Corp. Delaware UAC Securitization Corporation Delaware Union Acceptance Funding Corporation Delaware EX-23 12 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23 LETTERHEAD OF KPMG PEAT MARWICK LLP The Board of Directors Union Acceptance Corporation: We consent to incorporation by reference in the Registration Statement (No. 333-09717) on Form S-8 of Union Acceptance Corporation of our report dated July 30, 1996, relating to the consolidated balance sheets of the Union Acceptance Corporation and Subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended June 30, 1996, and the related consolidated statement of shareholders' equity for the year ended June 30, 1996, which report appears in the June 30, 1996 Annual Report on Form 10-K of Union Acceptance Corporation. /s/ KPMG Peat Marwick LLP Indianapolis, Indiana September 25, 1996 EX-27 13 FDS OF UNION ACCEPTANCE CORPORATION
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000927790 Union Acceptance Corporation 1,000 U.S. Dollars 12-MOS Jun-30-1996 Jun-29-1995 Jun-30-1996 1.000 91,838 0 262,516 (1,099) 0 353,255 3,858 (1,832) 451,195 20,458 352,113 58,180 0 0 20,444 451,195 0 84,539 0 23,841 0 2,875 22,275 35,548 14,406 21,142 0 0 0 21,142 1.60 1.60
-----END PRIVACY-ENHANCED MESSAGE-----