-----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, Tw08cS62bWAgP7EtxsqxB6ls9yILNqPOC9NidRHCFk/TjY1+zxf8VkJk2CFp8bYR zuk6GmttRgylRvUE1XqOuw== 0000908834-98-000261.txt : 19981002 0000908834-98-000261.hdr.sgml : 19981002 ACCESSION NUMBER: 0000908834-98-000261 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 DATE AS OF CHANGE: 19981001 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION ACCEPTANCE CORP CENTRAL INDEX KEY: 0000927790 STANDARD INDUSTRIAL CLASSIFICATION: 6141 IRS NUMBER: 351908796 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26412 FILM NUMBER: 98716756 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 6/30/98 ================================================================================ FORM 10-K United States Securities and Exchange Commission Washington, D.C. 20549 (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1998 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _____ to _____ Commission File Number: 0-26412 UNION ACCEPTANCE CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1908796 (State or other jurisdiction (I.R.S. Employer of incorporation Identification Number) or organization) 250 N. Shadeland Avenue, Indianapolis, IN 46219 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 317-231-6400 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Class A Common Stock, without par value Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405, Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the 4,047,351 shares of the issuer's Class A Common Stock held by non-affiliates, as of September 23, 1998, was $21,754,512. There is no trading market for the issuer's Class B Common Stock. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The number of shares of Class A Common Stock of the Registrant, without par value, outstanding as of September 23, 1998, was 4,376,446 shares. The number of shares of Class B Common Stock of the Registrant, without par value, as of such date was 8,855,036. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated into Part III. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES FORM 10-K INDEX PART I Page Item 1. Business................................................... 3 Item 2. Properties................................................. 19 Item 3. Legal Proceedings.......................................... 19 Item 4. Submission of Matters to a Vote of Security Holders........ 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 20 Item 6. Selected Consolidated Financial Data....................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 22 Item 7a. Quantitative and Qualitative Disclosures................... 38 Item 8. Financial Statements and Supplementary Data................ 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 61 PART III Item 10. Directors and Executive Officers of the Registrant......... 61 Item 11. Executive Compensation..................................... 61 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 61 Item 13. Certain Relationships and Related Transactions....................................... 61 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................ 61 SIGNATURES........................................................... 62 PART I Item 1. Business Note: Certain capitalized terms used but not otherwise defined in this report are defined in the "Glossary" set forth at the conclusion of "Item I, Business." Unless otherwise indicated, references to the "Company" through fiscal 1995 and before the Spin-off refer to the conduct of the business by the Union Division and Union Acceptance Corporation ("UAC") and Subsidiaries as a combined business. References to the "Company" following consummation of the Spin-off by Union Federal Savings Bank of Indianapolis of the Company refer to UAC and Subsidiaries. Overview The Company is a specialized finance company engaged in acquiring and servicing automobile retail installment sales contracts originated by dealerships affiliated with major domestic and foreign manufacturers. The Company focuses its efforts on acquiring loans on late model used and, to a lesser extent, new automobiles made to purchasers who exhibit a favorable credit profile, ("Tier I"). The Company currently acquires loans in 32 states from over 3,600 manufacturer-franchised auto dealerships nationwide. The Company also acquires loans from borrowers with adequate credit quality who would not qualify for a loan under the Company's Tier I quality criteria ("Tier II"). In June 1996, the Company began acquiring loans under the Marine Lending program and terminated the program in March 1998. Tier II and marine loan acquisitions accounted for 2.7% of total loan acquisitions during fiscal 1998. During the third quarter of fiscal 1998, the Tier I and Tier II origination departments were combined effectively reducing the administrative complexity involved with separate operating structures. The Company will continue to track performance and acquisition volume separately, as well as maintain separate underwriting criteria. In July 1998, the Company opened a new car franchised dealership in Indianapolis and began retailing a portion of its repossessed autos. The new car franchised dealership, Circle City Car Company, will be used as a supplement to wholesale disposal at auctions. The Company anticipates retailing approximately 20% of its repossessions and will not finance any of its repossessed auto resales. The Company was incorporated in Indiana in December 1993, as a subsidiary of Union Federal Savings Bank of Indianapolis ("Union Federal"), which is a federally-chartered savings bank. Union Federal entered the indirect automobile finance business in 1986. On August 7, 1995, the Spin-off of the Company by Union Federal was consummated concurrently with the Company's initial public offering of 4,000,000 shares of its Class A Common Stock. The Company's headquarters are located at 250 North Shadeland Avenue, Indianapolis, Indiana, 46219, and the telephone number is (317) 231-6400. See "Item 2, Properties." Market and Competition Based on the Company's knowledge and research with respect to the automobile and finance industry, manufacturer-franchised dealers in the United States sold approximately 19.2 million used automobiles at retail in calendar 1997 at an average price of $12,100 for a total sales volume of approximately $232.3 billion. Based on its knowledge of the industry, the Company believes that dealership finance departments typically originate or direct the origination of approximately 60%, or $139.4 billion in calendar 1997, of the financing of used car loans. The Company believes that it currently funds less than 1.0% of dealer-directed used car financing in the United States. Competition in the field of financing retail automobile sales is intense. The auto finance market is highly fragmented and historically has been serviced by a variety of financial entities including the captive finance affiliates of major automotive manufacturers, banks, savings associations, independent finance companies, credit unions and leasing companies. Providers of retail automobile financing have traditionally competed on the basis of interest rates charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to the dealers and customers. In seeking to establish itself as one of the principal financing sources at the dealerships it serves, the Company competes predominantly on the basis of providing a high level of dealer service (including evening and weekend hours and quick application response time), offering flexible loan terms, and developing strong relationships with dealerships. While the Company seeks to offer rates that are competitive in each of its geographic markets, the Company does not currently seek to compete by offering the lowest rates or by accepting lower quality credit (although its Tier II Lending competes in a lower credit-quality market segment). The Company's competition varies among its geographic markets. In the Tier I Lending market segment, the Company has experienced its most intense competition in the Midwest, particularly in Indiana and Ohio. The Company's primary competitors for Tier I loans are regional banks and the captive finance affiliates of major automotive manufacturers. Competition in the Tier II sector comes predominantly from independent finance companies. Dealer Marketing and Service The Company has entered into dealer agreements with over 3,600 retail automobile dealers in 32 states. The Company's objective is to enter into dealer agreements with a broad spectrum of large domestic and foreign automotive manufacturer-franchised dealerships in targeted major metropolitan areas. The Company believes that manufacturer-franchised dealerships are most likely to provide the Company with loans that meet the Company's underwriting standards. No individual dealer nor group of affiliated dealers accounted for more than 1.9% of the Company's loan purchases during the fiscal year ended June 30, 1998. The Company's ability to acquire Tier I loans depends to a large extent on its ability to establish and maintain relationships with dealerships and to induce finance managers to offer customer loan applications to the Company. The Company's marketing and loan purchasing staff emphasizes dealer service and conveniently accommodating dealers' needs for customer financing. The Company believes its loan purchasing operations are structured to be more responsive to these needs than the operations of its competitors. The Company believes that by responding rapidly to loan applications it is more likely to be the first financing source to indicate acceptance of a loan and, therefore, is more likely to receive the loan for purchase. With that in mind, the Company has developed the capacity to process a large volume of loan applications rapidly. The Company's average response time to loan applications during fiscal 1998 was under one hour. Although the Company's loan purchasing process is highly automated, the Company maintains a strong commitment to personalized dealer service. Sales representatives and credit analysts are in frequent contact with dealership personnel. Management believes that this personal contact and follow-through on the part of the Company's employees builds strong relations and maximizes loan acquisition volume from individual dealerships. The Company's credit scoring models and centralized purchasing assure dealers that the Company applies consistent purchasing standards and is a reliable financing source. The Company's flexibility in offering longer loan terms to qualified borrowers enhances the dealers' ability to offer desired financing terms to customers. The Company has regional or field sales representatives who give the Company a presence in local markets. Company sales representatives generally have auto dealer finance or sales backgrounds and are generally recruited from within the geographic markets they serve. The Company believes this helps to establish rapport and credibility with dealership personnel. The sales representatives are in frequent contact with the Company's dealers and are available to receive and respond to comments and complaints and to explain new programs and forms. Additionally, the Company created a department that specifically handles dealer customer service issues, in order to allow the outside sales representatives and the credit analysts to focus strictly on marketing and buying loans. A portion of the sales representatives' compensation may be based on new dealer agreements obtained in new markets. However, the sales representatives have no authority to approve credit applications. When approaching a new dealer, the Company sales representatives explain the Company's program and describe the ways the dealer can expect more timely and reliable service from the Company than that provided by other financing sources. Dealers who decide to establish a relationship with the Company are provided with a dealer agreement and supplied with copies of the Company's forms for all loan documentation and forms of drafts (which authorized dealer personnel submit for payment of the amount of each purchase). Also, most new dealer agreements include provisions for Automated Clearing House ("ACH") fund transfers. ACH agreements provide for the electronic transfer of funds to individual dealer accounts for the purchase amount of loans originated by the dealers and purchased by the Company. The Company is encouraging the use of ACH payments as opposed to drafts with all of its new dealers and is making attempts to convert its existing dealer base to the ACH program. Currently, over 51% of the Company's dealers have ACH agreements in place. The Company's representatives train dealer personnel in the proper completion and use of the Company's documentation. The dealer agreement provides the standard terms upon which the Company purchases loans from dealers, contains representations and warranties of the dealer and prescribes the calculation of the Dealer Premium. Loan Origination and Purchasing Retail automobile buyers are customarily directed to a dealer's finance and insurance department to finalize their purchase agreements and to review potential financing sources and rates available from the dealer. If the customer elects to pursue financing at the dealership, an application is taken for submission to the dealer's financing sources. Typically, a dealer submits the purchaser's application to more than one financing source for review. The dealership finance manager decides which source will finance the automobile purchase based upon the rates being offered, the Dealer Premium, the terms for approval and other factors (such as incentives offered by the lender.) The Company believes that its rapid response to an application coupled with its commitment to dealer service and flexibility in terms enhances the likelihood that the dealership will direct the loan to the Company, even though the Company may not offer the lowest rate available. See "Item 1. Business -- Market and Competition." Generally on a monthly basis, the Company quotes rates at which it will buy loans from dealers (the "Buy Rate"). Buy Rates are based on several factors including the age of the car and the term of the loan. The Company sets rates generally with a view to maintaining a predetermined spread above the relevant treasury security, based on the weighted average expected life of the loans being acquired. The Company publishes different Buy Rates in different geographic markets depending on its assessment of competitive conditions. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition." Centralization of loan purchasing at the Company's Indianapolis headquarters enables the Company to assure uniform application of underwriting criteria. It also enables the Company to respond very rapidly to a large volume of loan applications with a high level of efficiency. Upon receiving applications by facsimile transmission, certain data is entered into the Company's computer system, and the application is assigned to a credit analyst. The Company's computer system obtains a credit bureau report, applies the Credit Scoring model and generates summary credit analysis for the credit analyst. In April 1998, the Company automated the calculation of its income and debt to income ratios and incorporated these automated calculations as well as credit score into a quality control underwriting screen. The Company evaluates applications based on four key income or debt to income ratios as well as credit score and judgment of the credit analyst. Approval authority and advance amounts are determined by the combination of the five key underwriting criteria. The credit analyst analyzes the application data, the quality control data, and the credit bureau report and sends a response by facsimile transmission to the dealer. Approximately 69% of the Company's origination department, including sales and credit employees, have prior business experience with auto dealerships, many as dealership finance managers. The Company believes this common experience tends to strengthen their relationships with dealers and enhances dealers' respect for their credit decisions. The Company also frequently arranges for its credit analysts to visit dealers and their finance managers, both to develop dealer rapport and to maintain awareness of local economic trends. The Company utilizes a computerized credit scoring system to evaluate an applicant's credit profile. The Company continually evaluates its scoring methodologies and makes adjustments based on its experience. In July 1996, the Company implemented an upgraded version of its customized credit scoring model developed by an independent firm. In February 1997, the Company analyzed seven months of originations and compared the predictive ability of actual loss experience between the customized credit scoring model and a new scorecard model. In March 1997, the Company implemented the new scorecard model as it appeared to be more predictive in rank-ordering risk than the customized credit scoring model. While the Company is pleased with the performance of the existing scorecard, the Company has been developing a new customized scorecard that it plans to implement by the first half of calendar 1999. The Company's purchasing philosophy generally focuses on acquiring high quality credit and not solely on generating volume. The quality of the Company's loan purchasing is due in large part to the experience, training and judgment of the credit analysts. Based on underwriting guidelines, credit analysts must review each of the five criteria, mentioned above, in the approval process. An application that does not meet the minimum underwriting guidelines for any of the five underwriting criteria requires the approval of a Regional Credit Manager. Credit analysts may approve applications that meet all of these guidelines, with limits on advance amounts based on the combination of the five criteria. Regardless of the key underwriting ratios, the application characteristics and credit history must support the credit decision. The prior auto dealership business experience of a majority of the Company's credit employees is valuable, not only in assuring sound credit analysis, but also in protecting the Company from attempts by dealers or their customers to obtain approval of unacceptable credit. Management monitors and regularly audits credit analysts' decisions, and during fiscal 1998, the Company created a quality control department that primarily focuses on reviewing loan files. The department reviews 100% of the cashed Tier II loan files and a percentage of the Tier I cashed files based on predetermined high risk characteristics including high advance rates and approvals of loans that were below the minimum underwriting criteria. The Company tracks the delinquency and charge-off rates of all loans purchased by each individual credit analyst. The review process has created additional management controls, more immediate feedback on underwriting trends, and an additional source for capturing valuable loan data information that can be analyzed and used as origination or collection tools. Of the Tier I loan applications received from dealerships for the year ended June 30, 1998, the Company approved approximately 16.5% unconditionally and approximately 18.0% with conditions. Of the approved and conditionally approved loans, approximately 33.9% were ultimately acquired. During fiscal 1998, the Company acquired approximately $944.7 million in Tier I loans. If the Company approves a loan and is selected to provide the financing, the automobile buyer enters into a simple-interest retail installment sales contract with the dealer or a simple-interest installment loan and security interest contract with the Company. The Company also acquires some pre-computed interest installment sale contracts in California. The retail sales contract includes an assignment of the loan to the Company. In Ohio, because of regulatory provisions, the Company enters into the contract directly with the borrower. In connection with the loan acquisition and the preparation of Company forms, in many states the Company charges the borrower a loan origination fee. Dealerships in some geographic markets utilize a generic state-approved contract (as opposed to the Company's contract form). Most of the generic forms do not include provisions for origination fees. The use of generic contract forms became more prevalent during fiscal 1997 and continues to increase as the Company enters new geographic markets using generic contracts. For dealers that participate in the ACH program, ACH payments are made only after all loan documentation has been received, and the loan has been recorded on the Company's system. The use of ACH payments greatly reduces the Company's risk of fraudulent draft use and also presents a cash flow benefit as the loans are not funded until they are booked by the Company. For non-ACH dealers, when the dealer has completed and mailed the Company's loan documents and taken actions required to perfect the security interest on the vehicle, authorized dealer personnel may complete and remit a Company-supplied draft for payment of the amount financed. Because the Company provides forms of drafts to dealers in advance of particular loan acquisitions, it assumes the risk that such drafts may be used fraudulently, with corresponding loss to the Company. Historically, the Company has not sustained any material losses due to such uses but there is no assurance that such losses will not occur. The Company began utilizing dealer drafts on its Tier II quality loans as part of an administrative change resulting from the combination of Tier I and Tier II Lending departments. Previously, the Company did not utilize dealer drafts in its Tier II Lending. Dealers quote loan rates to customers at an average of approximately 1.50% - - - 2.00% over the Buy Rate. This difference, in most states, represents compensation to the dealership in the form of a Dealer Premium paid by the Company, in addition to the amount financed. See "Glossary." The Dealer Premium is paid to the dealer each month for all loans acquired from the dealer during the preceding month. In approximately 50% of all loan acquisitions, the dealer is paid the entire Dealer Premium in advance. If the loan is prepaid or defaults at any time prior to its scheduled maturity date, the amount of the premium is prorated, and the portion allocated to the remaining scheduled term is reimbursable to the Company as an offset against the premiums to be paid with respect to subsequent loans through the dealer's reserve account. In the majority of the other loan acquisitions, the Company may advance only a portion of the Dealer Premium, with an offset against the dealer only if the loan is prepaid or defaults within a limited period of time regardless of the length of the term. In Ohio, because the Company enters into installment loan contracts directly with dealers' customers, it generally pays the dealer a referral fee based on a percentage of the note amount. From time to time the Company may adjust its Dealer Premium payment methods based on management's assessment of the market. Before the termination of the Marine Lending program, the Company paid Dealer Premium in conjunction with marine loan acquisitions. The Company does not pay a Dealer Premium to dealers for Tier II loans. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." Geographic Concentration The following table sets forth certain information concerning the states in which the Company is operating its Tier I business:
Loans Acquired For The Twelve Months Ended At June 30,1998 ------------------------------------ Date Re-entry June 30, Servicing Number Of Number Of State Established Date 1998 1997 1996 Portfolio Metro Areas Dealers ----- ----------- ---- ---- ---- ---- --------- ----------- ------- (Dollars in Thousands) Indiana................ Jan-86 $ 25,464 40,858 38,755 69,518 1 192 Ohio................... Apr-88 52,699 69,928 58,123 127,318 3 241 Kentucky............... Jan-90 Oct-96 7,383 4,701 - 9,425 2 34 Arizona................ Jun-91 27,231 40,452 55,955 78,948 1 91 Colorado............... Dec-91 18,712 17,861 31,984 38,061 1 92 Kansas................. Jan-92 10,249 8,591 11,559 17,333 1 36 Missouri............... Jan-92 18,986 25,034 16,643 43,688 1 91 Texas.................. Jun-92 115,143 140,576 153,174 287,473 5 320 Minnesota ............. Aug-92 Apr-97 13,325 1,167 - 12,492 1 72 Utah................... Sep-92 Jun-97 7,121 - - 6,102 1 49 Oklahoma............... Oct-92 33,682 50,459 60,022 92,530 1 75 Florida................ Apr-93 76,883 81,815 55,292 146,215 5 222 North Carolina......... Jul-93 85,515 105,920 113,131 204,302 3 192 Georgia................ Apr-94 36,244 28,610 20,981 63,906 2 111 Virginia............... May-94 63,110 70,134 68,688 128,695 2 174 South Carolina......... Jul-94 35,711 35,353 15,175 58,351 2 80 Iowa................... Aug-94 24,170 23,672 13,673 38,838 2 93 Illinois............... Sep-94 69,599 78,508 85,716 144,051 2 255 California............. Nov-94 111,501 134,702 129,220 223,473 5 532 Nebraska............... Nov-94 4,210 2,528 1,053 5,561 1 24 New Mexico............. Dec-94 3,383 9,058 11,492 12,734 1 27 Wisconsin.............. Apr-95 9,866 14,316 18,007 22,414 2 84 Oregon................. Jun-95 2,331 5,116 9,861 7,009 1 37 Washington............. Jun-95 7,062 9,257 9,022 13,680 1 55 Maryland............... Nov-95 20,279 25,699 7,418 35,747 2 98 Tennessee.............. Feb-96 26,898 21,770 6,704 38,935 4 73 Michigan............... May-96 24,460 23,181 2,869 36,499 1 100 Pennsylvania........... May-96 7,712 4,606 317 9,285 2 59 Nevada................. Jan-97 3,757 2,192 - 4,305 1 34 Idaho.................. Sep-97 1,013 - - 823 0 * 17 Massachuesetts......... Jun-98 990 - - 990 1 19 South Dakota........... Jun-98 36 - - 220 0 ** 49 ======================================= ================================ TOTAL....... $ 944,725 $1,076,064 $994,834 $1,978,920 58 3,628 ======================================= ================================
* Boise, Idaho is considered part of the Salt Lake City, Utah metropolitan area ** Sioux Falls, South Dakota is considered part of the Omaha, Nebraska metropolitan area. The Company intends to continue its strategy of expanding into new geographic markets. In considering potential markets for expansion, the Company carefully reviews the regulatory and competitive environment and economic and demographic factors such as the number of auto registrations and dealerships in the metropolitan area. Because the Company is highly centralized, the incremental cost of entering new geographic markets is relatively low, and the Company can enter new markets quite rapidly. Alternatively, the Company's centralized operations give it the ability to vacate a market quickly and without great expense if competitive or other factors arise in the market that make it no longer suitable for the Company's operations. The Company's level of loan acquisitions in particular metropolitan areas may fluctuate significantly over time depending on competitive conditions and other factors in those areas. Loan Processing and Customer Service When original loan documents and the dealer's draft (after deposit through the dealer's bank) arrive at the Company's headquarters, they are processed onto the Company's servicing system. In the case of a loan submitted under the ACH program, the original loan documents are received by the Company, and the loan is processed in much the same way as a loan in which the dealer has completed a draft. Once the loan is processed, the Company's computer system triggers an ACH payment to the dealer. The Company's operations computer network interfaces with its loan approval system to retrieve the information entered when the borrower's application was received, saving time on data entry with respect to loan processing. The system transmits new loans daily to the Company's outside data processing servicer. Twice weekly, this servicer sends data on all new accounts to the Company's document service agency which generates payment coupon books and sends them directly to the borrower. Customer payments are sent directly to a lockbox. The Company has a separate remote outsourcing agreement with a data processing servicer. Under the agreement, the data processing service conducts a wide array of applications in both batch and on-line modes, and it provides interfacing with a number of Company developed systems. The service also provides off-site data storage at its data centers. The Company provides much of the hardware to facilitate the on-line transmission of data, which is routed through different data centers to provide redundancy in the event of a power failure. See - "Year 2000 Compliance." The Customer Service Department utilizes an automated voice response unit ("VRU") which allows customers to access standard account information as well as general information 24 hours a day, seven days a week. The VRU receives an average of 70,000 calls per month. Approximately 44% of the total calls are handled entirely by the VRU; the other 56% are transferred to live agents. The VRU provides many efficiencies for the Company and is user-friendly and convenient for customers. The Company is currently in the process of implementing a new, enhanced VRU that will be capable of handling a larger call volume and also offer additional menu options for the customers. The Collection Department plans to use this system which should in turn improve the efficiency of the Department. The Company expects to implement the new VRU during the second quarter of fiscal 1999. See - "Year 2000 Compliance." Loan Servicing and Servicing Portfolio Under the terms of its New Credit Facility and securitization transactions, the Company acts as servicer or subservicer with respect to the related automobile loans. Since August 1995, Tier I loan acquisitions have been funded through the $350 million Prime Warehouse Facility through Union Acceptance Funding Corporation ("UAFC"), a wholly-owned Company subsidiary. In September 1998, the Prime and Non-prime Warehouse Facilities were terminated by the Company and replaced by the New Credit Facility with the same lender, having a borrowing capacity of $450 million and a term of one year. The Company receives monthly servicing fees; the contractual fee, typically one percent per annum on the outstanding principal balance of the securitized loans, is paid to the Company through the securitized trusts. The Company services the loan pools by collecting payments due from borrowers and remitting payments to the pool trustee in accordance with the terms of the pooling and servicing agreements. The Company maintains computerized records with respect to each loan to record all receipts and disbursements and prepares related reports. As servicer, the Company is obligated to monitor collections and collect delinquent accounts and use diligence to obtain current payment of accounts. The following tables describe the composition of the Company's Tier I Lending servicing portfolio at June 30, 1998:
-------------------------------------------------------------------------------------------------- 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 33,971 $ 470,598 23.8% $13,853 59.2 12.38% Used auto / van 150,032 $1,508,322 76.2% $10,053 54.1 13.31% ----------- ----------------- ----------- Total 184,003 $1,978,920 100.0% $10,755 55.3 13.09% =========== ================= =========== Loans held for sale 8,472 $ 108,159 5.5% $12,767 67.9 12.27% Other loans serviced(2) 175,531 $1,870,761 94.5% $10,658 54.6 13.14% ----------- ----------------- ----------- Total 184,003 $1,978,920 100.0% $10,755 55.3 13.09% =========== ================= =========== ================================================================================
(1) Terms are shown in months. (2) Amounts include, Tier I fixed rate auto loans securitized under trusts as well as a small portfolio of prime fixed rate auto loans serviced under agreements with Union Federal (approximately $11,000) In addition to servicing securitized loans, the Company also services a portfolio of Union Federal fixed and variable rate loans on mobile homes, boats and autos, of approximately $1.4 million at June 30, 1998. At June 30, 1998, the Tier I servicing portfolio, including the principal balance of auto loans held for sale and securitized auto loans, was approximately $2.0 billion in aggregate principal balance. Approximately 76.2% of the Tier I servicing portfolio, as of June 30, 1998, represented financing of used vehicles; the remainder represented financing of new vehicles. The Company's loans consist primarily of simple-interest contracts which provide for equal monthly payments (as well as pre-computed loans acquired in California). As payments are received under a simple-interest contract, the interest accrued to date is paid first, and the remaining payment is applied to reduce the unpaid principal balance. In the case of a liquidation or repossession, amounts recovered are applied first to certain expenses of repossession and then to unpaid principal. Tier II Lending The Company began acquiring Tier II loans in the fall of 1994 to fund loans to borrowers with adequate credit quality who would not qualify under the Company's Tier I Lending quality criteria. Originally, the Company operated Tier II Lending under the name Performance Acceptance Corporation ("PAC"). As discussed previously, the Tier I and Tier II origination departments were combined during the third quarter of fiscal 1998. The origination of Tier II loans requires more extensive credit review and verification and also requires the approval of a Regional Credit Manager. Additionally, greater emphasis is placed on income and employment stability, the borrower's ability to afford monthly payments and loan-to-value ratios, and other collateral-based lending standards. The Company does not offer as prompt a response to Tier II loan applications as it offers on Tier I applications to permit more extensive credit review and verification. The Company's collection and repossession procedures relating to all new Tier II loans are essentially the same as Tier I loans. In the past, the Company's policy was to repossess Tier II loans at or before 90 days delinquent, however, this policy was changed to 120 days delinquent based on management's decision to allow for more expanded collection time and achieve consistency in collection practices. The Company, under the name PAC, commenced Tier II loan acquisitions in Indiana and has since expanded Tier II Lending into markets at dealerships from which the Company currently acquires Tier I loans. The following table describes the composition of the Company's Tier II Lending servicing portfolio at June 30, 1998:
-------------------------------------------------------------------------------------------------- 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 937 $12,989 19.4% $13,862 53.0 18.00% Used auto / van 5,348 $53,866 80.6% $10,072 48.1 19.28% -------------- ----------------- ------------ Total 6,285 $66,855 100.0% $10,637 49.0 19.03% ============== ================= ============ Loans held for sale 660 $7,624 11.4% $11,552 55.1 18.27% Securitized loans 5,625 $59,231 88.6% $10,530 48.2 19.13% -------------- ----------------- ------------ Total 6,285 $66,855 100.0% $10,637 49.0 19.03% ============== ================= ============ - - --------------------------------------------------------------------------------
(1) Terms are shown in months. The Company currently purchases Tier II loans at face value at an appropriate interest rate of approximately 5.00% above the rate at which it purchases Tier I loans. The Company's Tier II loans experience higher default rates than those historically experienced by the Company with respect to its Tier I Lending operations but also earn higher interest rates. The Company does not, however, pay Dealer Premiums to dealers in connection with the acquisition of Tier II loans, which reduces its cash flow requirements for Tier II operations. Since September, 1995, Tier II loan acquisitions have been funded through a separate $50 million Non-prime Warehouse Facility through Performance Funding Corporation ("PFC"), a wholly-owned Company subsidiary. Beginning in the third quarter of fiscal 1998, the funding of Tier II loan acquisitions was moved to Union Acceptance Funding Corporation ("UAFC"). As discussed previously, in September 1998, the Prime and Non-prime Warehouse Facilities were terminated by the Company and replaced by the New Credit Facility with the same lender, having a borrowing capacity of $450 million and a term of one year. The Company, through its wholly-owned, special-purpose subsidiary, Performance Securitization Corporation ("PSC"), effected its first securitization of Tier II loans in the third quarter of fiscal 1996 and completed its second Tier II securitization during the second quarter of fiscal 1997. The Company completed a third Tier II securitization during the fourth quarter of fiscal 1998. Of the loan applications received from dealerships for Tier II loans in the year ended June 30, 1998, the Company approved approximately 8.4% unconditionally and approximately 13.7% with conditions. Of the approved and conditionally approved loans, approximately 15.7% were ultimately acquired. In fiscal 1998, the Company acquired approximately $24.0 million in Tier II loans. Marine Lending program The Company began the Marine Lending program in June 1996 to fund boat and personal watercraft loans to borrowers who are classified as low risk. On March 1, 1998, the Marine Lending program was terminated due to strict rate competition in the market, resulting in the inability to acquire large volumes of loans with profitable spreads. The majority of the marine portfolio was sold in June 1998. Marine loan acquisitions totaled $2.5 million for the year ended June 30, 1998. Delinquency, Collection and Repossession The Company seeks to maintain low levels of delinquency and net charge-offs first by ensuring and monitoring the integrity of its credit purchasing. The Company tracks the delinquency rate of all loans approved by each credit analyst. The Company also seeks to limit delinquency and charge-offs through highly automated and efficient collection and repossession procedures. The collections area is highly automated and is supported by a separate computerized collections system provided by the Company's data processing servicer and an automatic telephone dialing system. Delinquent borrowers are contacted by phone, mail, telegram, and in special circumstances, personal visits. Notices to delinquent borrowers are dispatched automatically by computer when loans are 10 days delinquent in most states, but as early as 7 days delinquent for other states. The collections area operates during regular business hours, weekday evenings, and on Saturdays. Consistent with the growth of the servicing portfolio and higher delinquencies and credit losses seen in the latter half of fiscal 1997 and the first quarter of fiscal 1998, the Company increased its collection staff by over 26.0% or 45 full-time employees during fiscal 1998. See - "Employees." The Company utilizes an automatic, computer-controlled multiple telephone line system which dials phone numbers of delinquent borrowers from a file of records extracted from the Company's database. The system typically generates 750-1,000 calls per hour and allows the Company to prioritize calls based on a wide variety of factors. Once a call has been placed, the system monitors the call and transfers the call to a collector if it has reached a live human voice. Collectors handle approximately 400 calls per day. After delinquent borrowers fail to respond to the Company or to fulfill oral commitments made to bring their loans current, the Company repossesses the automobile securing the loan. Repossessions are effected for the Company by contracted repossession agents. The repossession agent transfers most of the autos to an independent auto auction company that reconditions the repossessed autos and sells them for the Company. Historically, some autos repossessed in central Indiana determined to be eligible for retail sales have been reconditioned and sold at an Indianapolis location owned by the Company. The Company opened a new car franchised dealership in Indianapolis in July 1998. As a result of the opening of the dealership, repossession agents will now transfer a selection of the autos from a broader region to the dealership for retail sale. The decision to repossess and charge-off is generally made after a loan is at least 90 days but no more than 120 days delinquent, absent extraordinary circumstances, such as bankruptcy or refusal to pay, requiring earlier action. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Delinquency and Credit Loss Experience." Financing and Sale of Loans Loan Funding. The Company relies upon external sources to provide financing for its loan purchases, Dealer Premiums and other ongoing cash requirements. Until September 1998, the Company utilized a $350 million Prime Warehouse Facility to provide funding for its Tier I loan acquisitions, a $50 million Non-prime Warehouse Facility to fund Tier II loan acquisitions, and until March 1998, a $50 million Marine Warehouse Facility to fund boat and personal watercraft loans. In September 1998, the Prime and Non-prime Warehouse Facilities were terminated by the Company and replaced by the New Credit Facility with the same lender, having a borrowing capacity of $450 million and a term of one year. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." Hedging. Because the loans purchased by the Company are fixed-rate loans, the Company bears the risk of interest-rate increases during the period between the setting of the Buy Rate for the acquisition of loans and their sale in a securitization transaction. In order to mitigate this risk, the Company employs a hedging strategy in which it executes short sales of U.S. Treasury securities having maturity approximating the average maturity of loans to be acquired during the relevant period. The Company's hedging strategy is an integral part of its practice of periodically securitizing loans. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" for a discussion of hedging risks and related issues. Securitizations. The Company sells its loans in securitization transactions to increase the Company's liquidity, to provide for redeployment of capital and to reduce risks associated with interest rate fluctuations. The Company applies the net proceeds from securitization transactions to repay amounts owed to short-term financing sources, thereby making such sources available for future loan acquisitions. The Company currently plans to continue securitizing pools of loans, generally on a quarterly basis. Management continually evaluates alternative financing sources and, in the future, may consider funding its loan acquisitions through a permanent warehouse facility or some other source or combination of sources. Since 1988, the Company has securitized approximately $5.4 billion in auto loan receivables in 29 public offerings and completed three private placements of Asset-backed Securities summarized below. In each of the public offerings, the senior Asset-backed Securities have been rated "AAA" or its equivalent by one or more rating agencies including Standard & Poor's Corporation, Moody's Investors Service and FITCH IBCA. Such ratings are not recommendations of the rating agencies to invest in the securitizations and may be modified or withdrawn by them at any time. Securitization Transactions
Remaining Balance Weighted Net Loss Original at June 30, Average Loan Certificate Gross Net to Original Securitization Amount 1998 Rate Rate Spread (1) Spread (2) Balance (3) -------------- ------ ---- ---- ---- ---------- ---------- ------------ (dollars in thousands) UACSC 1998-B Auto Trust $ 267,980 $ 257,764 12.51% 6.01% 6.50% 5.06% 0.00% UACSC 1998-A Auto Trust $ 228,938 $ 202,189 12.92% 6.11% 6.81% 5.27% 0.13% UACSC 1997-D Auto Trust $ 204,147 $ 158,696 13.02% 6.30% 6.72% 5.07% 0.32% UACSC 1997-C Auto Trust $ 218,390 $ 163,330 13.48% 6.45% 7.03% 5.38% 0.70% UACSC 1997-B Auto Trust $ 295,758 $ 198,415 13.21% 6.57% 6.64% 5.15% 1.06% UACSC 1997-A Auto Trust $ 293,348 $ 176,557 13.29% 6.33% 6.96% 5.43% 2.22% UACSC 1996-D Auto Trust $ 283,085 $ 148,084 13.53% 6.14% 7.39% 5.37% 2.85% UACSC 1996-C Auto Trust $ 310,999 $ 145,016 13.26% 6.44% 6.82% 5.11% 3.53% UACSC 1996-B Auto Trust $ 245,102 $ 101,567 12.96% 6.45% 6.51% 5.58% 3.29% UACSC 1996-A Auto Trust $ 203,048 $ 68,396 13.13% 5.40% 7.73% 5.68% 4.32% UACSC 1995-D Auto Trust $ 205,550 $ 64,860 13.74% 5.97% 7.77% 6.04% 4.79% UACSC 1995-C Auto Trust $ 236,410 $ 61,060 14.08% 6.42% 7.66% 6.11% 5.33% UACSC 1995-B Grantor Trust $ 220,426 $ 46,001 13.91% 6.61% 7.30% 4.88% 5.30% UACSC 1995-A Grantor Trust $ 173,482 $ 32,178 13.22% 7.77% 5.45% 3.88% 5.10% UFSB 1994-D Grantor Trust $ 114,070 $ 17,566 12.51% 7.69% 4.82% 3.91% 4.06% UFSB 1994-C Grantor Trust $ 150,725 $ 16,014 12.05% 6.77% 5.28% 4.04% 3.23% UFSB 1994-B Grantor Trust $ 142,613 $ 13,057 10.74% 6.46% 4.28% 3.54% 2.94% UFSB 1994-A Grantor Trust $ 119,960 $ - 9.98% 5.08% 4.90% 3.60% 2.54% UFSB 1993-C Auto Trust $ 141,811 $ - 11.00% 4.88% 6.12% 4.82% 2.58% UFSB 1993-B Auto Trust $ 212,719 $ - 11.50% 4.45% 7.05% 5.31% 2.51% UFSB 1993-A Grantor Trust $ 133,091 $ - 11.49% 4.53% 6.96% 4.96% 1.84% UFSB 1992-C Grantor Trust $ 119,280 $ - 11.64% 5.80% 5.84% 4.48% 1.71% UFSB 1992-B Grantor Trust $ 116,266 $ - 12.39% 4.90% 7.49% 5.49% 1.59% UFSB 1992-A Grantor Trust $ 103,619 $ - 13.66% 6.70% 6.96% 5.80% 1.94% UFSB 1991-B Grantor Trust $ 106,612 $ - 13.64% 7.15% 6.49% 4.94% 1.72% UFSB 1991-A Grantor Trust $ 150,436 $ - 12.52% 8.40% 4.12% 2.25% 0.79% UFSB 1989-B Grantor Trust $ 66,469 $ - 14.09% Variable - 2.82% 3.15% UFSB 1989-A Grantor Trust $ 113,080 $ - 13.24% 8.75% 4.49% 1.97% 1.94% UFSB 1988 Grantor Trust $ 105,179 $ - 12.73% 9.50% 3.23% 1.71% 2.74% Total Tier I ---------- ------------- Securitized Trusts $ 5,282,593 $ 1,870,750 PSC 1998-1 Grantor Trust $ 28,659 $ 28,003 18.69% 6.29% 12.40% 8.04% 0.00% PSC 1996-2 Grantor Trust $ 31,108 $ 18,070 19.65% 6.40% 13.25% 9.00% 6.98% PSC 1996-1 Grantor Trust $ 34,488 $ 13,158 19.87% 6.87% 13.00% 8.79% 11.23% Total Tier II ----------- ------------- Securitized Trusts $ 94,255 $ 59,231 ----------- ------------- Grand Total...........$ 5,376,848 $ 1,929,981 =========== =============
(1) Difference between weighted average loan rate and Certificate Rate. (2) Difference between weighted average loan rate and Certificate Rate, net of upfront costs, servicing fees, ongoing credit enhancements and trustee fees, and the hedging gain or loss. (3) Net loss to original balance at June 30, 1998, for all pools with a remaining principal balance and net loss to original balance at time of repurchase for all remaining pools. In securitization transactions, the Company transfers automobile loans to a newly-formed trust, which issues one or more classes of fixed-rate Certificates to investors (the "Certificateholders"). Through the 1994-A Grantor Trust, the Certificates were generally credit-enhanced by a letter of credit from an independent financial institution. The letter of credit provided Certificateholders with additional assurance, to the extent of the amount of the letter of credit, that their receipt of required payments from the pool would not be adversely affected by loan losses. Typically, the letter of credit was obtained in the amount, represented as a percentage of the pool, necessary to obtain the desired investment grade ratings for the Certificates. The Company subsequently employed the use of subordinated classes of Certificates as a credit enhancement device. Surety bonds have been utilized as additional credit enhancements in the Company's Tier I securitizations since the UACSC 1995-D Auto Trust. These credit enhancement features allow the offered Certificates to achieve the desired investment grade rating. In future securitizations, the Company may employ any of the above devices or may employ alternative credit enhancement devices. Gains from the sale of loans in securitization transactions have historically provided a significant portion of the net earnings of the Company and are likely to continue to represent a significant portion of the Company's net earnings. If the Company were unable or elected not to securitize loans in a financial reporting period, net earnings would likely be lower relative to periods in which securitizations occurred. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition -- General." Commencing with the 1995-A Grantor Trust, the Company has effected securitizations through a wholly-owned special-purpose subsidiary, UAC Securitization Corporation ("UACSC"). Its Tier II securitizations have been effected through Performance Securitization Corporation, also a wholly-owned special purpose subsidiary. In striving to complete the most efficient securitization transactions, the Company intends to securitize the Tier II loan acquisitions with the Tier I loan acquisitions in the future through its wholly-owned subsidiary UACSC. In the future, the Company may pursue alternative structures for securitizations, such as an owners' trust structure in which the securitization trust issues both Certificates and debt securities, and the Company will continue to assess other structured financing alternatives which may enable it to fund loans and/or deploy its capital with greater efficiency or at lower cost. Employees The Company employs personnel experienced in all areas of loan acquisition, documentation, collection and administration. Currently, the Company has 494 full-time employees and 67 part-time employees, including 73 full-time and 15 part-time employees in the operations department, 216 full-time and 49 part-time employees in the collection department, 72 full-time employees in loan purchasing, 20 full-time employees in the accounting and finance department and 41 full-time and 1 part-time systems and administrative employees. In addition, the Company has 37 sales representatives who reside and work in the Company's loan purchasing market areas, and 35 full-time and 2 part-time employees in the reconditioning and remarketing operations. None of the employees are covered by a collective bargaining agreement. Regulation The Company's operations are subject to regulation, supervision, and licensing under various federal, state and local statutes, ordinances, and regulations. The Company's business operations are conducted primarily in Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin and, accordingly, the laws and regulations of such states govern the Company's operations conducted in those states. The Company is required to be, and is, licensed as a sales finance company in Arizona, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nebraska, New Mexico, North Carolina, Pennsylvania and Wisconsin. In Colorado, Idaho, Indiana, Iowa, Texas and Utah, the Company has either filed the necessary notifications or registered to accept assignments of installment sale contracts, and in Ohio, the Company is licensed to make direct loans. As the Company expands its operations into additional states, it will be required to comply with the laws of those states. Numerous federal and state consumer protection laws and related regulations impose substantial requirements upon sellers, holders and servicers involved in consumer finance. These laws include the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z, state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, state "lemon" laws, state motor vehicle retail installment sales acts, retail installment sales acts, and other similar laws. Also, state laws impose finance charge ceilings and other restrictions on consumer transactions and require contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In some cases, this liability could affect the Company's ability to enforce the installment sale contracts it purchases and loans it makes. The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission (the "FTC Rule"), the provisions of which are generally duplicated by the Uniform Consumer Credit Code, other state statutes, or the common laws in certain states, has the effect of subjecting purchasers of installment sales contracts and even some direct lenders in consumer credit transactions to all claims and defenses which the obligor in the transaction could assert against the seller of the goods. The installment sale contracts purchased by the Company and direct loans made by it are generally subject to the provisions of the FTC Rule. Accordingly, the Company (or the trust to which a contract is assigned in a securitization), as holder of the contracts or as the direct lender, will be subject to any claims or defenses that the purchaser of the related financed vehicle may assert against the seller of the vehicle. Liability under the FTC Rule is limited to the amounts paid by the obligor under the contract, but the holder of the contract may also be unable to collect any balance remaining due thereunder from the obligor. The dealer selling an installment sale contract to the Company will generally warrant that the completion of each installment sale contract and the sale of the vehicle to the borrower complies with all requirements of law in all material respects. Accordingly, if a borrower has a claim against the Company for violation of any law and such claim materially and adversely affects the Company's interest in an installment sale contract, such violation often constitutes a breach of the dealer's warranties under the dealer agreement and related assignment and would create an obligation of the dealer to repurchase the contract unless the breach is cured. All states in which the Company operates have adopted a version of the Uniform Commercial Code ("UCC"). Except where limited by other state laws, the UCC governs the Company's rights upon the obligor's default. Generally, the UCC allows the secured party to conduct a self-help repossession, then sell the collateral and collect any deficiency if the proceeds of sale are insufficient to pay off the outstanding obligation. The UCC requires the secured party to provide the obligor with reasonable notice of any sale of the collateral, as well as an opportunity to redeem the collateral prior to sale. Other state laws may expand an obligor's rights, for example by providing the obligor an opportunity to cure default prior to repossession, or by eliminating the secured party's right to collect a deficiency balance. In addition, federal bankruptcy laws and related state laws may interfere with or affect the ability of a secured party to realize upon collateral or enforce a deficiency judgment. GLOSSARY Asset-backed Securities - A general reference to securities, such as Certificates, that are backed by financial assets, such as automobile loans or leases, credit card or trade receivables, home equity loans or equipment. Business Transfer - The transfer of certain assets related to the Union Division from Union Federal to the Company and the assumption of certain related liabilities by the Company. Buy Rate - A rate quoted by the Company to dealers, generally on a monthly basis, at which the Company will buy loans. Certificates - Asset-backed Securities representing fractional beneficial interests or indebtedness issued to investors by a trust that purchases a pool of loans in a Securitization. Such securities are generally fixed-rate securities payable solely from cash flows from the pooled receivables. Credit Facilities - Certain external financing arrangements negotiated by the Company with an independent financial institution consisting of a $350 million Warehouse Facility (the "Prime Warehouse Facility") to fund the Company's Prime loan acquisitions, a $50 million Non-Prime Warehouse Facility (the "Non-prime Warehouse Facility") to fund Non-prime loan acquisitions and a $50 million Marine Warehouse Facility (the "Marine Warehouse Facility") to fund loan acquisitions through it Marine Lending program. In September 1998, the Prime and Non-prime Warehouse Facilities were terminated by the Company and replaced by the New Credit Facility. The Marine Lending program was terminated March 1, 1998. Credit Scoring - The process of utilizing standard models in the loan acquisition process to evaluate an applicant's credit profile to arrive at an estimate of the associated credit risk based on statistical evaluation of several common characteristics that bear on credit worthiness and their correlation with credit risk. Dealer Premium - The amount paid to the dealer for the purchase of a loan above the principal amount financed. In states other than Ohio, the Dealer Premium is based upon the finance charge that would be paid on the loan if it earned interest at a rate equal to the difference between the contract rate and the Company's periodically published Buy Rate. The difference in rates averages between 1.50% - 2.00%. Dealer Premiums paid to Ohio dealers is generally in the form of referral fees are calculated as the product of the principal amount of the loan and a periodically adjusted referral rate set forth on the Company's rate sheets for loans with similar terms, note rate and age of collateral. All or a portion of a Dealer Premium may be paid in advance at the time the loan is acquired, subject to being charged back against the dealer if that loan prepays or defaults. The Dealer Premium is generally advanced to the dealer in the month following purchase of the loan, creating the Dealer Premium asset. The unamortized portion of such advance, depending on the dealer agreement, is recoverable from the dealer if the loan is prepaid or defaults. Dealer premiums are included in the carrying amount of loans prior to securitization. Future Servicing Cash Flows - Future Servicing Cash Flows are the projected cash flows resulting from the difference between the weighted average coupon rate of the loans sold and the Certificate Rate paid to investors in the securitized trusts, less an allowance for estimated credit losses, the Company's contractual servicing fee of 1% (on Tier I), and ongoing trust and credit enhancement fees, plus estimated Dealer Premium rebates. Gain (Loss) on Sales of Loans - Gain (Loss) on Sales of Loans represents the difference between the sales proceeds and the carrying amount of loans after reduction for amounts allocated to Retained Interest, less expenses of the sale and hedging gains or losses. Marine Lending - The Company's practice of acquiring loans made to borrowers, generally with high quality credit, through a boat or personal watercraft dealer agreement that provides for the acquisition of loans at a par plus the payment of a Dealer Premium to the dealer. Borrowers generally have a credit history with no or few minor defaults and can finance their purchase through a bank, or an independent finance company that focuses on prime credit. Marine Lending was terminated in March 1998. Marine Warehouse Facility - See definition of Credit Facility, above. New Credit Facility - An external financing arrangement negotiated by the Company with an independent financial institution having a borrowing capacity of $450 million and a one year term which replaces the Credit Facilities and will fund Tier I and II loan acquisitions. Non-prime Warehouse Facility - See definition of Credit Facility, above. Pooling - The accumulation of a group of loans to create a package of receivables for sale through a trust to investors in a Securitization. Prime Warehouse Facility - See definition of Credit Facility, above. Retained Interest in Securitized Assets ("Retained Interest") - Retained Interest represents the Company's retained interest in loans sold. At the closing of each securitization, the Company allocates its basis in the loans between the portion of the loans sold through the certificates and the portion of the loans retained from the securitizations ("Residuals" and "Servicing Assets") based on the relative fair values of those portions at the date of the sale. The fair value is based upon the cash proceeds received for the loans sold and the estimated fair value of the Residuals. Residuals consist of (a) the cash held in the Spread Account and (b) the excess servicing receivables ("ESRs"). ESRs represent the discounted cash flows to be received by the Trust in the future and dealer premium rebates less a discounted allowance for estimated credit losses. The fair value of the Residuals is determined by discounting the expected cash flows released from the Spread Account (the cash out method) using a discount rate which the Company believes is commensurate with the risks involved. An allowance for estimated credit losses is established using information from scoring models and available historical loss data for comparable loans and the specific characteristics of the loans purchased by the Company. Market discount rates are based on current market conditions, and prepayment assumptions are based on historical performance experience of comparable loans and the impact of trends in the economy. Accrued interest through the date of securitization, which will be returned to the Company through the trust, is also classified under the provisions of Statement of Financial Accounting Standard ("SFAS") 125 as Retained Interest. Retained Interest is reduced by actual servicing cash flows as received over the life of the securitization. Retained Interest is classified as "available-for-sale" and is carried at market based upon the application of current assumptions to the remaining expected cash flows. Unrealized gains and losses attributable to the change in the fair value of the Residuals are excluded from earnings and are reported net of related income taxes as a separate component of shareholders' equity until realized. Retained Interest is reviewed periodically for other than temporary impairment, with impairment, if any, recorded as a component of Gain on Sales of Loans, net. Securitization - The process through which loans and other receivables are pooled and sold to a trust which issues Certificates to investors. Senior Notes - Unsecured Senior Notes of the Company of $110 million and $65 million issued August 1995 and March 1997 respectively. Senior Subordinated Notes- Unsecured Senior Subordinated Notes of the Company in the aggregate principal amount of $46 million issued April 1996. Servicing Asset - The present value benefit derived from retaining the right to service loans securitized in excess of adequate servicer compensation. Servicing Assets are classified as held-to-maturity securities and are carried at their amortized cost. Spin-off - The pro rata distribution of the 9,200,000 shares of Class B Common Stock formerly held by Union Federal to the shareholders of its holding company, immediately prior to consummation of the Company's initial public offering in August 1995. Spread Account (a component of Retained Interest in Securitized Assets) - A cash collateral account or specific cash account maintained by the trustee of a securitization trust into which Future Servicing Cash Flows are deposited initially to protect Certificateholders (and any provider of third-party credit enhancement) against credit losses. The terms of the account, which vary with each securitization, state a maximum balance, generally expressed as a percentage of the current principal balance. Generally, the initial cash deposit, if required, is funded by the Company from the securitization proceeds and is expressed as a percentage of the original balance. The initial deposit amount is typically less than the minimum balance ("floor"). The floor amount required is determined based on the original principal balance. The Company receives cash flow Residuals that represent collections on the loans in excess of the amounts required to pay the Certificate principal and interest, the base servicing fees and certain other fees such as credit enhancement fees. If the amount of cash required for the allocations exceeds the amount collected during the collection period, the shortfall is drawn from the Spread Account. If the cash collected during the period exceeds the amount necessary for the allocations, and the related Spread Account is not at the required level, the excess cash collected is retained in the Spread Account until the specified level or maximum level is achieved. Once the required or maximum Spread Account level is achieved, the excess is released to the Company. Any remaining Spread Account balance is released to the Company upon termination of the securitization. There is no recourse to the Company for loan losses beyond the balance in the Spread Account and Future Servicing Cash Flows from the trust. Tier I Lending - The Company's practice of acquiring loans made to borrowers, generally with high quality credit, through an automotive dealer under a dealer agreement that provides for the acquisition of loans at par plus the payment of a Dealer Premium to the dealer. A Tier I borrower has a credit history with no or few minor defaults and can finance a new car purchase through a bank, a captive finance subsidiary of an automobile manufacturer or an independent finance company that focuses on Tier I credit. Tier II Lending - The Company's practice of acquiring loans made to borrowers who generally would not be eligible for credit under Tier I lending. Loans are acquired from automotive dealers under a dealer agreement that provides for the acquisition of loans at par without provision for payment of any Dealer Premium. A Tier II borrower is characterized as a borrower with some credit problems in his or her past which have subsequently been resolved and who has reestablished an acceptable payment history. To finance a new or late-model used car, the Tier II borrower may not qualify for a loan from a captive finance subsidiary but may access credit through non-traditional finance sources. Union Division - The indirect automobile lending business conducted as a division of Union Federal through fiscal 1994. Warehouse - A method whereby loans are financed by financial institutions on a short-term basis. In a Warehouse arrangement, loans are accumulated or pooled on a daily or less frequent basis and assigned or pledged as collateral for short-term borrowings until they are sold in a Securitization. Item 2. Properties The Company's operations are centered in a commercial office building owned by Waterfield Mortgage Company, Inc. ("Waterfield," a Company affiliate) in Indianapolis, Indiana. The Company occupies office space of 115,555 square feet under a lease with Waterfield. The Company sublets a portion of the building to Union Federal. In addition, the Company leases a garage of 5,000 square feet for vehicle reconditioning and remarketing, an office of 500 square feet and a 75-car lot located in Beech Grove, Indiana, from an independent party. These facilities are currently used to recondition and sell a small amount of the financed vehicles repossessed by the Company in central Indiana. In July 1997, the Company purchased a 6.5 acre (60,000 square foot) facility near its headquarters in Indianapolis at which it has established an automobile retail dealership for the purpose of expanding its reconditioning and remarketing operations. Item 3. Legal Proceedings The Company is party to litigation in the ordinary course of business. Most of the litigation is initiated by the Company against debtors to collect deficiency balances. Claims are, however, also asserted against the Company on a regular basis. The claims against the Company often involve allegations of wrongdoing by the motor vehicle dealer which originated the contract or sold the vehicle financed by the Company, and the Company is named as a defendant due to its status as holder of the contract. Claims are also asserted against the Company under the consumer protection laws described above and some of these claims, including the claims specifically described below, are asserted on behalf of a class of consumers. Similar litigation is common among industry participants. The first of the pending actions for which class certification is sought was commenced October 23, 1997, in the Common Pleas Court of Cuyahoga County, Ohio, Civil Division, by plaintiff Barohda Rucker. Suit was initially filed against the Company and Jackshaw Chevrolet, Inc. ("Jackshaw"), alleging that Jackshaw committed unfair, deceptive and unconscionable acts in connection with the sale of a vehicle, and further alleging that the Company committed disclosure and other violations of the Ohio Retail Installment Sales Act. Plaintiff has recently amended her complaint asserting similar claims on behalf of a class consisting of all consumers in Ohio who entered into loan agreements with the Company. The amended complaint also asserts new claims under or related to the Ohio Mortgage Loan Act on behalf of the proposed class. The plaintiff seeks rescission of the contracts, injunctive relief, statutory penalties, damages and attorney fees. The Company is also a defendant in an action brought in the District Court for Boulder County, Colorado, on April 10, 1998, by plaintiff Cristy Waggoner. The plaintiff alleges usury, contending that the retail installment contracts purchased by the Company were, in fact, direct loans by the Company subject to a lower usury limitation. The plaintiff has also asserted claims on behalf of a class of similarly situated Colorado residents who entered into retail installment contracts assigned to the Company. The plaintiff seeks unspecified damages, statutory penalties and attorney fees. Finally, the Company is a defendant in an adversary action brought in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division on August 23, 1998, by plaintiff, Keith D. Ferrell. The plaintiff alleges that the Company overstated the value of its collateral in connection with his Chapter 13 bankruptcy proceedings. The plaintiff has also asserted claims on behalf of a class consisting of similarly situated debtors involved in Chapter 13 proceedings. The plaintiff seeks injunctive relief, actual and punitive damages, and attorney fees. Each of the forgoing proceedings are in their early stages and no class has yet been certified. All proceedings are being vigorously defended and, although there can be no assurance that the Company will ultimately prevail in each of the pending proceedings, the Company, based on advice from outside legal counsel, does not, at this time, expect any of the proceedings to have a material effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company commenced its initial public offering of Class A Common Stock on August 7, 1995 concurrently with the Spin-off by Union Federal of the Company. Shares of Class A Common Stock are quoted on the Nasdaq Stock Market's National Market under the symbol "UACA." The following table sets forth the high and low sales price per share of Class A Common Stock for each quarter in fiscal 1998 and 1997: Fiscal Year Ended June 30, 1998 1997 ---- ---- High Low High Low ---- --- ---- --- First Quarter 11 1/4 8 7/8 19 1/4 12 1/4 Second Quarter 10 1/4 5 1/8 19 3/4 16 1/4 Third Quarter 9 1/8 7 1/4 22 1/2 13 1/4 Fourth Quarter 9 1/8 6 3/4 14 5/8 7 1/2 As of September 23, 1998, there were approximately 105 holders of record of the Company's Class A Common Stock and 8 persons holding Class B Common Stock of the Company of record. The Company estimates that its Class A Common Stock is owned beneficially by approximately 1,800 persons. There is no market for Class B Common Stock, and management has no plans to list the Class B Common Stock on Nasdaq or any exchange. The Company currently intends to retain earnings for use on the operation and expansion of its business and therefore does not anticipate paying cash dividends on Class A Common Stock or Class B Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend, among other things, upon earnings, capital requirements, any financing agreement covenants and the financial condition of the Company. In addition, provisions of the Senior and Senior Subordinated Notes limit distributions to shareholders. Item 6. Selected Consolidated Financial Data The following table sets forth certain selected consolidated financial information reflecting the consolidated operations and financial condition of the Company for each year in the five year period ended June 30, 1998. This data should be read in conjunction with the Company's consolidated financial statements and related notes thereto and "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" included herein. As described more fully in the notes to Consolidated Financial Statements, this report contains financial information which has been restated to correct the June 30, 1997 valuation of Retained Interest in Securitized Assets.
Year Ended June 30, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Income Statement Data: Interest income $ 33,727 $ 40,299 $ 34,160 $ 18,638 $ 14,260 Interest expense(1) 26,107 25,688 22,275 12,961 7,769 --------------------------------------------------------------------- Net interest margin 7,620 14,611 11,885 5,677 6,491 Provision for estimated credit losses 8,050 4,188 2,875 1,074 484 --------------------------------------------------------------------- Net interest margin (deficit) after provision (430) 10,423 9,010 4,603 6,007 Gain (loss) on sales of loans, net (11,926) 963 30,357 8,684 4,643 Servicing fees, net 26,137 25,344 16,926 14,628 11,570 Other 4,087 3,820 3,096 2,783 2,735 --------------------------------------------------------------------- Total revenues 17,868 40,550 59,389 30,698 24,955 Operating expenses 35,546 30,502 23,841 14,913 8,995 --------------------------------------------------------------------- Earnings (loss) before provision for income taxes (17,678) 10,048 35,548 15,785 15,960 Provision (benefit) for income taxes (7,856) 4,166 14,406 6,396 6,384 --------------------------------------------------------------------- Net earnings (loss) $ (9,822) $ 5,882 $ 21,142 $ 9,389 $9,576 ===================================================================== Operating Data: Tier I auto receivables acquired $944,725 $1,076,064 $ 994,834 $766,972 $614,627 Tier II auto receivables acquired 24,027 39,610 36,030 21,511 - Marine receivables acquired 2,515 6,590 50 - - --------------------------------------------------------------------- Total receivables acquired (dollars) $971,267 $1,122,264 $1,030,914 $788,483 $614,627 ===================================================================== Tier I auto receivables acquired 64,152 75,844 71,070 58,409 49,307 Tier II auto receivables acquired 1,746 3,050 2,870 1,770 - Marine receivables acquired 200 496 6 - - --------------------------------------------------------------------- Total receivables acquired (number of loans) 66,098 79,390 73,946 60,179 49,307 ===================================================================== Tier I auto loans securitized $919,455 $1,183,190 890,110 $658,703 $617,103 Tier II auto loans securitized 28,659 31,108 34,488 - - --------------------------------------------------------------------- Total auto loans securitized $948,114 $1,214,298 $ 924,598 $658,703 $617,103 ===================================================================== Ratio of operating expenses as a % of average servicing portfolio 1.78% 1.67% 1.73% 1.49% 1.21% Servicing fees, net, as a % of operating expenses 73.53% 83.09% 71.00% 98.09% 128.63% Tier I credit losses as a % of avg. servicing portfolio 2.80% 2.40% 1.58% 1.36% 0.69% Tier II credit losses as a % of avg. servicing portfolio 7.67% 5.18% 2.37% 2.97% N/A Marine credit losses as a % of avg. servicing portfolio 1.12% 0.25% N/A N/A N/A Tier I delinquencies of 30 days or more as a % of servicing portfolio 3.07% 2.96% 1.84% 1.40% 1.40% Tier II delinquencies of 30 days or more as a % of servicing portfolio 8.29% 6.18% 3.35% 1.25% N/A Marine deliquencies of 30 days or more as a % of servicing portfolio N/A 0.10% N/A N/A N/A
Item 6. Selected Consolidated Financial Data (Continued)
At June 30, 1998 1997 1996 1995 1994 - - ----------- ---- ---- ---- ---- ---- (Dollars in thousands) Balance Sheet Data(2): Loans, net $118,259 $121,156 $259,290 $201,022 $ 96,101 Retained interest in securitized assets 171,593 170,791 147,024 118,076 78,598 Total assets 411,533 391,268 451,195 349,283 181,516 Due to Union Federal - - - 338,958 177,577 Amounts due under warehouse facilities 73,123 44,455 187,756 - - Long-term debt 221,000 221,000 156,000 - - Total shareholder equity(3) 82,473 86,848 78,624 2 2 Other Data: Tier I auto servicing portfolio $1,978,920 $1,860,272 $1,548,538 $1,159,349 $843,245 Tier II auto servicing portfolio 66,855 68,289 47,062 19,858 - Marine servicing portfolio - 6,227 50 - - Other loans serviced 1,642 2,488 3,420 5,203 - --------------------------------------------------------------------- Total servicing portfolio $2,047,417 $1,937,276 $1,599,070 $1,184,410 $ 843,245 ===================================================================== Average Tier I auto servicing portfolio 1,922,977 1,759,666 1,343,770 982,875 744,149 Average Tier II auto servicing portfolio 69,622 63,305 33,124 9,448 - Average Marine servicing portfolio 6,920 2,357 - - Other loans average servicing portfolio 1,941 2,799 4,222 6,643 - --------------------------------------------------------------------- Total average servicing portfolio $2,001,460 $1,828,127 $1,381,116 $998,966 $744,149 ===================================================================== Number of Tier I auto loans serviced (at period end) 184,003 173,693 147,722 117,837 91,837 Number of Tier II auto loans serviced (at period end) 6,285 6,056 4,067 1,687 - Number of Marine loans serviced (at period end) - 472 6 - - Number of Other loans serviced (at period end) 256 402 537 836 - --------------------------------------------------------------------- Total number of loans serviced (at period end) 190,544 180,623 152,332 120,360 91,837 Number of dealers 3,628 3,204 2,523 1,604 884 Number of employees (full-time equivalents) 529 387 313 215 142
- - -------------------------------------------------------------------------------- (1) Interest expense for the years ended June 30, 1994 and 1995, was based upon the average monthly balance "Due to Union Federal" at Union Federal's all-inclusive cost of funds. (2) All consolidated balance sheet amounts, except the amounts "Due to Union Federal", represent actual recorded assets and liabilities of the Company's business. The amount Due to Union Federal includes division funding by Union Federal as well as inter-company funding. (3) The consolidated financial statements reflect no allocation of Union Federal's historical equity. Earnings of the Company are transferred to Union Federal through the Due to Union Federal account at June 30, 1994, and 1995. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Note: Certain capitalized terms used but not otherwise defined in this report are defined in the "Glossary" set forth at the conclusion of "Item 1. Business." General The Company derives substantially all of its earnings from the purchase, securitization and servicing of automobile loans originated by dealerships affiliated with major domestic and foreign manufacturers. To fund the purchase of loans prior to securitization, the Company utilizes the revolving New Credit Facility, discussed in "Liquidity and Capital Resources." Through securitizations, the Company periodically pools and sells loans to a trust which issues Certificates to investors representing interests in the loans sold. When the Company sells loans in a securitization, it records a gain or loss on the sale of loans and establishes Retained Interest as an asset. Future Servicing Cash Flows are received over the life of the related securitization. See the "Glossary" under "Item 1. Business" for definitions of accounting terms pertaining to securitizations. The following table illustrates changes in the Company's total loan acquisition volume and information with respect to Gain (Loss) on Sales of Loans, net and Securitizations during the past eight quarters. More complete quarterly statements of earnings information is set forth in Note 14 of the Consolidated Financial Statements.
Selected Quarterly Financial Information For Quarters in the Fiscal Years Ended June 30, ------------------------------------------------------------- 1998 ------------------------------------------------------------- First Second Third Fourth (3) ----- ------ ----- ---------- (Dollars in thousands) Loans acquired $252,877 $227,405 $220,317 $ 270,668 Gain on Sales of Loans 5,549 3,173 5,749 5,110 Less: Impairment (16,396) (1,153) (2,636) (3,451) Less: Cash out adjustment - - - (7,871) Gain (loss) on Sales of (10,847) 2,020 3,113 (6,212) Servicing portfolio at period end 1,977,368 2,001,111 2,008,287 2,047,417 Selected Securitization Data: 1997-C 1997-D 1998-A 1998-B/1998-1 Original amount 218,390 204,147 228,938 267,980/28,659 Weighted avg. loan rate 13.48% 13.02% 12.92% 12.51%/18.69% Weighted avg. remaining maturity (mos.) 70.68 67.14 70.80 67.50/57.70 Certificate rate 6.45% 6.30% 6.11% 6.01%/6.29% Gross spread (1) 7.03% 6.72% 6.81% 6.50%/12.40% Net spread (2) 5.38% 5.07% 5.27% 5.06%/8.04% - - ---------------------------------------------------------------------------------------------------
(1) Difference between weighted average loan rate and Certificate Rate. (2) Difference between weighted average loan rate and Certificate Rate, net of upfront costs, servicing fees, ongoing surety bond and trustee fees, and hedging gains or losses. (3) Two securitizations were effected during the presented quarters -- one public securitization (Tier I securitization) and one private placement (Tier II securitization)
Selected Quarterly Financial Information For Quarters in the Fiscal Years Ended June 30, ------------------------------------------------------------- 1997 ------------------------------------------------------------- First Second (3) Third Fourth ----- ---------- ----- ------ (Dollars in thousands) Loans acquired $296,601 $307,420 $279,847 $238,396 Gain on Sales of Loans 6,875 7,790 9,783 7,693 Less: Impairment - - (15,951) (4) (15,227) Less: Cash out adjustment - - - - Gain (loss) on Sales of Loans, net 6,875 7,790 (6,168) (7,534) Servicing portfolio at period end 1,709,917 1,835,662 1,910,455 1,937,276 Selected Securitization Data: 1996-C 1996-D/1996-2 1997-A 1997-B Original amount 310,999 283,085/31,108 293,348 295,758 Weighted avg. loan rate 13.26% 13.53%/19.65% 13.29% 13.21% Weighted avg. remaining maturity (mos.) 67.41 67.75/62.70 71.35 69.18 Certificate rate 6.44% 6.14%/6.40% 6.33% 6.57% Gross spread (1) 6.82% 7.39%/13.25% 6.96% 6.64% Net spread (2) 5.11% 5.37%/9.00% 5.43% 5.15% - - ----------------------------------------------------------------------------------------------------
(1) Difference between weighted average loan rate and Certificate Rate. (2) Difference between weighted average loan rate and Certificate Rate, net of upfront costs, servicing fees, ongoing surety bond and trustee fees, and hedging gains or losses. (3) Two securitizations were effected during the presented quarters -- one public securitization (Tier I securitization) and one private placement (Tier II securitization) (4) Impairment was reduced by reserves taken during the first two quarters of fiscal 1997 of $3.7 million and by existing reserves at June 30, 1996 of $2.2 million. Acquisition Volume. The Company currently acquires loans in 58 metropolitan areas in 32 states from over 3,600 manufacturer-franchised auto dealerships. The Company primarily acquires loans on automobiles made to borrowers who exhibit a favorable credit profile ("Tier I Lending"). The Company also offers a second level of loan quality to borrowers with adequate credit quality, but who would not qualify for a loan under the Company's Tier I Lending quality criteria ("Tier II Lending"). During fiscal 1997, the Company developed a Marine Lending program to fund loans to borrowers for boats and personal watercraft and terminated the program in March 1998. The Company's focus is on the Tier I automobile lending market. Only 2.7% of total loan acquisitions represented loans made to borrowers for Tier II and marine loans. During fiscal 1998, the Company extended operations into the states of Idaho, Massachusetts and South Dakota. The Company's total loan acquisitions decreased 13.5% to $971.3 million for the year ended June 30, 1998, from $1.1 billion in fiscal 1997. The decrease resulted primarily from increased competition in the consumer finance market combined with the Company's decision to tighten credit standards during the third quarter of fiscal 1997. Additionally, the termination of the Marine Lending program contributed to the decrease. Marine loan acquisitions totaled $2.5 million for the year ended June 30, 1998, compared to $6.6 million for fiscal 1997. Tier II loan acquisitions totaled $24.0 million for the year ended June 30, 1998, compared to $39.6 million in fiscal 1997. In late fiscal 1997 the Company made strategic decisions with regard to pricing and underwriting with a view to improving the overall credit quality of the portfolio over the long-term. These changes coupled with intense competition in the consumer finance markets resulted in lower loan acquisition volume in the first three quarters of fiscal 1998, however, Tier I acquisition volume increased 16.4% in fourth quarter of fiscal 1998 compared to the fourth quarter of fiscal 1997. Loan acquisitions for the first quarter of fiscal 1999 have increased significantly over all fiscal 1998 quarters. Total Tier I loan acquisitions for the months of July and August have surpassed $257.0 million, and total loan acquisitions for the first quarter of fiscal 1999 are expected to be nearly $400.0 million. See "Discussion of Forward-Looking Statements." The Company's servicing portfolio increased 5.7% to approximately $2.0 billion at June 30, 1998, compared to approximately $1.9 billion at June 30, 1997. Total serviced loans increased as a result of increased loan acquisition volume in excess of loan repayments and gross charge-offs, but decreased by approximately $7.0 million as a result of selling the marine portfolio. The volume of loans sold in securitizations decreased to $948.1 million for the year ended June 30, 1998, from $1.2 billion for the prior year. The decreased volume of loans securitized is a result of a decrease in Tier I loan acquisitions. Management continues to focus on controlled growth, recognizing that the underlying credit quality of the portfolio is one of the most important factors associated with long-term profitability. Delinquency and Credit Loss Experience From June 1997 to September 1997, the Company continued to see a general deterioriation in the consumer credit markets primarily as a result of debtor over extension. As a result of the deterioration, the Company experienced higher delinquency and net credit losses from June to September 1997. Due to rising delinquency and net credit losses, the Company made strategic changes in its origination and collection departments. As a result of these strategic efforts, the Company has seen improvements in delinquency and credit loss ratios since the September 30, 1997, quarter. The efforts in the origination department include implementing tighter credit standards in March 1997, developing quality control screens that rank an obligor by not only credit score, but by predetermined debt and income ratios, and growing the portfolio with quality obligors through dealer development and dealer expansion. The collection department's efforts include restructuring the collectors to form specialized sub-departments of collectors for auxiliary functions such as skip tracing and high risk accounts, initiating collection calls earlier in the delinquency process through use of the power dialer, targeting higher risk obligors through the use of quarterly updated credit scores, and increasing collection efforts on charged-off accounts. The Company has seen improvements in recoveries as a percentage of gross charge-offs since the September 30, 1997, quarter. This percentage, however, remains below management's expectations, and the Company continues to look for ways to improve. In July 1998, the Company opened a new car franchised dealership in Indianapolis and has begun retailing a portion of its repossessed autos through the dealership. The Company anticipates that this method of repossession disposal along with stricter monitoring of the repossession and resale process should continue to increase the recovery percentage to within management's expectations over time. The Company will not finance any of its repossessed auto resales. See "Discussion of Forward-Looking Statements". Provisions are made for estimated credit losses in conjunction with each loan sale. Current credit loss assumptions utilized in the calculation of the Gain on Sales of Loans during the year for Tier I and Tier II securitizations were 4.00% and 12.00%, respectively, over the life of the pool. Allowance for estimated credit losses on securitized loans (inherent in Retained Interest) increased to 4.67% at June 30, 1998, compared to 4.40% at June 30, 1997. The Company recorded a pre-tax charge of $23.6 million and $34.9 million during the years ended June 30, 1998, and June 30, 1997, respectively, to primarily increase the provision for estimated credit losses on those pools which were deemed to have other than temporary impairment. Tier I Portfolio. Set forth below is certain information concerning the delinquency experience and net credit losses on the Tier I fixed rate retail automobile, light truck and van receivables serviced by the Company. There can be no assurance that future delinquency and net credit loss experience on the receivables will be comparable to that set forth below. See "Discussion of Forward-Looking Statements." Tier I Delinquency Experience At June 30, ---------------------------------------------- 1998 1997 --------------------- ---------------------- (Dollars in thousands) Number of Number of Loans Amount Loans Amount --------- ------ --------- ------ Servicing portfolio 184,003 $1,978,920 173,693 $1,860,272 Delinquencies 30-59 days 3,179 32,967 2,487 27,373 60-89 days 1,907 20,819 1,646 18,931 90 days or more 657 6,992 723 8,826 ------- ---------- ------- ---------- Total delinquencies 5,743 $ 60,778 4,856 $ 55,130 ======= ========== ======= ========== Total delinquencies as a % of servicing portfolio 3.12% 3.07% 2.80% 2.96% As indicated in the above table, delinquency rates based upon outstanding loan balances of accounts 30 days past due and over increased to 3.07% at June 30, 1998, from 2.96% at June 30, 1997, for the Tier I Lending portfolio. The Company attributes the increase in delinquency from one year ago to the general deterioration in the consumer credit market. Although delinquency rates have increased from a year ago, the June 1998 quarter is the third consecutive quarter of improved performance in the servicing portfolio. The steady improvement is a direct result of the Company's continued focus on refining its collection practices and consistent application of conservative underwriting guidelines.
Tier I Credit Loss Experience For the Years Ended June 30, ------------------------------------------------------------------- 1998 1997 1996 --------------------- ------------------- ------------------- Number Number Number of Loans Amount of Loans Amount of Loans Amount -------- ------ -------- ------ -------- ------ (Dollars in thousands) Avg. servicing portfolio 179,822 $1,922,977 164,858 $1,759,666 132,363 $1,343,770 Gross charge-offs 7,909 87,325 6,280 70,830 3,663 40,815 Recoveries 33,545 28,511 19,543 -------- ------ ------ Net credit losses $ 53,780 $42,319 $21,272 ======== ======== ====== Gross charge-offs as a % of avg servicing portfolio 4.40% 4.54% 3.81% 4.03% 2.77% 3.04% Recoveries as a % of gross charge-offs 38.41% 40.25% 47.88% Net credit losses as a % of avg. servicing portfolio 2.80% 2.40% 1.58%
As indicated in the table above, net credit losses on the Tier I portfolio totaled $53.8 million for the fiscal year ended June 30, 1998, or 2.80% as a percentage of the average servicing portfolio, compared to $42.3 million or 2.40% for the fiscal year ended June 30, 1997. Net credit losses have increased, and recovery rates have decreased over one year ago; however, as stated above, both net credit losses and recovery rates have improved steadily since the quarter ended September 30, 1997. Tier II Portfolio. Set forth below is information pertaining to delinquency and net credit loss information on the Company's Tier II portfolio. There can be no assurance that future delinquency and credit loss experience on the receivables will be comparable to that set forth below. See "Discussion of Forward-Looking Statements." Tier II Delinquency Experience At June 30, --------------------------------------------- 1998 1997 --------------------- --------------------- (Dollars in thousands) Number of Number of Loans Amount Loans Amount ----- ------ ----- ------ Servicing portfolio 6,285 $ 66,855 6,056 $ 68,289 Delinquencies 30-59 days 365 4,023 236 2,807 60-89 days 140 1,457 123 1,412 90 days or more 5 64 - - ----- -------- ----- -------- Total delinquencies 510 $ 5,544 359 $ 4,219 ===== ======== ===== ======== Total delinquencies as a % of servicing portfolio 8.11% 8.29% 5.93% 6.18%
Tier II Credit Loss Experience For the Years Ended June 30, ------------------------------------------------------------------- 1998 1997 1996 --------------------- -------------------- -------------------- Number of Number of Number of Loans Amount Loans Amount Loans Amount --------- ------ --------- ------ --------- ------ (Dollars in thousands) Avg. servicing portfolio 6,320 $69,622 5,491 $ 63,305 2,869 $33,124 Gross charge-offs 748 8,275 422 4,698 136 1,455 Recoveries 2,937 1,420 670 ======== ======== ======== Net credit losses $ 5,338 $3,278 $ 785 ======== ======== ========= Gross charge-offs as a % of avg. servicing portfolio 11.84% 11.89% 7.69% 7.42% 4.74% 4.39% Recoveries as a % of gross charge-offs 35.49% 30.23% 46.07% Net credit losses as a % of avg. servicing portfolio 7.67% 5.18% 2.37%
Tier II portfolio delinquency was 8.29% based on outstanding loan balances of accounts 30 days past due and over at June 30, 1998, compared to 6.18% at June 30, 1997. Credit losses during fiscal 1998 totaled $5.3 million, or 7.67% as a percentage of the average Tier II servicing portfolio, compared to $3.3 million, or 5.18%, in fiscal 1997. The Company began acquiring Tier II loans in October 1994. Marine Portfolio. Due to the termination of the Marine Lending program and the resulting sale of most of the marine loans, delinquency was minimal at June 30, 1998 and 1997. Credit losses during fiscal 1998 totaled $78,000 or 1.12% as a percentage of the average marine servicing portfolio compared to .25% for fiscal 1997. Results of Operations The following table illustrates the Company's consolidated financial results for the past eight fiscal quarters. More complete earnings information can be found in the Consolidated Financial Statements and the Notes thereto.
Selected Quarterly Financial Information For Quarters in the Fiscal Year Ended June 30, --------------------------------------------------------------------------------------------------- 1998 1997 --------------------------------------------------------------------------------------------------- First Second Third Fourth First Second Third Fourth ----- ------ ----- ------ ----- ------ ----- ------ (Dollars in thousands) Interest on loans $ 6,627 $ 6,473 $ 7,133 $7,638 $ 9,233 $ 9,096 $ 7,543 $ 8,042 Interest on spread accounts and restricted cash 1,572 1,461 1,443 1,380 1,510 1,545 1,618 1,712 ---------- ------- ------- ------ ------- ------- -------- ------- Total interest income 8,199 7,934 8,576 9,018 10,743 10,641 9,161 9,754 Interest expense 6,053 6,167 6,990 6,897 6,410 6,265 6,118 6,895 ---------- ------- ------- ------ ------- ------- -------- ------- Net interest margin 2,146 1,767 1,586 2,121 4,333 4,376 3,043 2,859 Provision for estimated credit losses 1,505 1,770 1,900 2,875 855 993 1,180 1,160 ---------- ------- ------- ------ ------- ------- -------- ------- Net interest margin (deficit) after provision 641 (3) (314) (754) 3,478 3,383 1,863 1,699 Gain (loss) on sales of loans, net (10,847) 2,020 3,113 (6,212) 6,875 7,790 (6,168) (7,534) Servicing fees, net 6,286 6,533 6,529 6,789 5,826 6,258 6,854 6,406 Other revenues 1,020 985 1,065 1,017 934 910 1,011 965 Operating expenses 8,623 9,036 8,822 9,065 7,146 7,832 7,545 7,979 Net earnings (loss) $ (6,867) $ 1,210 $ 917 $ (5,082) $ 5,918 $6,193 $ (2,398) (3,831)
Years Ended June 30, 1998 and 1997 Net earnings (loss) decreased to ($9.8) million or ($0.74) per share for the year ended June 30, 1998, compared to $5.9 million or $.45 per share for the year ended June 30, 1997. The decrease in net earnings is primarily a result of lower gains recognized on the fiscal 1998 securitization transactions of $19.6 million pre-tax ($12.0 million net of tax) compared to the fiscal 1997 securitization transactions of $32.1 million pre-tax ($19.1 million net of tax). Gains on the securitizations were offset by charges taken for pool by pool impairments of the Retained Interest asset of $23.6 million pre-tax ($14.2 million net of tax) and $31.2 million pre-tax ($18.5 million net of tax) for the years ended June 30, 1998 and 1997, respectively. Net earnings also decreased due to the implementation of valuing Retained Interest on a "cash out" rather than "cash in" basis effectively reducing after-tax net earnings by $4.9 million. Exclusive of the after-tax other than temporary Retained Interest impairment charges and the after-tax "cash out" charge for fiscal 1998, net earnings would have been $9.3 million or $0.70 per share for fiscal 1998 compared to $24.4 million and $1.85 per share for fiscal 1997. The "cash out" method estimates Retained Interest by discounting the expected excess cash flows from the time they are projected to be released from the Spread Account using a discount rate which the Company believes is commensurate with the risks involved. Historically the Company has estimated Retained Interest, recognized as a component of the gain on sale, and its subsequent fair value by discounting the projected Future Servicing Cash Flows from the time they are received by the respective trust, the "cash in" method. Use of the "cash out" method resulted in a larger discount of estimated Retained Interest due to the timing of the expected excess cash flows released from the Spread Account. Additionally, interest income earned on the Spread Accounts became a component of the expected excess cash flows and beginning in the fourth quarter of fiscal 1998, will no longer be recognized as interest income. Offsetting the lower gain on sales and the reduction of interest earned was an increase in the accretion of discounted excess servicing. Net interest margin (deficit) after provision decreased 104.1% to ($430,000) for the year ended June 30, 1998, compared to $10.4 million for fiscal 1997. The decreased interest margin after provision as compared to prior year is a result of a combination of factors but is primarily due to a decrease in the average loans held for sale balance and an increase in the provision for estimated credit losses. Interest on loans decreased 17.8% to $27.9 million for the year ended June 30, 1998, compared to $33.9 million for year ended June 30, 1997. The decrease in interest income resulted from a decrease in the average outstanding balance of loans held for sale to $206.2 million for the year ended June 30, 1998, from $228.3 million for fiscal 1997, which was a result of decreased loan acquisitions during the first three quarters of fiscal 1998. Interest earned on the Tier II and marine portfolios was approximately $5.2 million and $801,000, respectively. Interest earned on spread accounts and restricted cash decreased 8.3% to $5.9 million for the year ended June 30, 1998, compared to $6.4 million for the year ended June 30, 1997. The decrease is primarily due to the reclassification of collection account interest. As a result of the implementation of SFAS 125, the Company established a Servicing Asset related to all securitization transactions after UACSC 1996-D. The Servicing Asset related to fiscal 1998 securitizations totaled $2.3 million compared to $1.5 million for fiscal 1997 securitizations. Such amounts equal the discounted projected cash flow of the interest earned on the collection account and are deemed to be additional servicing compensation. Such amounts were recognized as a component of the gain on sale with the discount being accretive into income in future periods. Establishment of the Servicing Asset had the effect of reducing interest income by $1.1 million and $153,000 for the years ended June 30, 1998 and 1997, respectively, however accretion of the discount will somewhat offset the reduction of interest income in future periods. The decrease related to the establishment of the Servicing Asset was partially offset by higher average balances on the cash collection and Spread Accounts. The average balance of these accounts was $139.2 million in fiscal 1998, compared to $127.4 million in fiscal 1997. The increased restricted cash balances result from the increased size of the securitized servicing portfolio. Average securitized loan balances were $1,793.3 million during the current fiscal year, compared to $1,445.4 million in fiscal 1997. Cash collection accounts represent customer payments held in trust until disbursement by the trustee. Interest is earned by the Company on these funds prior to distribution of such funds to investors and servicer. Spread Account balances represent credit enhancement on the securitized pools; the Spread Account requirements are affected by the size of the securitized servicing portfolio as well as loss and delinquency trends which may trigger higher spread requirements. As a result of the implementation of the "cash out" method of valuing Retained Interest, interest earned on spread accounts will be lower in future periods. However the reduction in income will be partially offset by higher discount accretion. Interest expense increased 1.6% to $26.1 million for the year ended June 30, 1998, from $25.7 million for the year ended June 30, 1997. The increase relates to the issuance of $65.0 million in Senior Notes during March 1997 resulting in higher long-term debt expense for all four quarters of fiscal 1998, but only the fourth quarter of fiscal 1997. Interest expense related to long-term debt was $19.5 million and $15.7 million for the years ended June 30, 1998 and 1997, respectively. The increase in interest related to long-term debt was offset by a decrease in the average warehouse borrowing needs for fiscal 1998 compared to fiscal 1997. The average outstanding borrowings was $111.2 million for the year ended June 30, 1998, compared to $174.2 million for the year ended June 30, 1997. The average cost of funds on the combined long-term debt and warehouse borrowings increased to 7.86% for the year ended June 30, 1998, from 7.39% for the year ended June 30, 1997. Interest rates on the New Credit Facility and Credit Facilities are variable in nature and are affected by changes in market rates of interest. Provision for estimated credit losses increased to $8.1 million for the year ended June 30, 1998, compared to $4.2 million for the year ended June 30, 1997. Increased provisions were made in response to increased losses and delinquency trends being experienced by the Company during the latter part of fiscal 1997 and the first quarter of fiscal 1998 and the consumer finance industry in general. The increase in the provision was also related to a higher balance of modified loans at June 30, 1998, compared to June 30, 1997, that were not eligible for securitization until the fourth quarter of fiscal 1998. Gain (loss) on sales of loans, net and interest rate risk. Gain (Loss) on Sales of Loans continues to be a significant element of the Company's net earnings. The Gain (Loss) on Sales of Loans is affected by several factors, primarily the amount of loans securitized, the net spread and the level of estimated credit losses. Historically, the Company has estimated the Future Servicing Cash Flows recognized as a component of the gain on sale by discounting the projected Future Servicing Cash Flows from the time they are received by the respective trust. However, management implemented the "cash out" method during the fourth quarter of fiscal 1998 which discounts the expected Future Servicing Cash Flows from the time they are released from the Spread Account to the Company. Loss on sales of loans totaled $11.9 million for the year ended June 30, 1998, compared to a gain of $963,000 for the year ended June 30, 1997. The decrease in Gain (Loss) on Sales of Loans is primarily a result of lower gains recognized on fiscal 1998 securitization transactions compared to fiscal 1997. The gain for the years ended June 30, 1998 and 1997, consisted of gains on new securitization transactions of $19.6 million and $32.1 million, (including $2.3 million and $1.5 million of Servicing Asset income), and charges for other than temporary impairments of Retained Interest of $23.6 million and $31.2 million, respectively. The net gain for the year ended June 30, 1998, was also lower than prior year due to a $7.9 million charge related to the implementation of the "cash out" method of valuing Retained Interest. The decrease in the Gain (Loss) on Sales of Loans is also attributed to a 21.9% decrease in the volume of loans securitized to $948.1 million for fiscal 1998 compared to $1,214.3 million for fiscal 1997. Additionally, the weighted average net spread decreased to 5.28% for the year ended June 30, 1998, compared to 5.36% for the year ended June 30, 1997. Credit loss assumptions on the Tier I transactions were 4.00% throughout fiscal 1998 compared to 3.25% throughout most of fiscal 1997. Allowance for credit losses were 12.00% for the Tier II fiscal 1998 securitization compared to 10.00% for the two previous securitizations. The Company adjusts its pricing frequently and employs a hedging strategy to help ensure an adequate net spread in the ensuing securitization, while mitigating the risks of increasing interest rates and the volatility in net spreads. See "Discussion of Forward-Looking Statements." Gross and net spreads. Market interest rates were lower in fiscal 1998 as compared to the corresponding periods of fiscal 1997. Gross spread is defined as the difference between the weighted average loan rate and the Certificate rate. Net spread is defined as gross spread less servicing fees, upfront costs, ongoing credit enhancement fees and trustee fees, and hedging gains or losses. Net spreads peaked in the third quarter of fiscal 1997 at 5.43% and have fluctuated over the succeeding five quarters between 5.06% and 5.38%. Net spreads have been decreasing but continue to be within management's expectations. Management is currently targeting net spreads of 5.00% to 5.50% on Tier I securitizations (assuming a pricing spread for Asset-Backed Securities over the two-year treasury note of 50 basis points). Management believes that by targeting a gross spread of 7.00% to 7.50% between loan rates and the two-year treasury rate, these net spreads can be achieved. Although management believes these spreads can be achieved, material factors affecting the net spreads are difficult to predict and could cause management's projections to be materially inaccurate. These include current market conditions with respect to market interest rates and demand for Asset-Backed Securities generally and for Certificates representing interests in securitizations sponsored by the Company. See "Discussion of Forward-Looking Statements." Servicing fees, net is comprised of fees earned by the Company as Servicer of the securitized loan portfolio (typically 1% per annum), the scheduled accretion of discount established on Retained Interest at the time of securitization, and rebates received in excess of original estimates inherent in the Gain (Loss) on Sales of Loans calculation until the third quarter of fiscal 1997. Servicing fees, net increased 3.1% to $26.1 million for the year ended June 30, 1998, compared to $25.3 million for the year ended June 30, 1997. Servicing fees, net as a percentage of the average securitized servicing portfolio decreased to 1.46% for fiscal 1998, from 1.75% for fiscal 1997. Although the average securitized loan portfolio increased 24.1% to $1.8 billion for the year ended June 30, 1998, from $1.4 billion for the year ended June 30, 1997, the increase in servicing fees related to the larger securitized portfolio was nearly offset by a decrease in excess rebates. Rebates received in excess of original estimate inherent in the gain calculation were recorded as a reduction of Retained Interest during fiscal 1998, but were recorded as a component of servicing fees in fiscal 1997 and totaled $2.3 million. The change in recording excess rebates was made during the third quarter of fiscal 1997. Other revenues increased 7.0% to $4.1 million for the year ended June 30, 1998, from $3.8 million for the year ended June 30, 1997. Other revenues consist primarily of late charge fee income and origination fee income. The increase in the current year resulted primarily from increases in late charge fee income to $3.3 million from $2.6 million in the prior year but was offset by a decrease in origination fees. The increase in late charge fee income is primarily due to the increase in the servicing portfolio as well as higher delinquencies experienced during fiscal 1998 compared to fiscal 1997. The decrease in origination fees is primarily due to a lower volume of loans acquired during the first three quarters of fiscal 1998 compared to fiscal 1997. Additionally, origination fees have decreased due to the use of a greater percentage of generic contracts that do not allow for an origination fee to be charged. Salaries and benefits expense increased 24.0% to $19.4 million for the year ended June 30, 1998, from $15.7 million for the year ended June 30, 1997. This increase resulted primarily from an increase in full-time equivalent ("FTE") employees. Average FTE's for the year ended June 30, 1998, were 466 compared to 368 for the year ended June 30, 1997. The Company has experienced growth in collections, human resources and training, operations, systems and retail operations. The increases in the collections and operations areas are in response to an increase in the servicing portfolio and an increase in delinquencies during the year. Increases in human resources and training resulted from a focus on providing better training to employees. The systems area increased because of a Company commitment to improve internal analysis and reporting of corporate financial, origination and collection data that will be used to improve operations and lead to a stronger more profitable portfolio. The increase in the number of reconditioning and remarketing operations employees was due to the opening of a new automotive dealership in July 1998 to facilitate remarketing of repossessed vehicles. Increases in salary and benefit expense were also due to annual merit increases for the Company's existing employees. Other operating expense includes occupancy and equipment costs, outside and professional services, loan expenses, promotional expenses, travel, office supplies and other. Other operating expense increased 8.7% to $16.1 million for the year ended June 30, 1998, from $14.8 million for the year ended June 30, 1997. The increase in other operating expense was primarily attributed to an increase in consulting and professional fees for the Activity Based Management ("ABM") consulting project that began in July 1997 and the non-recurring fees related to the change in commercial domicile for five of the Company's subsidiaries. ABM is used as a tool to better manage the Company's business and to improve the pricing of products and overall operating efficiency. The change in commercial domicile provided a one-time income tax benefit of $860,000 in the second quarter of fiscal 1998 which was recorded as a component of income tax expense. Years Ended June 30, 1997 and 1996 Net earnings decreased to $5.9 million or $0.45 per share for the year ended June 30, 1997, compared to $21.1 million or $1.60 per share for the year ended June 30, 1996. The decrease in net earnings is primarily a result of third and fourth quarter after-tax charges of $9.5 and $9.0 million, respectively, ($16.0 and $15.2 million pre-tax, respectively,) for the impairment of Retained Interest related primarily to an increase in the allowance for estimated credit losses on the securitized portfolio. The charge was taken based on current trends with respect to credit loss and delinquency and their effects on the valuation of Retained Interest on a pool by pool basis. Exclusive of the pool by pool impairment charges, net earnings would have been $24.4 million or $1.85 per share. Net interest margin after provision increased 15.7% to $10.4 million for the year ended June 30, 1997, compared to $9.0 million for fiscal 1996. The increased interest margin as compared to prior year is a result of a combination of factors but is primarily due to an increase in the average loans held for sale balance and a decrease in the cost of funds on the average outstanding borrowings. Interest on loans increased 18.1% to $33.9 million for the year ended June 30, 1997, compared to $28.7 million for last year. The increase in interest income resulted from an increase in the average outstanding balance of loans held for sale to $228.3 million for the year ended June 30, 1997, from $186.6 million for fiscal 1996, which was a result of increased loan acquisitions during the year and the timing of the fourth quarter securitization. The 1997 fourth quarter securitization was effected in June instead of May (as compared to previous years); therefore, an additional one month of interest was earned by the Company. Interest earned on the Tier II and Marine portfolios were approximately $3.8 million and $255,000, respectively. Interest earned on spread accounts and restricted cash increased 17.2% to $6.4 million for the year ended June 30, 1997, compared to $5.4 million for the year ended June 30, 1996. The increase is a result of increased average balances on cash collection and Spread Accounts. The average balance of these accounts was $127.4 million in fiscal 1997, compared to $110.3 million in fiscal 1996. The increased restricted cash balances result from the increased size of the securitized servicing portfolio. Average securitized loan balances were $1,445.4 million during the current fiscal year, compared to $1,179.4 million in fiscal 1996. The average interest yield on the Spread Accounts and restricted cash accounts improved approximately 15 basis points which contributed to the increase as well. Spread Account balances represent credit enhancement on the securitized pools; the Spread Account requirements are affected by the size of the securitized servicing portfolio as well as loss and delinquency trends which may trigger higher spread requirements. Cash collection accounts represent customer payments held in trust until disbursement by the trustee. Interest is earned by the Company on these funds prior to distribution of such funds to investors and Servicer. As a result of the implementation of SFAS 125, the Company established a Servicing Asset related to the 1997A and 1997B securitization transactions of $743,000 and $750,000, respectively. Such amounts equal the discounted projected cash flow of the interest earned on the collection account and are deemed to be additional servicing compensation. Such amounts were recognized as a component of the gain on sale with the discount being accretive to income in the future. Establishment of the Servicing Asset will have the effect of reducing interest earned on restricted cash in future periods, however, accretion of the discount on the Servicing Asset will somewhat offset this decrease. Interest expense increased 15.3% to $25.7 million for the year ended June 30, 1997, from $22.3 million for the year ended June 30, 1996. The increase was primarily a result of an increase in the average outstanding borrowings to $347.7 million for the year ended June 30, 1997, from $288.4 million for the year ended June 30, 1996, offset by a decline in the average cost of funds to 7.39% for the year ended June 30, 1997, from 7.72% for the year ended June 30, 1996. Cost of funds in the prior year included interest expense in the form of amortization of upfront borrowing fees paid in conjunction with the establishment of the Prime and Non-prime Warehouse Facilities. The agreements provided for an initial term of one year to be renewed annually; therefore, the total upfront fees paid to establish the Facilities were amortized during fiscal 1996. Upfront fees paid in fiscal 1996 related to the Prime and Non-prime Warehouse Facilities totaled approximately $1.5 million. The renewal of the Prime and Non-Prime Warehouse Facilities do not require payment of additional fees. Interest rates on the Prime and Non-prime Warehouse Facilities are variable in nature and are affected by changes in market rates of interest. Provision for estimated credit losses increased to $4.2 million for the year ended June 30, 1997, compared to $2.9 million for the year ended June 30, 1996. Increased provisions were made in response to, and in anticipation of, increased losses and delinquency trends being experienced by the Company and the industry in general. Gain (loss) on sales of loans, net and interest rate risk. Gain (Loss) on Sales of Loans continues to be a significant element of the Company's net earnings. The Gain (Loss) on Sales of Loans is affected by several factors, but is primarily affected by the amount of loans securitized and the net spread. The Company adjusts its pricing frequently and employs a hedging strategy to help ensure an adequate net spread in the ensuing securitization, while mitigating the risks of increasing interest rates and the volatility in net spreads. Gain (Loss) on Sales of Loans decreased to $963,000 for the year ended June 30, 1997, from $30.4 million for the year ended June 30, 1996. The decrease in gains recognized by the Company in the current fiscal year is due to pre-tax charges of $31.2 million for the impairment of Retained Interest primarily related to the increase in allowance for estimated credit losses related to its securitized portfolio. Exclusive of the charges, gains recorded in conjunction with the fiscal 1997 securitization transactions were $31.7 million compared to $30.4 million in fiscal 1996 and included $1.5 million in servicing asset income. Although the volume of loans securitized increased 31.3% to $1,214.3 million for the year ending June 30, 1997, compared to $924.6 million in fiscal 1996, the weighted average net spread on the securitization transactions decreased to 5.36% in fiscal 1997, compared to 5.96% in fiscal 1996. Additionally, the allowance for estimated credit losses established at the time of the sale was 3.87% (excluding the charge) as a percentage of total loans securitized in fiscal 1997, compared to 3.57% in fiscal 1996. Credit loss assumptions on the Tier I transactions were 3.25% throughout most of fiscal 1997; however, the Company began providing for losses at 3.50% on Tier I securitizations in the fourth quarter of fiscal 1997. Allowance for estimated credit losses were established at 3.00% for the majority of fiscal 1996. Allowance for estimated credit losses have historically been made at 10.00% on the Tier II securitizations. Gross and net spreads. Market interest rates were higher in fiscal 1997 as compared to the corresponding periods of fiscal 1996. Market rates experienced an upward trend beginning in the fourth quarter of fiscal 1996, but demonstrated relatively small fluctuations throughout fiscal 1997. Because changes in loan rates on automobile loans tend to lag behind fluctuations in market rates of interest, spreads are adversely affected in a rising rate environment. The increased market rates in fiscal 1997 had the effect of reducing gross and net spreads on Tier I securitizations compared to fiscal 1996. Gross spread is defined as the difference between the weighted average loan rate and the Certificate rate. Net spread is defined as gross spread less servicing fees, upfront costs, ongoing credit enhancement fees and trustee fees, and hedging gains or losses. Management is currently targeting net spreads of 5.00% to 5.50% on Tier I securitizations (assuming a pricing spread for Asset-backed Certificates over the two-year Treasury Note of 50 basis points) for fiscal 1998. Management believes that by targeting a spread of 7.00% to 7.50% between loan rates and the two-year treasury rate that the net spread targets can be achieved. Although management believes these spreads can be achieved, material factors affecting the net spreads are difficult to predict and could cause management's projections to be materially inaccurate. These include current market conditions with respect to market interest rates and demand for Asset-backed Securities generally, and for Certificates representing interests in Securitizations sponsored by the Company. See "Discussion of Forward-Looking Statements." Servicing fees, net is comprised of fees earned by the Company as Servicer of the securitized loan portfolio (typically 1% per annum), the scheduled accretion of discount established on Retained Interest at the time of securitization, and rebates received in excess of original estimates recorded in the gain calculation. Servicing fees, net increased 49.7% to $25.3 million for the year ended June 30, 1997, compared to $16.9 million for the year ended June 30, 1996. Servicing fees, net as a percentage of the average securitized servicing portfolio increased to 1.75% for fiscal 1997, from 1.42% in fiscal 1996. The increase in servicing fees, net is primarily a result of a 22.6% increase in the average securitized loan balances in fiscal 1997 to $1.4 billion, compared to $1.2 billion in fiscal 1996. Servicing fees are also impacted by the timing of Future Servicing Cash Flows and excess rebates. Excess rebates received during fiscal 1997 were $2.3 million, compared to $2.8 million in fiscal 1996. The Company's rebate receivable was marked to market as a component of Retained Interest in accordance with SFAS 125 during the third quarter of fiscal 1997. Other revenues increased 23.4% to $3.8 million for the year ended June 30, 1997, from $3.1 million for the year ended June 30, 1996. The increase in the current year resulted primarily from increases in late charge fee income to $2.6 million from $1.9 million in the prior year. Salaries and benefits expense increased 30.8% to $15.7 million for the year ended June 30, 1997, from $12.0 million for the year ended June 30, 1996. This increase resulted primarily from an increase in full-time equivalent ("FTE") employees. Average FTE's for the year ended June 30, 1997, were 333 compared to 270 for the year ended June 30, 1996. The Company has experienced growth in credit, sales and operations, collections, and support. These increases are in response to, and in anticipation of, continued expansion and loan acquisition growth as well as a growing servicing portfolio. Additional levels of management and support staff have been added to ensure efficiency in operations as the Company's acquisition volume and servicing portfolio continues to grow. Increases in salary and benefit expense were also due to annual merit increases for the Company's existing employees. Other operating expense includes occupancy and equipment costs, outside and professional services, loan expenses, promotional expenses, travel, office supplies and other. Other operating expense increased 25.1% to $14.8 million for the year ended June 30, 1997, from $11.9 million for the year ended June 30, 1996. Many of these expenses vary directly with increased loan acquisition volume and the increased size of the servicing portfolio. Both loan acquisition volume and the servicing portfolio were increased during the year ended June 30, 1997, compared to the year ended June 30, 1996. Occupancy expense increased reflecting a full twelve months of rent expense in fiscal 1997 at the Company's new headquarters, compared to only six months in fiscal 1996. Equipment expense was also impacted by a full year of expense from its collections and telephone systems implemented at the Company's new headquarters in January 1996. Financial Condition Loans, net and servicing portfolio. Loans, net includes the principal balance of loans held for sale, net of unearned discount and allowance for credit losses, loans in process, and prepaid dealer premiums. Loans, net decreased to $118.3 million at June 30, 1998, from $121.2 million at June 30, 1997. This decrease was due primarily to the fourth quarter Tier II securitization and the sale of the marine portfolio. The Tier II securitization and the sale of the marine portfolio accounted for $18.3 million of the difference but was offset by an increase in the Tier I loans held for sale balance of $17.8 million. The modified loan portfolio balance included in loans held for sale totaled $20.8 million at June 30, 1998, compared to $14.3 million at June 30, 1997. The modified loan portfolio balance increased during fiscal 1998; however, due to more refined underwriting policies for modifications and the ability to securitize a small percentage of the modified portfolio in future securitizations, the balance is expected to decrease. Allowance for credit losses on loans held for sale was increased $1.1 million from June 30, 1997, primarily as a result of higher losses from modifications. The Company serviced $1.9 billion and $1.8 billion in securitized loans, and the total servicing portfolio was $2.0 billion and $1.9 billion as of June 30, 1998, and June 30, 1997, respectively. Retained interest in securitized assets ("Retained Interest"). Beginning with the June 30, 1998, consolidated financial statements, the previously captioned Excess Servicing asset and the Spread Account asset have been combined into one asset entitled Retained Interest in Securitized Assets ("Retained Interest"). Retained Interest increased to $171.6 million at June 30, 1998, from $170.8 million at June 30, 1997. The Retained Interest balance increased by the amounts capitalized upon consummation of the various Tier I and Tier II securitizations, including estimated dealer premium rebates, unrealized gains recognized on certain pools, and in some securitizations, the initial cash deposits into a specific cash account ("Spread Account") held by the Trust as credit enhancement for the benefit of the investors. Total amounts capitalized for the year ended June 30, 1998, were $49.1 million. Retained Interest also increased by an additional pre-tax unrealized gain of $8.5 million and a $800,000 increase in accrued interest. Additions to Retained Interest were offset by the return of excess cash flows over the year ended June 30, 1998, related to all securitizations of $22.5 million and by the effect of the $23.6 million impairment of Retained Interest taken during the fiscal year ended June 30, 1998. Impairment of Retained Interest is measured on a disaggregate basis (pool by pool) in accordance with SFAS 115. Additionally, Retained Interest decreased by the net decrease in Spread Accounts of $3.6 million for the year ended June 30, 1998, and by $7.9 million related to the implementation of the "cash out" method of valuing Retained Interest. Withdrawals of Spread Account funds are made when the balance of the account is in excess of the requirements stipulated in the servicing agreement (the Company's servicing agreements are collectively referred to as the "Pooling and Servicing Agreements"). Allowance for estimated credit losses on securitized loans is included as a component of Retained Interest. At June 30, 1998, the allowances related to both Tier I and Tier II securitized loans totaled $90.2 million or 4.67% of the total securitized loan portfolio, compared to $79.9 million or 4.40% at June 30, 1997. See--"Note 1 of the Consolidated Financial Statements." Amounts due under credit facilities and long-term debt. Beginning in August 1995, after the Spin-off from its parent, the revolving Credit Facilities and Senior Notes constituted the Company's primary funding sources. The Company issued in a private placement $46.0 million in Senior Subordinated Notes in April 1996 and $65.0 million in Senior Notes in March 1997. The balance of the revolving Credit Facilities and the Senior and Senior Subordinated Notes was $294.1 million at June 30, 1998, compared to $265.5 million at June 30, 1997. Liquidity and Capital Resources Sources and uses of cash in operations. The Company's business requires significant amounts of cash to support operations. Its primary uses of cash include: (i) acquisitions and financing of loans; (ii) payment of Dealer Premiums; (iii) securitization costs including cash held in Spread Accounts and similar cash collateral accounts under the revolving Credit Facilities; (iv) servicer advances of payments on securitized loans pursuant to securitization trusts; (v) losses on hedging transactions realized in connection with the closing of securitization transactions where interest rates have declined during the period covered by the hedge; (vi) operating expenses; (vii) payment of income taxes; and (viii) interest expense. The Company's sources of cash from operations include: (i) standard servicing fees; generally 1.0% per annum of the Tier I securitized portfolio; (ii) Future Servicing Cash Flows; (iii) Dealer Premium rebates; (iv) gains on hedging transactions realized in connection with the closing of securitization transactions where interest rates have increased during the periods covered by the hedge; (v) interest income; (vi) sales of loans in securitization transactions; and (vii) proceeds from sale of interest-only strips in conjunction with securitization transactions. Net cash used by operating activities decreased to $5.0 million for the year ended June 30, 1998, from net cash provided by operating activities of $126.0 million for the year ended June 30, 1997. The decrease was primarily attributable to a decrease in loans securitized relative to loans acquired and a decrease in proceeds from the sale of interest-only strips. Proceeds from the sale of interest-only strips generated $13.9 million in cash for the period ended June 30, 1998, compared to $31.8 million for the period ended June 30, 1997. The increase in cash used for investing activities was primarily due to the purchase of property for the expansion of the reconditioning and remarketing operations in Indianapolis. Hedging. Hedging transactions may represent a source or a use of cash during a given period depending on changes in interest rates. During fiscal 1998, hedging transactions have required a net use of cash of $2.7 million compared to $6.3 million used during fiscal 1997. Financing activities. Net cash provided by financing activities for fiscal 1998 was $28.6 million compared to a use of $79.7 million in the prior year. The increase was a result of an increase in warehouse borrowings at June 30, 1998, relative to the balance at June 30, 1997. The Company has substantial capital requirements to support its ongoing operations and anticipated growth. The Company's sources of liquidity are currently funds from operations, securitizations and external financing including long-term debt and the revolving New Credit Facility. Historically, the Company has used the securitization of loan pools as its primary source of long-term funding. Securitization transactions enable the Company to improve its liquidity, to recognize gains from the sales of the loan pools while maintaining the servicing rights to the loans, and to control interest rate risk by matching the repayment of amounts due to investors in the securitizations with the actual cash flows from the securitized assets. Between securitization transactions, the Company relies primarily on the New Credit Facility to fund ongoing loan acquisitions (not including Dealer Premiums). In addition to loan acquisition funding, the Company also requires substantial capital on an ongoing basis to fund the advances of Dealer Premiums, securitization costs, servicing obligations and other cash requirements described above. The Company's ability to borrow under the New Credit Facility is dependent upon its compliance with the terms and conditions thereof. The Company's ability to obtain successor facilities or similar financing will depend on, among other things, the willingness of financial institutions to participate in funding automobile financing business and the Company's financial condition and results of operations. Moreover, the Company's growth may be inhibited, at least temporarily, if the Company is not able to obtain additional funding through these or other facilities or if it is unable to satisfy the conditions to borrowing under the New Credit Facility. The Company consistently assesses it's long-term loan funding arrangements with a view to optimizing cash flows and reducing costs. Warehouse facility. The aggregate capacity of the Prime and Non-prime Warehouse Facilities was $400.0 million, of which $73.1 million was utilized, and an additional $4.7 million was available to borrow based on the outstanding principal balance of eligible loans at June 30, 1998. According to the credit agreement, modified loans can not be pledged as collateral, thus, they are not considered eligible loans that can be borrowed against. In September 1998, the Company entered into a borrowing arrangement with an independent financial institution for the $450.0 million New Credit Facility that is insured by a surety bond provider. The proceeds from the New Credit Facility were used to pay off and close the existing Prime and Non-prime Warehouse Facilities. The New Credit Facility is renewable annually and allows for borrowings against both Tier I and Tier II loan acquisitions. The New Credit Facility provides funding for loan acquisitions at a purchase price of up to 100% of the outstanding principal balance of eligible loans at the time of purchase. The advance rate may be adjusted based on an actual net yield percentage that is measured monthly on all receivables in the Warehouse. Long-term debt. The Company issued $110.0 million of 8.53% Senior Notes due August 1, 2002, in connection with the Company's initial public offering. Interest on the Notes is payable semiannually, and principal payments began August 1, 1998, and are due on each subsequent August 1, in the amount equal to approximately 20% of the stated original principal balance. In April 1996, the Company completed a private placement of $46.0 million of 9.99% Senior Subordinated Notes due March 30, 2003, with interest payable quarterly and principal due at maturity. In March 1997, the Company issued $65.0 million of Senior Notes due December 27, 2002. The Notes were issued as "Series A" in the principal amount of $50.0 million at 7.75% interest and "Series B" in the principal amount of $15.0 million at 7.97% interest. Interest on the Notes is payable semiannually and a principal payment is due March 15, 2002, in the amount equal to approximately 33 1/3% of the stated original balance. The Company's credit agreements, among other things, require compliance with monthly and quarterly financial maintenance tests as well as restrict the Company's ability to create liens, incur additional indebtedness, sell or merge assets and make investments. The Company is in compliance with all covenants and restrictions imposed by the terms of indebtedness. During the fiscal quarter ended December 31, 1997, the Company was notified by FITCH IBCA ("Fitch") that its ratings of the Company's Senior and Senior Subordinated Notes were being reduced one grade. At the time of the initial downgrade, Fitch informed the Company that it would consider a further downgrade of such securities if the Company failed to show material improvement in asset quality unless the Company obtained additional equity capital. Although improvement in asset quality during the second and third quarters of fiscal 1998 occurred, the Company was notified on February 27, 1998, of a further downgrade to "BB+" and "BB" on the Senior and Senior Subordinated notes, respectively. Given the improvement in asset quality and adequacy of capital resources, at that time, the Company did not seek additional equity investment in the current fiscal year. The Company completed a Tier I securitization including a portion of the modified loan portfolio and a Tier II securitization during the fourth quarter of fiscal 1998 resulting in an increase in liquidity for the short-term. Management believes that the Company's existing capital resources, the New Credit Facility described above, future earnings, expected growth in loan acquisitions, and periodic securitization of loans should provide the necessary capital and liquidity for its operations through at least the third quarter of fiscal 1999. The period during which its existing capital resources will continue to be sufficient will, however, be affected by the factors described above affecting the Company's cash requirements. A number of these factors are difficult to predict, particularly including the cash effect of hedging transactions, the availability of outside credit enhancement in securitizations or other financing transactions and other factors affecting the net cash provided by securitizations. Depending on the Company's ongoing cash and liquidity requirements, market conditions and investor interest, the Company may seek to issue additional debt or equity securities in the near term. The sale of additional equity, including Class A Common Stock or preferred stock, would dilute the interests of current shareholders. Discussion of Forward-Looking Statements The above discussions contain forward-looking statements made by the Company regarding its results of operations, cash flow needs and liquidity, loan origination volume, target spreads and other aspects of its business. Similar forward-looking statements may be made by the Company from time to time. Such forward-looking statements are subject to a number of important factors that cannot be predicted with certainty and which could cause such forward-looking statements to be materially inaccurate. Among these factors are the following: Capital requirements and availability. The Company requires substantial amounts of cash to support its business and growth as described above. Its cash requirements can vary depending on the cash-effect of hedging transactions, the availability of external credit enhancement in securitizations or other financing transactions and the other factors that affect the net cash provided by securitizations (at closing and over time) as well as the percentage of principal amount of loans acquired for which the Company can obtain Warehouse financing. The Company's ability to meet these ongoing cash and liquidity requirements depends on several factors. First is the Company's ability to effect periodic securitizations of its loan portfolio and the terms of such securitizations which are dependent on market factors generally, changes in interest rates, demand for Asset-Backed Securities and the Certificates offered in the Company's securitizations particularly. Another important factor is the Company's ability to continue to comply with the terms of its Senior and Senior Subordinated Notes and Warehouse Facility and/or its ability to obtain funding to replace and/or supplement such facility should it become necessary to do so. The Company's ability to obtain successor facility or similar financing will depend on, among other things, the willingness of financial institutions to participate in funding automobile financing businesses and the Company's financial condition and results of operations. Moreover, the Company's growth may be inhibited, at least temporarily, if the Company is not able to obtain additional funding through these or other facilities or if it is unable to satisfy the conditions to borrow under the Credit Facility. Loan acquisition volume, spread and growth. Many factors affect the Company's loan acquisition volume and spread, which have significant impact on the Company's net earnings. Volume is affected by overall demand for new and used automobiles in the economy generally, the willingness of automobile dealers to forward prospective borrowers' loan applications to the Company, as well as the number of qualified borrowers whose loans are approved and whose loans are ultimately acquired by the Company. Competition can impact significantly both acquisition volume and the note rate at which loans are originated. Generally, competition in the Company's business is intense. The Buy Rate offered by the Company is a significant competitive factor. A competitor offering a lower Buy Rate may be more likely to acquire a loan. The continued growth of the Company's servicing portfolio will depend significantly on the receptivity to the Company's program of new dealers in existing geographic markets as well as new markets and the continued stability of the Company's relationships with its existing dealer network. Interest rate risk. The Company's sources of funds generally have variable rates of interest and its loan portfolio bears interest at fixed rates. The Company therefore bears interest rate risk on loans until they are securitized and employs a hedging strategy to mitigate this risk. As a part of the hedging strategy, the Company executes short sales of U.S. Treasury securities having a maturity approximating the average maturity of loans to be acquired during the relevant period. There is no assurance that this strategy will completely offset changes in interest rates. In particular, such strategy depends on management's estimates of loan acquisition volume. The Company realizes a gain on its hedging transactions during periods of increasing interest rates and realizes a loss on such transactions during periods of decreasing interest rates. The hedging gain or loss will substantially offset changes in interest rates as seen by a lower or higher reported gain on sales of loans, respectively. Recognition of unrealized gains or losses is deferred until the sale of loans during the securitization. On the date of the sale, hedging deferred gains and losses are recognized as a component of Gain (Loss) on Sales of Loans. Loan losses and prepayment rates. The Company bears the primary risk of loss due to defaults in its servicing portfolio. Default and credit loss rates are impacted by general economic factors that affect borrowers' ability to continue to make timely payments on their indebtedness. Prepayments on loans in the servicing portfolio reduce the size of the portfolio and reduce the Company's servicing income. The Gain on Sales of Loans in connection with each securitization transaction and the amount of Retained Interest recognized in each transaction reflect deductions for estimates of future defaults and prepayments. The carrying value of Retained Interest may be adjusted periodically to reflect differences between estimated and actual credit losses and prepayments on past securitizations. The Company's results of operations could be adversely affected if default or prepayment rates on securitized loans substantially exceed the estimated levels. Regulation. The Company's business is subject to numerous federal and state consumer protection laws and regulations which, among other things: (i) require the Company to obtain and maintain certain licenses and qualifications; (ii) limit the interest rates, fees and other charges the Company is allowed to charge; (iii) limit or prescribe certain other terms of the Company's contracts; (iv) require specified disclosures; and (v) define the Company's rights to repossess and sell collateral. Changes in existing laws or regulations, or in the interpretation thereof, or the promulgation of any additional laws or regulation could have an adverse effect on the Company's business. Impact of Current Accounting Pronouncements In June, 1997, The Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which introduces new guidance on segment reporting. The Statement is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. The Statement is not expected to have a material impact on the financial condition or results of operations of the Company. In February 1998, FASB issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits." The Statement does not alter the measurement and recognition provisions currently outlined in generally accepted accounting principles but merely standardizes the disclosure requirements. The Statement is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. The Statement is not expected to have a material impact on the financial condition or results of operations of the Company when adopted. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement is effective for fiscal years beginning after June 15, 1999, with earlier application allowed. Management is currently assessing the impact of this Statement on the financial condition of operations of the Company upon adoption. Year 2000 Compliance During the year ended June 30, 1997, the Company began a risk evaluation of potential Year 2000 issues. The outcome of this evaluation was the formation of a Year 2000 Committee that consists of directors, officers and employees of the Company. The purpose of this committee is to assess all risks, analyze current systems, coordinate upgrades and replacements, and report current and projected status of all known Year 2000 compliance issues. During the assessment phase, over thirty service bureaus and system vendors were identified that performed or supplied potential Year 2000 compliance issues. The list included eight service bureaus, seven software vendors, seven hardware vendors, one electric company, six maintenance and supplies companies and four telecommunications companies. Once the systems were identified an immediate correspondence was established for the purpose of educating the Company on known Year 2000 issues or Year 2000 compliance certification. The systems identified were put through one of two possible phases. If the vendor provided proof that the system in question had proper Year 2000 compliance certification and a testing cycle was possible, an appropriate testing cycle was performed. If the testing cycle failed or the system had known Year 2000 issues, a mission critical evaluation and replacement recommendations were performed. The Company has three known mission critical systems that are not in Year 2000 compliance. All three of the systems have Year 2000 compliance certified replacement products that are scheduled for implementation in November 1998, February 1999 and March 1999, respectively. The replacement or remedied costs for year 2000 compliance issues with the Company is estimated to be less than $100,000, which the Company recognizes as incurred. This extimated cost is mostly due to software upgrades that include new features which are combined with Year 2000 corrections. The Company estimates that the worst case Year 2000 issue scenario would be discontinuance of electrical power. Although the Company has numerous power backup devices, a long-term power outage would bring the Company to a standstill. Because of this potentially crippling effect, the Company has been examining the potential of installing a complete electrical backup generator at a cost of approximately $400,000. Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Company bears the primary risk of loss due to defaults in its servicing portfolio. Default and credit loss rates are impacted by general economic factors that affect borrowers' ability to continue to make timely payments on their indebtedness. Prepayments on loans in the servicing portfolio reduce the size of the portfolio and reduce the Company's servicing income. The Gain on Sales of Loans in connection with each securitization transaction and the amount of Retained Interest recognized in each transaction reflect deductions for estimates of future defaults and prepayments. The carrying value of Retained Interest may be adjusted periodically to reflect differences between estimated and actual credit losses and prepayments on past securitizations. For example, if credit losses increased or decreased by 1.00%, the gain on sale of a $300.0 million securitization would result in a reduction or an increase of the Gain (Loss) on Sales of Loans by $3.0 million pre-tax. The same 1.00% increase or decrease would result in a reduction or an increase of the Retained Interest of approximately $19.3 million as of June 30, 1998. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Notes 1 and 4 of the Consolidated Financial Statements." The Company's sources of funds generally have variable rates of interest and its loan portfolio bears interest at fixed rates. The Company therefore bears interest rate risk on loans until they are securitized and employs a hedging strategy to mitigate this risk. As a part of the hedging strategy, the Company executes short sales of U.S. Treasury securities having a maturity approximating the average maturity of loans to be acquired during the relevant period. There is no assurance that this strategy will completely offset changes in interest rates. In particular, such strategy depends on management's estimates of loan acquisition volume. The Company realizes a gain on its hedging transactions during periods of increasing interest rates and realizes a loss on such transactions during periods of decreasing interest rates. The hedging gain or loss will substantially offset changes in interest rates as seen by a lower or higher reported gain on sales of loans, respectively. Recognition of unrealized gains or losses is deferred until the sale of loans during the securitization. On the date of the sale, hedging deferred gains and losses are recognized as a component of gain on sales of loans. Increases or decreases in interest rates reduce or increase the fair value of long-term debt, respectively. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Notes 2 and 6 of the Consolidated Financial Statements." Item 8. Financial Statements and Supplementary Data ------------------------------------------- Independent Auditors' Report The Board of Directors Union Acceptance Corporation: We have audited the accompanying consolidated balance sheets of Union Acceptance Corporation and Subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of earnings (loss) and comprehensive earnings (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Union Acceptance Corporation and Subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998 in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, on January 1, 1997. As discussed in note 13 to the consolidated financial statements, the Company has restated its June 30, 1997 consolidated financial statements to include an other than temporary impairment adjustment of the retained interest in securitized assets. /s/ KPMG Peat Marwick LLP - - ------------------------- KPMG Peat Marwick LLP August 27, 1998 Indianapolis, Indiana UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 30, 1998 and 1997 (in thousands, except share data)
- - --------------------------------------------------------------------------------------------------------------------------- Assets 1998 1997 - - --------------------------------------------------------------------------------------------------------------------------- Cash $ 75,612 $ 58,801 Restricted cash 17,823 16,657 Loans, net 118,259 121,156 Accrued interest receivable 1,045 1,232 Property, equipment, and leasehold improvements, net 7,921 2,150 Retained interest in securitized assets 171,593 170,791 Other assets 19,280 20,481 - - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 411,533 $ 391,268 - - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity - - --------------------------------------------------------------------------------------------------------------------------- Liabilities: Amounts due under warehouse facilities $ 73,123 $ 44,455 Long-term debt 221,000 221,000 Accrued interest payable 6,280 5,793 Amounts due to trusts 15,510 16,067 Dealer premiums payable 1,374 1,372 Deferred income tax payable 9,573 13,859 Other payables and accrued expenses 2,200 1,874 - - ------------------------------------------------------------------------------------------------------------------------- Total liabilities $ 329,060 $ 304,420 - - --------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock, without par value, authorized 10,000,000 shares; none issued and outstanding -- -- Class A common stock, without par value, authorized 30,000,000 shares; 4,376,446 and 4,016,788 shares issued and outstanding at June 30, 1998 and June 30, 1997, respectively 58,360 58,270 Class B common stock, without par value, authorized 20,000,000 shares; 8,855,036 and 9,200,000 shares issued and outstanding at June 30, 1998 and June 30, 1997, respectively -- -- Net unrealized gain on retained interest in securitized assets 7,609 2,252 Retained earnings 16,504 26,326 - - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 82,473 86,848 - - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 411,533 $ 391,268 ===========================================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss) Years ended June 30, 1998, 1997, and 1996 (in thousands, except share data)
- - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------------------- Interest on loans $ 27,871 $ 33,914 $ 28,712 Interest on spread accounts and restricted cash 5,856 6,385 5,448 - - -------------------------------------------------------------------------------------------------------------------------- Total interest income 33,727 40,299 34,160 Interest expense 26,107 25,688 22,275 - - -------------------------------------------------------------------------------------------------------------------------- Net interest margin 7,620 14,611 11,885 Provision for estimated credit losses 8,050 4,188 2,875 - - -------------------------------------------------------------------------------------------------------------------------- Net interest margin (deficit) after provision (430) 10,423 9,010 Gain (loss) on sales of loans, net (11,926) 963 30,357 Servicing fees, net 26,137 25,344 16,926 Other revenues 4,087 3,820 3,096 - - -------------------------------------------------------------------------------------------------------------------------- Total revenues 17,868 40,550 59,389 - - -------------------------------------------------------------------------------------------------------------------------- Salaries and benefits 19,427 15,673 11,985 Other revenues 16,119 14,829 11,856 - - -------------------------------------------------------------------------------------------------------------------------- Total operating expenses 35,546 30,502 23,841 - - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before provision (benefit) for income taxes (17,678) 10,048 35,548 Provision (benefit) for income taxes (7,856) 4,166 14,406 - - -------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) (9,822) 5,882 21,142 - - -------------------------------------------------------------------------------------------------------------------------- Other comprehensive earnings before taxes: Net unrealized gain on retained interests in securitized assets 8,527 3,785 - Income taxes related to items of other comprehensive earnings (3,170) (1,533) - - - -------------------------------------------------------------------------------------------------------------------------- Other comprehensive earnings, net of taxes 5,357 2,252 - - - -------------------------------------------------------------------------------------------------------------------------- Comprehensive earnings (loss) $ (4,465) $ 8,134 $ 21,142 ========================================================================================================================== Net earnings (loss) per common share (basic and diluted) $ (0.74) $ 0.45 $ 1.60 ========================================================================================================================== Weighted average number of common shares outstanding 13,226,651 13,215,112 13,209,378 ==========================================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the years ended June 30, 1998, 1997, and 1996 (in thousands, except share data)
- - --------------------------------------------------------------------------------------------------------------------------------- Net Number of unrealized common stock gain on shares outstanding retained Total --------------------------------------- Common interest in Retained shareholders' Class A Class B stock securitized earnings equity assets - - --------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 1 1 $ 2 - - 2 Issuance of common stock through initial public offering 4,000,000 9,200,000 58,000 - - 58,000 Regulatory equity distributions related to spin-off (1) (1) (2) - (698) (700) Grants of common stock 11,358 - 180 - - 180 Net earnings - - - - 21,142 21,142 - - --------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 4,011,358 9,200,000 58,180 - 20,444 78,624 Grants of common stock 5,430 - 90 - - 90 Net earnings - - - - 5,882 5,882 Net change in unrealized gain on retained interest in securitized assets - - - 2,252 - 2,252 - - --------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 4,016,788 9,200,000 58,270 2,252 26,326 86,848 Grants of common stock 14,694 - 90 - - 90 Conversion of Class B common stock into Class A common stock 344,964 (344,964) - - - - Net loss - - - - (9,822) (9,822) Net change in unrealized gain on retained interest in securitized assets - - - 5,357 - 5,357 - - --------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 4,376,446 8,855,036 $ 58,360 7,609 16,504 82,473 =================================================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1998, 1997, and 1996 (in thousands)
- - ------------------------------------------------------------------------------------------------------- 1998 1997 1996 - - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings (loss) $ (9,822) 5,882 21,142 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Loan originations in excess of liquidations (953,252) (1,087,065) (982,800) Dealer premiums paid in excess of dealer premium rebates received on loans held for sale (40,526) (53,461) (50,059) Securitization of loans held for sale 948,114 1,214,298 924,598 Gain on sales of loans (19,253) (46,713) (37,900) Proceeds on sale of interest only strip 13,869 31,773 26,686 Return of excess and servicing asset cash flows, net of present value effect 23,347 24,738 37,871 Impairment of retained interest in securitized assets 23,636 34,828 -- Provision for estimated credit losses 8,050 4,188 2,875 Amortization and depreciation 4,689 3,979 4,395 Spread accounts 3,631 (8,154) (6,176) Restricted cash (1,166) (1,868) (5,934) Other assets and accrued interest receivable (2,425) (10,296) (6,788) Amounts due to trusts (557) 8,136 2,030 Other payables and accrued expenses (3,383) 5,697 14,281 - - ------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities (5,048) 125,962 (55,779) - - ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchase of property, equipment, and leasehold improvements (6,809) (967) (1,347) - - ------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net change in warehouse credit facilities 28,668 (143,301) 187,756 Proceeds from issuance of senior notes -- 65,000 110,000 Proceeds from issuance of senior subordinated notes -- -- 46,000 Payment of borrowing fees -- (1,352) (3,231) Net proceeds from issuance of common stock -- -- 58,000 Net change in due to Union Federal, including regulatory equity distribution -- -- (337,423) - - ------------------------------------------------------------------------------------------------------ Net cash provided (used) from financing activities 28,668 (79,653) 61,102 - - ------------------------------------------------------------------------------------------------------ Change in cash 16,811 45,342 3,976 Cash, beginning of year 58,801 13,459 9,483 - - ------------------------------------------------------------------------------------------------------ Cash, end of year $ 75,612 58,801 13,459 ======================================================================================================= Supplemental disclosures of cash flow information: Income taxes paid $ 22 4,288 10,680 ======================================================================================================= Interest paid $ 26,472 26,475 15,648 =======================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1998, 1997, and 1996 - - -------------------------------------------------------------------------------- (1) Summary of Significant Accounting Policies (a) Description of Business Union Acceptance Corporation ("UAC") is an Indiana corporation formed in December 1993. UAC and its subsidiaries (collectively, the Company) engage primarily in the business of acquiring, securitizing, and servicing retail automobile installment sales contracts originated by dealerships affiliated with major domestic and foreign automobile manufacturers. The Company currently acquires loans from a network of over 3,600 manufacturer-franchised automobile dealerships in 32 states. No individual dealer or group of affiliated dealers accounted for more than 1.9% of the Company's loan acquisitions during the year ended June 30, 1998. The Company's lending program focuses on acquiring two levels of loan quality. Primarily, the Company acquires loans from borrowers who exhibit a favorable credit profile ("Tier I" lending) purchasing late model used and, to a lesser extent, new automobiles. The Company also acquires loans from borrowers with adequate credit quality who would not qualify for the Company's Tier I lending quality criteria ("Tier II" lending). Tier II loan acquisitions accounted for 2.5% of total loan acquisitions during fiscal 1998 and 3.3% of loan servicing portfolio at June 30, 1998. (b) Basis of Financial Statement Presentation The consolidated financial statements included the accounts of UAC and its wholly-owned subsidiaries, Union Acceptance Funding Corporation, UAC Securitization Corporation, Performance Funding Corporation, Performance Securitization Corporation, UAC Boat Funding Corp., UAC Finance Corporation, Circle City Car Company, and Union Acceptance Receivables Corporation. All significant intercompany balances and transactions have been eliminated in the consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with those in the general practice of the consumer finance industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of retained interest in securitized assets, gain (loss) on sales of loans, net, and the allowance for credit losses. Priorto the UAC's initial public offering in August 1995, the Company was a wholly-owned subsidiary of Union Federal Savings Bank of Indianapolis Union Federal. The consolidated financial statements reflect no allocation of Union Federal's historical equity. Earnings of the Company were transferred to Union Federal through the Due to Union Federal account prior to the spin-off. (c) Cash The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. (d) Restricted Cash Restricted cash primarily consists of funds held in reserve accounts in compliance with the terms of the Warehouse Facility Agreements. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- (e) Loans, Net All loans in the Company's Tier I and Tier II portfolios are held for sale and include automobile, light-truck, van, and other loans including dealer premiums (on Tier I loans). Such loans are packaged and sold through asset-backed securitization transactions and are carried at their principal amount outstanding (amortized cost) which approximates the lower of cost or market, net of unearned discount. Interest on these loans is accrued and credited to interest income based upon the daily principal amount outstanding. The Company provides an allowance for credit losses from the date of origination to the date of securitization. The allowance is shown as a reduction to loans. The Company accrues interest on loans until the earlier of an account being charged-off or becoming 120 days delinquent. Loans, net includes dealer premiums which are incentives paid to dealers in connection with the acquisition of loans. Dealer premiums are deferred in accordance with Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. A portion of the dealer premiums are refundable to the Company in the event of loan prepayment or default. On January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities (SFAS 125). The adoption of SFAS 125 had the effect of reducing fiscal 1997 net earnings by $1,311,000 or $0.10 per share and increasing retained earnings by $941,000. (f) Accrued Interest Receivable Accrued interest receivable represents interest earned but not collected on loans held for sale. (g) Property, Equipment, and Leasehold Improvements, Net Property, equipment, and leasehold improvements are recorded at cost. Depreciation is determined on accelerated methods over the estimated useful lives of the respective assets. (h) Retained Interest in Securitized Assets and Gain (Loss) on Sales of Loans The Company acquires loans with the primary intention of reselling them as asset-backed securities through securitizations. In the securitization transactions, the Company sells a portfolio of loans to a wholly owned subsidiary ("SPS") which has been established for the limited purpose of buying and reselling the Company's loans. The SPS transfers the same loans to a trust vehicle (the "Trust"), which issues interest-bearing asset-backed securities (the "Certificates"). The Certificates are generally sold to investors in the public market. The Company provides credit enhancement for the benefit of the investors in the form of a specific cash account ("Spread Account") held by the Trust. The Spread Account is required by the servicing agreement (the Company's servicing agreements are collectively referred to as the "Pooling and Servicing Agreements") to be maintained at specified levels. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- At the closing of each securitization, the Company allocates its basis in the loans between the portion of the loans sold through the certificates and the portion of the loans retained from the securitizations ("Residuals" and "Servicing Assets") based on the relative fair values of those portions at the date of the sale. The fair value is based upon the cash proceeds received for the loans sold and the estimated fair value of the Residuals and Servicing Assets. Residuals consist of (a) the fair value of cash held in the Spread Account and (b) the excess servicing receivables ("ESRs"). ESRs represent the discounted cash flows to be received by the Trust in the future and dealer premium rebates less a discounted allowance for estimated credit losses. Servicing Assets represent the present value benefit derived from retaining the right to service loans securitized in excess of adequate servicer compensation. The excess of the cash received over the basis allocated to the loans sold, less transaction costs, and hedging gains and losses, equals the net gain on sale of loans recorded by the Company. The Company recognizes unrealized gains or losses attributable to the change in the fair value of the Residuals, which are recorded as "available-for-sale" securities, net of related income taxes as a separate component of shareholders' equity until realized. The Company is not aware of an active market for the purchase or sale of residuals, and accordingly, the Company determines the estimated fair value of the Residuals by discounting the expected cash flows released from the Spread Account (the cash out method) using a discount rate which the Company believes is commensurate with the risks involved. The Company has utilized discount rates ranging from 9.00% to 11.50% on the estimated cash flows released from the Spread Account to value the Residuals. The Annual Percentage Rate ("APR") on the loans is relatively high in comparison to the pass through rate on the certificates, accordingly, the Residuals described above are a significant asset of the Company. In determining the fair value of the Residuals described above, the Company must estimate the future rates of prepayments, delinquencies, defaults and default loss severity as they impact the amount and timing of the estimated cash flows. The Company estimates prepayments by evaluating historical prepayment performance of comparable loans and the impact of trends in the economy. The Company has used annual prepayment estimates ranging from 20.0% to 26.5%. The Company estimates defaults and default loss severity using available historical loss data for comparable loans and the specific characteristics of the loans purchased by the Company. The Company used default losses of 3.0% to 6.3% for Tier I loans and 12.0% to 15.0% for Tier II loans as a percentage of the original principal balance over the life of the loans. The Company receives periodic base servicing fees for the servicing and collection of the loans. In addition, the Company is entitled to the cash flows from the Residuals that represent collections on the loans in excess of the amounts required to pay the Certificate principal and interest, the base servicing fees and certain other fees such as credit enhancement fees. In general, at the end of each collection period, the aggregate cash collections from the loans are allocated first to the base servicing fees, then to the Certificateholders for interest at the pass-through rate on the certificates plus principal as defined in the Pooling and Servicing Agreements, and finally to the credit enhancement fees. If the amount of cash required for the above allocations exceeds the amount collected during the collection period, the shortfall is drawn from the Spread Account. If the cash collected during the period exceeds the amount necessary for the above allocations, and the related Spread Account is not at the required level, the excess cash collected is retained in the Spread Account until the specified level is achieved. The cash in the Spread Accounts is restricted from use by the Company. Once the required Spread Account level is achieved, the excess is released to the Company. Cash held in the various Spread Accounts is invested in high quality liquid investment securities, as specified in the Pooling and Servicing Agreements. The specified credit enhancement levels are defined in the Pooling and Servicing Agreements as the Spread Account balance expressed generally as a percentage of the current collateral principal balance. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- An other than temporary impairment adjustment to the carrying value of the Residuals may be required if the present value of an individual Residual (the pool by pool method), discounted at a risk free rate, is less than its carrying value. Other than temporary impairment adjustments are recorded as a component of gain on sales of loans, net. (i) Servicing Assets Servicing Assets are the Company's present value benefit derived from retaining the right to service loans securitized in excess of adequate servicer compensation. Servicing Assets are recognized as a component of gain on sales of loans, net. Accretion of related discount to present value is recognized as a component of interest income. Servicing Assets are carried at their amortized cost and is included in other assets. Impairment is measured using relative fair value of the individual Servicing Assets and recognized through a valuation allowance. Impairment adjustments are recorded as a component of gain on sales of loans, net. (j) Common Stock In election of directors, the holders of Class B Common Stock are entitled to five votes per share and Class A Common Stock are entitled to one vote per share. On all matters other than the election of directors, holders of Class B and A have one vote per share and vote as a single class. The Company's charter provides that shares of Class B Common Stock convert automatically to shares of Class A Common Stock on a share-for-share basis upon transfer outside a prescribed group of initial holders and certain affiliates. Pursuant to such provision, 344,964 shares of Class B Common Stock were converted to shares of Class A Common Stock during fiscal 1998. (k) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (l) Amounts Due to Trusts Amounts due to trusts represent monies collected but not paid to the trustee for principal and interest remittances as well as recovery payments in respect of securitized loans. All amounts collected by the Company are remitted to the trustee within two business days, and subsequently distributed by the trustee to the investors, servicer, and credit enhancers on a monthly basis. (m) Servicing Fees, Net Servicing fees, net include the contractual fee, typically one percent of loans serviced, earned from each trust plus the accretion of discounted retained interest in securitized assets. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- (n) Hedging Loan production is hedged periodically to such time as the next securitization is estimated to occur. Securitizations of the Tier I portfolio occur approximately every three months. The primary hedging vehicle is a short sale of Treasury Notes having a maturity approximating the average maturity of the loan production during the relevant period. At such time as a securitization is committed, the hedge is covered by the purchase of a like volume of Treasury Notes. Gains or losses on the hedge are recognized concurrently with the gain or loss at securitization. (o) Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS 128). SFAS 128 provides computation, presentation, and disclosure requirements for earnings per share and supersedes Accounting Principles Board Opinion 15. Basic EPS for fiscal 1998, 1997, and 1996 have been computed on the basis of the weighted average number of common shares outstanding. The effect of stock options not exercised during the periods presented are anti-dilutive and therefore not included in diluted earnings per share. The initial public offering was completed on August 7, 1995. Shares outstanding from August 7, 1995, through September 30, 1995, were assumed to be outstanding for the entire three months ended September 30, 1995. (p) Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income (SFAS 130), which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all nonowner changes in equity. The Statement is effective for fiscal years beginning after December 15, 1997 with earlier application permitted. The Company elected to adopt SFAS 130 as of June 30, 1998, and the Statement had no impact on the financial condition or results of operations. (q) Reclassification Certain amounts for the prior periods have been reclassified to conform to the current presentation. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- (2) Loans, Net Loans, net are as follows (in thousands, except average loan balance) at: - - -------------------------------------------------------------------------------- June 30, ------------------------- 1998 1997 - - -------------------------------------------------------------------------------- Principal balance of Tier I loans held for sale, net of unearned discount $ 108,159 90,331 Principal balance of Tier II loans held for sale, net of unearned discount 7,624 19,829 Other loans held for sale 171 6,227 Loans in process (154) 1,189 Dealer premiums 4,375 4,360 Allowance for credit losses (1,916) (780) - - -------------------------------------------------------------------------------- $ 118,259 121,156 - - -------------------------------------------------------------------------------- Activity in the allowance for credit losses on loans held for sale (in thousands): - - -------------------------------------------------------------------------------- Year ended June 30, ---------------------------------- 1998 1997 1996 - - ------------------------------------------------------------------------------- Balance at the beginning of the period $ 780 1,099 453 Charge-offs (10,635) (7,361) (4,556) Recoveries 3,721 2,854 2,327 Provision for estimated credit losses 8,050 4,188 2,875 - - ------------------------------------------------------------------------------- Balance at the end of the period $ 1,916 780 1,099 - - ------------------------------------------------------------------------------- (cont'd) Loans serviced are as follows (in thousands) at: - - -------------------------------------------------------------------------------- June 30, -------------------------------- 1998 1997 - - -------------------------------------------------------------------------------- Loans held for sale: Tier I (net of unearned discount) $ 108,159 $ 90,331 Tier II (net of unearned discount) 7,624 19,829 Other 171 6,227 - - -------------------------------------------------------------------------------- 115,954 116,387 - - -------------------------------------------------------------------------------- Securitized loan: Tier I 1,870,750 1,769,903 Tier II 59,231 48,460 - - -------------------------------------------------------------------------------- 1,929,981 1,818,363 - - -------------------------------------------------------------------------------- Other loans serviced 1,482 2,526 - - -------------------------------------------------------------------------------- $ 2,047,417 $1,937,276 ================================================================================ Certain characteristics of loans serviced are as follows at: - - -------------------------------------------------------------------------------- June 30, -------------------------------- 1998 1997 - - -------------------------------------------------------------------------------- Weighted average interest rate (Tier I) 13.09% 13.18% Weighted average interest rate (Tier II) 19.03 19.62% Average loan balance (Tier I) $ 10,755 $10,710 Average loan balance (Tier II) $ 10,637 $11,276 - - -------------------------------------------------------------------------------- During fiscal 1998, loan acquisitions relating to borrowers who reside in Texas, California, and North Carolina totaled 12.5%, 11.6%, and 9.1%, respectively, of all loans acquired. At June 30, 1998, borrowers who reside in Texas, California, and North Carolina totaled 15.0%, 11.0%, and 10.5%, respectively, of the loan servicing portfolio. A significant adverse change in the economic climate in Texas, California, and North Carolina or other states could result in fewer loans held for sale and potentially less revenue. Notional amounts and unrealized losses related to outstanding hedges follow (in thousands) at: - - -------------------------------------------------------------------------------- June 30, -------------------------------- 1998 1997 - - -------------------------------------------------------------------------------- Notional amounts outstanding $ 210,000 $204,000 Unrealized losses on hedging transactions 394 909 - - -------------------------------------------------------------------------------- (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- Notional amounts of $210 million were expected to be closed in September 1998 for the amounts outstanding at June 30, 1998, and $180 million, $18 million and $6 million were closed in September 1997, December 1997, and March 1998, respectively, for amounts outstanding at June 30, 1997. Hedging realized losses were approximately $2,669,000, $6,293,000, and $2,733,000 during fiscal 1998, 1997, and 1996, respectively. (3) Property, Equipment, and Leasehold Improvements, Net Property, equipment, and leasehold improvements, net are as follows (in thousands) at: - - -------------------------------------------------------------------------------- June 30, ----------------------- 1998 1997 - - -------------------------------------------------------------------------------- Property, equipment, and leasehold improvements $ 11,410 4,724 Accumulated depreciation (3,489) (2,574) - - -------------------------------------------------------------------------------- $ 7,921 2,150 ================================================================================ (4) Retained Interest in Securitized Assets The carrying amount of retained interest in securitized assets is as follows (in thousands) at:
- - ----------------------------------------------------------------------------------------------- June 30, -------------------------- 1998 1997 - - ----------------------------------------------------------------------------------------------- Estimated fair value of excess servicing receivable, net of estimated prepayments $ 175,164 145,872 Estimated dealer premium rebates 25,718 26,447 Allowance for estimated credit losses on securitized loans (90,203) (79,923) Discount to present value (33,117) (9,941) - - ----------------------------------------------------------------------------------------------- 77,562 82,455 Spread accounts 68,113 71,744 Accrued interest on securitized loans 13,606 12,807 Unrealized gain 12,312 3,785 - - ----------------------------------------------------------------------------------------------- $ 171,593 170,791 =============================================================================================== Outstanding balance of securitized loans serviced $ 1,929,981 1,818,363 - - ----------------------------------------------------------------------------------------------- Allowance for estimated credit losses as a percentage of securitized loans serviced 4.67% 4.40% - - -----------------------------------------------------------------------------------------------
(cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- Retained interest in securitized assets activity is as follows (in thousands):
- - --------------------------------------------------------------------------------------------------------------------------- Year ended June 30, ----------------------------------- 1998 1997 1996 - - --------------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 170,791 147,024 118,036 Amounts capitalized (including estimated dealer rebates) 49,071 68,922 56,436 Return of excess cash flows, net of present value effect (22,457) (24,619) (37,871) Change in spread accounts (3,631) 8,154 6,176 Change in accrued interest on securitized loans 799 2,353 4,247 Impairment of retained interest in securitized assets (23,636) (34,828) - Change in method of estimating fair value of excess servicing receivable (7,871) - - Change in unrealized gain 8,527 3,785 - - - --------------------------------------------------------------------------------------------------------------------------- Balance at end of period $ 171,593 170,791 147,024 ===========================================================================================================================
Because of current trends with respect to credit loss and delinquency, and their effects on the valuation of the retained interest in securitized assets, the Company recorded a pre-tax charge of $23,636,000 and $34,828,000 for the impairment of the retained interest in securitized assets during fiscal 1998 and 1997, respectively. During the fourth quarter of fiscal 1998, the Company changed the method of estimating the fair value of the retained interest in securitized assets from "cash in" to "cash out." This change in method, which is inseparable from the change in estimate, reduced the retained interest in securitized assets by $7,871,000 as of June 30, 1998, and had the effect of reducing fiscal 1997 net earnings by $4,864,000 or $0.37 per share. The change in estimate adjustment was recorded as a component of gain on sales of loans, net. The weighted average yield, net of fees, on spread accounts was 4.85% and 4.97% at June 30, 1998 and 1997, respectively. (5) Other Assets Other assets are as follows (in thousands) at: - - ------------------------------------------------------------------------- June 30, ----------------------- 1998 1997 - - ------------------------------------------------------------------------- Repossessed assets $ 5,934 5,048 Accrued servicing fees 3,228 2,511 Servicing assets 2,743 1,374 Deferred borrowing fees 1,981 3,078 Income tax receivable 1,577 5,735 Advance of delinquent interest 1,387 1,056 Other 2,430 1,679 - - ------------------------------------------------------------------------- $ 19,280 20,481 ========================================================================= (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- (6) Amounts Due Under Warehouse Facilities At June 30, 1998 and 1997, the Company, through its wholly owned special-purpose subsidiaries, had borrowing arrangements with a financial institution which provided for two and three, respectively, revolving Warehouse Facilities (the Facilities) with an aggregate borrowing capacity of $400 million and $450 million, respectively. Borrowings under these facilities are collateralized by certain loans held for sale. There are separate Facilities for the funding of Tier I auto, Tier II auto, and until March 1998, marine loan acquisitions. Outstanding borrowings of the Facilities at June 30, 1998 and 1997, was $73,123,000 and $44,455,000, respectively. The weighted average cost of funds, net of income earned, of the Facilities for the years ended June 30, 1998 and 1997, was 6.92% and 5.94%, respectively. The cost of funds includes a variable interest rate on the outstanding commercial paper, fees on the used and unused portions of the Facilities, and the amortization of prepaid warehouse fees. The largest portion of the cost of funds related to the Facilities is the variable rate interest on the commercial paper issued by the financing conduit. Upfront warehouse fees are non-recurring costs related to the initial set-up of the Facilities. The Company recognized $6,622,000, $9,991,000, and $12,491,000 of interest expense during the years ended June 30, 1998, 1997, and 1996, respectively, related to amounts due under Warehouse Facilities. The Facilities agreements specify a term of one year and are renewable annually. Both the Tier I auto and Tier II auto Facilities have been renewed for an additional year, and expire in June and July 1999, respectively. (7) Long-term Debt In connection with the Company's initial public offering, the Company issued, in a private placement, $110 million principal amount of 8.53% Senior Notes due 2002. Interest on the Senior Notes is payable semi-annually on February 1 and August 1 of each year, and commenced on February 1, 1996, with annual principal reductions commencing on August 1, 1998. The Senior Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. In April 1996, the Company issued, in a private placement, $46 million 9.99% Senior Subordinated Notes due 2003. Interest on the Senior Subordinated Notes is payable quarterly on March 30, June 30, September 30 and December 30 of each year, and commenced on June 30, 1996. The Senior Subordinated Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. In March 1997, the Company issued, in a private placement, $50 million Series A 7.75% Senior Notes due 2002 and $15 million Series B 7.97% Senior Notes due 2002. Interest on the Senior Notes is payable semi-annually on March 15 and September 15 of each year, commencing September 15, 1997, with a principal reduction occurring on March 15, 2002. The Senior Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. The Company recognized $19,485,000, $15,697,000, and $9,784,000 of interest expense during the years ended June 30, 1998, 1997, and 1996, respectively, related to long-term debt. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- Scheduled contractual maturities of long-term debt at June 30, 1998 follows: - - -------------------------------------------------------------------------- 1999 $ 22,000,000 2000 22,000,000 2001 22,000,000 2002 43,666,667 2003 111,333,333 - - -------------------------------------------------------------------------- Total $ 221,000,000 ========================================================================== (8) Other Revenue and Expenses Other revenue and expenses follow (in thousands): - - -------------------------------------------------------------------------------- Year ended June 30, ------------------------------------- 1998 1997 1996 - - -------------------------------------------------------------------------------- Other revenues: Late charges $ 3,283 2,618 1,922 Origination fees 637 1,019 1,072 Other 167 183 102 - - -------------------------------------------------------------------------------- $ 4,087 3,820 3,096 ================================================================================ Other expenses: Loan expenses 2,691 2,948 2,202 Outside services 3,223 2,767 2,515 Office, telephone and postage 2,522 2,626 2,207 Occupancy 1,769 1,433 891 Equipment 1,190 1,013 839 Other 4,724 4,042 3,202 - - -------------------------------------------------------------------------------- $ 16,119 14,829 11,856 ================================================================================ (9) Income Taxes The composition of income tax expense (benefit) follows (in thousands): - - -------------------------------------------------------------------------------- Year ended June 30, --------------------------------------- 1998 1997 1996 - - -------------------------------------------------------------------------------- Current tax expense (benefit) $ (9,863) (1,644) 9,096 Deferred tax expense 2,007 5,810 5,310 - - -------------------------------------------------------------------------------- $ (7,856) 4,166 14,406 ================================================================================ (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- The effective income tax rate differs from the statutory federal corporate tax rate as follows: - - -------------------------------------------------------------------------------- Year ended June 30, --------------------------- 1998 1997 1996 - - -------------------------------------------------------------------------------- Statutory rate 35.0% 35.0 35.0 State income taxes 3.2 5.5 5.5 Change in commercial domicile 4.9 - - Other 1.3 1.0 - - - -------------------------------------------------------------------------------- Effective rate 44.4% 41.5 40.5 ================================================================================ The composition of deferred income taxes payable is as follows (in thousands):
- - ------------------------------------------------------------------------------------------------ June 30, ------------------------ 1998 1997 - - ------------------------------------------------------------------------------------------------ Deferred tax assets: Net operating losses carryforward $ 11,304 1,841 Allowance for estimated credit losses 732 316 Mark to market and allowance for credit losses 5,713 2,073 - - ------------------------------------------------------------------------------------------------ 17,749 4,230 - - ------------------------------------------------------------------------------------------------ Deferred tax liabilities: Retained interest in securitized assets 22,619 16,556 Unrealized gain on retained interest in securitized assets 4,703 1,533 - - ------------------------------------------------------------------------------------------------ 27,322 18,089 - - ------------------------------------------------------------------------------------------------ Deferred income taxes payable $ 9,573 13,859 ===============================================================================================
The Company believes the deferred tax assets will more likely than not be realized due to the reversal of deferred tax liabilities and expected future taxable income. Accordingly, no deferred tax asset valuation allowance has been established. (10) Estimated Fair Value of Financial Instruments Loans held for sale--Cost approximates fair value as loans are sold shortly after origination. Accrued interest receivable--Cost approximates fair value. Retained interest in securitized assets--Amount carried at fair value. Spread accounts--Cost approximates fair value as the interest rate earned is at a variable rate. Repossessed assets--Cost approximates fair market value. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- All liabilities, except long-term debt--Cost approximates fair value. Long-term debt--Carrying amount of $221,000,000 at June 30, 1998 and 1997, has been calculated to have a fair value of approximately $195,000,000 and $221,000,000, respectively, by discounting the scheduled loan payments to maturity using rates that are believed to be currently available for debt of similar terms and maturities. (11) Commitments and Contingencies Future minimum payments under noncancelable operating leases on premises and equipment with terms of one year or more as of June 30, 1998 are as follows: - - -------------------------------------------------------------------------------- 1999 $ 1,341,000 2000 1,161,000 2001 954,000 2002 911,000 2003 759,000 Thereafter - - - -------------------------------------------------------------------------------- Total $ 5,126,000 ================================================================================ These agreements include, in certain cases, various renewal options and contingent rental agreements. Rental expense for premises and equipment amounted to approximately $1,900,000, $1,572,000, and $1,015,000 for the years ended June 30, 1998, 1997 and 1996, respectively. A majority of the rental expense relates to the lease of the Company's principal offices with a company owned by the majority shareholders of UAC. The Company is party to litigation in the ordinary course of business, often involving claims by consumers under the consumer protection laws described above. Other claims brought are primarily allegations of wrongdoing by the motor vehicle dealer which originated the contract or sold the vehicle financed by the Company. The Company is named as a co-defendant in such actions because of its status as holder of the contract. Such litigation is common for industry participants. The Company is currently a defendant in an action commenced October 23, 1997, in the Common Pleas Court of Cuyahoga County, Ohio, Civil Division, by plaintiff Barohda Rucker. Suit was initially filed against the Company and Jackshaw Chevrolet, Inc. ("Jackshaw"), alleging that Jackshaw committed unfair, deceptive and unconscionable acts in connection with the sale of a vehicle, and further alleging that the Company committed disclosure and other violations of the Ohio Retail Installment Sales Act. Plaintiff seeks rescission of the contract, injunctive relief and damages. Although the suit was considered routine when initiated, the plaintiff has now sought to amend the complaint, asserting class action claims and seeking monetary damages. The class claims relate to the claims set forth in the original complaint and new claims under or related to the Ohio Mortgage Loan Act. The court has not, at this time, granted the motion to amend. The Company is also a defendant in an action brought in the District Court for Boulder County, Colorado, on April 10, 1998, by plaintiff Cristy Waggoner. The suit alleges usury, contending that the retail installment contracts purchased by the Company were, in fact, direct loans by the Company subject to a lower usury limitation. The complaint seeks certification of a class of Colorado residents similarly injured but no class has been certified at this time. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- The Company is a defendant in an adversary action brought in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division on August 23, 1998, by plaintiff, Keith D. Ferrell. The plaintiff alleges the Company overstated the value of its collateral in connection with his Chapter 13 bankruptcy proceedings. The plaintiff has also asserted claims on behalf of a class consisting of similarly situated debtors involved in Chapter 13 proceedings. The plaintiff seeks injunctive relief, actual and punitive damages and attorney fees. Management of the Company, based on advice of outside legal counsel, does not expect any pending proceeding to have a material adverse effect on the Company, and such proceedings are being vigorously defended. (12) Stock-Based Compensation The Company has one stock-based compensation plan, which is described below. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for these plans. Had compensation cost been determined based on the fair value at the grant date for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except share data):
- - -------------------------------------------------------------------------------------------------- June 30, -------------------------------- 1998 1997 1996 - - -------------------------------------------------------------------------------------------------- Net earnings (loss): As reported $ (9,822) 5,882 21,142 Pro forma (10,951) 4,543 19,449 Net earnings (loss) per common share (basic and diluted): As reported (0.74) 0.45 1.60 Pro forma (0.83) 0.34 1.47 ==================================================================================================
The Union Acceptance Corporation 1994 Incentive Stock Plan (Incentive Stock Plan) is the Company's long-term incentive plan for directors, executive officers and other key employees. The Incentive Stock Plan authorizes the Company's Compensation Committee to award executive officers and other key employees incentive and non-qualified stock options and restricted shares of Class A Common Stock. A total of 500,000 shares of Class A Common Stock have been reserved for issuance under the Incentive Stock Plan, of which options for 271,875 shares of Class A Common Stock were granted at an issue price of $16 per share to senior officers upon consummation of the Company's initial public offering of the Class A Common Stock. Options or other grants to be received by executive officers or other employees in the future are within the discretion of the Company's Compensation Committee and are not determinable. Stock options granted under the Incentive Stock Plan are exercisable at such times (not after ten years and one day from the date of the grant) and at such exercise prices (not less than 85% of the fair market value of the Class A Common Stock at date of grant) as the Committee determines and will, except in limited circumstances, terminate if the grantee's employment terminates prior to exercise. The outstanding options' maximum term is ten years. Such options vest over a period of five years, with one-fifth becoming exercisable on each anniversary of the option grant. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions used for grants in 1998, 1997, and 1996; dividend yield of 0.0% for all three years; expected volatility of 100% for all three years; weighted average risk-free interest rates of 5.45%, 6.50%, and 6.41%, respectively; and expected lives of ten years for all three years. A summary of the status of the Company's stock option plans as of June 30, 1998 and 1997 changes during the years ended on those dates is presented below:
- - ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ----------------------- ------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price - - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 314,485 $ 16.02 276,915 $ 16.03 - $ - Options granted 74,000 9.69 39,750 16.00 280,600 16.04 Options exercised - - - - - - Options canceled 19,810 14.63 2,180 17.48 3,685 16.31 - - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at end of year 368,675 $ 14.86 314,485 $ 16.02 276,915 $ 16.03 - - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 8.86 $14.71 $ 14.79 - - -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at June 30, 1998:
- - -------------------------------------------------------------------------------------------------- Options outstanding Options exercisable ---------------------------------------------- ----------------------------- Weighted prices Weighted average remaining Average Average number contractual exercise Number exercise outstanding life price exercisable price - - -------------------------------------------------------------------------------------------------- $ 9.69 67,500 9.10 $ 9.69 3,500 $ 9.69 16.00 298,375 7.27 16.00 109,288 16.00 17.88 2,800 7.53 17.88 1,120 17.88 - - --------------------------------------------------------------------------------------------------- 368,675 7.67 $ 14.86 113,908 $ 15.90 - - ---------------------------------------------------------------------------------------------------
In addition to the options outstanding at June 30, 1998, there were 99,843 shares of Class A Common Stock were available for future grants or awards. The Incentive Stock Plan also provides that each director of the Company who is not an executive officer is automatically granted shares of Class A Common Stock with a fair market value of $15,000 following each annual meeting of shareholders. Shares so granted have a six-month period of restriction during which they may not be transferred. Shares granted under this section of the Incentive Stock Plan totaled 14,694, 5,430, and 11,358 in fiscal 1998, 1997, and 1996, respectively, and compensation cost charged against income was $90,000 in 1998 and 1997, and $180,000 in 1996. (cont'd) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - - -------------------------------------------------------------------------------- (13) Restatement of Consolidated Financial Statements The Company determined in August 1998 that it should have been measuring other than temporary impairment of Retained Interest in Securitized Assets, previously captioned Excess Servicing, on a disaggregate basis (the pool-by-pool method) as opposed to its historical method which measured impairment on an aggregate basis. The adjustments resulting from the measurement of other than temporary impairment on a disaggregate basis were of sufficient significance to require restatement of the consolidated financial statements since the implementation of SFAS 125. This restatement had the effect of reducing fiscal 1997 earnings by $1,890,000 (net of income taxes of $1,288,000) or $0.14 per share. The restatement had no effect on shareholders equity at June 30, 1997. In connection with the restatement, the Company made other adjustments, which were not individually significant, that increased fiscal 1997 net earnings by $372,000 (net of income taxes of $259,000) or $0.03 per share and increased shareholders' equity at June 30, 1997 by $733.000. (14) Quarterly Financial Information (unaudited) Quarterly financial information is as follows (in thousands, except share data):
- - -------------------------------------------------------------------------------------------------- First Second Third Fourth Total Year ended June 30, 1998 - - -------------------------------------------------------------------------------------------------- Interest on loans $ 6,627 $ 6,473 $ 7,133 $ 7,638 $27,871 Interest on spread accounts and restricted cash 1,572 1,461 1,443 1,380 5,856 Interest expense (6,053) (6,167) (6,990) (6,897) (26,107) Provision for estimated credit losses on loans held for sale (1,505) (1,770) (1,900) (2,875) (8,050) - - -------------------------------------------------------------------------------------------------- Net interest margin (deficit) after provision 641 (3) (314) (754) (430) Gain (loss) on sales of loans, net (10,847) 2,020 3,113 (6,212) (11,926) Servicing fees, net 6,286 6,533 6,529 6,789 26,137 Other revenues 1,020 985 1,065 1,017 4,087 - - -------------------------------------------------------------------------------------------------- Total revenues (2,900) 9,535 10,393 840 17,868 - - -------------------------------------------------------------------------------------------------- Salaries and benefits 4,610 4,871 4,815 5,131 19,427 Other expenses 4,013 4,165 4,007 3,934 16,119 - - -------------------------------------------------------------------------------------------------- Operating expenses 8,623 9,036 8,822 9,065 35,546 - - -------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes (4,656) (711) 654 (3,143) (7,856) - - -------------------------------------------------------------------------------------------------- Net earnings (loss) $ (6,867) $ 1,210 $ 917 $ (5,082) $(9,822) ================================================================================================== Net earnings (loss) per common share (basic and diluted) (0.52) 0.09 0.07 (0.38) (0.74) ================================================================================================== Weighted average common shares outstanding $13,216,788 13,227,010 13,231,482 13,231,482 13,226,651 ==================================================================================================
(cont'd) Item 9. Changes in and Disagreements with Accountants on ------------------------------------------------ Accounting and Financial Disclosure ----------------------------------- Not Applicable PART III Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- The information required by this item with respect to directors is incorporated by reference to the information contained under the caption "Election of Directors" in the Company's 1998 Proxy Statement for its 1998 Annual Shareholder Meeting (the "1998 Proxy Statement"). Item 11. Executive Compensation ---------------------- Only the information required by this item to be included with this report is incorporated by reference to the information contained under the caption "Compensation" in the 1998 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The information required by this item is incorporated by reference to the information contained under the captions "Voting Securities and Principal Holders Thereof" and "Election of Directors" in the 1998 Proxy Statement. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- The information required by this item is incorporated by reference to the information contained under the caption "Certain Transactions with Related Persons" in the 1998 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a) List the following documents filed as part of the report: Financial Statements -- Included Under Item 8: Report of KPMG Peat Marwick LLP, Independent Auditors Consolidated Balance Sheets as of June 30, 1998 and 1997 Consolidated Statements of Earnings for the Years Ended June 30, 1998, 1997, 1996 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997, 1996 Consolidated Statement of Shareholders' Equity for the Years Ended June 30, 1998 and 1997 (b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the quarter ended June 30, 1998 (c) The exhibits filed herewith or incorporated by reference herein are set forth following the signature page which appears on page 62. EXHIBIT INDEX Exhibit No. Description Page (Ex. No. Cross Reference)(1) - - ------------------------------------------------------------------------------- 3.1 Registrant's Articles of Incorporation, as amended S-1, 3.1 and restated. 3.2 Registrant's Code of By-Laws, as amended and S-1, 3.2 restated. 3.3 Form of Share Certificate for Class A Common Stock. S-1, 3.3 4.1 Articles V and VI of the Registrant's Articles of S-1, 4.1 Incorporation respecting the terms * of shares of Common Stock, are incorporated by reference to the Registrant's Articles of Incorporation filed hereunder as Exhibit 3.1 4.2 Article III - "Shareholder Meetings," Article VI - S-1, 4.2 "Certificates for Shares," Article VII - "Corporate Books and Records - Section 3" and Article X - "Control Share Acquisitions Statute" of the Registrant's Code of By-Laws are incorporated by reference to the Registrant's Restated Code of By-Laws filed herewith as Exhibit 3.2. 4.3 Transfer and Administration Agreement among S-1, 4.3 Enterprise Funding Corporation, Union Acceptance Funding Corporation and Union Acceptance Corporation, dated as of June 27, 1995 ("UAFC Transfer and Administration Agreement"). 4.3(a) Amendment No. 1 to UAFC Transfer and Administration 10Q 9/95 Agreement dated September 8, 1995 4.3(a) 4.3(b) Amendment No. 2 to UAFC Transfer and Administration 10Q 9/95 Agreement dated September 29, 1995 4.3(b) 4.3(c) Letter Agreement regarding UAFC Transfer and 10K 1996 Administration Agreement dated November 13, 1995 4.3(c) 4.3(d) Amendment No. 3 to UAFC Transfer and Administration 10K 1996 Agreement dated March 1, 1996 4.3(d) 4.3(e) Letter Agreement UAFC regarding UAFC Transfer and 10K 1996 Administration Agreement dated May 30, 1996 4.3(e) 4.3(f) Amendment No. 4 to UAFC Transfer and Administration 10K 1996 Agreement dated September 5, 1996 4.3(f) 4.3(g) Amendment No. 5 to UAFC Transfer and Administration 10K 1997 Agreement dated October 31, 1996 4.3(g) 4.3(i) Amendment No. 6 to UAFC Transfer and Administration 10Q 12/96 Agreement dated December 23, 1996 4.1 4.3(h) Amendment No. 7 to UAFC Transfer and Administration 10K 1997 Agreement dated March 31, 1997 4.3(h) 4.3(j) Letter Agreement No. 3 with respect to UAFC Transfer 10K 1997 and Administration Agreement, dated April 28, 1997 4.3(j) 4.4 Note Purchase Agreement between Union Acceptance 10K 1995 Corporation and certain lenders dated as of August 7, 4.4 1995. 4.4(a) Amendment No. 1 to Note Purchase Agreement dated 10Q 12/95 November 22, 1995 4.4(a) 4.5 Transfer and Administration Agreement among S-1, 4.5 Enterprise Funding Corporation, Performance Funding Corporation and Union Acceptance Corporation, dated as of July 24, 1995. 4.5(a) Amendment No. 1 to Transfer and Administration 10Q 12/95 Agreement dated September 8, 1995 4.5(a) 4.5(b) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated October 12, 1995 4.5(b) 4.5(c) Amendment No. 2 to Transfer and Administration 10K 1996 Agreement dated May 10, 1996 4.5(c) 4.5(d) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated July 11, 1996 4.5(d) 4.5(e) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated August 20, 1996 4.5(e) 4.5(f) Amendment No. 3 to Transfer and Administration 10Q 12/96 Agreement, dated December 23, 1996 4.2 4.5(g) Letter Agreement No. 4 to Transfer and ____ Administration Agreement dated April 25, 1997 4.5(h) Amendment No. 5 to Transfer and Administration ____ Agreement dated June 6, 1997 4.5(i) Letter Agreement with regard to Transfer and ____ Administration Agreement dated June 24, 1997 4.5(j) Amendment No. 6 to Transfer and Administration Agreement ____ dated as of July 29, 1997 4.6 Note Purchase Agreement dated as of April 3, 1996 10Q 3/96 among Union Acceptance Corporation and several 4.1 purchasers of Senior Subordinated Notes due 2003 4.7 Note Purchase Agreement, dated March 24, 1997, among 10Q 3/97 Union Acceptance Corporation and certain purchasers 10.1 of Senior Notes, due 2002. 4.8(a) Note Purchase Agreement, dated April 3, 1997 among ____ UAC Boat Funding Corp., Enterpirse Funding Corporation and NationsBank, N.A. 4.8(b) Security Agreement, dated April 3, 1997, among UAC Boat ____ Funding Corp., Enterpirse Funding Corp., et. al. 9(a) Voting Trust Agreement among Richard D. Waterfield, S-1, 9(a) as trustee, and certain existing shareholders of Union Holding Company, Inc., dated June 10, 1994. 9(b) First Amendment to Voting Trust Agreement dated June S-1, 9(b) 1, 1995. 10.1 Remittance Processing Agreement by and between Union S-1, 10.5 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.2 Mail and Printing Services Agreement by and between S-1, 10.6 Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.3 Telephone Equipment Lease Agreement by and between S-1, 10.7 Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.4 Telecommunications Agreement by and between Union S-1, 10.8 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.5 Communications Equipment and Software License by and S-1, 10.9 between Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.6 Software License and Maintenance Agreement by and S-1, 10.10 between Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.7 Loan Servicing Agreement by and between Union Federal S-1, 10.11 Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.8 General Subservicing Agreement by and between Union S-1, 10.12 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated as of January 1, 1995. 10.9 Loan Collection Agreement by and between Union S-1, 10.13 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.10 Letter respecting Terms of Bank Accounts from Union S-1, 10.14 Federal Savings Bank of Indianapolis to Union Acceptance Corporation dated May 25, 1994. 10.11 Supplement to Account Agreement Re: Drafts by and S-1, 10.15 between Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.12 Tax Allocation Agreement by and between Union Holding S-1, 10.16 Company, Inc. and its subsidiaries dated February 1, 1991, as amended. 10.13 Form of Remote Outsourcing Agreement by and between S-1, 10.18 Systematics Financial Services, Inc. and Union Acceptance Corporation. 10.13(a) Letter Agreement by and among Systematics Financial S-1, 10.18(a) Services, Inc., Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated July 13, 1994 respecting Provision of Data Processing Services. 10.13(b) Memorandum respecting Billing Procedure in connection S-1, 10.18(b) with Remote Outsourcing Agreement from Systematics System Financial Services, Inc. to Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated October 25, 1994. 10.14 Union Acceptance Corporation Annual Bonus Plan For S-1, 10.23 Senior Officers. 10.15 Union Acceptance Corporation Incentive Stock Plan. S-1, 10.24 10.16 Letter respecting Access to Records from Union S-1, 10.25 Acceptance Corporation to Union Federal Savings Bank of Indianapolis dated September 13, 1994. 10.17 Letter Agreement by and between Union Federal S-1, 10.26 Savings Bank of Indianapolis and Union Acceptance Corporation dated December 14, 1994 amending and initiating terms of certain Inter-Company Agreements. 10.18 Letter respecting terms and conditions of bank S-1, 10.27 accounts from Union Federal Savings Bank of Indianapolis to Union Acceptance Corporation dated December 16, 1994. 10.19 Lease Agreement between Waterfield Mortgage Company, 10Q 12/95 Incorporated, and Union Acceptance Corporation dated 10.19 as of November 1, 1995 10.20 Purchase Agreement among Union Acceptance Funding 10Q 3/96 Corporation, Union Acceptance Corporation and Union 10.1 Federal Savings Bank of Indianapolis dated as of January 18, 1996 10.21 Sublease Agreement between Union Acceptance 10K 1996 Corporation and Union Federal Savings Bank of 10.26 Indianapolis dated as of August 1, 1996 21 Subsidiaries of the Registrant _____ 23 Consent of KPMG Peat Marwick LLP. _____ 27 Financial Data Schedule _____ - - -------------------- (1) Exhibits set forth above that are not included with this filing are incorporated by reference to the Registrant's previously filed registration statement or reports (and the indicated exhibit number) as indicated in the right hand column above, as follows: S-1 -- Refers to Registrant's Registration Statement on Form S-1 (Reg. No. 33-82254 10K 1995 -- Refers to Registrant's Form 10-K for the year ended June 30, 1995 10K 1996 -- Refers to Registrant's Form 10-K for the year ended June 30, 1996 10Q (month/year) -- Refers to Registrant's Form 10-Q for the quarter ended at the end of such month in such calendar year SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNION ACCEPTANCE CORPORATION September 28, 1998 By: /S/ John M. Stainbrook John M. Stainbrook President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date (1) Principal Executive Officer: ) ) /s/ John M. Stainbrook President and Chief ) -------------------------------------- Executive Officer ) John M. Stainbrook ) (2) Principal Financial/Accounting Officer: ) ) Treasurer and ) /s/ Rick A. Brown Chief Financial ) -------------------------------------- Officer ) Rick A. Brown ) ) (3) A Majority of the Board of Directors: ) ) /s/ Howard L. Chapman Director ) -------------------------------------- ) Howard L. Chapman ) ) /s/ John M. Davis Director ) September 28, 1998 -------------------------------------- ) John M. Davis ) ) /s/ Fred M. Fehsenfeld Director ) -------------------------------------- ) Fred M. Fehsenfeld ) ) /s/ Donald A. Sherman Director ) -------------------------------------- ) Donald A. Sherman ) ) /s/ John M. Stainbrook Director ) -------------------------------------- ) John M. Stainbrook ) ) Director ) -------------------------------------- ) Jerry D. Von Deylen ) ) Director ) -------------------------------------- ) Richard D. Waterfield ) ) /s/ Thomas M. West Director ) -------------------------------------- ) Thomas M. West ) )
EX-4.9(A) 2 NOTE PURCHASE AGREEMENT - - -------------------------------------------------------------------------------- NOTE PURCHASE AGREEMENT among UNION ACCEPTANCE FUNDING CORPORATION as Issuer, ENTERPRISE FUNDING CORPORATION, as Company, and NATIONSBANK, N.A., as Agent and Bank Investor Dated as of September 18, 1998 - - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS SECTION 1.1. Definitions.....................................................1 ARTICLE II FUNDINGS; THE NOTE SECTION 2.1. Funding; The Note............................................8 SECTION 2.2. Sharing of Payments, Etc....................................11 SECTION 2.3. Right of Setoff.............................................12 SECTION 2.4. Fees........................................................12 ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ISSUER SECTION 3.1. Representations and Warranties of the Issuer................12 SECTION 3.2. Covenants of the Issuer.....................................15 ARTICLE IV INDEMNIFICATION SECTION 4.1. Indemnity...................................................21 SECTION 4.2. Indemnity for Taxes, Reserves and Expenses....................................................23 SECTION 4.3. Other Costs, Expenses and Related Matters.....................................................26 ARTICLE V THE AGENT; BANK COMMITMENT SECTION 5.1. Authorization and Action....................................26 SECTION 5.2. Agent's Reliance, Etc.......................................28 SECTION 5.3. Credit Decision.............................................29 SECTION 5.4. Indemnification of the Agent................................29 SECTION 5.5. Successor Agent.............................................30 SECTION 5.6. Payments by the Agent.......................................30 SECTION 5.7. Bank Commitment; Assignment to Bank Investors...................................................31 1 Page ARTICLE VI MISCELLANEOUS SECTION 6.1. Notices, Etc.................................................36 SECTION 6.2. Successors and Assigns.......................................37 SECTION 6.3. Severability Clause..........................................39 SECTION 6.4. Amendments...................................................39 SECTION 6.5. Governing Law................................................39 SECTION 6.6. No Bankruptcy Petition Against the Company......................................................39 SECTION 6.7. Setoff.......................................................39 SECTION 6.8. No Recourse..................................................40 SECTION 6.9. Further Assurances...........................................40 SECTION 6.10. No Recourse Against Stockholders, Officers or Directors......40 SECTION 6.11. Counterparts.................................................41 SECTION 6.12. Headings.....................................................41 EXHIBITS EXHIBIT A Form of Assignment and Assumption Agreement A-1 EXHIBIT B Form of Initial Funding Request B-1 EXHIBIT C Form of Prefunding Notice C-1 EXHIBIT D Form of Note D-1 NOTE PURCHASE AGREEMENT NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of September 18, 1998, among ENTERPRISE FUNDING CORPORATION, a Dela ware corporation, as lender (together with its successors and assigns, the "Com pany"), UNION ACCEPTANCE FUNDING CORPORATION, a Delaware corpora tion, as borrower (together with its successors and assigns, the "Issuer") and NATIONSBANK, N.A., a national banking association ("NationsBank"), as agent for the Company and the Bank Investors (in such capacity, together with its succes sors, the "Agent") and as a Bank Investor. W I T N E S S E T H : WHEREAS, subject to the terms and conditions of this Agreement and the Security Agreement, the Issuer desires to obtain funds from the Company or the Bank Investors, as applicable, and to evidence the obligation to repay such amounts, together with interest thereon, through the issuance of the Note; WHEREAS, pursuant to the Security Agreement, the Issuer will pledge to the Collateral Agent for the benefit of the Secured Parties its interest in the Collateral, including the Issuer's security interest in the Contracts; NOW THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION I.1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings specified in the Security Agreement. The following terms shall have the meanings specified below, and shall include in the singular number the plural and in the plural number the singular: "Administrative Agent" shall mean NationsBank, N.A., as administra tive agent for the Company. "Affiliate" shall have the meaning specified in the Security Agreement. "Agent" means NationsBank, N.A., in its capacity as agent for the Company and the Bank Investors, and any successor thereto appointed pursuant to Article V of this Agreement. "Agreement" shall mean this Note Purchase Agreement, as it may from time to time be amended, supplemented or otherwise modified in accordance with the terms hereof. "Assignment Amount" with respect to a Bank Investor shall mean at any time an amount equal to the lesser of (i) such Bank Investor's Pro Rata Share of the Net Investment at such time, (ii) such Bank Investors Pro Rata Share of the aggregate Outstanding Balance of Receivables (excluding Defaulted Receivables) at such time, and (iii) such Bank Investor's unused Commitment. "Assignment and Assumption Agreement" means an Assignment and Assumption Agreement substantially in the form of Exhibit A attached hereto. "Bank Investors" shall mean NationsBank, N.A. and each other financial institution identified as such on the signature pages hereof and their respective successors and assigns. "Carrying Costs" shall have the meaning specified in the Security Agreement. "Closing Date" shall mean September 18, 1998. "Collateral" shall have the meaning set forth in the Security Agree ment. "Collateral Agent" shall mean NationsBank, N.A., or any successor thereto, as Collateral Agent under the Security Agreement. "Collection Agent" shall mean UAC as collection agent, or any of its successors or assigns. "Collections" shall have the meaning specified in the Security Agreement. "Commercial Paper" shall mean promissory notes of the Company issued by the Company in the commercial paper market. "Commitment" means for each Bank Investor, the commitment of such Bank Investor to make acquisitions from the Issuer or the Company in accordance herewith in an amount not to exceed the dollar amount set forth opposite such Bank Investor's signature on the signature page hereto under the heading "Commitment". "Commitment Termination Date" shall have the meaning specified in the Security Agreement. "Common Stock" shall mean 1000 shares of the Issuer's common stock, par value $1.00 per share. "Company" shall mean Enterprise Funding Corporation, a Delaware corporation, together with its successors and assigns. "Conduit Assignee" shall mean any commercial paper conduit administered by NationsBank and designated by NationsBank from time to time to accept an assignment of the Company of all or a portion of the Net Investment. "Credit and Collection Policy" shall have the meaning specified in the Security Agreement. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall have the meaning specified in the Security Agreement. "Facility Limit" shall mean $450,000,000. "Funding" shall mean the Initial Funding and any Prefunding Deposit. "Funding Date" shall mean the date upon which any Funding occurs. 3 "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements of the Financial Accounting Standards Board or in such other statements or pronouncements by such other entity as approved by a significant segment of the accounting profession, which are in effect from time to time. "Indemnified Amounts" shall have the meaning set forth in Section 4.1 hereof. "Indemnified Parties" shall have the meaning set forth in Section 4.1 hereof. "Initial Funding" shall have the meaning set forth in Section 2.1(a) hereof. "Initial Funding Request" shall have the meaning specified in 2.1(a) hereof. "Interest Component" shall have the meaning specified in the Security Agreement. "Issuer" shall mean Union Acceptance Funding Corporation, a Delaware corporation, and its successors and permitted assigns. "Law" shall have the meaning specified in the Security Agreement. "Liquidity Provider Agreement" shall mean the agreement between the Company and the Liquidity Provider evidencing the obligation of the Liquidity Provider to provide liquidity support to the Company in connection with the issuance of Commercial Paper. "Liquidity Provider" shall mean the Person or Persons who will provide liquidity support to the Company in connection with the issuance by the Company of its Commercial Paper, and shall include any Person which acquires a participation interest therein. 4 "Majority Investors" shall have the meaning specified in Section 5.1(a) hereof. "Merrill" shall have the meaning specified in Section 6.10. "Moody's" shall mean Moody's Investors Service, Inc. "Net Asset Test" shall mean a test that is satisfied if the Net Invest ment less the quotient of (a) the amount on deposit in the Prefunding Account Account and (b) 100% less the quotient of (x) the percentage used to determine the Required Reserve Account Amount and (y) the Noteholder's Percentage is equal to or less than the product of the Noteholder's Percentage and the Net Receivables Balance. "Net Investment" shall have the meaning specified in the Security Agreement. "Note" shall mean the note issued to the Company pursuant to Section 2.1 of this Agreement. "Obligor" shall have the meaning set forth in the Security Agreement. "Official Body" shall have the meaning set forth in the Security Agreement. "Other Transferor" shall mean any Person other than the Issuer that has entered into a receivables purchase agreement, transfer and administration agreement, security agreement or other similar agreement with the Company. "Outstanding Balance" shall have the meaning specified in the Security Agreement. "Person" shall have the meaning specified in the Security Agreement. "Potential Termination Event" shall have the meaning specified in the Security Agreement. "Prefunding Deposit" shall have the meaning specified in Section 2.1(c) hereof. 5 "Prefunding Notice" shall have the meaning specified in Section 2.1 hereof. "Pro Rata Share" means, for a Bank Investor, the Commitment of such Bank Investor divided by the sum of the Commitments of all Bank Investors. "Remittance Date" shall have the meaning specified in the Security Agreement. "Requirements of Law" for any Person means the certificate of incorporation or articles of association and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or determination of an arbitrator or Governmental Authority, in each case applicable to or binding upon such Person or to which such Person is subject, whether Federal, state or local (including, without limitation, usury laws, the Federal Truth in Lending Act and Regulation Z and Regulation B of the Board of Governors of the Federal Reserve System). "Sale and Purchase Agreement" shall have the meaning specified in the Security Agreement. "S&P" shall mean Standard & Poor's Ratings Services, a Division of The McGraw-Hill Companies. "Secured Parties" shall have the meaning specified in the Security Agreement. "Security Agreement" shall mean the Security Agreement, dated as of September 18, 1998 among UAC, as Collection Agent, the Issuer, the Collateral Agent, the Insurer and the Company. "Servicing Fee" shall have the meaning specified in the Security Agreement. "Subsidiary" shall mean any corporation more than 50% of the outstanding voting securities of which shall at any time be owned or controlled, 6 directly or indirectly, by the Issuer or one or more Subsidiaries, or any similar business organization which is so owned or controlled. "Termination Date" shall have the meaning specified in the Security Agreement. "Termination Event" shall have the meaning specified in the Security Agreement. "Transaction Costs" shall have the meaning specified in Section 4.3 hereto. "Transaction Documents" shall have the meaning specified in the Security Agreement. "UAC" shall mean Union Acceptance Corporation, an Indiana corporation, and its permitted successors and assigns. "Uniform Commercial Code" or "UCC" shall mean, with respect to any state, the Uniform Commercial Code as from time to time in effect in such state. ARTICLE II FUNDINGS; THE NOTE SECTION II.1. Funding; The Note. (a) Initial Funding. Upon the terms and subject to the conditions herein set forth, the Company may, at its option, or the Bank Investors shall, if so requested by the Company, make an initial advance (the "Initial Funding") to the Issuer on or after the Closing Date and prior to the Termination Date. In connection with the Initial Funding, the Issuer shall, by notice in the form of Exhibit B hereto (the "Initial Funding Request") request such Funding at least one Business Day prior to the proposed date of such Initial Funding. Such notice shall specify the proposed Funding Amount (which shall be at least $1,000,000) and the proposed date of the Initial Funding. (b) Conditions to Initial Funding. Neither the Company nor 7 the Bank Investors shall, and shall have no obligation to, advance any funds to the Issuer in connection with the Initial Funding if on the date of the Initial Funding, (i) either (x) if the Initial Funding is to be made by the Company, the sum of the Net In vestment after giving effect to the Initial Funding plus the Interest Component of Commercial Paper issued in connection with such Funding would exceed the Facility Limit, or (y) if the Initial Funding is to be made by the Bank Investors, the Net Investment, after giving effect to the Initial Funding, would exceed the Facility Limit, (ii) after giving effect to such Funding, the Net Asset Test is not satisfied, (iii) if the Net Investment is funded by the Company, the Company is unable to obtain funds therefor in the commercial paper market or under the Liquidity Provider Agreement, (iv) the Issuer shall have failed to deposit any Required Yield Deposit Amount into the Yield Supplement Account required pursuant to Section 2.13 of the Security Agreement, (v) the Issuer is not in compliance with Section 5.3 of the Security Agreement, (vi) the Policy shall not be in full force and effect or the Insurer shall have failed to make any required payment thereunder; (vii) the Issuer shall not have deposited in the Reserve Account, or shall not have given irrevocable instructions to the Agent to withhold from the proceeds of the Initial Funding, an amount equal to the amount necessary to cause the amount on deposit in the Reserve Account to equal the Required Reserve Account Amount (calculated as if the Initial Funding shall have occurred); (viii) a Potential Termination Event or the Termination Date shall have oc curred and be continuing, or (ix) the conditions precedent set forth in Section 4.1 of the Security Agreement shall not be satisfied. (c) Prefunding Deposits. On the Business Day prior to each Prefunding Date, the Issuer shall provide the Agent and the Insurer with a written notice in substantially the form of Exhibit C (a "Prefunding Notice") setting forth the Issuer's reasonable best estimate of the aggregate amount of Receivables projected to be acquired or originated by UAC and purchased by the Issuer pursuant to the Sale and Purchase Agreement during the period from such Prefunding Date to but not including the next succeeding Prefunding Date. The Company and the Bank Investors agree that on the related Prefunding Date, provided that (i) no Potential Termination Event has occurred, (ii) the Issuer shall have made the Interest Reserve Deposit to the Prefunding Interest Reserve Account as required by Section 2.11(b) of the Security Agreement on such day, (iii) after giving effect to any such deposit (x) if the Net Investment is held by the Company, the Net Investment plus the aggregate Interest Component of Related Commercial Paper (as estimated by the Agent and provided to the Issuer), after giving effect to such Prefunding Deposit, would not 8 exceed the Facility Limit, or (y) if the Net Investment is held by the Bank Investors, the Net Investment, after giving effect to such Prefunding Deposit, would not exceed the Facility Limit, (iv) after giving effect to such Prefunding Deposit, the Net Asset Test shall be satisfied, (v) the Collection Agent shall be in compliance with the re quirements of Section 5.3 of the Security Agreement in respect of such Prefunding Date, (vi) the Issuer shall have deposited all Required Yield Deposit Amounts into the Yield Supplement Account required pursuant to Section 2.13 of the Security Agreement, (vii) the Policy shall continue to be in full force and effect and the Insurer shall have made all required payments thereunder, (viii) the amount on deposit in the Reserve Account shall not be less than the Required Reserve Account Amount (calculated (x) immediately prior to such Prefunding Date and (y) as if such Prefunding Deposit shall have occurred), and (ix) the Company (if the deposit is to be made by the Company) shall be able to obtain funds therefor in the commercial paper market, the Company or the Bank Investors, if the Company is not so able to obtain funds and the Company shall have assigned the Note to the Bank Investors pursuant to Section 5.7 hereof, shall deposit in the Prefunding Account an amount equal to the product of the Noteholder's Percentage and the aggregate amount of Receivables so projected to be acquired or originated (such product, the "Prefunding Deposit"). Funds equal to the product of (i) the percentage used to determine the Required Reserve Account Amount and (ii) the Prefunding Deposit divided by the Noteholder's Percentage will be removed from the Prefunding Account and transferred to the Reserve Account. (d) Initial Funding Request and Prefunding Notices Irrevocable. The Initial Funding Request and any Prefunding Notice shall be irrevo cable and binding on the Issuer and the Issuer shall indemnify the Company and the Bank Investors against any loss or expense incurred by the Company or the Bank Investors, either directly or indirectly (including through the Liquidity Provider Agreement) as a result of any failure by the Issuer to complete the requested Funding including, without limitation, any loss (including loss of anticipated profits) or expense incurred by the Company or the Bank Investors, either directly or indirectly (including pursuant to the Liquidity Provider Agreement), by reason of the liquidation or reemployment of funds acquired by the Company (or the Liquidity Provider) (including, without limitation, funds obtained by issuing commercial paper or promissory notes or obtaining deposits or loans from third parties) for the Company or the Bank Investors to complete the requested Funding. 9 (e) Disbursement of Funds. (i) No later than 4:30 p.m. (New York City time) on the date on which the Initial Funding is to be made, the Company or the Bank Investors, as applicable, will make available to the Issuer in immediately available funds, the amount of the Funding to be made on such day by remitting the required amount thereof to an account of the Issuer as designated in the related notice requesting such Funding. (ii) No later than 4:30 p.m. (New York City time) on the date on which any Prefunding Deposit is to be made, the Company or the Bank Investors, as applicable, will deposit in immediately available funds, the amount of the Funding to be made on such day by remitting the required amount thereof to the Prefunding Account. (f) The Note. (i) The Issuer's obligation to pay the principal of and interest on all amounts advanced by the Company or the Bank Investors pursuant to any Funding shall be evidenced by a single note of the Issuer (the "Note") which shall (1) be dated the Closing Date; (2) be in the stated principal amount equal to the Facility Limit (as reflected from time to time on the grid attached thereto); (3) bear interest as provided therein; (4) be payable to the order of the Agent for the account of the Company or the Bank Investors and mature on the Remittance Date occurring in the fourth calendar month following the calendar month in which the latest maturing Receivable (deter mined as of the Termination Date) is scheduled to mature (without regard to extensions subsequently granted on any Receivable by the Issuer or the Collection Agent) (5) be entitled to the benefit of the Policy and the Security Agreement and (6) be substantially in the form of Exhibit D to this Agreement, with blanks appropriately completed in conformity herewith. The Agent shall, and is hereby authorized to, make a notation on the schedule attached to the Note of the date and the amount of each Funding and the date and amount of the payment of principal thereon, and prior to any transfer of the Note, the Agent shall endorse the outstanding principal amount of the Note on the schedule attached thereto; provided, however, that failure to make such notation shall not adversely affect the Company's or any Bank Investor's rights with respect to the Note. 10 (ii) Although the Note shall be dated the Closing Date, interest in respect thereof shall be payable only for the periods during which amounts are outstanding thereunder. In addi tion, although the stated principal amount of the Note shall be equal to the Facility Limit, the Note shall be enforceable with respect to the Issuer's obligation to pay the principal thereof only to the extent of the unpaid principal amount of the Fundings outstanding thereunder at the time such enforcement shall be sought. SECTION II.2. Sharing of Payments, Etc. If the Company or any Bank Investor (for purposes of this Section only, being a "Recipient") shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) on account of any interest in the Note owned by it in excess of its ratable share of payments on account of any interest in the Note obtained by the Company and/or the Bank Investors entitled thereto, such Recipient shall forthwith purchase from the Company and/or the Bank Investors entitled to a share of such amount participations in the percentage interests owned by such Persons as shall be necessary to cause such Recipient to share the excess payment ratably with each such other Person entitled thereto; provided, however, that if all or any portion of such excess payment is thereafter recovered from such Recipient, such purchase from each such other Person shall be rescinded and each such other Person shall repay to the Recipient the purchase price paid by such Recipient for such participation to the extent of such recovery, together with an amount equal to such other Person's ratable share (according to the proportion of (a) the amount of such other Person's required payment to (b) the total amount so recovered from the Recipient) of any interest or other amount paid or payable by the Recipient in respect of the total amount so recovered. SECTION II.3. Right of Setoff. Without in any way limiting the provisions of Section 2.2, each of the Company and the Bank Investors is hereby authorized (in addition to any other rights it may have) at any time after the occur rence of a Termination Event or during the continuance of a Potential Termination Event to set-off, appropriate and apply (without presentment, demand, protest or other notice which are hereby expressly waived) any deposits and any other indebt edness held or owing by the Company or such Bank Investor to, or for the account of, the Issuer against the amount owing by the Issuer hereunder to such Person (even if contingent or unmatured). 11 SECTION II.4. Fees. The Issuer shall pay, in accordance with the Fee Letter, such fees as are described therein, all of which shall be non-refundable. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE ISSUER SECTION III.1. Representations and Warranties of the Issuer. The Issuer represents and warrants to and covenants with the Company and the Bank Investors as of the Closing Date and, except as otherwise provided herein, as of any Funding Date that: (a Corporate Existence and Power. The Issuer is a corpora tion duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate power and all material governmen tal licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is now conducted. (b Corporate and Governmental Authorization; Contraven tion. The execution, delivery and performance by the Issuer of this Agreement and the other Transaction Documents are within the Issuer's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official, and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Certificate of Incorporation or Bylaws of the Issuer or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Issuer or result in the creation or imposition of any lien on assets of the Issuer, or require the consent or approval of, or the filing of any notice or other documentation with, any governmen tal authority or other Person. (c Binding Effect. Each of this Agreement and the other Transaction Documents constitutes the legal, valid and binding obligation of the Issuer, enforceable against the Issuer in accordance with its terms, subject to applica ble bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors. 12 (d Accuracy of Information. All information heretofore furnished by the Issuer (including without limitation, the Settlement Statement and UAC's financial statements) to the Company, the Bank Investors or the Agent for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Issuer to the Company, the Bank Investors or the Agent will be, true and accurate in every material respect, on the date such information is stated or certified. (e Tax Status. All tax returns (federal, state and local) required to be filed with respect to the Issuer have been filed (which filings may be made by an Affiliate of the Issuer on a consolidated basis covering the Issuer and other Persons) and there has been paid or adequate provision made for the payment of all taxes, assessments and other governmental charges in respect of the Issuer (or in the event consolidated returns have been filed, with respect to the Persons subject to such returns). (f Action, Suits. There are no actions, suits or proceedings pending, or to the knowledge of the Issuer threatened, against or affecting the Issuer or any Affiliate of the Issuer or their respective properties, in or before any court, arbitrator or other body, which may have a material adverse effect on the Issuer's ability to perform its obligations hereunder, under the Security Agreement, the Note, the Sale and Purchase Agreement or any other Transaction Document. (g Use of Proceeds. The proceeds of any Funding will be used by the Issuer to (a) acquire the Receivables, the Contracts related thereto and the Related Security with respect thereto from UAC pursuant to the Sale and Pur chase Agreement, (b) to pay down debt in connection with the purchase of the Receivables and Contracts pursuant to the Sale and Purchase Agreement, or (c) to make distributions constituting a return of capital. (h Place of Business. The chief place of business and chief executive office of the Issuer are located at the address of the Issuer indicated in Section 9.3 of the Security Agreement and the offices where the Issuer keeps all its records, are located at the address indicated in Section 9.3 of the Security Agreement. (i Merger and Consolidation. As of the date hereof the Issuer has not changed its name, merged with or into or been consolidated with any other corporation or been the subject of any proceeding under Title 11, United States Code (Bankruptcy). 13 (j Solvency. The Issuer is not insolvent and will not be rendered insolvent immediately following the consummation on the Closing Date of the transactions contemplated by this Agreement and the Security Agreement, including the pledge by the Issuer to the Collateral Agent of the Collateral. (k No Termination Event. After giving effect to each Funding, no Potential Termination Event or Termination Event exists. (l Compliance. The Issuer has complied in all material respects with all Requirements of Law in respect of the conduct of its business and ownership of its property. (m Not an Investment Company. The Issuer is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions of such Act. (n ERISA. The Issuer is in compliance in all material respects with ERISA and no lien in favor of the PBGC on any of the Receivables shall exist. (o Subsidiaries. The Issuer does not have any Subsidiaries. (p Capital Stock. The Issuer has neither sold nor pledged any of its Common Stock to any entity other than UAC. Any document, instrument, certificate or notice delivered to the Company, any Bank Investor or the Agent by the Issuer hereunder shall be deemed a representation and warranty by the Issuer. The representations and warranties set forth in this Section 3.1 shall survive the pledge and assignment of the Collateral to the Collateral Agent for the benefit of the Secured Parties. Upon discovery by the Issuer, the Company, the Agent or a Bank Investor of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the others. 14 ARTICLE IV INDEMNIFICATION SECTION IV.1. Indemnity. Without limiting any other rights which the Company or the Bank Investors may have hereunder or under applicable law, the Issuer agrees to indemnify the Company, the Bank Investors, the Collateral Agent, the Agent, the Administrative Agent, the Liquidity Provider, the Credit Support Provider and any permitted assigns and their respective agents, officers, directors and employees (collectively, "Indemnified Parties") from and against any and all damages, losses, claims, liabilities, costs and expenses, including reasonable attorneys' fees (which such attorneys may be employees of the Company, the Bank Investors, the Agent, the Collateral Agent, the Administrative Agent, the Liquidity Provider and the Credit Support Provider) and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of this Agreement or the ownership, either directly or indirectly, by the Company, the Bank Investors, the Agent, the Administrative Agent, the Liquidity Provider or the Credit Support Provider of the Note excluding, however, (i) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of an Indemnified Party or (ii) recourse (except as otherwise specifically provided in this Agreement) for uncollectible Receivables. Such Indemnified Amounts shall be paid in accordance with Section 2.3(a)(xiii) of the Security Agreement. Without limiting the generality of the foregoing, the Issuer shall indemnify each Indemnified Party for Indemnified Amounts relating to or resulting from: (a reliance on any representation or warranty made by the Issuer, UAC or the Collection Agent (or any officers of the Issuer or the Collection Agent) under or in connection with this Agreement, the Security Agreement, the Initial Funding Request, any Prefunding Notice, any Settlement Statement or any other information or report delivered by the Issuer, UAC or the Collection Agent pursuant hereto or thereto, which shall have been false or incorrect in any material respect when made or deemed made; (b the failure by the Issuer, UAC or the Collection Agent to comply with any applicable law, rule or regulation with respect to the Collateral, or the nonconformity of the Collateral with any such applicable law, rule or regulation; 15 (c the failure to vest and maintain vested in the Collateral Agent a first priority perfected security interest in the Collateral, free and clear of any Lien; (d the failure to file, or any delay in filing, financing statements, continuation statements, or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to all or any part of the Collateral which failure has an adverse effect on the validity, perfected status or priority of the security interest granted to the Collateral Agent under the Security Agreement; (e any valid dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable (including, without limitation, a defense based on such Receivable not being legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of services related to such Receivable or the furnishing or failure to furnish such services; (f any failure of the Issuer to perform its duties or obligations in accordance with the provisions of the Security Agreement; or (g any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with related merchandise or services which are the subject of any Receivable; provided, however, that if the Company enters into agreements for the purchase of interests in receivables from one or more Other Transferors, the Company shall allocate such Indemnified Amounts which are in connection with the Liquidity Provider Agreement or the Credit Support Agreement to the Issuer and each Other Transferor; and provided, further, that if such Indemnified Amounts are attributable to the Issuer and not attributable to any Other Transferor, the Issuer shall be solely liable for such Indemnified Amounts or if such Indemnified Amounts are attributable to Other Transferors and not attributable to the Issuer, such Other Transferors shall be solely liable for such Indemnified Amounts. SECTION IV.2. Indemnity for Taxes, Reserves and Expenses. (a) If after the date hereof, the adoption of any Law or bank regulatory guideline or any 16 amendment or change in the interpretation of any existing or future Law or bank regulatory guideline by any Official Body charged with the administration, interpre tation or application thereof, or the compliance with any directive of any Official Body (in the case of any bank regulatory guideline, whether or not having the force of Law): (10 shall subject any Indemnified Party to any tax, duty or other charge with respect to this Agreement, the Security Agreement, the Note, the Net Investment, the Collateral or payments of amounts due hereunder, or shall change the basis of taxation of payments to any Indemnified Party of amounts payable in respect of this Agreement, the Note, the Net Investment, the Collateral or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement, the Credit Support Agreement or otherwise in respect of this Agreement, the Security Agreement, the Note, the Net Investment or the Collateral (except for changes in the rate of federal, state or local general corporate, franchise, net income or other income or similar tax imposed on such Indemnified Party by the jurisdiction in which such Indemnified Party's principal executive office is located); or (20 shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against assets of, deposits with or for the account of, or credit extended by, any Indemnified Party or shall impose on any Indemnified Party or on the United States market for certificates of deposit or the London interbank market any other condition affecting this Agreement, the Security Agreement, the Note, the Net Investment, the Collateral or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement, the Credit Support Agreement or otherwise in respect of this Agreement, the Note, the Net Investment or the Collateral; (30 imposes upon any Indemnified Party any other expense (including, without limitation, reasonable attorneys' fees and expenses, and expenses of litigation or preparation therefor in contesting any of the foregoing) with respect to this Agreement, the Security Agreement, the Note, the Net Investment, the Collateral or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement or the Credit Support Agreement or otherwise in respect of this Agreement, the Note, the Net Investment or the Collateral; 17 and the result of any of the foregoing is to increase the cost to such Indemnified Party with respect to this Agreement, the Security Agreement, the Note, the Net Investment, the Collateral, the obligations hereunder, the funding of any purchases hereunder, the Liquidity Provider Agreement or the Credit Support Agreement, by an amount reasonably deemed by such Indemnified Party to be material, then within 10 days after demand by the Agent, the Issuer shall pay to the Agent such additional amount or amounts as will compensate such Indemnified Party for such increased cost provided that no such amount shall be payable with respect to any period commencing more than 90 days prior to the date the Agent first notifies the Issuer of its intention to demand compensation therefor under this Section 4.2(a). (b If any Indemnified Party shall have determined that after the date hereof, the adoption of any applicable Law or bank regulatory guideline regarding capital adequacy, or any change therein, or any change in the interpretation thereof by any Official Body, or any directive regarding capital adequacy (in the case of any bank regulatory guideline, whether or not having the force of law) of any such Official Body, has or would have the effect of reducing the rate of return on capital of such Indemnified Party (or its parent) as a consequence of such Indemnified Party's obligations hereunder or with respect hereto to a level below that which such Indemnified Party (or its parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount reasonably deemed by such Indemnified Party to be material, then from time to time, within 10 days after demand by the Agent, the Issuer shall pay to the Agent such additional amount or amounts as will compensate such Indemnified Party (or its parent) for such reduction; provided that no such amount shall be payable with respect to any period commencing less than 30 days after the date the Agent first notifies the Issuer of its intention to demand compensation under this Section 4.2(b). (c The Agent or the Company will promptly notify the Issuer of any event of which it has knowledge, occurring after the date hereof, which will entitle an Indemnified Party to compensation pursuant to this Section 4.2. A notice by the Agent claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Agent may use any reasonable averaging and attributing methods. (d Anything in this Section 4.2 to the contrary notwith standing, if the Company enters into agreements for the acquisition of interests in receivables from one or more Other Transferors, the Company shall allocate the liability for any amounts under this Section 4.2 ("Section 4.2 Costs") ratably to the Issuer and each Other Transferor; provided, however, that if such Section 4.2 Costs are attributable to the Issuer and not attributable to any Other Transferor, the Issuer shall be solely liable for such Section 4.2 Costs or if such Section 4.2 Costs are attributable to Other Transferors and not attributable to the Issuer, such Other Transferors shall be solely liable for such Section 4.2 Costs. SECTION IV.3. Other Costs, Expenses and Related Matters. The Issuer agrees, upon receipt of a written invoice, to pay or cause to be paid, and to save the Company, the Bank Investors, the Collateral Agent, the Agent and the Administrative Agent harmless against liability for the payment of, all reasonable out-of-pocket expenses (including, without limitation, all reasonable attorneys', accountant's and other third parties' fees and expenses, any filing fees and expenses incurred by officers or employees of the Company or any Bank Investor) incurred by or on behalf of the Company, any Bank Investor, the Collateral Agent, the Agent or the Administrative Agent (i) in connection with the negotiation, execution, delivery and preparation of this Agreement, the Note and the Security Agreement and any other Transaction Document and the transactions contemplated hereby and thereby and (ii) from time to time (a) relating to any amendments, waivers or consents under this Agreement, the Note and the Security Agreement, (b) arising in connection with the Company's, any Bank Investor's or any of their agent's agent's enforcement or preservation of rights (including, without limitation, the perfection and protection of the Collateral Agent's security interest in the Collateral), or (c) arising in connection with any audit, dispute, disagreement, litigation or preparation for litigation involving this Agreement (all of such amounts, collectively, "Transaction Costs"). ARTICLE V THE AGENT; BANK COMMITMENT SECTION V.1. Authorization and Action. (a) The Company and each Bank Investor hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Security Agreement as are delegated to the Agent by the terms hereof and thereof, together 18 with such powers as are reasonably incidental thereto. In furtherance, and without limiting the generality of the foregoing, the Company and each Bank Investor hereby appoints the Agent as its agent to execute and deliver all further instruments and documents, and take all further action that the Agent may deem necessary or appropriate or that the Company or a Bank Investor may reasonably request in order to perfect, protect or more fully evidence the interests transferred or to be transferred from time to time by the Issuer hereunder, or to enable any of them to exercise or enforce any of their respective rights hereunder, including, without limitation, the execution by the Agent as secured party/assignee of such financing or continuation statements, or amendments thereto or assignments thereof, relative to all or any of the Receivables now existing or hereafter arising, and such other instruments or notices, as may be necessary or appropriate for the purposes stated hereinabove. The Company and the Majority Investors may direct the Agent to take any such incidental action hereunder. With respect to other actions which are incidental to the actions specifically delegated to the Agent hereunder, the Agent shall not be required to take any such incidental action hereunder, but shall be required to act or to refrain from acting (and shall be fully protected in acting or refraining from acting) upon the direction of the Majority Investors; provided, however, that the Agent shall not be required to take any action hereunder if the taking of such action, in the reasonable determination of the Agent, shall be in violation of any applicable law, rule or regulation or contrary to any provision of this Agreement or shall expose the Agent to liability hereunder or otherwise. Upon the occurrence and during the continuance of any Termination Event or Potential Termination Event the Agent shall take no action hereunder (other than ministerial actions or such actions as are specifically provided for herein) without the prior consent of the Majority Investors. "Majority Investors" shall mean, at any time, the Agent and those Bank Investors which hold Commitments aggregating in excess of 50% of the Facility Limit as of such date. In the event the Agent requests the Company's or a Bank Investor's consent pursuant to the foregoing provisions and the Agent does not receive a consent (either positive or negative) from the Company or such Bank Investor within 10 Business Days of the Company's or Bank Investor's receipt of such request, then the Company or such Bank Investor (and its percentage interest hereunder) shall be disregarded in determining whether the Agent shall have obtained sufficient consent hereunder. (b The Agent shall exercise such rights and powers vested in it by this Agreement and the Security Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. 19 SECTION V.2. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them as Agent under or in connection with this Agree ment or the Security Agreement, except for its or their own gross negligence or willful misconduct. Without limiting the foregoing, the Agent: (i) may consult with legal counsel (including counsel for the Issuer or UAC), independent public accoun tants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to the Company or any Bank Investor and shall not be responsible to the Company or any Bank Investor for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the perfor mance or observance of any of the terms, covenants or conditions of this Agreement or of the Security Agreement on the part of the Issuer or UAC or to inspect the property (including the books and records) of the Issuer or UAC; (iv) shall not be responsible to the Company or any Bank Investor for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the Security Agreement or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of this Agreement, the Security Agreement by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION V.3. Credit Decision. The Company and each Bank Investor acknowledges that it has, independently and without reliance upon the Agent, any of the Agent's Affiliates, any other Bank Investor or the Company (in the case of any Bank Investor) and based upon such documents and information as it has deemed appropriate, made its own evaluation and decision to enter into this Agree ment to which it is a party and, if so required, to acquire an interest in the Note. The Company and each Bank Investor also acknowledges that it will, independently and without reliance upon the Agent, any of the Agent's Affiliates, any other Bank Investor or the Company (in the case of any Bank Investor) and based on such documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under this Agreement and the other Transaction Documents to which it is a party. 20 SECTION V.4. Indemnification of the Agent. The Bank Investors agree to indemnify the Agent (to the extent not reimbursed by the Issuer), ratably in accordance with their Pro Rata Shares, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agree ment or any action taken or omitted by the Agent, provided that the Bank Investors shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, the Bank Investors agree to reimburse the Agent, ratably in accordance with their Pro Rata Shares, promptly upon demand for any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that such expenses are incurred in the interests of or otherwise in respect of the Bank Investors hereunder and/or thereunder and to the extent that the Agent is not reimbursed for such expenses by the Issuer. SECTION V.5. Successor Agent. The Agent may resign at any time by giving written notice thereof to each Bank Investor, the Company and the Issuer and may be removed at any time with cause by the Majority Investors. Upon any such resignation or removal, the Company and the Majority Investors shall appoint a successor Agent. The Company and each Bank Investor agrees that it shall not unreasonably withhold or delay its approval of the appointment of a successor Agent. If no such successor Agent shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Investors' removal of the retiring Agent, then the retiring Agent may, on behalf of the Company and the Bank Investors, appoint a successor Agent which successor Agent shall be either (i) a commercial bank organized under the laws of the United States or of any state thereof and have a combined capital and surplus of at least $50,000,000 or (ii) an Affiliate of such a bank. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article V shall continue to inure to 21 its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION V.6. Payments by the Agent. Unless specifically allocated to a Bank Investor pursuant to the terms of this Agreement, all amounts received by the Agent on behalf of the Bank Investors shall be paid by the Agent to the Bank Investors (at their respective accounts specified in their respective Assignment and Assumption Agreements) in accordance with their respective related pro rata interests in the Net Investment on the Business Day received by the Agent, unless such amounts are received after 12:00 noon on such Business Day, in which case the Agent shall use its reasonable efforts to pay such amounts to the Bank Investors on such Business Day, but, in any event, shall pay such amounts to the Bank Investors in accordance with their respective related pro rata interests in the Net Investment not later than the following Business Day. SECTION V.7. Bank Commitment; Assignment to Bank Investors. (a Bank Commitment. At any time on or prior to the Commitment Termination Date, in the event that the Bank Investors elect to make a Prefunding Deposit as requested under Section 2.1, then at any time, the Issuer shall be considered to have directed the Company to assign its interest in the Note in whole to the Bank Investors pursuant to this Section 5.7, the Bank Investors agree to accept such assignment, and the Issuer hereby agrees to pay the amounts described in Section 5.7(d) below. In addition, at any time on or prior to the Commitment Termination Date upon the occurrence of a Termination Event or the Termination Date, the Issuer hereby requests and directs that the Company assign its interest in the Note in whole to the Bank Investors pursuant to this Section 5.7 and the Issuer hereby agrees to pay the amounts described in Section 5.7(d) below. Upon any such election by the Company or any such request by the Issuer, the Company shall make such assignment and the Bank Investors shall accept such assignment and shall assume all of the Company's obligations hereunder. In connection with any assign ment from the Company to the Bank Investors pursuant to this Section 5.7, each Bank Investor shall, on the date of such assignment, pay to the Company an amount equal to its Assignment Amount. In addition, at any time on or prior to the Commit ment Termination Date the Issuer shall have the right to request funding under this Agreement and the Security Agreement directly from the Bank Investors provided that at such time all conditions precedent set forth herein and in the Security Agree ment for a Prefunding Deposit shall be satisfied and provided further that in connec tion with such funding by the Bank Investors, the Bank Investors accept the assign ment of the Note from the Company and assume all of the Company's obligations hereunder concurrently with or prior to any such Prefunding Deposit. Upon any assignment by the Company to the Bank Investors contemplated hereunder, the Company shall cease to make any further advances to the Issuer hereunder. (b Assignment. No Bank Investor may assign all or a portion of its interest in the Note and its rights and obligations hereunder to any Person unless approved in writing by the Agent and the Issuer. In the case of an assignment by the Company to the Bank Investors or by a Bank Investor to another Person, the assignor shall deliver to the assignee(s) an Assignment and Assumption Agreement, duly executed, assigning to the assignee a pro rata interest in the Note and the assignor's rights and obligations hereunder and the assignor shall promptly execute and deliver all further instruments and documents, and take all further action, that the assignee may reasonably request, in order to protect, or more fully evidence the assignee's right, title and interest in and to such interest and to enable the Agent, on behalf of such assignee, to exercise or enforce any rights hereunder and under the other documents to which such assignor is or, immediately prior to such assignment, was a party. Upon any such assignment, (i) the assignee shall have all of the rights and obligations of the assignor hereunder and under the other documents to which such assignor is or, immediately prior to such assignment, was a party with respect to such interest for all purposes of this Agreement and under the other documents to which such assignor is or, immediately prior to such assignment, was a party and (ii) the assignor shall relinquish its rights with respect to such interest for all purposes of this Agreement and under the other documents to which such assignor is or, immediately prior to such assignment, was a party. No such assignment shall be effective unless a fully executed copy of the related Assignment and Assumption Agreement shall be delivered to the Agent and the Issuer. All reasonable costs and expenses of the Agent and the assignor incurred in connection with any assignment hereunder shall be borne by the Issuer and not by the assignor or any such assignee. No Bank Investor shall assign any portion of its Commitment hereunder without also simultaneously assigning an equal portion of its interest in the Liquidity Provider Agreement. (c Effects of Assignment. By executing and delivering an Assignment and Assumption Agreement, the assignor and assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other 22 than as provided in such Assignment and Assumption Agreement, the assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, the other documents or any other instrument or document furnished pursuant hereto or thereto or the execution, legality, validity, enforceability, genuine ness, sufficiency or value or this Agreement, the other documents or any such other instrument or document; (ii) the assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Issuer or UAC or the performance or observance by the Issuer or UAC of any of its obligations under this Agreement, the Sale and Purchase Agreement, the Security Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, the Security Agreement, the Sale and Purchase Agreement and such other instruments, documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Assumption Agreement and to purchase such interest; (iv) such assignee will, independently and without reliance upon the Agent, or any of its Affiliates, or the assignor and based on such agreements, documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other documents; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement, the other documents and any other instrument or document furnished pursuant hereto or thereto as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto and to enforce its respective rights and interests in and under this Agreement, the Security Agreement and the other documents; (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement and the other documents are required to be performed by it as the assignee of the assignor; and (vii) such assignee agrees that it will not institute against the Company any proceeding of the type referred to in Section 6.6 prior to the date which is one year and one day after the payment in full of all Commercial Paper issued by the Company or the Conduit Assignee, as applicable. (d Issuer's Obligation to Pay Certain Amounts; Additional Assignment Amount. The Issuer shall pay to the Agent, for the account of the Company, in connection with any assignment by the Company to the Bank Investors pursuant to this Section 5.7, an aggregate amount equal to all Carrying Costs to accrue with respect to obligations already entered into by the Company as a result of 23 or in connection with this Agreement. To the extent that such Carrying Costs relate to interest or discount on Commercial Paper issued to fund or refinance the Net Investment, if the Issuer fails to make payment of such amounts at or prior to the time of assignment by the Company to the Bank Investors, such amount shall be paid by the Bank Investors (in accordance with their respective Pro Rata Shares) to the Company as additional consideration for the interests assigned to the Bank Investors and the amount of the Net Investment hereunder held by the Bank Investors shall be increased by an amount equal to the additional amount so paid by the Bank Investors. (e Administration of Agreement After Assignment. After any assignment by the Company to the Bank Investors pursuant to this Section 5.7 (and the payment of all amounts owing to the Company in connection therewith), all rights of the Administrative Agent and the Collateral Agent set forth herein shall be deemed to be afforded to the Agent on behalf of the Bank Investors instead of either such party. (f Payments. After any assignment by the Company to the Bank Investors pursuant to this Section 5.7, all payments to be made hereunder by the Issuer or the Collection Agent to the Bank Investors shall be made to the Agent's account as such account shall have been notified to the Issuer. In the event that the sum of the Assignment Amount paid by the Bank Investors and the amounts paid to the Company pursuant to Section 5.7(d) in connection with such assignment is less than the sum of the Net Investment plus the Interest Component of all outstanding Related Commercial Paper, then to the extent payments made hereunder in respect of the Net Investment exceed the Assignment Amount, such excess shall be remitted by the Agent to the Company. (g Downgrade of Bank Investor. If at any time prior to any assignment by the Company to the Bank Investors as contemplated pursuant to this Section 5.7, the short term debt rating of any Bank Investor shall be "A-2" or "P-2" with negative credit implications from S&P or Moody's, respectively, such Bank Investor, upon request of the Agent, shall, within 30 days of such request, assign its rights and obligations hereunder to another financial institution (which institution's short term debt shall be rated at least "A-2" and "P-2" from S&P and Moody's, respectively, and which shall not be so rated with negative credit implications). If the short term debt rating of a Bank Investor shall be "A-3" or "P-3", or lower, from S&P or Moody's, respectively (or such rating shall have been withdrawn by S&P's or 24 Moody's), such Bank Investor, upon request of the Agent, shall, within five (5) Business Days of such request, assign its rights and obligations hereunder to another financial institution (which institution's short term debt shall be rated at least "A-2" and "P-2" from S&P and Moody's, respectively, and which shall not be so rated with negative credit implications). In either such case, if any such Bank Investor shall not have assigned its rights and obligations under this Agreement within the applicable time period described above, the Company shall have the right to require such Bank Investor to advance to the Agent an amount equal to its Commitment for deposit by the Agent into an account, in the name of the Agent, which shall be in satisfaction of such Bank Investor's obligations to make Fundings and to accept an assignment from the Company in accordance with Section 5.7(a) hereof. The amount on deposit in such account shall be invested by the Agent in Eligible Investments and such Eligible Investments shall have a term of no more than 30 days, at the Agent's sole discretion. The Agent shall remit to such Bank Investor, monthly, the income thereon. Nothing in the two preceding sentences shall affect or diminish in any way any such downgaded Bank Investor's Commitment to the Issuer or such downgraded Bank Investor's other obligations and liabilities hereunder and under the other documents. ARTICLE VI MISCELLANEOUS SECTION VI.1. Notices, Etc. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be sent by facsimile transmission with a confirmation of the receipt thereof and shall be deemed to be given for purposes of this Agreement on the day that the receipt of such facsimile transmission is confirmed in accordance with the provisions of this Section 6.1. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this Section, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party below: 25 If to the Company: Enterprise Funding Corporation c/o Merrill Lynch Money Markets Inc. World Financial Center--South Tower 225 Liberty Street New York, New York 10218 Telephone: (212) 236-7200 Telecopy: (212) 236-7584 (with a copy to the Administrative Agent) If to the Issuer: Union Acceptance Funding Corporation 9240 Bonita Beach Road, Suite 1109-C Bonita Springs, Florida 34135-4250 Attn: Leeanne W. Graziani, Vice President Telephone: (941) 948-1852 Telecopy: (941) 948-1855 If to the Agent: NationsBank, N.A. NationsBank Corporate Center 100 North Tryon Street NC1-007-10-07 Charlotte, North Carolina 28255-0001 Attention: Michelle M. Heath Investment Banking Telephone: (704) 386-7922 Telecopy: (704) 388-9169 SECTION VI.2. Successors and Assigns. This Agreement shall be binding upon the Issuer and the Company and their respective successors and assigns and shall inure to the benefit of the Issuer and the Company and their respective successors and assigns including the Liquidity Provider; provided, however, that the Issuer shall not assign any of its rights or obligations hereunder without the prior written consent of the Company, the Collateral Agent and the Insurer. The Issuer 26 hereby acknowledges that the Company has assigned and granted a security interest in all of its rights hereunder to the Collateral Agent. In addition, the Issuer hereby acknowledges that the Company may at any time and from time to time assign all or a portion of its rights hereunder to the Liquidity Provider pursuant to the Liquidity Provider Agreement. Except as expressly permitted hereunder or in the agreements establishing the Company's commercial paper program, the Company shall not assign any of its rights or obligations hereunder without the prior written consent of the Issuer. Without limiting the foregoing, the Company may, from time to time, with prior or concurrent notice to the Issuer and the Collection Agent, in one transaction or a series of transactions, assign all or a portion of the Net Investment and its rights and obligations under this Agreement and any other Transaction Documents to which it is a party to a Conduit Assignee. Upon and to the extent of such assignment by the Company to a Conduit Assignee, (i) such Conduit Assignee shall be the owner of the assigned portion of the Net Investment, (ii) the related administrative or managing agent for such Conduit Assignee will act as the Adminis trative Agent for such Conduit Assignee, with all corresponding rights and powers, expressed or implied, granted to the Administrative Agent hereunder or under the other Transaction Documents, (iii) such Conduit Assignee and its liquidity support provider(s) and credit support provider(s) and other related parties shall have the benefit of all the rights and protections provided to the Company and its Liquidity Provider(s) and Credit Support Provider(s), respectively, herein and in the other Transaction Documents (including, without limitation, any limitation on recourse against such Conduit Assignee or related parties, any agreement not to file or join in the filing of a petition to commence an insolvency proceeding against such Conduit Assignee, and the right to assign to another Conduit Assignee as provided in this paragraph), (iv) such Conduit Assignee shall assume all (or the assigned or assumed portion) of the Company's obligations, if any, hereunder or any other Transaction Document, and the Company shall be released from such obligations, in each case to the extent of such assignment, and the obligations of the Company and such Conduit Assignee shall be several and not joint, (v) all distributions in respect of the Net Investment and the Note shall be made to the applicable agent or administrative agent, as applicable, on behalf of the Company and such Conduit Assignee on a pro rata basis according to their respective interets, (vi) the definition of the term "Carrying Costs" with respect to the portion of the Net Investment funded with commercial paper issued by the Conduit Assignee from time to time shall be determined on the 27 basis of the interest rate or discount applicable to commercial paper issued by such Conduit Assignee (rather than the Company), (vii) the defined terms and other terms and provisions of this Agreement and the other Transaction Documents shall be interpreted in accordance with the foregoing, and (viii) if requested by the Agent or the agent of administrative agent with respect to te Conduit Assignee, the parties will execute and deliver such further agreements and documents and take such other actions as the Agent or such agent or administrative agent may reasonably request to evidence and give effect to the foregoing. No Assignment by the Company to a Conduit Assignee of all or any portion of the Net Investment shall in any way diminish the related Bank Investors' obligation under Section 2.1(a) to fund the Initial Funding if not funded by the Company or such Conduit Assignee or under Section 5.7(a) to acquire from the Company or such Conduit Assignee all or any portion of the Net Investment. SECTION VI.3. Severability Clause. Any provisions of this Agree ment which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION VI.4. Amendments. (a) No failure or delay on the part of the Agent, the Company and the Bank Investors in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other further exer cise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. (b) Any provision of this Agreement may be amended or waived if, but only if, such amendment is in writing and is signed by the Issuer, the Company, the Insurer and the Majority Investors (and, if Article V or the rights or duties of the Agent are affected thereby, by the Agent); provided, that no such amendment or waiver shall, unless signed by each Bank Investor directly affected thereby, (i) increase the Commitment of a Bank Investor, (ii) reduce the Net Investment or rate of interest to accrue thereon or any fees or other amounts payable hereunder, (iii) postpone any date fixed for the payment of any scheduled distribution in respect of 28 the Net Investment or interest with respect thereto or any fees or other amounts payable hereunder or for termination of any Commitment, (iv) change the percentage of the Commitments or the number of Bank Investors, which shall be required for the Bank Investors or any of them to take any action under this Section or any other provision of this Agreement, (v) extend or permit the extension of the Commitment Termination Date, (vi) reduce or impair Collections or the payment of fees payable hereunder to the Bank Investors or delay the scheduled dates for payment of such amounts, (vii) increase the Servicing Fee to a percentage greater than 1.0% per annum of the aggregate Outstanding Balance of the Receivables as of the first day of the related Settlement Period, (viii) modify any provisions of this Agreement or the Sale and Purchase Agreement relating to the timing of payments required to be made by the Issuer or UAC or the application of the proceeds of such payments, or (ix) provide for the appointment of any Person (other than the Agent) as a successor Collection Agent. In the event the Agent requests the Company's or a Bank Inves tor's consent pursuant to the foregoing provisions and the Agent does not receive a consent (either positive or negative) from the Company or such Bank Investor within 10 Business Days of the Company's or Bank Investor's receipt of such request, then the Company or such Bank Investor (and its percentage interest hereunder) shall be disregarded in determining whether the Agent shall have obtained sufficient consent hereunder. SECTION VI.5. Governing Law. This Agreement shall be con strued in accordance with and governed by the laws of the State of New York. SECTION VI.6. No Bankruptcy Petition Against the Company. The Issuer covenants and agrees that, and each of the other parties hereto covenant and agree that, and each such Person agrees that they shall cause any successor Collection Agent appointed pursuant to the Security Agreement to covenant and agree that, prior to the date which is one year and one day after the payment in full of all Commercial Paper issued by the Company (or, if the Net Investment (or any portion thereof) has been assigned to a Conduit Assignee, one year and one day after the payment in full of all Commercial Paper issued by such Conduit Assignee), it will not institute against, or join any other Person in instituting against, the Company, the Issuer or any Conduit Assignee any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any federal or state bankruptcy or similar law. 29 SECTION VI.7. Setoff. The Issuer hereby irrevocably and uncondi tionally waives all right of setoff that it may have under contract (including this Agreement), applicable law or otherwise with respect to any funds or monies of the Company at any time held by or in the possession of the Company. SECTION VI.8. No Recourse. The Issuer's obligations under the Note are payable solely from the Collateral and no general recourse shall be had on the Note against the Issuer or UAC. Except as otherwise expressly provided in this Agreement, it is understood and agreed that neither the Issuer nor UAC shall be liable for the payment of Commercial Paper or for any losses suffered by the Company in respect of the Note. The foregoing sentence shall not relieve the Issuer from any liability hereunder or under the Security Agreement with respect to its representations, warranties, covenants and other payment and performance obliga tions herein or therein described. SECTION VI.9. Further Assurances. The Issuer agrees to do such further acts and things and to execute and deliver to the Company or the Collateral Agent such additional assignments, agreements, powers and instruments as are required by the Company to carry into effect the purposes of this Agreement or the Security Agreement or to better assure and confirm unto the Company or the Collateral Agent its rights, powers and remedies hereunder or thereunder. SECTION VI.10. No Recourse Against Stockholders, Officers or Directors. Notwithstanding anything to the contrary contained in this Agreement, the obligations of the Company under this Agreement and all other Transaction Docu ments are solely the corporate obligations of the Company and shall be payable solely to the extent of funds received from the Issuer in accordance herewith or from any party to any Transaction Document in accordance with the terms thereof in excess of funds necessary to pay matured and maturing Commercial Paper. No recourse under any obligation, covenant or agreement of the Company contained in this Agreement shall be had against Merrill Lynch Money Markets Inc. ("Merrill")(or any affiliate thereof), or any stockholder, officer or director of the Company, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and understood that this Agreement is solely a corporate obligation of the Company, and that no personal liability whatsoever shall attach to or be incurred by Merrill (or any affiliate thereof), or the stockholders, officers or directors of the buyer, as such, or any of them, under 30 or by reason of any of the obligations, covenants or agreements of the Company contained in this Agreement, or implied therefrom, and that any and all personal liability for breaches by the Company of any of such obligations, covenants or agreements, either at common law or at equity, or by statute or constitution, of Merrill (or any affiliate thereof) and every such stockholder, officer or director of the Company is hereby expressly waived as a condition of and consideration for the execution of this Agreement. SECTION VI.11. Counterparts. This Agreement may be executed in any number of copies, and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument. SECTION VI.12. Headings. Section headings used in this Agreement are for convenience of reference only and shall not affect the construction or interpre tation of this Agreement. 31 IN WITNESS WHEREOF, the Issuer, the Company and the Agent have caused this Note Purchase Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. UNION ACCEPTANCE FUNDING CORPORATION, as Issuer By: Name: Title: ENTERPRISE FUNDING CORPORATION, as Company By: Name: Title: NATIONSBANK, N.A., as Agent and as Bank Investor $450,000,000 Commitment By: Name: Title: EX-4.9(B) 3 SECURITY AGREEMENT --------------------------------------------------------------- SECURITY AGREEMENT among ENTERPRISE FUNDING CORPORATION, as Company, UNION ACCEPTANCE FUNDING CORPORATION, as Debtor UNION ACCEPTANCE CORPORATION, Individually and as Collection Agent MBIA INSURANCE CORPORATION as Insurer and NATIONSBANK, N.A., as Collateral Agent and Bank Investor Dated as of September 18, 1998 --------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS SECTION 1.1 Certain Defined Terms.........................................2 SECTION 1.2 Other Terms..................................................21 SECTION 1.3 Computation of Time Periods..................................22 ARTICLE II GRANT OF SECURITY INTEREST AND SETTLEMENTS SECTION 2.1 Grant of Security Interest...................................22 SECTION 2.2 Carrying Costs, Fees and Other Costs and Expenses............23 SECTION 2.3 Allocations of Collections; Servicer Advances................23 SECTION 2.4 Liquidation Settlement Procedures............................26 SECTION 2.5 Fees.........................................................26 SECTION 2.6 Protection of Interest of the Collateral Agent...............26 SECTION 2.7 Payments on Receivables; Application of Payments.............28 SECTION 2.8 Payments and Computations, Etc...............................28 SECTION 2.9 Reports......................................................29 SECTION 2.10 Collection Account...........................................29 SECTION 2.11 Prefunding Account; Prefunding Interest Reserve Account; Interest Reserve Deposits; Interest Reserve Advances; Reimbursements...............................................31 SECTION 2.12 Prefunding Account and Prefunding Interest Reserve Account Withdrawals..................................................34 SECTION 2.13 Yield Supplement Account, Deposits; Withdrawals..............35 SECTION 2.14 Reserve Account; Withdrawals; Releases; Draws on Policy......37 SECTION 2.15 Optional Release.............................................39 SECTION 2.16 Hedging Amounts..............................................42 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of the Debtor.................44 SECTION 3.2 Representations and Warranties of the Collection Agent.......47 SECTION 3.3 Reaffirmation of Representations and Warranties..............49 1 ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1 Conditions to Effectiveness..................................50 ARTICLE V COVENANTS SECTION 5.1 Affirmative Covenants of the Debtor and UAC..................52 SECTION 5.2 Negative Covenants of Debtor and UAC.........................56 SECTION 5.3 Hedging Arrangements.........................................58 ARTICLE VI ADMINISTRATION AND COLLECTIONS SECTION 6.1 Appointment of Collection Agent..............................58 SECTION 6.2 Duties of Collection Agent...................................59 SECTION 6.3 Collection Agent Defaults....................................61 SECTION 6.4 Rights After Designation of New Collection Agent.............61 SECTION 6.5 Responsibilities of the Debtor...............................62 [SECTION 6.6 Suspension of Previous Servicing Agreement...................63 ARTICLE VII TERMINATION EVENTS SECTION 7.1 Termination Events...........................................63 SECTION 7.2 Termination..................................................65 SECTION 7.3 Proceeds.....................................................66 ARTICLE VIII THE COLLATERAL AGENT SECTION 8.1 Duties of the Collateral Agent...............................67 SECTION 8.2 Compensation and Indemnification of Collateral Agent.........68 SECTION 8.3 Representations, Warranties and Covenants of the Collateral Agent......................................69 SECTION 8.4 Liability of the Collateral Agent............................70 SECTION 8.5 Merger or Consolidation of, or Assumption of the Obligations of, the Collateral Agent.........................72 SECTION 8.6 Limitation on Liability of the Collateral Agent and Others...73 SECTION 8.7 Indemnification of the Secured Parties.......................74 2 ARTICLE IX MISCELLANEOUS SECTION 9.1 Term of Agreement..............................................74 SECTION 9.2 Waivers; Amendments............................................74 SECTION 9.3 Notices........................................................75 SECTION 9.4 Governing Law; Submission to Jurisdiction; Integration.........78 SECTION 9.5 Severability; Counterparts.....................................79 SECTION 9.6 Successors and Assigns.........................................79 SECTION 9.7 Waiver of Confidentiality......................................79 SECTION 9.8 Confidentiality Agreement......................................79 SECTION 9.9 No Bankruptcy Petition Against the Company.....................80 SECTION 9.10 No Recourse Against Stockholders, Officers or Directors........80 SECTION 9.11 Further Assurances.............................................81 SECTION 9.12 Exercise of Rights by Insurer..................................81 SECTION 9.13 Characterization of the Transactions Contemplated by the Agreement; Tax Treatment.......................................81 3 EXHIBITS EXHIBIT A Credit and Collection Policy EXHIBIT B List of Lock-Box Banks and Lock-Box Accounts EXHIBIT C Form of Policy EXHIBIT D Form of Settlement Statement EXHIBIT E Form of UAFC Withdrawal Notice EXHIBIT F List of Actions and Suits EXHIBIT G Schedule of Locations of Records EXHIBIT H List of Subsidiaries, Divisions and Tradenames EXHIBIT I Form of Opinion of Barnes & Thornburg EXHIBIT J Form of Opinon of Barnes & Thornburg 4 SECURITY AGREEMENT SECURITY AGREEMENT (this "Agreement"), dated as of Septem ber 18, 1998, by and among UNION ACCEPTANCE FUNDING CORPORATION, a Delaware corporation, as debtor (in such capacity, the "Debtor"), UNION ACCEP TANCE CORPORATION, an Indiana corporation ("UAC"), individually and in its capacity as collection agent (in such capacity, the "Collection Agent"), ENTER PRISE FUNDING CORPORATION, a Delaware corporation (the "Company"), MBIA INSURANCE CORPORATION, a New York stock insurance company, as financial guaranty insurer (the "Insurer") and NATIONSBANK, N.A., a national banking association ("NationsBank"), individually and as collateral agent for the Company, the Bank Investors, and the Insurer (in such capacity, the "Collateral Agent"). PRELIMINARY STATEMENTS WHEREAS, subject to the terms and conditions of this Agreement, the Debtor desires to grant a security interest in and to the Receivables and related property including the Debtor's interest in certain retail automotive installment sales contracts; WHEREAS, pursuant to the Insurance Agreement, the Insurer has issued its Policy to provide for the full and timely payment of all amounts of interest due on and principal of the Note; WHEREAS, pursuant to the Note Purchase Agreement, the Debtor has issued the Note to the Company and will be obligated to the holder of the Note to pay the principal of and interest on the Note in accordance with the terms thereof; WHEREAS, the Debtor is granting a security interest in the Collateral to the Collateral Agent, for the benefit of the Secured Parties, to secure the payment and performance of the Debtor of its obligations under this Agreement, the Note, the Note Purchase Agreement and the Insurance Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1 ARTICLE I DEFINITIONS SECTION 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Acceptable Hedging Arrangement" shall have the meaning specified in the Insurance Agreement. "Accrued Interest Component" shall mean, for any Settlement Period, the Interest Component of all Related Commercial Paper outstanding at any time during such Settlement Period which has accrued from the first day through the last day of such Settlement Period, whether or not such Related Commercial Paper matures during such Settlement Period. For purposes of the immediately preceding sentence, the portion of the Interest Component of Related Commercial Paper accrued in a Settlement Period in which Related Commercial Paper has a stated maturity date that succeeds the last day of such Settlement Period shall be computed based on the actual number of days that such Related Commercial Paper was out standing during such Settlement Period. "Acquisition Subsidiary" shall mean PAC, or any wholly-owned sub sidiary of UAC which has entered into (i) agreements with dealers in certain states for the origination or purchase of Receivables, and (ii) an agreement with UAC pursuant to which UAC acquires all Receivables originated or purchased by such Acquisition Subsidiary. "Adjusted LIBOR Rate" means, with respect to any Settlement Period, a rate per annum equal to the sum (rounded upwards, if necessary, to the next higher 1/100 of 1%) of (A) the rate obtained by dividing (i) the applicable LIBOR Rate by (ii) a percentage equal to 100% minus the reserve percentage used for determining the maximum reserve requirement as specified in Regulation D (including, without limitation, any marginal, emergency, supplemental, special or other reserves) that is applicable to the Agent during such Settlement Period in respect of eurocurrency or eurodollar funding, lending or liabilities (or, if more than one percentage shall be so applicable, the daily average of such percentage for those days in such Settlement Period during which any such percentage shall be applicable) plus (B) the then daily net annual assessment rate (rounded upwards, if necessary, to the nearest 1/100 of 1%) as estimated by the Agent for determining the current annual assessment payable 2 by the Agent to the Federal Deposit Insurance Corporation in respect of eurocurrency or eurodollar funding, lending or liabilities. "Administrative Agent" shall mean NationsBank, as administrative agent. "Adverse Claim" shall mean a lien, security interest, charge or encum brance, or other right or claim in, of or on any Person's assets or properties in favor of any other Person. "Affiliate" shall mean, with respect to any Person, any other Person di rectly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting stock, by contract or otherwise. "Agent" shall mean NationsBank, as agent for the Company and the Bank Investors, and its successors and assigns. "Aggregate Unpaids" shall mean, at any time, an amount equal to the sum of (i) the aggregate accrued and unpaid Carrying Costs at such time, (ii) an amount equal to the Company's existing obligations which comprise Carrying Costs thereafter, (iii) the Net Investment at such time, and (iv) all other amounts owed (whether due or accrued) hereunder and under the other Transaction Documents by the Debtor at such time. "Arrangement Fee" shall mean the fee payable by the Debtor to the Administrative Agent pursuant to Section 2.5 hereof, the terms of which are set forth in the Fee Letter. "Available Funds" shall have the meaning specified in Section 2.3 hereof. "Bank Investors" shall have the meaning specified in the Note Pur chase Agreement. "Base Rate" shall mean, a rate per annum equal to the greater of (i) the prime rate of interest announced by the Liquidity Provider from time to time, chang ing when and as said prime rate changes (such rate not necessarily being the lowest or 3 best rate charged by the Liquidity Provider) and (ii) the rate equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transac tions received by the Liquidity Provider from three Federal funds brokers of recog nized standing selected by it plus 2.0%. "Business Day" shall mean any day excluding Saturday, Sunday and any day on which banks in New York, New York, Charlotte, North Carolina, Little Rock, Arkansas, Indianapolis, Indiana, or Bonita Springs, Florida are authorized or required by law to close. "Carrying Costs" shall mean for any Settlement Period the sum of: (i) the sum of the dollar amount of the Company's obligations for such Settlement Period determined on an accrual basis in accordance with generally accepted accounting principles consistently applied (a) to pay interest with respect to the Transferred Interest pursuant to the provisions of the Liquidity Provider Agreement (such interest to be calculated based on the Adjusted LIBOR Rate, if available, otherwise to be calculated at the Base Rate), outstanding at any time during such Settlement Period accrued from the day of the acquisition of the related Transferred Interest through the last day of such Settlement Period whether or not such interest is payable during such Settlement Period; (b) without duplication of the amounts described in clause (a) above, to pay interest, calculated at the Base Rate, with respect to amounts disbursed by the Credit Support Provider in respect of Defaulted Receivables or in respect of shortfalls between the Assignment Amount obtained by the Company upon the assignment of the Transferred Interest to the Bank Investors and the Net Invest ment, outstanding at any time during such Settlement Period accrued from the first day through the last day of such Settlement Period whether or not such interest is payable during such Settlement Period; (c) to pay the Accrued Interest Component of Related Commercial Paper with respect to any Settlement Period (it being understood that to the extent the Company has obtained funding under the Liquidity Provider Agreement 4 or a Credit Support Agreement, the Company will not obtain duplicative funding in the commercial paper markets); (d) to pay the Dealer Fee; (e) to pay any servicing compensation payable to a successor Collection Agent appointed pursuant to Section 6.1 of this Agreement; (f) to reimburse any successor Collection Agent for any Interest Reserve Advances made by such successor Collection Agent and not previ ously reimbursed; (g) any past due amounts not paid in clause (a), (b) and (c) with respect to prior Settlement Periods; (h) to pay the costs of the Company with respect to the Yield Protection Provision, which amounts paid pursuant to this clause (h) shall not exceed 1.00% per annum of the Net Investment; and (ii) the Program Fee, the Administrative Fee, and Liquidity Fee accrued from the first day through the last day of such Settle ment Period whether or not such amount is payable during such Settlement Period the sum of which amounts shall not exceed 0.17% per annum of the Net Investment plus 0.11% per annum of the Facility Limit. During any Settlement Period during which the Bank Investors have (x) advanced funds with respect to a Funding or (y) acquired an interest in the Note, in lieu of the amounts described in clauses (i)(c) and (i)(d) above, Carrying Costs shall include interest on the daily average Net Investment for the related Settlement Period at the Adjusted LIBOR Rate, or if such rate is unavailable, at the Base Rate, or if an Insurer Default and a Termination Event shall have occurred and be continuing, at the Base Rate plus 2.00%. "Closing Date" shall mean September 18, 1998. "Collateral" shall have the meaning specified in Section 2.1 hereof; provided, that the term "Collateral" specifically excludes Modified Receivables. "Collateral Agent" shall mean NationsBank, as collateral agent for the Secured Parties, and its successors and assigns. 5 "Collections" shall mean, with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including, without limitation, all Finance Charges, if any, and any refunded portion of extended warranty protection plan costs or of insurance costs (for example, physical damage, credit life or disabil ity) included in the original amount financed under such Receivable, and cash pro ceeds of Related Security with respect to such Receivable, provided that amounts re ceived in respect of a Receivable which constitute, in accordance with the Credit and Collection Policy, a payment of a late payment charge, insufficient funds charge or a prepayment charge will not be considered a Collection and shall be retained by the Collection Agent and not deposited into the Collection Account. "Collection Account" shall mean the account established by the Collateral Agent, for the benefit of the Secured Parties, pursuant to Section 2.10. "Collection Agent" shall mean at any time the Person then authorized pursuant to Section 6.1 to service, administer and collect Receivables. "Collection Agent Default" shall have the meaning specified in Section 6.3. "Commercial Paper" shall mean the promissory notes of the Company issued by the Company in the commercial paper market. "Commitment Termination Date" shall mean September 17, 1999, or such later date to which the Commitment Termination Date may be extended by the Debtor, the Agent and the Bank Investors not later than 30 days prior to the then current Commitment Termination Date. "Company" shall have the meaning specified in the preamble hereto. "Contract" shall mean any and all retail installment sales contracts or installment notes and security agreements relating to the sale of a new or used auto mobile, light duty truck or van and other writings related thereto now existing and hereafter created or acquired by UAC (or in the case of certain Receivables existing on the Cut-Off Date, created or acquired by PAC or UAC d/b/a PAC) and assigned from time to time to the Debtor pursuant to the Sale and Purchase Agreement or the PFC Sale and Purchase Agreement, as applicable. "Credit and Collection Policy" shall mean the Collection Agent's credit and collection policy or policies and practices relating to "prime" and "non-prime" 6 automobile installment sales contracts, existing on the date hereof and referred to in Exhibit A attached hereto, as amended, supplemented or otherwise modified and in effect from time to time in compliance with Section 5.2(d). "Credit Support Agreement" shall mean the agreement between the Company and the Credit Support Provider evidencing the obligation of the Credit Support Provider to provide credit support to the Company in connection with the issuance by the Company of Commercial Paper. "Credit Support Provider" shall mean the Person or Persons who will provide credit support to the Company in connection with the issuance by the Company of Commercial Paper. "Cut-Off Date" shall mean September 17, 1998. "Dealer Fee" shall mean the fee payable by the Debtor to the Collateral Agent, pursuant to Section 2.5 hereof, the terms of which are set forth in the Fee Letter. "Debtor" shall mean Union Acceptance Funding Corporation, a Delaware corporation. "Defaulted Receivable" shall mean, for any Settlement Period, a Receivable: (i) as to which any payment (in excess of $10.00), or part thereof (in excess of $10.00), remains unpaid for 120 days or more as of the last day of such Settlement Period; (ii) which has been or should have been identified by the Collec tion Agent as uncollectible in accordance with the Collection Agent's customary practices on or before the last day of such Settlement Period; or (iii) as to which the related Financed Vehicle has been repossessed from the Obligor. "Delinquent Receivable" shall mean a Receivable: (i) as to which any payment, or part thereof (provided that such part is in excess of $10.00), remains unpaid for more than thirty (30) days from the due date for such payment and (ii) which is not a Defaulted Receivable. "Determination Date" shall mean, with respect to each Remittance Date, the second Business Day preceding such Remittance Date. "Duff & Phelps" shall mean Duff & Phelps Credit Rating Company. 7 "Eligible Institution" shall mean the Collateral Agent or any other depository institution organized under the laws of the United States or any one of the States thereof including the District of Columbia, the deposits in which are insured by the FDIC and which at all times has a short-term unsecured debt rating of at least "A-1+" and "P-1" from Standard & Poor's and Moody's, respectively, and of at least "D-1+" from Duff & Phelps, if such institution is rated by Duff & Phelps, and of at least "F-1+" from Fitch, if such institution is rated by Fitch. "Eligible Investments" shall mean (a) negotiable instruments or securities represented by instruments in bearer or registered or in book-entry form which evidence (i) obligations fully guaranteed by the United States of America; (ii) time deposits in, or bankers acceptances issued by, any depository institution or trust company incorporated under the laws of the United States of America or any state thereof (or any domestic branch or agency of any foreign bank) and subject to supervision and examination by Federal or state banking or depository institution authorities; provided, however, that at the time of the investment or contractual commitment to invest therein, the certificates of deposit or short-term deposits, if any, or long-term unsecured debt obligations (other than any such obligation whose rating is based on collateral or on the credit of a Person other than such institution or trust company) of such depository institution or trust company shall have a credit rating from Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively, and from Duff & Phelps of at least "D-1+", if such investment is rated by Duff & Phelps, and from Fitch of at least "F-1+", if such investment is rated by Fitch, in the case of the certificates of deposit or short-term deposits, or a rating not lower than one of the two highest investment categories granted by Moody's and Standard & Poor's and Duff & Phelps, if such investment is rated by Duff & Phelps, and Fitch, if such investment is rated by Fitch; (iii) certificates of deposit having, at the time of the investment or contractual commitment to invest therein, a rating from Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively, and from Duff & Phelps of at least "D-1+", if such certificates of deposit are rated by Duff & Phelps, and from Fitch of at least "F-1", if such certificates of deposit are rated by Fitch; or (iv) investments in money market funds rated in the highest investment category, (b) demand deposits in the name of the Secured Parties or the Collateral Agent on behalf of the Secured Parties in any depository institution or trust company referred to in (a)(ii) above, (c) commercial paper (having original or remaining maturities of no more than 30 days) having, at the time of the investment or contractual commitment to invest therein, a credit rating from Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively, and from Duff & Phelps of at least "D-1+", if such commer cial paper is rated by Duff & Phelps, and from Fitch of at least "F-1", if such commer cial paper is rated by Fitch, (d) Eurodollar time deposits having a credit rating from 8 Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively, and from Duff & Phelps of at least "D-1+", if such deposits are rated by Duff & Phelps, and from Fitch of at least "F-1", if such deposits are rated by Fitch, and (e) repurchase agreements involving any of the Eligible Investments described in clauses (a)(i), (a)(iii) and (d) hereof so long as the other party to the repurchase agreement has at the time of the investment therein, a rating from Moody's and Standard & Poor's of at least "P-1" and "A-1+", respectively, and from Duff & Phelps of at least "D-1+", if such party is rated by Duff & Phelps, and from Fitch of at least "F-1", if such party is rated by Fitch. "Eligible Receivable" shall mean, at any time, any Receivable: (i) (A) which shall have been either (x) originated by or through a factory authorized dealer, a nationally recognized rental car outlet, or a nationally recognized used car superstore, in each case located in the United States and which, to gether with the Contract related thereto, shall have been validly as signed by such dealer to an Acquisition Subsidiary or UAC or pursuant to the terms of such Contract, for the retail sale of the related Financed Vehicle in the ordinary course of its business, shall have been validly assigned to UAC if such Receivable had been assigned by such a dealer to an Acquisition Subsidiary (other than PAC) or to PFC if such Receivable had been assigned by such a dealer to PAC or UAC d/b/a PAC, shall have been fully and properly executed by the parties thereto, and shall have been advanced directly to or for the benefit of the Obligor for the purchase of the related Financed Vehicle, or (y) originated by an Acquisition Subsidiary or UAC for the retail sale of the related Financed Vehicle in the ordinary course of its business, shall have been validly assigned to UAC if such Receivable had been originated by an Acquisition Subsidiary (other than PAC) or to PFC if such Receivable had been originated by PAC or UAC d/b/a PAC, shall have been fully and properly executed by the parties thereto, and shall have been advanced directly to or for the benefit of the Obligor for the purchase of the related Financed Vehicle, (B) shall have been sold by UAC or PFC to the Debtor pursuant to the Sale and Purchase Agree ment or the PFC Sale and Purchase Agreement, as applicable, and to which the Debtor has good title thereto, free and clear of all Adverse Claims, and (C) the Contract related to which shall contain customary and enforceable provisions such that the rights and remedies of the 9 holder thereof shall be adequate for the realization against the collateral of the benefits of the security provided thereby; (ii) the Obligor of which is recorded in the Collection Agent's records as having a United States billing address, is a natural person, and is not a government or a governmental subdivi sion or agency; (iii) which is not a Defaulted Receivable at the time of the initial creation of an interest of the Company therein; (iv) which is not a Delinquent Receivable at the time of the initial creation of an interest of the Company therein; (v) which, according to the Contract related thereto, shall provide for level monthly payments (provided that the payment in the first or last month in the life of the Receivable may be minimally different from such level payment) that fully amortizes the amount financed over the original term; (vi) the Contract related thereto shall pro vide for the calculation of interest payable thereunder under either the "simple interest" or "Rule of 78's" or the "sum of the periodic time balances" method; (vii) the Contract related to which provides for no more than 84 monthly payments; (viii) which is an "eligible asset" as defined in Rule 3a-7 under the Investment Company Act of 1940, as amended; (ix) which is "chattel paper" within the meaning of Article 9 of the Relevant UCC, and which is secured by a first priority perfected lien on the related Financed Vehicle, free and clear of any Adverse Claim or for which all necessary steps to result in such a first priority perfected lien shall have been taken; (x) which is denominated and payable only in United States dollars in the United States; 10 (xi) which arises under a Contract that, to gether with the Receivable related thereto, is in full force and effect and constitutes the legal, valid and binding obligation of the related Obligor enforceable against such Obligor in accordance with its terms and is not subject to any offset, counterclaim or other defense at such time; (xii) which, together with the Contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to usury laws, the Federal Truth-in- Lending Act, the Equal Credit Opportunity Act, the Fair Credit Re porting Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Magnuson-Moss Warranty Act, Regulations B and Z of the Federal Reserve Board, various state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, and other consumer credit laws and equal credit opportunity and disclosure laws) and with respect to which no part of the Contract related thereto is in violation of any such law, rule or regulation in any material respect; (xiii) which (A) satisfies all applicable require ments of the Credit and Collection Policy and is identified on the Collection Agent's master servicing records as a "prime" loan (by code designation as a "type 84" or "type 85" loan) or a "non-prime" loan (by code designation as a "type 54" or "type 55" loan), (B) arises under a Contract which does not require the Obligor under such Contract to consent to the transfer of the rights and duties of the Debtor under such Contract, and which does not contain a confidentiality provision that purports to restrict the ability of the Company to exercise its rights under this Agreement, including, without limitation, its right to review the Contract, (C) arises under a Contract with respect to which UAC, any Acquisition Subsidiary and the Debtor have each performed all obligations required to be performed by them thereunder, and delivery of the Financed Vehicle to the related Obligor has occurred, and (D) complies with such other criteria and requirements as the Company may from time to time reasonably specify to the Debtor following sixty (60) days' notice; and 11 (xiv) the Obligor of which has been directed to make all payments to a specified account of the Collection Agent. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder. "ERISA Affiliate" means, with respect to any Person, (i) any corpora tion which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code (as in effect from time to time, the "Code")) as such Person; (ii) a trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with such Person; or (iii) a member of the same affiliated service group (within the meaning of Section 414(n) of the Code) as such Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above. "Event of Bankruptcy", with respect to any Person, shall mean (i) that such Person shall generally not pay its debts as such debts become due or shall admit in writing its inability to pay its debts generally or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against such Person seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composi tion of it or its debts under any law relating to bankruptcy, insolvency or reorganiza tion or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property or (ii) if such Person is a corporation, such Person or any Subsidiary shall take any corporate action to authorize any of the actions set forth in the preceding clause (i). "Excess Delinquent Receivables Balance" shall mean an amount, calculated on the day a Take-Out occurs and for each day until the next Take-Out occurs, equal to the excess, if any, of (i) the Outstanding Balance of all Delinquent Receivables at any time of determination over (ii) the product of 2.5% and the Net Receivables Balance (calculated without giving effect to clause (iv) of the definition thereof) at any time of determination; provided, that if the Excess Delinquent Receiv ables Balance shall, at any time since the most recent Take-Out, be less than or equal to zero, the Excess Delinquent Receivables Balance shall be deemed to be zero from such time until the next Take-Out shall occur. "Face Amount" shall mean (i) with respect to Commercial Paper issued on a discount basis, the face amount stated therein, and (ii) with respect to 12 Commercial Paper which is interest-bearing, the principal amount of and interest accrued and to accrue on such Commercial Paper to its stated maturity. "Facility Limit" shall mean $450,000,000. "Fee Letter" shall mean the letter agreement dated the date hereof between the Debtor and the Company, as amended, modified or supplemented from time to time. "Finance Charges" shall mean, with respect to a Contract, any finance, interest or similar charges owing by an Obligor or another Person pursuant to such Contract. "Financed Vehicle" shall mean, with respect to a Receivable, any new or used automobile, van or light-duty truck, together with all accessories thereto, securing the related Obligor's indebtedness thereunder. "Fitch" shall mean Fitch IBCA, Inc. "Funding" shall have the meaning specified in the Note Purchase Agreement. "Funding Date" shall have the meaning specified in the Note Purchase Agreement. "Hedge Proceeds Account" shall have the meaning specified in Section 2.16(a). "Hedging Arrangement" shall mean any financial arrangement obtained by the Collection Agent satisfying the requirements of Section 5.3 hereof and other wise in form and substance reasonably satisfactory to the Company, the Insurer, and the Administrative Agent, the benefits (but not the obligations) of which are, on and after the occurrence of a Termination Event, in favor of the Debtor. "Initial Funding" shall have the meaning specified in the Note Purchase Agreement. "Insurance Agreement" shall mean that certain Insurance Agreement, dated as of September 18, 1998, among the Collection Agent, the Debtor, the Collateral Agent and the Insurer. 13 "Insurer" shall mean MBIA Insurance Corporation, a New York stock insurance company. "Insurer Default" shall mean, at any time, any failure by the Insurer to make any payment when due under the Insurance Agreement or under any other insurance policy or financial guaranty insurance policy issued by it. "Interest Component" shall mean, with respect to Commercial Paper issued (i) on a discount basis, the portion of the Face Amount of such Commercial Paper representing the discount incurred in respect thereof and (ii) on an interest-bearing basis, the interest payable on such Commercial Paper at its maturity provided, however, that if any component of such rate is a discount rate in calculating the Interest Component, the rate used to calculate such component of such rate shall be a rate resulting from converting such discount rate to an interest bearing equivalent rate per annum. "Interest Reserve Advance" shall mean, with respect to any Remit tance Date, the amount, if any (which shall not be less than zero), equal to (i) the product of (x) the daily weighted average amount on deposit in the Prefunding Account during the preceding Settlement Period, (y) the Targeted Interest Rate for such Settlement Period (on a per annum basis) and (z) a fraction the numerator of which is the number of days in such Settlement Period and the denominator of which is 360 minus (ii) the amount earned during the preceding Settlement Period on amounts on deposit in the Prefunding Account. "Interest Reserve Deposit" shall have the meaning specified in Section 2.11. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "LIBOR Rate" means, with respect to any Settlement Period, the rate determined by NationsBank to be (i) the per annum rate for deposits in U.S. Dollars for a term of one month which appears on the Telerate Page 3750 Screen on the day that is two London Business Days prior to the first day of such Settlement Period except, that if such first day of the Settlement Period is not a Business Day, then the first preceding day that is a Business Day (rounded upwards, if necessary, to the near est 1/100,000 of 1%), (ii) if such rate does not appear on the Telerate Page 3750 Screen, the term "LIBOR Rate" with respect to that Settlement Period shall be the 14 arithmetic mean (rounded upwards, if necessary, to the nearest 1/100,000 of 1%) of the offered quotations obtained by NationsBank from four major banks in the London interbank market selected by NationsBank (the "Reference Banks") for deposits in U.S. Dollars to leading banks in the London interbank market as of approximately 11:00 a.m. (London time) on the day that is two London Business Days prior to the first day of such Settlement Period, unless such first day of the Settlement Period is not a Business Day, in which case, the first preceding day that is a Business Day or (iii) if fewer than two Reference Banks provide NationsBank with such quotations, the LIBOR Rate shall be the rate per annum which NationsBank determines to be the arithmetic mean (rounded upwards, if necessary, to the nearest 1/100,000 of 1%) of the offered quotations which leading banks in New York City selected by NationsBank are quoting in the New York interbank market on such date for deposits in U.S. dollars to the Reference Banks or; if fewer than two such quotations are avail able, to leading European and Canadian Banks. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement under the UCC (other than any such financing statement filed for informational purposes only) or comparable law of any jurisdiction to evidence any of the foregoing. "Liquidity Provider Agreement" shall mean the agreement between the Company and the Liquidity Provider evidencing the obligation of the Liquidity Provider to provide liquidity support to the Company in connection with the issuance by the Company of Commercial Paper. "Liquidity Provider" shall mean the Person or Persons who provide liquidity support to the Company in connection with the issuance by the Company of Commercial Paper. "Lock-Box Account" shall mean an account or accounts maintained by the Collection Agent at a Lock-Box Bank for the purpose of receiving Collections from Receivables. "Lock-Box Bank" shall mean each of the banks set forth in Exhibit B hereto and such banks as may be added thereto or deleted therefrom pursuant to Section 2.6. 15 "London Business Day" shall mean any day which is a Business Day and also is a day on which commercial banks are open for international business (including dealings in U.S. Dollar deposits) in London. "Majority Investors" shall have the meaning specified in the Note Purchase Agreement. "Minimum Required APR" shall mean, as of any date of determination, the greater of (i) the money market yield of the rate quoted on a discount basis for commercial paper having a thirty (30) day maturity, as made available and subse quently published by the Board of Governors of the Federal Reserve System in H.15(519) under the heading "Commercial Paper" plus 1.40% per annum and (ii) the current yield to maturity of the United States Treasury Security having a maturity of two years (or if there is more than one such security, the average of the yields to maturity thereof) plus 1.63% per annum. "Modified Receivable" means indebtedness owed to the Debtor by an Obligor (without giving effect to any transfer under this Agreement) under a Contract which has been modified and is classified as a type 44, 45, 74 or 75 receivable in the Debtor's records, whether constituting an account, chattel paper, instrument or general intangible, arising out of or in connection with the sale of new or used automobiles, vans or light-duty trucks or the rendering of services by the originating dealer in connection therewith, and includes the right of payment of any finance charges and other obligations of the Obligor with respect thereto. "Moody's" shall mean Moody's Investors Service, Inc. "NationsBank" shall have the meaning specified in the preamble hereto. "Negative Carry" shall mean, with respect to any Prefunding Date, a percentage equal to (i) for the amount on deposit in the Prefunding Account by the Company, (a) the money market yield of the rate quoted on a discount basis for commercial paper having a thirty (30) day maturity, as made available and subse quently published by the Board of Governors of the Federal Reserve System in H.15(519) under the heading "Commercial Paper", plus (b) 1.40%, minus (c) the Targeted Interest Rate; (ii) for the amount on deposit in the Prefunding Account funded by the Bank Investors, (a) the LIBOR Rate, (b) plus 1.40%, minus (c) the Targeted Interest Rate. 16 "Net Asset Test" shall have the meaning specified in the Note Purchase Agreement. "Net Investment" shall mean the sum of (i) all amounts paid to the Debtor for the Initial Funding plus (ii) the cumulative amount of Prefunding Deposits minus (iii) the aggregate amount released from the Prefunding Account and applied to reduce the Net Investment pursuant to Section 2.12, minus (iv) the aggregate amount released from the Prefunding Interest Reserve Account and applied to reduce the Net Investment pursuant to Section 2.12, minus (v) the sum of (a) the aggregate amount of Receipts of Principal on deposit in the Collection Account, plus (b) the aggregate amount of Receipts of Principal which have been received by the Collection Agent on or prior to any date of determination but have not yet been deposited in the Collection Account (if such Receipts of Principal are not so deposited therein within 2 Business Days of the receipt thereof by the Collection Agent the "Net Investment" shall thereupon be recalculated, effective as of the original date of determination, without giving effect to such Receipts of Principal) plus (c) the aggregate amount of Collec tions received and applied by the Company to reduce such Net Investment pursuant to Section 2.3, minus (vi) draws on the Policy distributed and applied in reduction of Net Investment, and minus (vii) the aggregate amount of funds received and applied to reduce such Net Investment pursuant to Sections 2.7, 2.15 and 2.16; provided that the Net Investment shall be restored in the amount of any Collections so received and applied if at any time the distribution of such Collections is rescinded or must other wise be returned for any reason; provided further, that as to the Insurer, draws made under the Policy will not reduce the principal amount due under the Note. "Net Negative Hedging Amounts" shall mean, as of any Remittance Date, an amount equal to the amount by which (i) the aggregate amount of losses incurred by the Collection Agent on any Hedging Arrangements during the related Settlement Period and any prior Settlement Periods exceeds (ii) the sum of (x) the aggregate amount of gains retained by the Collection Agent on any Hedging Arrange ments during the related Settlement Period and any prior Settlement Periods and (y) amounts distributed to the Collection Agent pursuant to Section 2.3(a)(xiii) on any prior Remittance Date. "Net Receivables Balance" means at any time the Outstanding Balance of the Eligible Receivables at such time reduced by the sum of (i) the amount by which the aggregate Outstanding Balance of Undocumented Receivables exceeds $15,000,000, plus (ii) the aggregate Outstanding Balance of all Eligible Receivables which are Defaulted Receivables, plus (iii) the amount, if any, by which the aggregate outstanding Balance of all Eligible Receivables which are type 54 or 55 loans (the 17 "non-prime" loans) exceeds the product of (x) 5% and (y) the Outstanding Balance of all Eligible Receivables, plus (iv) the Excess Delinquent Receivables Balance. "Net Yield" shall mean, as calculated on each Determination Date, the product of (i) 12 and (ii) a fraction, the numerator of which is (x) the Available Funds less the aggregate amount of Carrying Costs accrued during the related Settlement Period less the aggregate Outstanding Balance of all Receivables which became Defaulted Receivables during the related Settlement Period net of the aggregate amount of recoveries received during such Settlement Period, and the denominator of which is (y) the average daily Net Investment for such Settlement Period. The Net Yield shall be expressed as a percentage. "Note" shall have the meaning specified in the Note Purchase Agree ment. "Noteholder's Percentage" shall mean an amount equal to 100% less the product of (i) 2, and (ii) the amount, if any, by which the Target Net Yield exceeds the Net Yield as of the most recent Determination Date. The Noteholder's Percentage shall initially equal 100% "Note Purchase Agreement" shall mean that certain Note Purchase Agreement, dated as of September 18, 1998, among the Debtor, the Company, the Bank Investors and the Agent. "Obligor" shall mean a Person obligated to make payments pursuant to a Contract. "Official Body" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumental ity of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Other Transferor" shall have the meaning specified in the Note Purchase Agreement. "Outstanding Balance" of a Receivable at any time shall mean the amount advanced under the related Contract toward the purchase price of the related Financed Vehicle and related costs minus all Receipts of Principal received with respect to such Receivable. 18 "PAC" shall mean Performance Acceptance Corporation, an Indiana corporation, and its successors and assigns, including UAC and UAC d/b/a PAC. "Person" shall mean any corporation, natural person, firm, joint venture, partnership, trust, unincorporated organization, enterprise, government or any department or agency of any government. "PFC" shall mean Performance Funding Corporation, a Delaware corporation, and its successors and assigns. "PFC Sale and Purchase Agreement" shall mean the Purchase and Assignment Agreement, dated as of February 28, 1998, among the Debtor, as purchaser, and PFC, as seller, as amended to the date hereof and as amended, modi fied or supplemented from time to time hereafter. "Policy" shall mean that certain financial guaranty insurance policy, substantially in the form attached hereto as Exhibit C. "Potential Termination Event" shall mean an event which but for the lapse of time or the giving of notice, or both, would constitute a Termination Event. "Prefunding Account" shall mean the account established by the Collateral Agent, for the benefit of the Secured Parties, pursuant to Section 2.11. "Prefunding Date" shall mean the 1st calendar day of each month (or if such day is not a Business Day, the next succeeding Business Day) and such other dates which are agreed upon by the Debtor and the Agent at least one Business Day in advance; provided, that there shall in no event be more than one additional Prefunding Date in any period between any two Remittance Dates (without Agent approval) and provided, further, that no Prefunding Date shall occur on and after the Termination Date. "Prefunding Deposit" shall have the meaning specified in the Note Purchase Agreement. "Prefunding Interest Reserve Account" shall mean the account estab lished by the Collateral Agent, for the benefit of the Secured Parties, pursuant to Section 2.11. 19 "Prefunding Period" shall mean, with respect to any Prefunding Date, the period from such date to the succeeding Prefunding Date. "Premium" shall have the meaning specified in the Insurance Agree ment. "Proceeds" shall mean "proceeds" as defined in Section 9-306(1) of the Relevant UCC. "Receipts of Interest" shall mean that portion of the Collections with respect to the Receivables which are properly designated as Finance Charges in accordance with the Credit and Collection Policy, together with (i) any recoveries in respect of Defaulted Receivables and Related Security with respect thereto, and (ii) amounts considered to be "Receipts of Interest" pursuant to Sections 2.7, 2.10 and 2.15. "Receipts of Principal" shall mean all Collections, other than those designated as Receipts of Interest, together with all amounts considered to be "Re ceipts of Principal" pursuant to Sections 2.7 and 2.15, provided, that Collections con stituting a refund of all or any portion of extended warranty protection plan costs or of insurance costs (for example, physical damage, credit life or disability) included in the original amount financed under a Receivable (other than a Defaulted Receivable) shall be considered a Receipt of Principal. "Receivable" shall mean indebtedness owed to the Debtor by an Obligor (without giving effect to any transfer hereunder) under a Contract, whether constituting an account, chattel paper, instrument or general intangible, arising out of or in connection with the sale of new or used automobiles, vans or light-duty trucks or the rendering of services by the originating dealer in connection therewith, and in cludes the right of payment of any Finance Charges and other obligations of the Obligor with respect thereto. Notwithstanding the foregoing, once the Collateral Agent has released its security interest in a Receivable and the related Contract pursu ant to Section 2.7 or Section 2.15 hereof, it shall no longer constitute a Receivable hereunder. The term "Receivable" specifically excludes Modified Receivables. "Records" shall mean all Contracts and other documents, books, records and other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained with respect to Receivables and the related Obligors. 20 "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System, as the same may be amended, supplemented or otherwise modified and is effect from time to time. "Related Commercial Paper" shall mean Commercial Paper issued by the Company the proceeds of which were used to acquire, or refinance the acquisition of, an interest in the Net Investment with respect to the Debtor. "Related Security" shall mean with respect to any Receivable: (i) all of the Debtor's interest in the Financed Vehicles (including repossessed vehicles) or in any document or writing evidencing any security interest in any Financed Vehicle and all of the Debtor's interest in all rights to payment under all insurance contracts with respect to a Financed Vehicle, including, without limitation, any monies collected from whatever source in connection with any default of an Obligor with respect to a Financed Vehicle and any proceeds from claims or refunds of premiums on any physical damage, lender's single interest, credit life, disability and hospitaliza tion insurance policies covering Financed Vehicles or Obligors; (ii) all of the Debtor's interest in all other security interests or liens and property subject thereto from time to time, if any, purporting to secure payment of the Contract related thereto, whether pursuant to such Contract or otherwise, together with all financing statements signed by an Obligor and security agreements describing any collateral securing such Contract; (iii) all of the Debtor's interest in all guaran ties, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable, whether pursuant to the Contract related to such Receiv able or otherwise; (iv) all of the Debtor's interest in all rights to payment under all service contracts and other contracts and agree ments associated with such Receivables and all of the Debtor's interest in all recourse rights against the dealers (excluding any rights in any dealer reserve); 21 (v) all of the Debtor's interest in all Re cords, documents and writings evidencing or related to such Receiv ables or the Contracts; and (vi) all Proceeds of the foregoing. "Relevant UCC" shall mean the Uniform Commercial Code as from time to time in effect in all applicable jurisdictions. "Remittance Date" shall mean, for each Settlement Period, the tenth (10th) day of the next succeeding calendar month; provided that if such day is not a Business Day, then the Remittance Date shall be the next succeeding Business Day. "Required Reserve Account Amount" shall mean, at any time of determination, an amount equal to the product of (a) 3.25% and (b) the Net Invest ment divided by the Noteholder's Percentage. "Required Yield Deposit Amounts" shall have the meaning specified in Section 2.13(a). "Reserve Account" shall have the meaning specified in Section 2.14 hereof. "Reserve Account Advance" shall mean any advance made pursuant to Section 2.3(c) from amounts on deposit in the Reserve Account. "Reserve Account Guaranty" shall mean the amount available pursuant to any guaranty of the amount required to be kept in the Reserve Account pursuant to this Agreement and the other Transaction Documents. Any Reserve Account Guaranty shall be rated at least investment grade by S&P and Moody's. "S&P" shall mean Standard & Poor's Ratings Services, a Division of the McGraw Hill Companies. "Sale and Purchase Agreement" shall mean, as applicable, either or both of (i) the Amended and Restated Sale and Purchase Agreement dated as of December 23, 1996, between the Debtor, as purchaser, and UAC, as seller, and (ii) the Amended and Restated Sale and Purchase Agreement dated as of December 23, 1996, between PFC, as purchaser, and UAC, as seller, each as amended to the date hereof and as amended, modified or supplemented from time to time hereafter. 22 "Secured Parties" shall mean the Company, the Bank Investors and the Insurer. "Securities Intermediary" shall mean NationsBank, and any other entity acting in the capacity of a "securities intermediary" as defined in Section 8- 102(14) of the UCC. "Servicer Advance" shall have the meaning specified in Section 2.3(c). "Servicing Fee" shall mean, for any Settlement Period, the fee payable pursuant to Section 2.3 on the related Remittance Date by the Company to the Col lection Agent, in an amount equal to 1.0% per annum on the amount of the aggregate Outstanding Balance of the Receivables as of the first day of such Settlement Period. "Settlement Period" shall mean any calendar month, provided that the initial Settlement Period shall commence on the Cut-Off Date and end on October 31, 1998. "Settlement Statement" shall mean a report, in substantially the form of Exhibit D or in such other form as is mutually agreed to by the Debtor and the Company, furnished by the Collection Agent to the Collateral Agent, the Agent, Moody's, S&P and the Insurer on each Determination Date pursuant to Section 2.9. "Subsidiary" of a Person shall mean any corporation more than 50% of the outstanding voting securities of which, and any partnership more than 50% of the partnership interests of which, shall at any time be owned or controlled, directly or indirectly, by such Person or by one or more Subsidiaries of such Person or any simi lar business organization which is so owned or controlled. "Take-Out" shall mean the release, pursuant to Section 2.15(a) or 2.15(d), by the Collateral Agent of Receivables and the Contracts related thereto. In order to qualify as a "Take-Out", the Outstanding Balance of Receivables immediately after the Take-Out shall be no more than 25% of the highest Outstanding Balance of Receivables in existence as of a date not more than 31 days prior to the Take-Out. "Targeted Interest Rate" for any Settlement Period shall mean 2.5% or such lower rate set forth in a written notice by the Agent to the Debtor and the Col lection Agent, such other rate to be effective three (3) Business Days after the date of such notice. 23 "Target Net Yield" shall mean 5.0% "Termination Date" shall mean the earliest of (i) that Business Day designated by the Debtor to the Agent as the Termination Date at any time following 60 days' written notice to the Agent, (ii) the date of termination of the liquidity commitment of the Liquidity Provider under the Liquidity Provider Agreement, (iii) the date of termination of the commitment of the Credit Support Provider under the Credit Support Agreement, (iv) the day on which a Termination Event occurs pursu ant to Section 7.1, (v) two business days prior to the Commitment Termination Date, or (vi) September 17, 1999, unless extended prior to such date pursuant to a Revolv ing Period Extension (as defined in the Insurance Agreement). "Termination Event" shall mean an event described in Section 7.1. "Transaction Documents" shall mean this Agreement, the Note Purchase Agreement, the Note, the Sale and Purchase Agreement, the Insurance Agreement, the Policy, the Fee Letter and all other agreements, documents and instruments delivered pursuant thereto or in connection therewith. "Transferred Interest" shall mean, at any time of determination, an undivided interest in the Note. "UAC" shall mean Union Acceptance Corporation, an Indiana corpo ration, and its successors and assigns. "UARC" shall mean Union Acceptance Receivables Corporation, a Delaware corporation, and its successors and assigns. "Undocumented Receivable" shall mean any Receivable as to which, at the time of the assignment of such Receivable and the Contract related thereto to UAC or an Acquisition Subsidiary by the dealer which originated such Receivable or at the time of the origination of such Receivable by UAC or such Acquisition Subsid iary, the Collection Agent shall not have received from the dealer and the related Obligor all documentation required to be received by the Collection Agent pursuant to the Credit and Collection Policy. "Withdrawal Notice" shall have the meaning specified in Section 2.12(a). 24 "Yield Protection Provision" shall mean the compensation of the Company and the Bank Investors by the Debtor of the Company's and the Bank Investors' costs due to increased taxes, reserve and funding costs as described in Section 4.2 of the Note Purchase Agreement. "Yield Supplement Account" shall mean the account established by the Collateral Agent, for the benefit of the Company, pursuant to Section 2.13. SECTION 1.2 Other Terms. Unless the context otherwise requires, all capi talized terms used herein and not otherwise defined herein shall have the meanings specified in the Note Purchase Agreement, and shall include in the singular number the plural and in the plural number the singular. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the Relevant UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. SECTION 1.3 Computation of Time Periods. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" shall mean "from and including" and the words "to" and "until" each shall mean "to but excluding." ARTICLE II GRANT OF SECURITY INTEREST AND SETTLEMENTS SECTION 2.1 Grant of Security Interest. As security for the prompt and complete payment of the Note and the performance of all of the Debtor's obliga tions under the Note, the Note Purchase Agreement, the Insurance Agreement, this Agreement and the other Transaction Documents, the Debtor hereby grants to the Collateral Agent, for the benefit of the Secured Parties, without recourse except as provided herein, a security interest in and continuing Lien on all of the Debtor's property, in existence on the Cut-Off Date or thereafter acquired and wherever located, including, without limitation, all of its right, title and interest in, to and under all accounts, contract rights, general intangibles, chattel paper, instruments, docu ments, money, cash, deposit accounts, certificates of deposit, goods, letters of credit, securities, investment property, financial assets or security entitlements (all of the foregoing, collectively, the "Collateral"); provided, that once the Company has released its interest in a Receivable and the related Contract pursuant to Section 2.7 25 or 2.15 hereof, such Receivable and related Contract shall no longer be part of the Collateral. In connection with such grant, the Debtor agrees to record and file, at its own expense, financing statements with respect to the Collateral now existing and hereafter created meeting the requirements of applicable state law in such manner and in such jurisdictions as are necessary to perfect the first priority security interest of the Collateral Agent in the Collateral, and to deliver a file-stamped copy of such financing statements or other evidence of such filing (which may, for purposes of this Section 2.1, consist of telephone confirmation of such filing) to the Collateral Agent on or prior to the Closing Date. In addition, the Debtor and the Collection Agent agree to clearly and unambiguously mark their respective general ledgers and all accounting records and documents and all computer tapes and records to show that the Collat eral, including that portion of the Collateral consisting of the Receivables and the related Contracts, have been pledged to the Collateral Agent hereunder. SECTION 2.2 Carrying Costs, Fees and Other Costs and Expenses. Notwithstanding the limitation on recourse under Section 2.1, the Debtor shall pay, as and when due in accordance with this Agreement, all fees hereunder, Carrying Costs, all amounts payable pursuant to Article VIII hereof, if any, all fees specified in the Fee Letter, and the Servicing Fee. On each Remittance Date, the Debtor shall pay to the Company and the Bank Investors, as applicable, an amount equal to the accrued and unpaid Carrying Costs for the related Settlement Period together with, in respect of the Company, an amount equal to the discount accrued on the Company's Commer cial Paper notes to the extent such notes were issued in order to fund the Net Invest ment in an amount in excess of the amount of the Initial Funding or in excess of any deposit made by the Company to the Prefunding Account. The Debtor shall pay to the Agent, for the account of the Company, on each day on which Commercial Paper is issued by the Company, the Dealer Fee. Nothing in this Agreement shall limit in any way the obligations of the Debtor to pay the amounts set forth in this Section 2.2. SECTION 2.3 Allocations of Collections; Reserve Account Ad vances; Servicer Advances. (a) On each Determination Date, the Collection Agent shall allocate all Collections received during the preceding Settlement Period as Receipts of Interest or Receipts of Principal. On each Remittance Date, Receipts of Interest plus all earnings during the related Settlement Period on amounts on deposit in the Prefunding Account to the extent not required pursuant to Section 2.11 to be distrib uted to the Collection Agent in reimbursement for previously advanced Interest 26 Reserve Advances plus all amounts deposited in the Prefunding Interest Reserve Account with respect to the related Settlement Period (together with any earnings thereon during such Settlement Period) plus any Interest Reserve Advance made by the Collection Agent on such Remittance Date pursuant to Section 2.11 plus any payments to the Debtor under an Acceptable Hedging Arrangement plus all amounts to be applied pursuant to Section 2.14(c)(ii)(y) (the aggregate of such amounts in re spect of any remittance date, the "Available Funds") shall be applied, without duplica tion, by the Collection Agent as follows: (i) first, (A) to pay any amounts due under an Acceptable Hedging Arrangement, and (B) to the Reserve Account, in the amount of Reserve Account Advances related to such Settle ment Period; (ii) second, to the extent of any remaining Available Funds, to the retention by the Collection Agent of any Servicer Advances related to such Settlement Period; (iii) third, to pay to the Collateral Agent all fees and expenses due pursuant to Section 8.2 hereof; (iv) fourth, to the extent of any remaining Available Funds, to the Agent, for the account of the Company and the Bank Investors, as applicable, an amount equal to all accrued and unpaid Carrying Costs (exclusive of all amounts payable pursuant to the Yield Protection Provision) in respect of such Settlement Period and with respect to any previous Settlement Period to the extent not previously paid; (v) fifth, to the extent of any remaining Available Funds, to the payment of the Agent, for the account of the Company and the Bank Investors, as applicable, to be applied in reduction of the Net Investment, of the amount by which the Net Investment less the quotient of (A) the amount on deposit in the Prefunding Account and (B) 100% less the quotient of (x) the percent age used to determine the Required Reserve Account Amount and (y) the Noteholder's Percentage exceeds the product of the Noteholder's Percentage and the Net Receivables Balance; 27 (vi) sixth, to the extent of any remaining Available Funds, to the Insurer, the aggregate amount of any previ ously unreimbursed draws on the Policy, plus accrued interest thereon at the rate provided in the Insurance Agreement; (vii) seventh, to the extent of any remaining Available Funds, to the Insurer, the Premium, including any overdue Premium, accrued interest thereon plus any amounts owed under the Policy or the Insurance Agreement; (viii) eighth, to the extent of any remaining Available Funds, to the Reserve Account, to the extent necessary to cause the amount on deposit therein to equal the Required Reserve Account Amount; (ix) ninth, to the extent of any remaining Available Funds, to the Yield Supplement Account to the extent of any amounts previously withdrawn therefrom pursuant to Section 2.3(c) and not previously reimbursed to the credit of the Yield Supplement Account; provided that there shall be no requirement to reimburse such account for amounts withdrawn therefrom related to any Receiv ables and the related Contracts with respect to which the Collateral Agent shall have released its interest therein pursuant to Section 2.7 or Section 2.15; (x) tenth, to the extent of any remaining Available Funds, to the payment of the Collection Agent (if the Collec tion Agent is UAC), of the Servicing Fee for such Settlement Period and any unreimbursed Interest Reserve Advances made by the Collec tion Agent and not previously reimbursed; (xi) eleventh, to the extent of any remaining Available Funds, on or after the Termination Date, such remaining Available Funds shall be paid to the Agent, for the account of the Company and the Bank Investors, as applicable, in reduction of the Net Investment; (xii) twelfth, to pay all amounts due under the Yield Protection Provision; 28 (xiii) thirteenth, to the extent of any remaining Available Funds, to the Collection Agent, in reimbursement for any Net Negative Hedging Amounts incurred by the Collection Agent and not previously reimbursed; (xiv) fourteenth, to the extent of any remain ing funds, to the Agent, for the account of the Persons entitled thereto, an amount equal to all other amounts owed under the Note Purchase Agreement; and (xv) fifteenth, any remaining Available Funds shall be paid to the Debtor. (b) On any Business Day on which Commercial Paper issued in connection herewith matures, the Collection Agent may apply and remit to the Agent, in reduction of the Net Investment, any Receipts of Principal received on or prior to such day and not previously remitted to the Agent in any such case in an amount not to exceed the principal component of such maturing Commercial Paper. On each Remittance Date, the Collection Agent shall apply and remit to the Agent, in reduction of the Net Investment, all Receipts of Principal received with respect to the prior Settlement Period and not previously remitted to the Agent pursuant to the preceding sentence. (c) In the event that, at any time, the Company does not have sufficient funds at such time to pay Carrying Costs when due, then, in such event, there shall be made a Reserve Account Advance equal to the amount of such deficiency, which amount shall be applied to pay such costs and expenses of the Company; provided, that such Reserve Account Advance shall be made only to the extent of funds then on deposit in the Reserve Account and shall not include any amount pursuant to a Reserve Account Guaranty. In the event that any such Reserve Account Advance is not made by 11:00 a.m. (New York City time) on the day requested the Collection Agent shall, at the request of the Agent, advance to the Company an amount equal to such deficiency (each, a "Servicer Advance"); provided, that the Collection Agent shall not be required to make any such Servicer Advance to the extent that the Collection Agent reasonably believes that it will not be reimbursed for such Servicer Advance pursuant to Section 2.3(a)(ii) on any subsequent Remit tance Date. In the event that any such Servicer Advance is not made by 11:00 a.m. (New York City time) on the day requested, there shall be withdrawn from the Yield Supplement Account an amount equal to the amount of such deficiency, which amount shall be applied to pay such costs and expenses of the Company. In the event that any such payment from the Yield Supplement Account is not made by 11:00 a.m. 29 (New York City time) there shall be made a Reserve Account Advance and/or an advance pursuant to any Reserve Account Guaranty equal to the amount of such deficiency, which amount shall be applied to pay such costs and expenses of the Company. In the event that any such Reserve Account Advance and/or advance pursuant to any Reserve Account Guaranty is not made by 11:00 a.m. (New York City time) on the day requested by the Collection Agent, there shall be made a draw under the Policy equal to the amount of such deficiency, which amount shall be paid directly to the Agent and shall be applied to pay such costs and expenses of the Company. SECTION 2.4 Liquidation Settlement Procedures. Following any date after the Termination Date on which all Aggregate Unpaids have been paid in full, (i) the Collateral Agent shall be considered to have released its security interest in and continuing Lien on the Collateral, including all of the Receivables and Related Security, (ii) the Collection Agent shall pay to the Debtor any remaining Collections set aside and held by the Collection Agent, and (iii) the Collateral Agent shall execute and deliver to the Debtor, at the Debtor's expense, such documents or instruments as are necessary to terminate the Collateral Agent's security interest in the Collateral, including all of the Receivables and Related Security and Collections with respect thereto. Any such documents shall be prepared by or on behalf of the Debtor at the expense of the Debtor. SECTION 2.5 Fees. Notwithstanding any limitation on recourse con tained in this Agreement, the Debtor shall pay, in the manner and at the time specified in the Fee Letter, the fees specified in the Fee Letter. SECTION 2.6 Protection of Interest of the Collateral Agent. The Debtor agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents and take all actions as may be necessary or as the Collateral Agent may reasonably request in order to perfect or protect the Collateral or to enable the Collateral Agent to exercise or enforce any of its rights hereunder. Without limiting the foregoing, the Debtor will, upon the request of the Collateral Agent, in order to accurately reflect the security interest of the Collateral Agent in the Collateral, execute and file such financing or continuation statements or amendments thereto or assignments thereof (as permitted pursuant to Section 9.6 hereof) as may be requested by the Collateral Agent and mark its master data pro cessing records (or to cause such records to be marked) so as to indicate the Collat eral Agent's security interest in the portion of the Collateral consisting of Receivables, the related Contracts, the Collections and the Related Security with respect thereto. The Debtor agrees that it shall take all actions necessary to cause UAC to similarly 30 mark its records to reflect the sale of the Receivables and the Contracts to the Debtor and the Collateral Agent's security interest in the Receivables, the related Contracts, the Collections and the Related Security with respect thereto. The Debtor shall, at its own expense, upon request of the Collateral Agent, obtain such additional search reports as the Collateral Agent shall request. To the fullest extent permitted by appli cable law, the Collateral Agent shall be permitted to sign and file continuation state ments and amendments thereto and assignments thereof without the Debtor's signa ture. Carbon, photographic or other reproduction of this Agreement or any financing statement shall be sufficient as a financing statement. The Debtor shall neither change its name, identity or corporate structure (within the meaning of Section 9-402(7) of the Relevant UCC as in effect in the State of Florida) nor relocate its chief executive office or any office where Records are kept unless it shall have: (i) given the Collat eral Agent and the Insurer at least thirty (30) days prior notice thereof and (ii) prepared at the Debtor's expense and delivered to the Collateral Agent all financing statements, instruments and other documents necessary to preserve and protect the Collateral or requested by the Collateral Agent or the Insurer in connection with such change or relocation. Any filings under the Relevant UCC or otherwise that are occa sioned by such change in name or location shall be made at the expense of the Debtor. On the Closing Date, the Debtor shall deliver to the Collateral Agent and the Insurer a listing by account number of the Contracts as of the Cut-Off Date, which listing shall constitute Schedule A hereto and is hereby incorporated herein by reference. On the second Business Day after the end of each Settlement Period, the Debtor shall deliver to the Collateral Agent an updated listing by account number of the Contracts as of the last day of such Settlement Period (giving effect to any releases by the Company pursuant to Section 2.7 or Section 2.15) and such updated list shall thereupon consti tute Schedule A hereto and is hereby incorporated by reference herein. (a) The Collection Agent shall instruct all Obligors to cause all Collections to be deposited directly with a Lock-Box Bank. The Collection Agent shall not add any bank as a Lock-Box Bank to those listed on Exhibit B without the consent of the Collateral Agent and the Insurer. The Collection Agent shall not terminate any bank as a Lock-Box Bank unless the Collateral Agent and the Insurer shall have received fifteen (15) days' prior notice of such termination. If the Debtor or the Collection Agent receives any Collections, the Debtor or the Collection Agent, as applicable, shall immediately, but in any event within two (2) Business Days of receipt, remit such Collections to a Lock-Box Account. 31 SECTION 2.7 Payments on Receivables; Application of Payments. If, on any day, (a) the Outstanding Balance of a Receivable is either (x) reduced as a result of any defective, rejected or returned goods or services, any cash discount, credit, rebate, allowance or other dilution factor, any billing adjustment or other adjustment, or (y) reduced or canceled as a result of a setoff or offset in respect of any claim by any Person (whether such claim arises out of the same or a related transaction or an unrelated transaction); or (b) as to any Undocumented Receivable, all documentation required to be received after the origination of such Receivable pursuant to the Credit and Collection Policy has not been received and accepted by the Collection Agent within twenty (20) days following the date of the initial draft drawn by the originating dealer on UAC in connection with the origination of such Receivable; or (c) any of the representations or warranties in Article III is no longer true with respect to a Receivable; then, in any such event, the Collateral Agent shall release its security interest in and Lien on such Receivable and the related Contract; provided that if such release would result in the Net Asset Test not being satisfied, then as a condition precedent to such release the Debtor shall deposit into the Collection Account an amount equal to the amount which, if applied to the reduction of the Net Investment, would cause the Net Asset Test to be satisfied. Such amount shall be applied as a Receipt of Principal pursuant to Section 2.3. All collections of Finance Charges received with respect to any such released Receivable through the last day of the Settlement Period in which such Receivable is released shall continue to constitute Receipts of Interest hereunder. SECTION 2.8 Payments and Computations, Etc. All amounts to be paid or deposited by the Debtor or the Collection Agent hereunder shall be paid or deposited in accordance with the terms hereof no later than 12:00 noon. (New York City time) on the day when due in immediately available funds; if such amounts are payable to the Company or the Bank Investors, they shall be paid or deposited in the Agent's account indicated in Section 9.3, until otherwise notified by the Agent, the Company or any Bank Investor; if such amounts are payable to the Insurer, they shall be paid or deposited in the Insurer's account indicated in Section 9.3, until otherwise notified by the Insurer. The Debtor shall, to the extent permitted by law, pay to the applicable Secured Parties upon demand, interest on all amounts not paid or deposit ed when due to the Secured Parties hereunder at a rate equal to 2% per annum plus 32 the Base Rate. All computations of Carrying Costs, interest and all per annum fees hereunder shall be made on the basis of a year of 360 days for the actual number of days elapsed. Any computations of amounts payable by the Debtor hereunder to any of the Secured Parties, the Liquidity Provider or the Credit Support Provider shall be binding absent manifest error. SECTION 2.9 Reports. On or before each Determination Date, the Collection Agent shall prepare and forward to the Collateral Agent, the Adminis trative Agent, Moody's, S&P and the Insurer, (i) a Settlement Statement as of the end of the preceding Settlement Period, (ii) if requested by the Collateral Agent, the Administrative Agent or the Insurer, a computer tape listing by Obligor all Receiv ables, together with an aging of such Receivables, and (iii) such other information as the Collateral Agent, the Administrative Agent or the Insurer may reasonably request. The Agent shall provide to the Debtor, on the day prior to each Determination Date, a monthly settlement statement containing information relating to the amount of each obligation of the Company which comprises Carrying Costs for the most recent Collection Period and the amount of interest earnings on all related accounts for such Collection Period. SECTION 2.10 Collection Account. There shall be established on the Closing Date and maintained, for the benefit of the Secured Parties, with the Collateral Agent, a segregated account (the "Collection Account"), bearing a designa tion clearly indicating that the funds deposited therein are held for the benefit of the Secured Parties. Subject to the terms hereof, the Collateral Agent shall possess all right, title and interest in and to all funds deposited from time to time in the Collection Account. The Collateral Agent will maintain the Collection Account at an Eligible Institution. If the Eligible Institution holding the Collection Account shall cease to be an Eligible Institution, the Collateral Agent shall have the right to direct the transfer of the Collection Account to an Eligible Institution. The Collection Agent shall remit daily from the Lock-Box Account, within two (2) Business Days of receipt, to the Collection Account all Collections received with respect to any Receivables. On each Remittance Date, all interest and earnings (net of losses and investment expenses) on funds on deposit in the Collection Account shall be considered to be Receipts of Interest and shall be distributed hereunder as such. On the date on which the Net Investment is zero and all amounts payable hereunder by the Debtor have been paid in full, any funds remaining on deposit in the Collection Account shall be paid to the Debtor. (a) Funds on deposit in the Collection Account shall be invested in Eligible Investments by or at the written direction of the Debtor, provided 33 that if a Termination Event shall have occurred, such investments shall be made as directed by the Collateral Agent. Any such written directions shall specify the particular investment to be made and shall certify that such investment is an Eligible Investment and is permitted to be made under this Agreement. (b) The Collateral Agent agrees that it shall not accept for credit to the Collection Account any investment as to which it has knowledge of any adverse claim thereto. NationsBank hereby agrees (and any other Securities Interme diary holding the Collection Account shall so agree) to comply with all Entitlement Orders (as defined in Section 8-102 of the 1994 Official Text of the Uniform Com mercial Code) received by it with respect to the Collection Account from the Collat eral Agent. (c) Funds on deposit in the Collection Account (other than investment earnings) shall be invested by the Collateral Agent in Eligible Investments that will mature so that such funds will be available on the Remittance Date with respect to the Settlement Period during which such funds were received. No Eligible Investment may be liquidated or disposed of prior to its maturity. All proceeds of any such Eligible Investment shall be deposited in the Collection Account. Investments may be made in the Collection Account on any date (provided such investments mature in accordance herewith), only after giving effect to deposits to and withdraw als from the Collection Account on such date. Realized losses, if any, on amounts invested in such Eligible Investments shall be charged against investment earnings on amounts on deposit in the Collection Account (d) The Debtor shall provide the Collateral Agent on the date hereof and from time to time an incumbency certificate or the substantial equivalent with respect to each officer of the Debtor that is authorized to provide instructions relating to investments in Eligible Investments in the Collection Account. (e) Eligible Investments shall be maintained by the Collat eral Agent in the Collection Account in such manner as may be necessary to maintain the first priority perfected security interest in favor of the Collateral Agent on behalf of the Secured Parties. NationsBank, agrees (and any other Securities Intermediary holding the Collection Account shall so agree) that it shall not agree to comply with Entitlement Orders (as defined in Section 8-102 of the 1994 version of the Official Text of Article 8 of the Uniform Commercial Code) with respect to the Collection Account given to it by any Person other than the Collateral Agent. 34 SECTION 2.11 Prefunding Account; Prefunding Interest Reserve Account; Interest Reserve Deposits; Interest Reserve Advances; Reimbursements. (a) There shall be established on the Closing Date and maintained, for the benefit of the Secured Parties, with the Collateral Agent, two segregated accounts (the "Prefunding Account" and the "Prefunding Interest Reserve Account"), each bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Secured Parties. Subject to the terms hereof, the Collateral Agent shall possess all right, title and interest in and to all funds deposited from time to time in the Prefunding Account and the Prefunding Interest Reserve Account. The Collateral Agent will maintain the Prefunding Account and the Prefunding Interest Reserve Account at an Eligible Institution. If the Eligible Institution holding the Prefunding Account or the Prefunding Interest Reserve Account shall cease to be an Eligible Institution, the Collateral Agent shall have the right to direct the transfer of the Prefunding Account or the Prefunding Interest Reserve Account to an Eligible Institution. (1) Funds on deposit in the Prefunding Account and the Prefunding Interest Reserve Account shall be invested by the Collateral Agent in overnight Eligible Investments by or at the written direction of the Debtor, provided that if a Termination Event shall have occurred, such investments shall be made as directed by the Collateral Agent. Any such written directions shall specify the particular investment to be made and shall certify that such investment is an Eligible Investment and is permitted to be made under this Agreement. (2) The Collateral Agent agrees that it shall not accept for credit to the Prefunding Account and the Prefunding Interest Reserve Account any investment as to which it has knowledge of any adverse claim thereto. NationsBank, hereby agrees (and any other Securities Intermediary holding the Prefunding Account or the Prefunding Interest Reserve Account shall so agree) to comply with all Entitlement Orders (as defined in Section 8-102 of the 1994 Official Text of the Uniform Commercial Code) received by it with respect to the Prefunding Account or the Prefunding Interest Reserve Account from the Collateral Agent. (3) Funds on deposit in the Prefunding Account and the Prefunding Interest Reserve Account shall be invested in Eligible Investments that will mature overnight. No such Eligible Investment may be liquidated or disposed of prior to its maturity. All proceeds of any such Eligible Investment shall be deposited in the Prefunding Account or the Prefunding Interest Reserve Account, as applicable. Investments may be made in either account on any date (provided such investments 35 mature in accordance herewith), only after giving effect to deposits to and withdraw als from such account on such date. Realized losses, if any, on amounts invested in Eligible Investments in the Prefunding Account or the Prefunding Interest Reserve Account shall be charged against investment earnings on amounts on deposit in the Prefunding Account or the Prefunding Interest Reserve Account, as applicable. (4) The Debtor shall provide the Collateral Agent on the date hereof and from time to time an incumbency certificate or the substantial equivalent with respect to each officer of the Debtor that is authorized to provide instructions relating to investments in Eligible Investments in the Prefunding Account and the Prefunding Interest Reserve Account. (5) Eligible Investments shall be maintained in the Prefunding Account and the Prefunding Interest Reserve Account by the Collateral Agent in such manner as may be necessary to maintain the first priority perfected security interest in favor of the Collateral Agent on behalf of the Secured Parties. NationsBank, agrees (and any other Securities Intermediary holding the Prefunding Account or the Prefunding Interest Reserve Account shall so agree) that it shall not agree to comply with Entitlement Orders (as defined in Section 8-102 of the 1994 version of the Official Text of Article 8 of the Uniform Commercial Code) with respect to the Prefunding Account or the Prefunding Interest Reserve Account given to it by any Person other than the Collateral Agent. (b) On the Business Day preceding each Prefunding Date, the Debtor shall deposit in the Prefunding Interest Reserve Account an amount equal to the product of (i) the Negative Carry for such Prefunding Date, (ii) the principal component of the amount of Commercial Paper which would be required on such date to fund the Prefunding Deposit, or if such deposit is to be made by the Bank Investors, the amount to be advanced by the Bank Investors, and (iii) a fraction, the numerator of which is the number of days from the Prefunding Date through the end of the Settlement Period during which such Prefunding Date occurs and the denom inator of which is 360 (such amount with respect to a Prefunding Date, the "Interest Reserve Deposit"). (c) On each Remittance Date, the Collection Agent shall deposit to the Collection Account an amount equal to the Interest Reserve Advance, if any, for such Remittance Date. In the event that, on any Remittance Date, the amount earned over the preceding Settlement Period on amounts on deposit in the Prefunding Account shall exceed an amount equal to the product of (i) the daily weighted average amount on deposit in the Prefunding Account during the preceding 36 Settlement Period, (y) the Targeted Interest Rate (on a per annum basis) and (z) a fraction, the numerator of which is the number of days in the related Settlement Period and the denominator of which is 360, the Collateral Agent shall release such excess amount from the Prefunding Interest Reserve Account to the Collection Agent in reimbursement for previously advanced Interest Reserve Advances or, to the extent no such unreimbursed advances exist, the Collection Agent shall apply such excess amount as part of Available Funds under Section 2.3(a). SECTION 2.12 Prefunding Account and Prefunding Interest Reserve Account Withdrawals. (a) On any Business Day, upon receipt by the Agent and the Collateral Agent not later than 11:00 a.m. New York City time of written certif ication in substantially the form of Exhibit E (a "Withdrawal Notice") from the Debtor setting forth, among other things, the amount requested to be released from the Prefunding Account and certifying that (i) after giving effect to the amount to be funded with respect to such additional Receivables, the Net Asset Test shall be satisfied, (ii) the amount on deposit in the Reserve Account shall not be less than the Required Reserve Account Amount (calculated (x) immediately prior to the related Prefunding Date and (y) as if such Prefunding Deposit shall have occurred), (iii) the Debtor shall have made any deposit into the Yield Supplement Account required pursuant to Section 2.13 in connection with such Receivables, if any, and (iv) the Collection Agent shall be in compliance with the requirements of Section 5.3 in re spect of such Prefunding Date, the Collateral Agent shall release to the Debtor the amount requested by the Collection Agent. (b) On the last day of each Prefunding Period, all amounts on deposit in the Prefunding Account (exclusive of earnings thereon) shall be, at the Debtor's option, either (i) released to the Agent to be applied in reduction of the Net Investment, or (ii) retained in the Prefunding Account and applied to reduce the amount of the Prefunding Deposit otherwise required to be made by the Company or the Bank Investors, as applicable, on the succeeding Prefunding Date. Notwithstand ing the foregoing however, on the first Remittance Date to occur on or after the Termination Date, all amounts on deposit, exclusive of earnings thereon, in the Prefunding Account shall be released to the Agent, for the account of the Company and the Bank Investors, as applicable, and applied in reduction of the Net Investment and earnings thereon shall be deposited in the Collection Account for application as Available Funds. 37 (c) On each Remittance Date all amounts deposited in the Prefunding Interest Reserve Account with respect to the related Settlement Period (together with any earnings on the Prefunding Interest Reserve Account during such Settlement Period) shall be deposited in the Collection Account. SECTION 2.13 Yield Supplement Account, Deposits; Withdrawals. (a) On the day of the Initial Funding with respect to all Receivables recorded on the Collection Agent's master servicing records as of such day and on any Business Day thereafter on which a Receivable is recorded on the Collection Agent's master servicing records, the Debtor shall deposit into the Yield Supplement Account for each such Receivable with respect to which the related Con tract provides for interest to accrue thereunder at a rate less than the Minimum Re quired APR (determined as of the date of such recordation on the Collection Agent's master servicing records) an amount (each such amount, a "Required Yield Deposit Amount") equal to the product of (i) the number of monthly payments originally required under such Contract and (ii) an amount equal to (x) the scheduled monthly payment on such Contract which would be required to be made by the Obligor there under if such Contract had a rate per annum equal to the Minimum Required APR minus (y) the scheduled monthly payment on such Contract which would be required to be made by the Obligor thereunder if such Contract had a rate per annum equal to the rate set forth in such Contract. Notwithstanding the foregoing, no Required Yield Deposit Amount need be deposited to the Yield Supplement Account until the total amount of all undeposited Required Yield Deposit Amounts equals or exceeds $1,000. (b) There shall be established on the Closing Date and maintained, for the benefit of the Company and the Bank Investors, with the Collat eral Agent, a segregated account (the "Yield Supplement Account"), bearing a desig nation clearly indicating that the funds deposited therein are held for the benefit of the Secured Parties. Subject to the terms hereof, the Collateral Agent shall possess all right, title and interest in and to all funds deposited from time to time in the Yield Supplement Account. The Collateral Agent will maintain the Yield Supplement Account at an Eligible Institution. If the Eligible Institution holding the Yield Supplement Account shall cease to be an Eligible Institution, the Collateral Agent shall have the right to direct the transfer of the Yield Supplement Account to an Eligible Institution. (1) Funds on deposit in the Yield Supplement Account shall be invested in overnight Eligible Investments by or at the written 38 direction of the Debtor, provided that if a Termination Event shall have occurred, such investments shall be made as directed by the Collateral Agent. Any such written directions shall specify the particular investment to be made and shall certify that such investment is an Eligible Investment and is permitted to be made under this Agree ment. (2) The Collateral Agent agrees that it shall not accept for credit to the Yield Supplement Account any investment as to which it has knowledge of any adverse claim thereto. NationsBank hereby agrees (and any other Securities Intermediary holding the Yield Supplement Account shall so agree) to comply with all Entitlement Orders (as defined in Section 8-102 of the 1994 Official Text of the Uniform Commercial Code) received by it with respect to the Yield Supplement Account from the Collateral Agent. (3) No Eligible Investment in the Yield Supplement Account may be liquidated or disposed of prior to its maturity. All proceeds of any such Eligible Investment shall be deposited in the Yield Supplement Account. Investments may be made in the Yield Supplement Account on any date (provided such investments mature in accordance herewith), only after giving effect to deposits to and withdrawals from such account on such date. Realized losses, if any, on amounts invested in such Eligible Investments shall be charged against investment earnings on amounts on deposit in the Yield Supplement Account. (4) The Debtor shall provide the Collateral Agent on the date hereof and from time to time an incumbency certificate or the substantial equivalent with respect to each officer of the Debtor that is authorized to provide instructions relating to investments in Eligible Investments in the Yield Supplement Account. (5) Eligible Investments in the Yield Supplement Account shall be maintained by the Collateral Agent in such manner as may be necessary to maintain the first priority perfected security interest in the Yield Supple ment Account in favor of the Collateral Agent on behalf of the Secured Parties. NationsBank agrees (and any other Securities Intermediary holding the Yield Supple ment Account shall so agree) that it shall not agree to comply with Entitlement Orders (as defined in Section 8-102 of the 1994 version of the Official Text of Article 8 of the Uniform Commercial Code) with respect to the Yield Supplement Account given to it by any Person other than the Collateral Agent. 39 (c) In the event that Available Funds with respect to any Remittance Date are insufficient to provide for the payment of the amounts described in Sections 2.3(a)(ii), (iv) and (v), the Collateral Agent shall make a withdrawal from the Yield Supplement Account in the amount of such deficiency and the proceeds from such withdrawal shall be applied by the Collateral Agent to the required distribu tions and payments. Funds may also be released from the Yield Supplement Account each month in accordance with Section 2.3(c). On any day on which the Collateral Agent, pursuant to Section 2.7 or Section 2.15, releases to the Debtor its security interest in a Contract and related Receivable with respect to which the Debtor deposited funds in the Yield Supplement Account pursuant to Section 2.13(a), the amount of such deposit (together with any earnings thereon) less any amounts released from the Yield Supplement Account in accordance with Section 2.3(c) shall be released to the Debtor. Upon the occurrence of a Termination Event, all amounts on deposit in the Yield Supplement Account shall be released to the Agent, for the account of the Company and the Bank Investors, as applicable, and applied in reduction of the Net Investment. SECTION 2.14 Reserve Account; Withdrawals; Releases; Draws on Policy. (a) There shall be established on the Closing Date and maintained, for the benefit of the Secured Parties, with the Collateral Agent, a segre gated account (the "Reserve Account"), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Secured Parties. Subject to the terms hereof, the Collateral Agent shall possess all right, title and interest in and to all funds deposited from time to time in the Reserve Account. The Collateral Agent will maintain the Reserve Account at an Eligible Institution. If the Eligible Institution holding the Reserve Account shall cease to be an Eligible Institution, the Collateral Agent shall have the right to direct the transfer of the Reserve Account to an Eligible Institution. On each Funding Date and each Prefunding Date, the Debtor shall deposit (or cause to be withheld from proceeds from the issuance of Related Commercial Paper) to the credit of the Reserve Account an amount equal to an amount necessary to fund the Reserve Account to the Required Reserve Account Amount. The amount of any Reserve Account Guaranty shall be counted toward the amount of funds available in the Reserve Account. (1) Funds on deposit in the Reserve Account shall be invested in Eligible Investments by or at the written direction of the Debtor, provided that if a Termination Event shall have occurred, such investments shall be made as directed by the Collateral Agent. Any such written directions shall specify 40 the particular investment to be made and shall certify that such investment is an Eligible Investment and is permitted to be made under this Agreement. (2) The Collateral Agent agrees that it shall not accept for credit to the Reserve Account any investment as to which it has knowledge of any adverse claim thereto. NationsBank hereby agrees (and any other Securities Intermediary holding the Reserve Account shall so agree) to comply with all Entitle ment Orders (as defined in Section 8-102 of the 1994 Official Text of the Uniform Commercial Code) received by it with respect to the Reserve Account from the Collateral Agent. (3) No Eligible Investment in the Reserve Account may be liquidated or disposed of prior to its maturity. All proceeds of any such Eligible Investment shall be deposited in the Reserve Account. Investments may be made in the Reserve Account on any date (provided such investments mature in accordance herewith), only after giving effect to deposits to and withdrawals from such account on such date. Realized losses, if any, on amounts invested in such Eligible Investments shall be charged against investment earnings on amounts on deposit in the Reserve Account, as applicable. (4) The Debtor shall provide the Collateral Agent on the date hereof and from time to time an incumbency certificate or the substantial equivalent with respect to each officer of the Debtor that is authorized to provide instructions relating to investments in Eligible Investments in the Reserve Account. (5) Eligible Investments shall be maintained by the Collateral Agent in such manner as may be necessary to maintain the first priority perfected security interest in favor of the Collateral Agent on behalf of the Secured Parties. NationsBank agrees (and any other Securities Intermediary holding the Reserve Account shall so agree) that it shall not agree to comply with Entitlement Orders (as defined in Section 8-102 of the 1994 version of the Official Text of Article 8 of the Uniform Commercial Code) with respect to the Reserve Account given to it by any Person other than the Collateral Agent. (b) Funds on deposit in the Reserve Account shall be invested by the Collateral Agent in Eligible Investments with maturities such that all funds on deposit in the Reserve Account will be available on the next succeeding Remittance Date following such investment. The Collateral Agent shall maintain possession of the negotiable instruments or securities, if any, evidencing the Eligible Investments from the time of purchase thereof until the time of sale or maturity. Such 41 investments shall be held in the name of the Collateral Agent, for the benefit of the Secured Parties. (c) In the event that Available Funds with respect to any Remittance Date and any withdrawals from the Yield Supplement Account are insufficient to provide for the payment of the amounts described in Sections 2.3(a)(ii), (iv) and (v), the Collateral Agent shall make a withdrawal from the Reserve Account in the amount of such deficiency and the proceeds from such withdrawal shall be applied by the Collateral Agent to the required distributions and payments. Funds may also be released from the Reserve Account each month in accordance with Section 2.3(c). To the extent that amounts available in the Reserve Account are insufficient to cover such costs and the Debtor fails to make a deposit to the Reserve Account in the amount of such shortfall, the Agent shall make a demand for payment under the Policy in accordance with its terms. (i) In the event that on any Remittance Date or day on which a Take-Out occurs after giving effect to clause (c)(i) above, the amount on deposit in the Reserve Account (calculated as of the related Determination Date or the date of the Take-Out, as applicable) exceeds the Required Reserve Account Amount, the Collateral Agent shall (x) if no Termination Event shall have occurred, release to the Debtor an amount equal to the excess of the amount on deposit in the Reserve Account over the Required Reserve Account Amount and (y) if a Termina tion Event shall have occurred, apply as part of Available Funds pursuant to Section 2.3 an amount equal to the excess of the amount on deposit in the Reserve Account over the Required Reserve Account Amount. (ii) After the occurrence of the Termination Date upon the earlier of (i) the day on which the Net Investment is zero and the Secured Parties shall have received all Aggregate Unpaids and (ii) the day on which the aggregate Outstanding Balance of the Receivables shall be zero, the Collateral Agent shall release to the Debtor all amounts on deposit in the Reserve Account. SECTION 2.15 Optional Release. (a) On any Business Day, the Debtor shall have the right to require the Collateral Agent to release its security interest in and its Lien on the Con tracts and the related Receivables (excluding any Contracts and related Receivables booked after the cut-off date applicable to the structured finance transaction estab lished by or on behalf of the Debtor or an affiliate, to which the released Contracts and related Receivables will be subject) on the terms and conditions set forth herein. 42 It shall be a condition precedent to any such release that (i) the Debtor shall pay to the Company and the Bank Investors, as applicable, an amount equal to the amount necessary to cause the Net Asset Test to be satisfied after giving effect to the pro posed release, (ii) the amount to be paid pursuant to clause (i) above shall (x) not be greater than the principal component of the Company's maturing Commercial Paper which was issued to fund such portion of the Net Investment or the principal com ponent subject to the funding period utilized by the Bank Investors and the Liquidity Provider to fund such portion of the Net Investment, as applicable and (y) be at least $5,000,000, (iii) the Debtor shall deposit to the Collection Account an amount equal to the sum of (x) all unreimbursed Servicer Advances and (y) all interest costs associated with the Company's Commercial Paper issued to fund its interest in the Contracts and related Receivables proposed to be reassigned or all interest costs associated with any funding periods utilized by the Bank Investors or the Liquidity Provider with respect to their respective interests in such Contracts and related Receivables, as applicable, as well as all Carrying Costs accrued through the date of the maturity of such Commercial Paper or funding period, (iv) the Debtor shall have given the Agent, the Collateral Agent and the Insurer at least ten (10) days prior written notice of its intention to request release with respect to such Contracts and Receivables, (v) after giving effect to such release the amount on deposit in the Reserve Account shall be at least equal to the Required Reserve Account Amount, and (vi) all amounts due and owing to the Insurer from the Debtor shall have been paid in full. It is the intention of the parties that the Debtor shall pay to the Agent, for the benefit of the Company and the Bank Investors, as applicable, and the Collection Account, as applicable, such amounts as are required under this Section on the closing date of such structured finance transaction. The amount described in clause (i) above upon receipt by the Agent, for the benefit of the Company and the Bank Investors, as applicable, shall be applied in reduction of the Net Investment. From the amount described in clause (iii) above an amount equal to unreimbursed Servicer Advances shall be distributed to the Collection Agent and the remainder of such amounts shall be remitted to the Agent, for the benefit of the Company and the Bank Investors, as applicable. The Debtor shall also be obligated to pay to the Collateral Agent (i) an amount equal to $5,000 as an administrative fee in connection with any such assign ment and (ii) the reasonable legal fees and expenses of the Collateral Agent and the Secured Parties arising in connection with any such assignment. Upon the deposit to the Collection Account and the payment by the Debtor of the amounts described in this Section, the Collateral Agent shall execute 43 and deliver to the Debtor, at the Debtor's expense, such documents or instruments as are necessary to terminate the Collateral Agent's security interest in the Receivables and the Contracts related thereto. Any such documents shall be prepared by or on behalf of the Debtor. (b) In connection with a Take-Out, the Debtor shall have the right, from time to time thereafter (but not more frequently than once per calendar week), on the maturity date of any Commercial Paper note issued by the Company to fund the Net Investment or upon the termination of any funding period utilized by the Liquidity Provider or the Bank Investors, as applicable, to require the Collateral Agent to release its security interest in and Lien on specified Contracts and the related Receivables, provided that (x) such Contracts and related Receivables are to be assigned or sold by the Debtor, directly or indirectly, to a structured finance vehicle established by or on behalf of the Debtor or an affiliate, in connection with an asset- securitization or other structured financing having a prefunding (or similar) feature, (y) the aggregate Outstanding Balance of such Receivables shall be (i) not greater than the principal component of such maturing Commercial Paper or the principal component subject to such funding period, as applicable and (ii) at least $5,000,000 and (z) the Debtor shall have given the Agent, the Collateral Agent and the Insurer at least seven (7) days prior written notice of its intention to effect a release with respect to such Contracts and Receivables. Any such release shall be in consideration for the deposit by the Debtor into the Collection Account of an amount equal to the sum of (i) the Outstanding Balance of such Receivables on the day of such assignment plus (ii) all accrued and unpaid interest thereon (whether or not due thereunder) at the rate set forth in the related Contracts to such date of assignment. The amount described in clause (i) above shall be allocated and applied on such day (whether or not a Remit tance Date) as described in Section 2.3(b) as a Receipt of Principal, and the amount described in clause (ii) above shall be applied on such day (whether or not a Remit tance Date) in the order of priorities set forth in Section 2.3(a) as a Receipt of Interest (in which case "Settlement Period" as used in said Section 2.3(a) shall be considered to be the period from the last date of the previous Settlement Period to the date on which the amounts required to be paid under this Section 2.15(b) are paid). The Debtor shall also be obligated to pay to the Agent (i) an amount equal to $2,500 as an administrative fee in connection with any such assignment and (ii) the reasonable legal fees and expenses of the Company, the Collateral Agent, the Bank Investors and the Administrative Agent incurred in connection with any such release. Upon the deposit to the Collection Account and the payment by the Debtor of the amounts described in this Section, the Collateral Agent shall execute and deliver to the Debtor, at the Debtor's expense, such documents or instruments as are necessary to terminate the 44 Collateral Agent's interest in the Receivables and the Contracts related thereto. Any such documents shall be prepared by or on behalf of the Debtor. (c) On any Business Day, the Debtor shall have the right to require the Collateral Agent to release its security interest in and its Lien on specified Contracts and the related Receivables on the terms and conditions set forth herein. It shall be a condition precedent to any such release that, immediately after such release, (i) the Debtor shall pay to the Company and the Bank Investors, as applicable, an amount equal to the amount necessary to cause the Net Asset Test to be satisfied calculated after giving effect to the proposed release, (ii) after giving effect to such release, the amount on deposit in the Reserve Account shall be at least equal to the Required Reserve Account Amount, and (iii) all amounts due and owing to the Insurer from the Debtor shall have been paid in full. (d) On any Business Day, the Debtor shall have the right to require the Collateral Agent to release its security interest in and Lien on all of the Contracts and the related Receivables on the terms and conditions set forth herein. It shall be condition precedent to any such release that (i) the Debtor shall pay to the Agent, for the benefit of the Company and the Bank Investors, as applicable, an amount equal to the Net Investment at the time of such release, (ii) the Debtor shall pay to the Agent, for the benefit of the Company and the Bank Investors, as applica ble, an amount equal to all interest costs associated with the Company's Commercial Paper issued to fund the Net Investment through the date of maturity or all interest costs associated with all funding periods utilized by the Bank Investors for the Liquidity Provider with respect to its interest in the Contracts, related Receivables and Transferred Interest, as applicable, as well as all Carrying Costs accrued through the date of such release and all other costs which constitute Carrying Costs which will accrue after such date, (iii) the Debtor shall have given the Collateral Agent, the Administrative Agent and the Insurer at least thirty (30) days prior written notice of its intention to effect such a release the Contracts and Receivables, and (iv) all amounts due and owing to the Insurer from the Debtor shall have been paid in full. SECTION 2.16 Hedging Amounts. (a) There shall be established on the Closing Date and maintained, for the benefit of the Secured Parties, with the Collateral Agent, a segre gated account (the "Hedge Proceeds Account"), bearing a designation clearly indicat ing that the funds deposited therein are held for the benefit of the Secured Parties. Subject to the terms hereof, the Collateral Agent shall possess all right, title and interest in and to all funds deposited from time to time in the Hedge Proceeds 45 Account. The Collateral Agent will maintain the Hedge Proceeds Account at an Eligible Institution. If the Eligible Institution holding the Hedge Proceeds Account shall cease to be an Eligible Institution, the Collateral Agent shall have the right to direct the transfer of the Hedge Proceeds Account to an Eligible Institution. Funds on deposit in the Hedge Proceeds Account shall be invested by the Collateral Agent in overnight Eligible Investments. (1) Funds on deposit in the Hedge Proceeds Account shall be invested in Eligible Investments by or at the written direction of the Debtor, provided that if a Termination Event shall have occurred, such investments shall be made as directed by the Collateral Agent. Any such written directions shall specify the particular investment to be made and shall certify that such investment is an Eligible Investment and is permitted to be made under this Agreement. (2) The Collateral Agent agrees that it shall not accept for credit to the Hedge Proceeds Account any investment as to which it has knowledge of any adverse claim thereto. NationsBank hereby agrees (and any other Securities Intermediary holding the Hedge Proceeds Account shall so agree) to comply with all Entitlement Orders (as defined in Section 8-102 of the 1994 Official Text of the Uniform Commercial Code) received by it with respect to the Hedge Proceeds Account from the Collateral Agent. (3) No Eligible Investment held in the Hedge Proceeds Account may be liquidated or disposed of prior to its maturity. All pro ceeds of any such Eligible Investment shall be deposited in the Hedge Proceeds Account. Investments may be made in the Hedge Proceeds Account on any date (provided such investments mature in accordance herewith), only after giving effect to deposits to and withdrawals from such account on such date. Realized losses, if any, on amounts invested in such Eligible Investments shall be charged against investment earnings on amounts on deposit in the Hedge Proceeds Account. (4) The Debtor shall provide the Collateral Agent on the date hereof and from time to time an incumbency certificate or the substantial equivalent with respect to each officer of the Debtor that is authorized to provide instructions relating to investments in Eligible Investments in the Hedge Proceeds Account. (5) Eligible Investments shall be maintained in the Hedge Proceeds Accounts by the Collateral Agent in such manner as may be neces sary to maintain the first priority perfected security interest in favor of the Collateral 46 Agent on behalf of the Secured Parties. NationsBank, agrees (and any other Securi ties Intermediary holding the Reserve Account shall so agree) that it shall not agree to comply with Entitlement Orders (as defined in Section 8-102 of the 1994 version of the Official Text of Article 8 of the Uniform Commercial Code) with respect to the Hedge Proceeds Account given to it by any Person other than the Collateral Agent. (b) On and after the occurrence of any Termination Event or in the event of the receipt of any proceeds received by the Collection Agent pursuant to any Hedging Arrangement and immediately thereafter Hedging Arrange ments which satisfy the requirements of Section 5.3 are not in place, the Collection Agent, for the benefit of the Debtor, shall remit to the Collateral Agent for deposit into the Hedge Proceeds Account any proceeds received by the Collection Agent of any Hedging Arrangement. Such amounts shall be held by the Collateral Agent as security for the repayment to the Company, the Bank Investors and the Insurer, as applicable, of the Net Investment and the Aggregate Unpaids. At any time after the deposit of such amounts to the credit of the Hedge Proceeds Account, the Collateral Agent may apply such amounts either (i) to reduce the Net Investment, (ii) to provide for the payment to the Company, the Bank Investors and the Insurer, as applicable, of the Aggregate Unpaids, or (iii) to purchase an interest rate hedge acceptable to the Insurer. Upon the termination of this Agreement, provided that the Net Investment shall be zero and all other Aggregate Unpaids shall have been paid in full, the Collat eral Agent shall release to the Debtor any amounts remaining on deposit in the Hedge Proceeds Account. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of the Debtor. The Debtor represents and warrants to the Collateral Agent and the Secured Parties that: (a) Corporate Existence and Power. The Debtor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate power and all material govern mental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is now conducted. (b) Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Debtor of this Agree ment and the other Transaction Documents are within the Debtor's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (except as contemplated by Section 2.6), and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Certificate of Incorporation or Bylaws of the Debtor or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Debtor or result in the creation or imposition of any lien on assets of the Debtor (except as contemplated by Section 2.6), or require the consent or approval of, or the filing of any notice or other documentation with, any governmental authority or other Person (except as contemplated by Section 2.6). (c) Binding Effect. Each of this Agreement and the other Transaction Documents constitutes the legal, valid and binding obligation of the Debtor, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors. (d) Perfection. Immediately preceding each Funding, the Debtor shall be the owner of all of the Receivables, free and clear of all liens, encumbrances, security interests, preferences or other security arrangement of any kind or nature whatsoever, except as permitted by this Agreement and the other Transaction Documents. On or prior to each Funding and each day on which a Receivable is sold to the Debtor by UAC pursuant to the Sale and Purchase Agree ment, all financing statements and other documents required to be recorded or filed in order to perfect and protect (i) the Debtor's interest in the Receivables, the Contracts related thereto, the Related Security with respect thereto and all Proceeds thereof against all creditors of and purchasers from UAC, PFC or any Acquisition Subsidiary, and (ii) the Collateral Agent's interest in the Collateral against all creditors of and purchasers from the Debtor, and all filing fees and taxes, if any, payable in connection with such filings shall have been paid in full. (e) Accuracy of Information. All information heretofore furnished by the Debtor (including without limitation, the Settlement Statements, any reports delivered pursuant to Section 2.9 and UAC's financial statements) to the Collateral Agent, the Secured Parties, the Administrative Agent or any of the other Persons party hereto for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Debtor to any such Person will be, true and accurate in every material respect, on the date such information is stated or certified. 47 (f) Tax Status. All tax returns (federal, state and local) required to be filed with respect to the Debtor have been filed (which filings may be made by an Affiliate of the Debtor on a consolidated basis covering the Debtor and other Persons) and there has been paid or adequate provision made for the payment of all taxes, assessments and other governmental charges in respect of the Debtor (or in the event consolidated returns have been filed, with respect to the Persons subject to such returns). (g) Action, Suits. Except as set forth in Exhibit F, there are no actions, suits or proceedings pending, or to the knowledge of the Debtor threatened, against or affecting the Debtor or any Affiliate of the Debtor or their respective properties, in or before any court, arbitrator or other body, which may have a material adverse effect on the Debtor's ability to perform its obligations hereunder or under the Sale and Purchase Agreement. (h) Use of Proceeds. The proceeds of any Funding will be used by the Debtor to (a) acquire the Receivables, the Contracts related thereto and the Related Security with respect thereto from UAC pursuant to the Sale and Pur chase Agreement, (b) to pay down debt in connection with the purchase of the Receivables and Contracts pursuant to the Sale and Purchase Agreement, or (c) to make distributions constituting a return of capital. (i) Place of Business. The chief place of business and chief executive office of the Debtor are located at the address of the Debtor indicated in Section 9.3 hereof and the offices where the Debtor keeps all its Records, are located at the address(es) described on Exhibit G or such other locations notified to the Company in accordance with Section 2.6 in jurisdictions where all action required by Section 2.6 has been taken and completed. (j) Good Title. Upon each Funding and on each day on which a Receivable and related Contract is sold to the Debtor by UAC pursuant to the Sale and Purchase Agreement, the Collateral Agent shall acquire a valid and perfected first priority security interest in each Receivable and related Contract that exists on the date of such Funding and sale and in the Related Security and Collections with respect thereto free and clear of any Adverse Claim. (k) Tradenames, Etc. As of the date hereof: (i) the Debtor has only the subsidiaries and divisions listed on Exhibit H hereto; and (ii) the Debtor has, within the last five (5) years, operated only under the tradenames identified in Exhibit H hereto, and, within the last five (5) years, has not changed its name, merged 48 with or into or consolidated with any other corporation or been the subject of any proceeding under Title 11, United States Code (Bankruptcy), except as disclosed in Exhibit H hereto. (l) Nature of Receivables. Each Receivable represented by the Debtor as an Eligible Receivable hereunder or in any report, document or instru ment delivered hereunder or in connection with the other Transaction Documents is an Eligible Receivable at the time of such representation. (m) Coverage; Amount of Receivables. The Net Asset Test is currently satisfied. As of September 17, 1998, the aggregate Outstanding Balance of the Receivables in existence was $86,193,823.44 and the aggregate Outstanding Balance of all Eligible Receivables was $85,808,215.61. (n) No Termination Event. No event has occurred and is continuing and no condition exists which constitutes a Termination Event or a Poten tial Termination Event. (o) Not an Investment Company. The Debtor is not an "in vestment company" within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions of such Act. (p) ERISA. The Debtor is in compliance in all material respects with ERISA and no lien in favor of the Pension Benefit Guaranty Corpora tion on any of the Receivables shall exist. (q) Lock-Box Accounts. The names and addresses of all the Lock-Box Banks, together with the account numbers of the Lock-Box Accounts at such Lock-Box Banks, are specified in Exhibit B hereto (or at such other Lock- Box Banks and/or with such other Lock-Box Accounts as have been notified to the Administrative Agent). All Obligors have been instructed to make payment to a Lock-Box Account. (r) Insurance Policies. At the time of the sale of each Receivable and related Contract by UAC to the Debtor pursuant to the Sale and Purchase Agreement, each Financed Vehicle is required to be covered by physical damage and liability insurance obtained by the related Obligor at least in the amount required by the related Contract, and each such required insurance policy is required to name UAC as loss payee and is required to be in full force and effect. (s) Year 2000 Compliance. The Debtor (i) has initiated a review and assessment of all areas within its and each of its Subsidiaries' business and 49 operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Debtor or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) is in the process of developing a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) will implement that plan in accordance with that timetable. Based on the foregoing, the Debtor believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not be reasonably expected to have a material adverse effect on the Debtor or on the transaction documented under this Agreement, or to result in a Termination Event. The Debtor (i) has completed a review and assessment of all computer applications (including, but not limited to those of its suppliers, vendors, customers, and any third party servicers), which are related to or involved in the origination, collection, management or servicing of the Receivables (the "Receivables Systems") and (ii) has identified any of such Receivables Systems which are "mission critical" operations (i.e. those which jeopardize the viability of the Debtor's business if not Year 2000 Compliant). The Debtor will implement a plan to ensure that all "mission critical" operations of the Receivables Systems are Year 2000 Compliant or will be Year 2000 Compliant on or before June 30, 1999, and thereafter. The costs of all assessment, remediation, testing and integration related to the Debtor's plan for becoming Year 2000 Compliant will not have a material adverse effect on the financial condition or operations of the Debtor. Any document, instrument, certificate or notice delivered to the Company by the Debtor hereunder shall be deemed a representation and warranty by the Debtor. SECTION 3.2 Representations and Warranties of the Collection Agent. The Collection Agent represents and warrants to the Collateral Agent and the Secured Parties that: (a) Corporate Existence and Power. The Collection Agent is a corporation duly organized and validly existing under the laws of its jurisdiction 50 of incorporation and has all corporate power and all material governmental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is now conducted. (b) Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Collection Agent of this Agreement and the other Transaction Documents are within the Collection Agent's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (except as contemplated by Section 2.6), and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Certificate of Incorporation or Bylaws of the Collection Agent or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Collection Agent or result in the creation or imposition of any lien on assets of the Collection Agent or any of its Subsidiaries (except as contemplated by Section 2.6), or require the consent or approval of, or the filing of any notice or other documentation with, any governmental authority or other Person (except as contemplated by Section 2.6). (c) Binding Effect. This Agreement constitutes the legal, valid and binding obligation of the Collection Agent, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors. (d) Accuracy of Information. All information heretofore furnished by the Collection Agent to the Collateral Agent, the Secured Parties or the Administrative Agent for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Collection Agent to the Collateral Agent, the Secured Parties or the Administrative Agent will be, true and accurate in every material respect, on the date such informa tion is stated or certified. (e) Credit and Collection Policy. Since June 30, 1998, (except for any changes as received by the Administrative Agent in writing), there have been no material changes in the Credit and Collection Policy; since such date, no material adverse change has occurred in the overall rate of collection of the Receiv ables. (f) Collections and Servicing. Since June 30, 1998, there has been no material adverse change in the ability of UAC, as Collection Agent hereunder, to service and collect the Receivables. 51 (g) Year 2000 Compliance. The Collection Agent (i) has initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and custom ers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Collection Agent or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) is in the process of developing a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) will implement that plan in accordance with that timetable. Based on the foregoing, the Collateral Agent believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not be reasonably expected to have a material adverse effect on the Collateral Agent or on the transaction documented under this Agreement, or to result in a Termination Event. The Collateral Agent (i) has completed a review and assessment of all computer applications (including, but not limited to those of its suppliers, vendors, customers, and any third party servicers), which are related to or involved in the origination, collection, management or servicing of the Receivables (the "Receivables Systems") and (ii) has identified any of such Receivables Systems which are "mission critical" operations (i.e. those which jeopardize the viability of the Collection Agent's business if not Year 2000 Compliant). The Collection Agent will implement a plan to ensure that all "mission critical" operations of the Receivables Systems are Year 2000 Compliant or will be Year 2000 Compliant on or before June 30, 1999, and thereaf ter. The costs of all assessment, remediation, testing and integration related to the Collection Agent's plan for becoming Year 2000 Compliant will not have a material adverse effect on the financial condition or operations of the Collec tion Agent. Any document, instrument, certificate or notice delivered by the Collection Agent to the Collateral Agent, the Secured Parties hereunder shall be deemed a representation and warranty by the Collection Agent. 52 SECTION 3.3 Reaffirmation of Representations and Warranties. On each Determination Date, Remittance Date and day on which a Funding is made, each of the Debtor and the Collection Agent, shall be deemed to have certified that all of its respective representations and warranties described in Sections 3.1 and 3.2 are correct on and as of such day as though made on and as of such day. 53 ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1 Conditions to Effectiveness. This Agreement shall become effective on the first day on which all of the following conditions have been satisfied: (a) A Certificate of the Secretary of the Debtor certifying (i) the names and signatures of the officers and other agents authorized on its behalf to execute this Agreement and the other Transaction Documents and any other documents to be delivered by it hereunder or thereunder (on which Certificate the Collateral Agent and the Secured Parties may conclusively rely until such time as the Collateral Agent and the Secured Parties shall receive from the Debtor a revised Certificate meeting the requirements of this clause (a)(i)), (ii) a copy of the Debtor's Certificate of Incorporation, as amended to the date hereof, certified by the Secretary of State of the State of Delaware, (iii) a copy of the Debtor's By-laws, as amended to the date hereof, (iv) a copy of resolutions of the Debtor's Board of Directors approv ing the transactions contemplated hereby and (v) a certificate of the Secretary of State of the State of Delaware certifying the Debtor's good standing. (b) A Certificate of the Secretary of the Collection Agent certifying (i) the names and signatures of the officers authorized on its behalf to execute this Agreement and any other documents to be delivered by it hereunder (on which Certificate the Collateral Agent and the Secured Parties may conclusively rely until such time as the Collateral Agent and Secured Parties shall receive from the Collection Agent a revised Certificate meeting the requirements of this clause (a)(i)), (ii) a copy of the Collection Agent's Articles of Incorporation, as amended to the date hereof, certified by the Secretary of State of the State of Indiana, (iii) a copy of the Collection Agent's By-laws, as amended to the date hereof, (iv) a copy of resolutions of the Collection Agent's Board of Directors approving the transactions contemplated hereby and (v) a certificate of the Secretary of State of the State of Indiana certifying the Collection Agent's existence. (c) Copies of proper financing statements (Form UCC-1), naming UAC as the debtor in favor of the Debtor as secured party and the Collateral Agent, for the benefit of the Secured Parties, as assignee of the secured party or other similar instruments or documents as may be necessary or in the reasonable opinion of the Collateral Agent desirable under the Relevant UCC to perfect the Debtor's 54 security interest in the Receivables, Related Security and Collections, free and clear of any Adverse Claim. (d) Copies of proper financing statements (Form UCC-1), dated a date reasonably near to the date of the Initial Funding naming the Debtor as the debtor in favor of the Collateral Agent, for the benefit of the Secured Parties, or other similar instruments or documents as may be necessary or in the reasonable opinion of the Collateral Agent desirable under the Relevant UCC to perfect the Collateral Agent's security interest in the Collateral, including all Receivables, Related Security and Collections, free and clear of any Adverse Claim. (e) Copies of proper financing statements (Form UCC-3), if any, necessary under the Relevant UCC to terminate all security interests and other rights of any person in the Collateral, including the Receivables, Related Security and Collections, previously granted by the Debtor. (f) Certified copies of request for information or copies (Form UCC-11) (or a similar search report certified by parties acceptable to the Collateral Agent) dated a date reasonably near the date of the Initial Funding listing all effective financing statements which name the Debtor (under its present name and any previous name) as debtor and which are filed in jurisdictions in which the filings were made pursuant to item (e) above together with copies of such financing state ments (none of which shall cover any Receivables or Contracts). (g) Opinions of Barnes & Thornburg, special counsel to the Debtor and the Collection Agent, covering the matters set forth in (i) Exhibit I hereto, and (ii) Exhibit J hereto. (h) An opinion of Barrett & McNagny, special counsel to the Debtor and the Collection Agent, covering matters relating to Florida law. (i) A list setting forth all Receivables and the Outstanding Balances thereon as of the close of business on the Cut-Off Date and such other infor mation as the Collateral Agent or any of the Secured Parties may reasonably request. (j) An executed copy of the Fee Letter. (k) The Note, duly executed by the Debtor and appropri ately completed. 55 (l) A Termination and Release Agreement, dated as of September 18, 1998, among the Company, the Debtor and UAC, terminating the Transfer and Administration Agreement, dated as of June 27, 1995 (as amended to the date hereof), among the Company, the Debtor and UAC. (m) A Termination and Release Agreement, dated as of September 18, 1998, among the Company, the Debtor and UAC terminating the Transfer and Administration Agreement, dated as of August 24, 1995 (as amended to the date hereof), among the Company, PFC and UAC. (n) The Arrangement Fee in accordance with Section 2.5. (o) Such other documents as the Collateral Agent or the Secured Parties shall reasonably request. ARTICLE V COVENANTS SECTION 5.1 Affirmative Covenants of the Debtor and UAC. At all times from the date hereof to the later to occur of (i) the Termination Date or (ii) the date on which the Net Investment is zero, unless the Secured Parties shall otherwise consent in writing: (a) Financial Reporting. The Debtor and UAC each will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and UAC (or, in the case of the first sentence of clauses (iii), (iv), and clause (ix), the Debtor) will furnish to the Administrative Agent, the Collateral Agent and the Insurer: (i) Annual Reporting. Within ninety (90) days after the close of each of its fiscal years, audited financial state ments, prepared in accordance with generally accepted accounting principles on a consolidated basis for itself and its Subsidiaries, includ ing balance sheets as of the end of such period, related statements of operations, shareholder's equity and cash flows, accompanied by an audit report of a nationally recognized firm of independent certified public accountants (or such other firm of independent certified public accountants acceptable to the Administrative Agent, the Collateral 56 Agent, and the Insurer) which report shall be unqualified as to going concern and scope of audit and shall state that such consolidated financial statements present fairly the financial position of UAC and its Subsidiaries at the dates indicated and the results of their operations and their cash flow for the periods indicated is in conformity with GAAP and that the examination had been made in accordance with generally accepted auditing standards. (ii) Quarterly Reporting. Within forty-five (45) days after the close of the first three quarterly periods of each of its fiscal years, for itself and its Subsidiaries, consolidated unaudited balance sheets as at the close of each such period and consolidated re lated statements of operations, shareholder's equity and cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer. (iii) Compliance Certificate. Concurrently with the delivery by UAC of the financial statements required hereun der, a compliance certificate signed by its treasurer or vice president stating that no Termination Event or Potential Termination Event ex ists, or if any Termination Event or Potential Termination Event exists, stating the nature and status thereof. On and after the date of any change in ownership of UAC contemplated by Section 5.2(i), together with the financial statements hereunder, a compliance certificate signed by the chief financial officer of UAC showing the computation of, and showing compliance with, each of the quarterly financial tests or conditions set forth in Section 5.2(i). (iv) Notice of Termination Events or Poten tial Termination Events. As soon as possible and in any event within two (2) days after the occurrence of each Termination Event or each Potential Termination Event, a statement of the treasurer or vice president of the Debtor setting forth details of such Termination Event or Potential Termination Event and the action which the Debtor pro poses to take with respect thereto. (v) Change in Credit and Collection Policy and Debt Ratings. Within ten (10) days after the date any material change in or amendment to the Credit and Collection Policy is made, a 57 copy of the Credit and Collection Policy then in effect indicating such change or amendment. (vi) Credit and Collection Policy. Upon request by the Collateral Agent or any Secured Party, a complete copy of the Credit and Collection Policy then in effect. (vii) Blue Book. Within forty-five (45) days after the close of the quarterly period of each of its fiscal years, a copy of the UAC Quarterly Statistical Update (a/k/a/ UAC's "blue book"). (viii) Green Book. Within forty-five (45) days after the close of the quarterly period of each of its fiscal years, a copy of the Union Acceptance Corporation Tier II Quarterly Statistical Update (a/k/a UAC's "green book") or the equivalent information in some other written form. (ix) ERISA. Promptly after the filing or receiving thereof, copies of all reports and notices with respect to any Reportable Event (as defined in Article IV of ERISA) which the Debtor, UAC or any ERISA Affiliate of the Debtor or UAC files under ERISA with the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or which the Debtor, UAC or any ERISA Affiliates of the Debtor or UAC receives from the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the U.S. Department of Labor. (x) Other Information. Such other informa tion (including non-financial information) as the Administrative Agent, the Collateral Agent or any Secured Party may from time to time rea sonably request. (b) Conduct of Business. The Debtor will and UAC will (x) carry on and conduct its business in substantially the same manner and in substan tially the same or related fields of enterprise (including, in the case of UAC, consumer finance activities) as it is presently conducted and do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and (y) maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 58 (c) Compliance with Laws. The Debtor will and UAC will comply in all material respects with all laws, rules, regulations, orders, writs, judg ments, injunctions, decrees or awards to which it may be subject. (d) Furnishing of Information and Inspection of Records. The Debtor will furnish to the Collateral Agent and the Secured Parties from time to time such information with respect to the Receivables as the Collateral Agent or any Secured Party may reasonably request, including, without limitation, listings identi fying the Obligor and the Outstanding Balance for each Receivable. Upon at least two (2) Business Days prior notice, the Debtor and UAC will during regular business hours permit the Collateral Agent or any Secured Party, or their agents or representa tives, (i) to examine and make copies of and abstracts from all Records and (ii) to visit the offices and properties of the Debtor and UAC for the purpose of examining such Records, and to discuss matters relating to Receivables or the Debtor's or UAC's performance hereunder or under the Sale and Purchase Agreement with any of the officers, employees or independent public accountants of the Debtor or UAC having knowledge of such matters. (e) Keeping of Records and Books of Account. The Debtor and UAC (consistent with its role as Collection Agent) will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain, all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (in cluding, without limitation, records adequate to permit the daily identification of each new Receivable and all Collections of and adjustments to each existing Receivable). The Debtor and UAC will give the Collateral Agent, the Insurer, Moody's and S&P notice of any material change in the administrative and operating procedures referred to in the previous sentence. (f) Performance and Compliance with Receivables and Contracts. The Debtor and UAC will at their expense timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Receivables. (g) Credit and Collection Policies. UAC will comply in all material respects with the Credit and Collection Policy in regard to each Receivable and the related Contract. 59 (h) Collections. The Debtor and UAC shall instruct all Obligors to cause all Collections to be deposited directly to a Lock-Box Account. (i) Collections Received. The Debtor and UAC shall hold in trust, and deposit, immediately, but in any event not later than two (2) Business Days of its receipt thereof, to a Lock-Box Account all Collections received from time to time by them. (j) Separate Business. The Debtor shall at all times (a) to the extent the Debtor's office is located in the offices of UAC or any Affiliate of UAC, pay fair market rent for its executive office space located in the offices of UAC or any Affiliate of UAC, (b) maintain the Debtor's books, financial statements, accounting records and other corporate documents and records separate from those of UAC or any other entity, (c) not commingle the Debtor's assets with those of UAC or any other entity (it being understood that certain Collections on Receivables owned by the Debtor may be temporarily commingled with collections on other receivables serviced by UAC); (d) act solely in its corporate name and through its own authorized officers and agents, (e) make investments directly or by brokers engaged and paid by the Debtor or its agents (provided that if any such Agent is an Affiliate of the Debtor it shall be compensated at a fair market rate for its services), (f) separately manage the Debtor's liabilities from those of UAC or any Affiliates of UAC and pay its own liabil ities, including all administrative expenses, from its own separate assets, and (g) pay from the Debtor's assets all obligations and indebtedness of any kind incurred by the Debtor. The Debtor shall abide by all corporate formalities, including the mainte nance of current minute books, and the Debtor shall cause its financial statements to be prepared in accordance with generally accepted accounting principles in a manner that indicates the separate existence of the Debtor and its assets and liabilities. The Debtor shall (i) pay all its liabilities, (ii) not assume the liabilities of UAC or any Affil iate of UAC, and (iii) not guarantee the liabilities of UAC or any Affiliate of UAC. The officers and directors of the Debtor (as appropriate) shall make decisions with respect to the business and daily operations of the Debtor independent of and not dictated by any controlling entity. (k) Corporate Documents. The Debtor shall only amend, alter, change or repeal Articles III, IV, V, VI, and XI of its Certificate of Incorpora tion as in effect on the date hereof with the prior written consent of the Administra tive Agent. (l) Year 2000 Compliance. Each of the Debtor and UAC will promptly notify the Administrative Agent and the Insurer in the event the Debtor 60 or UAC discovers or determines that any computer application (including those of its suppliers, vendors and customers) (i) that is necessary for the origination, collection, management, or servicing of the Receivables will not be Year 2000 Compliant on or before June 30, 1999 and thereafter, (ii) that is otherwise material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that, in the case of (ii) above, such failure could not reasonably be expected (x) to have a material adverse effect on the Debtor or UAC or on the transaction documented under this Agreement, or (y) to result in a Termination Event, or (iii) notwithstanding the foregoing, that is necessary for "mission critical" operations will not be Year 2000 Compliant on or before June 30, 1999. Further, each of the Debtor and UAC will deliver simultaneously with any quarterly or annual financial statements or reports to be delivered under the Agreement, a letter, report, certificate or statement signed by the appropriate officer that no material event, problems or conditions have occurred which in the opinion of management would (i) prevent or materially delay the Debtor's or UAC's plan to become Year 2000 Compliant or (ii) cause or be likely to cause the Debtor's or UAC's representations and warranties with respect to being or becoming Year 2000 Compli ant to no longer be true. SECTION 5.2 Negative Covenants of Debtor and UAC. During the term of this Agreement, unless the Secured Parties shall otherwise consent in writing: (a) No Sales, Liens, Etc. Except as otherwise provided herein, neither the Debtor nor UAC will sell, assign (by operation of law or other wise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon (or the filing of any financing statement) or with respect to, any Receivable or related Contract, or upon or with respect to any account which concentrates in a Lock-Box Bank to which any Collections of any Receivable are sent, or assign any right to re ceive income in respect thereof. (b) No Extension or Amendment of Receivables. Except as otherwise permitted in Section 6.2, neither the Debtor nor UAC will extend, amend or otherwise modify the terms of any Receivable, or amend, modify or waive any term or condition of any Contract related thereto. (c) No Amendment of Sale and Purchase Agreement. The Debtor shall not amend or otherwise modify the Sale and Purchase Agreement with out the prior written consent of the Secured Parties. 61 (d) No Change in Business or Credit and Collection Policy. Neither the Debtor nor UAC shall, without the prior written consent of the Agent, make any change in the character of its business or in the Credit and Collection Policy, which change would, in either case (i) impair the collectibility of any Receiv able or (ii) change the write-off policy in effect as of the Closing Date, with respect to the Receivables and the Contracts. (e) Sale of Assets, Etc. Neither the Debtor nor UAC will sell, lease or transfer all or substantially all of its assets to any other person, provided, however, that no such sale shall be deemed to occur solely as a result of a Take-Out or solely as a result of the sale of Contracts and related Receivables which are released to the Debtor pursuant to Section 2.15(c) and 2.15(d). (f) Change in Payment Instructions to Obligors. Neither the Debtor nor UAC nor the Collection Agent will add or terminate any bank as a Lock-Box Bank or any account as a Lock-Box Account to or from those listed in Exhibit B hereto or make any change in its instructions to Obligors regarding pay ments to be made to any Lock-Box Account, unless (i) such instructions are to deposit such payments to another existing Lock-Box Account or (ii) the Collateral Agent and the Administrative Agent shall have received written notice of such addi tion, termination or change at least 30 days prior thereto. (g) Change of Name, Etc. The Debtor will not change its name, identity or structure or its chief executive office, unless at least 30 days prior to the effective date of any such change the Debtor delivers to the Collateral Agent UCC financing statements, executed by the Debtor necessary to reflect such change and to continue the perfection of the Collateral Agent's security interest in the Receivables. (h) No Mergers, Etc. Neither the Debtor nor UAC will (i) consolidate or merge with or into any other Person, or (ii) sell, lease or transfer all or substantially all of its assets to any other person, unless the Debtor or UAC, respec tively, is the surviving entity. (i) Sale Treatment. Neither the Debtor nor UAC will account for (including for accounting and tax purposes), or otherwise treat, the transactions contemplated by the Sale and Purchase Agreement in any manner other than as a sale of Receivables by UAC to the Debtor. (j) Other Debt. Except as provided for herein, the Debtor will not create, incur, assume or suffer to exist any indebtedness whether current or 62 funded, or any other liability other than (i) indebtedness of the Debtor representing fees, expenses and indemnities arising hereunder or under the Sale and Purchase Agreement for the purchase price of the Receivables under the Sale and Purchase Agreement, and (ii) other indebtedness incurred in the ordinary course of its business in an amount not to exceed $9,500 (except for indebtedness incurred in connection with the repurchase of Receivables from UARC) at any time outstanding. SECTION 5.3 Hedging Arrangements. The Collection Agent shall (i) at or prior to the time of any Funding, provide to the Administrative Agent, the Collateral Agent and the Insurer an officer's certificate stating that the Collection Agent has Hedging Arrangements in place satisfying the conditions of this Section 5.3 as set forth below and after January 1, 1999, qualifies as an Acceptable Hedging Arrangement (as defined in the Insurance Agreement), and (ii) in connection with any Settlement Statement provided hereunder, provide an executed copy of all existing Hedging Arrangements, which Hedging Arrangements shall be satisfactory to the Administrative Agent, the Collateral Agent and the Insurer, and with respect to which at any time after the occurrence of a Termination Event the Debtor shall be the bene ficiary, in respect of an aggregate notional amount at least equal to the Net Invest ment. The form and structure and counterparty to each Hedging Arrangement shall be acceptable to the Administrative Agent, the Collateral Agent and the Insurer and must be in full force and effect at all times during which the Net Investment is greater than zero (however such required amount may be reduced for the period of time be tween the pricing and the funding of a structured financing utilizing receivables released to the Debtor pursuant to Section 2.15 by the aggregate Outstanding Balance of such Receivables). ARTICLE VI ADMINISTRATION AND COLLECTIONS SECTION 6.1 Appointment of Collection Agent. The servicing, administering and collection of the Receivables shall be conducted by such Person (the "Collection Agent") so designated from time to time in accordance with this Section 6.1. Until the Collateral Agent gives notice to UAC of the designation of a new Collection Agent, UAC is hereby designated as, and hereby agrees to perform the duties and obligations of, the Collection Agent pursuant to the terms hereof. The Collateral Agent, upon the written request of the Insurer shall, or may, with the consent of the Insurer, upon the occurrence of a Collection Agent Default or any other Termination Event, designate as Collection Agent any Person (including itself) 63 acceptable to the Insurer to succeed UAC or any successor Collection Agent, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Collection Agent pursuant to the terms hereof, but in any event the Company shall notify Moody's and S&P of any Collection Agent Default. The Company may notify any Obligor of its security interest in the Contracts and the related Receivables. SECTION 6.2 Duties of Collection Agent. (a) The Collection Agent shall take or cause to be taken all such action as may be necessary or advisable to collect each Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. Each of the Debtor, the Company, each Bank Investor and the Insurer hereby appoints as its Agent the Collection Agent, from time to time designated pursuant to Section 6.1, to enforce its respective rights and interests in and under the Receivables, the Related Security and the Contracts. The Collection Agent shall remit daily, within two (2) Business Days of receipt, to the Collection Account all Collections received with respect to any Receivables. The Collection Agent shall segregate and deposit to the Agent's, the Company's, the Bank Investor's or the Insurer's account, as applicable, such Person's allocable share of Collections of Receivables when required pursuant to Article II hereof. So long as no Termination Event shall have occurred and be con tinuing, the Collection Agent may, unless otherwise required by law, in accordance with the Credit and Collection Policy, extend the maturity of Receivables as the Collection Agent may determine to be appropriate to maximize Collections thereof. The Debtor shall hold in trust for the Secured Parties in accordance with their security interest, all Records which evidence or relate to Receivables or Related Security. In the event that a successor Collection Agent is appointed by the Company, upon the direction or with the consent of the Insurer, the Debtor shall deliver to the Collection Agent and the Collection Agent shall hold in trust for the Debtor and the Secured Parties in accordance with their respective interests, all Records which evidence or relate to Receivables or Related Security. Notwithstanding anything to the contrary contained herein, the Collateral Agent shall have the absolute and unlimited right to direct the Collection Agent (whether the Collection Agent is the Debtor or any other Person) to commence or settle any legal action to enforce collection of any Receiv able or to foreclose upon or repossess any Related Security. (b) The Collection Agent shall, as soon as practicable fol lowing receipt thereof, turn over to the Debtor any collections of any indebtedness of any Obligor which is not a Receivable. If UAC or any affiliate thereof is not the Col lection Agent, the Collection Agent, by giving three (3) Business Days' prior written notice to the Collateral Agent, the Agent and the Insurer, may revise the percentage used to calculate the Servicing Fee so long as the revised percentage will not result in a Servicing Fee that exceeds 110% of the reasonable and appropriate out-of-pocket costs and expenses of such Collection Agent incurred in connection with the perfor mance of its obligations hereunder as documented to the reasonable satisfaction of the Collateral Agent, the Agent and the Insurer. The Collection Agent, if other than the Debtor, shall as soon as practicable upon demand, deliver to the Debtor all Records in its possession which evidence or relate to indebtedness of an Obligor which is not a Receivable. (c) On or before ninety (90) days after the end of each fiscal year of the Collection Agent, beginning with the fiscal year ending June 30, 1999, the Collection Agent shall cause a firm of independent public accountants (who may also render other services to the Collection Agent or the Debtor) to furnish a report on applying agreed upon procedures to the Collateral Agent to the effect that they have (i) compared the information contained in the Settlement Statements and Withdrawal Notices delivered during such fiscal year, based on a sample size provided by the Agent, with the information contained in the Contracts and the Collection Agent's records and computer systems for such period, (ii) verified the Net Receiv ables Balance as of the end of each Settlement Period during such fiscal year, and (iii) verified that a sample of Receivables treated by the Collection Agent as Eligible Receivables in fact satisfied the requirements of the definition thereof contained herein, and (iv) conducted a 'negative confirmation' of a sample of the Receivables and verified that the Collection Agent's records and computer system used in servic ing the Receivables contained correct information with regard to due dates and outstanding balances, except, in each case for (a) such exceptions as such firm shall believe to be immaterial (which exceptions need not be enumerated) and (b) such other exceptions as shall be set forth in such report. (d) Notwithstanding anything to the contrary contained in this Article VI, the Collection Agent, if not the Debtor, shall have no obligation to collect, enforce or take any other action described in this Article VI with respect to any Receivable that is not included in the Collateral other than to deliver to the Debtor the Collections and documents with respect to any such Receivable as de scribed in Section 6.2(b). (e) In the event that a Take-Out does not occur at least once in any period of sixteen (16) consecutive calendar weeks, the Collateral Agent, the Company or the Insurer shall have the right to conduct (or to cause its accoun tants or other third parties to conduct) an audit of the Collection Agent's records (including all Records and Contracts) and servicing, reporting and collection proce dures. SECTION 6.3 Collection Agent Defaults. The occurrence of any one or more of the following events shall constitute a Collection Agent Default: (a) any representation, warranty, certification or statement made by the Collection Agent (including UAC, if it is the Collection Agent) in this Agreement or in any other document delivered pursuant hereto shall prove to have been incorrect in any material respect when made or deemed made; or (b) the Collection Agent shall default in the performance of any payment, covenant or undertaking hereunder; or (c) any Event of Bankruptcy shall occur with respect to the Collection Agent or any Subsidiary of Collection Agent. SECTION 6.4 Rights After Designation of New Collection Agent. At any time following the designation of a Collection Agent (other than UAC) pursuant to Section 6.1: (i) The Agent or the Insurer may direct that payment of all amounts payable under any Receivable be made directly to the Collateral Agent and the Insurer, as applicable, or their respec tive designees. (ii) The Debtor shall, at the Agent's or the Insurer's request and at the Debtor's expense, give notice of the Collat eral Agent's interest in the Receivables to each Obligor and direct that payments be made directly to the Collateral Agent or its designee. (iii) The Debtor shall, at the Agent's or the Insurer's request, (A) assemble all of the Records, and shall make the same available to the Collateral Agent and the Insurer at a place se lected by the Collateral Agent and the Insurer or their respective designees, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Receivables in a manner acceptable to the Collateral Agent and the Insurer and shall, promptly upon receipt, remit all such cash, checks and instru ments, duly endorsed or with duly executed instruments of transfer, to the Collateral Agent or its designee. (iv) The Debtor hereby authorizes the Collateral Agent to take any and all steps in the Debtor's name and on behalf of the Debtor necessary or desirable, in the determination of the Collateral Agent, to collect all amounts due under any and all Receiv ables and Related Security with respect thereto, including, without limitation, endorsing the Debtor's name on checks and other instru ments representing Collections and enforcing such Receivables and the related Contracts. SECTION 6.5 Responsibilities of the Debtor. Anything herein to the contrary notwithstanding, the Debtor shall (i) perform all of its obligations under the Contracts related to the Receivables to the same extent as if interests in such Receiv ables had not been pledged hereunder and the exercise by the Collateral Agent of its rights hereunder shall not relieve the Debtor from such obligations and (ii) pay when due any taxes, including without limitation, any sales taxes payable in connection with the Receivables and their creation and satisfaction. Neither the Collateral Agent nor any Secured Party shall have any obligation or liability with respect to any Receivable or related Contracts, nor shall any of them be obligated to perform any of the obliga tions of the Debtor thereunder. ARTICLE VII TERMINATION EVENTS SECTION 7.1 Termination Events. The occurrence of any one or more of the following events shall constitute a Termination Event: (a) any representation, warranty, certification or statement made by the Debtor or UAC in this Agreement, the Sale and Purchase Agreement or in any other Transaction Document shall prove to have been incorrect in any material respect when made or deemed made; (b) the Debtor or UAC shall default in the performance of (i) any payment obligation hereunder or under the Sale and Purchase Agreement or (ii) any other covenant or undertaking hereunder or under the Sale and Purchase 64 Agreement which in the case of this clause (ii) shall remain unremedied for five (5) days; or (c) any Event of Bankruptcy shall occur with respect to the Debtor or the Collection Agent or any Subsidiary of either of them; or (d) a Collection Agent Default shall have occurred or for any reason UAC is not the Collection Agent; or (e) the Collection Agent shall at any time not be in compliance with the requirements of Section 5.3; or (f) the Collateral Agent shall, for any reason, fail to have a valid and perfected first priority security interest in the Receivables and Related Security and Collections with respect thereto, free and clear of any Adverse Claim; or (g) either of the Debtor or the Collection Agent shall con solidate or merge with or into any other Person whereby it is not the surviving entity; or (h) there shall have occurred any material adverse change in the operations of the Debtor or the Collection Agent since the Closing Date, or any other event shall have occurred which materially affects the Debtor's or the Collection Agent's ability to either collect the Receivables or to perform under this Agreement, the Sale and Purchase Agreement or any other Transaction Document; or (i) the Liquidity Provider or the Credit Support Provider shall have given notice that an event of default has occurred and is continuing under its agreements with the Company; or (j) the Commercial Paper issued by the Company shall not be rated at least "A-2" by S&P and at least "P-2" by Moody's; or (k) (i) the Net Investment minus amounts on deposit in the Prefunding Account shall at any time exceed the Net Receivables Balance, or (ii) the Net Asset Test is not satisfied; or (l) a Take-Out shall not occur at least once in any period of six consecutive calendar months; or 65 (m) the Net Yield as of any Determination Date is less than 2.00%; (n) a draw is made under the Policy or an Insurer Default has occurred and is continuing; (o) the Insurer shall have given notice that an event of default has occurred and is continuing under the Insurance Agreement; (p) the term of the Policy is not of the term required by the Company (which term shall be at least equal to the term of the latest maturing Receivable in the facility plus 90 days); and (q) the sum of the (i) amount on deposit in the Reserve Account and (ii) the amount available pursuant to any Reserve Account Guaranty is less than the Required Reserve Account Amount for two (2) consecutive Business Days. SECTION 7.2 Termination. If a Termination Event occurs hereunder and is continuing, the Collateral Agent, at the written direction of the Insurer shall, or the Collateral Agent may, with the consent of the Insurer, in either case by notice to the Debtor, (i) if UAC is the Collection Agent at the time, terminate UAC as Collec tion Agent hereunder, or (ii) declare any date as the date upon which the Note shall become due and payable, and, subject to the limitations on recourse set forth in Section 2.1 hereof and Section 6.8 of the Note Purchase Agreement, the Collateral Agent shall have all of the rights and remedies provided to a secured creditor or a purchaser of chattel paper under the Relevant UCC by applicable law in respect thereto (including, but not limited to, initiating foreclosure and/or liquidation proceed ings with respect to all of the Receivables and Contracts or any portion thereof). In addition, the Agent shall have the right to designate the Base Rate plus, if an Insurer Default shall have occurred, 2%, to be applicable to the Net Investment (except in the case of a Termination Event described under clauses (i) and (j) above, in which case the Adjusted LIBOR Rate or the Base Rate, as applicable, shall be applicable), and the Company shall have the right to cease issuing Commercial Paper in order to maintain the Net Investment and may assign to the Bank Investors all of its right, title and interest hereunder. No waiver of any Termination Event or Potential Termination Event shall be effective without the prior written consent of the Insurer. 66 If the Note is declared due and payable in accordance with this Section 7.2, the Collateral Agent shall, at the direction of the Insurer, and may, with the consent of the Insurer, do any one or more of the following: (i) take all necessary action to foreclose upon the Collateral; (ii) retain in satisfaction of any amounts owing from the Debtor all amounts otherwise payable to the Debtor pursuant to this Agreement to the extent necessary to pay in full all amounts (including principal and interest) (i) due and payable under the Note, (ii) due and payable by the Debtor under the Note Purchase Agreement, and (iii) all amounts due and payable by the Debtor under the Insurance Agreement; (iii) subject to the limitations on recourse set forth in Section 2.1 hereof and Section 6.8 of the Note Purchase Agreement, pursue any available remedy by proceeding at law or in equity including complete or partial foreclosure of the lien upon the Collateral and sale of the Collateral or any portion thereof or rights or interest therein as may appear necessary or desirable (i) to collect amounts owed pursuant to the Note and any other payments then due and thereafter to become due under the Note or (ii) to enforce the performance and observance of any obligation, covenant, agreement or provision contained in this Agreement to be observed or performed by the Debtor; or (iv) subject to the limitations on recourse set forth in Section 2.1 hereof and Section 6.8 of the Note Purchase Agreement, exercise any remedies of a secured party under the Uni form Commercial Code and take any other appropriate action to protect and enforce the rights and remedies of the Collateral Agent on behalf of the Secured Parties The Debtor and the Collection Agent agree that they shall take all actions (including reliening of the certificates of title or other title documents in the name of the Collateral Agent on behalf of the Secured Parties) and execute all documents as may be necessary or requested by the Collateral Agent to perfect its interest in the Collateral, including, without limitation, to perfect the Collateral Agent's security interest in the Financed Vehicles. The Debtor and UAC hereby grant 67 to the Collateral Agent, on behalf of the Secured Parties, a power of attorney to act in their place and stead to take all actions as may be necessary to perfect the Collateral Agent's security interest in the Financed Vehicles. Each of UAC and the Debtor acknowledge that such power of attorney is irrevocable and is coupled with an interest. In connection with any sale of the Receivables by the Collateral Agent after the occurrence of a Termination Event, the Debtor shall have, for a period of five (5) Business Days after notice of such proposed sale from or on behalf of the Secured Parties, the right to repurchase the Receivables and related Contracts for a price, payable in immediately available funds, in an amount equal to the Aggregate Unpaids. SECTION 7.3 Proceeds. The proceeds from the sale, disposition or liquidation of the Receivables pursuant to Section 7.2 above shall be treated as Collections on the Receivables and shall be allocated and deposited in accordance with the provisions governing allocations set forth herein. ARTICLE VIII THE COLLATERAL AGENT SECTION 8.1 Duties of the Collateral Agent. The Secured Parties hereby appoint NationsBank to act solely on their behalf as Collateral Agent hereun der, and NationsBank hereby accepts such appointment. The Collateral Agent, both prior to the occurrence of a Termination Event hereunder and after a Termination Event shall have been cured or waived, shall undertake to perform such duties and only such duties as are specifically set forth in this Agreement. The Collateral Agent shall at all times after the occurrence of a Termination Event which has not been cured or waived exercise such of the rights and powers vested in it pursuant to this Agreement using the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. All Collections received by the Collateral Agent from the Collection Agent or otherwise will, pending remittance to the Secured Party entitled thereto, be held in trust by the Collateral Agent for the benefit of the Secured Parties and to gether with all other payment obligations of the Debtor hereunder owing to the Secured Parties shall be payable to the Secured Parties in accordance with the provi sions of Article II hereof. 68 The Collateral Agent shall only resign if it shall (i) become incapable of acting as Collateral Agent in accordance with the terms of this Agreement, (ii) be adjudicated insolvent or bankrupt or otherwise become subject to any bankruptcy, insolvency, reorganization or liquidation proceeding, (iii) be no longer qualified as the Collateral Agent as such term is defined in the agreement governing its responsibility as Collateral Agent or otherwise be subject to replacement pursuant to or such agreement governing its responsibility as Collateral Agent or (iv) materially breach any of the provisions of this Agreement or provided, further, that, without the consent of the Agent and the Insurer, such resignation shall not be effective until a successor Collateral Agent acceptable to the Insurer shall have accepted appointment as Collat eral Agent hereunder and shall have agreed to be bound by the terms of this Agree ment. Except as otherwise provided herein, the Collateral Agent shall not resign from the obligations and duties hereby imposed on it except upon determina tion that (i) the performance of its duties hereunder is no longer permissible under applicable law and (ii) there is no reasonable action which the Collateral Agent could take to make the performance of its duties hereunder permissible under applicable law. Any such determination permitting the resignation of the Collateral Agent shall be evidenced as to clause (i) above by an opinion of counsel to such effect delivered to the Collateral Agent and the Secured Parties. Notwithstanding the foregoing, the Collateral Agent may resign if, after demand therefor, it does not receive payment of any compensation due from the Debtor pursuant to the letter agreement described in Section 8.2. No resignation of the Collateral Agent shall become effective until a suc cessor Collateral Agent approved by the Agent and the Insurer and the successor Collateral Agent shall have assumed the responsibilities and obligations of the Collat eral Agent hereunder. This Agreement shall be administered in the Corporate Trust Office of the Collateral Agent. The Collateral Agent shall maintain fidelity bond coverage insuring against losses through wrongdoing of its officers and employees who are involved in the administration of Collections covering such actions and in such amounts as the Collateral Agent believes to be reasonable in light of industry stan dards from time to time. SECTION 8.2 Compensation and Indemnification of Collateral Agent. The Collateral Agent shall be compensated for its activities hereunder and reimbursed for reasonable out-of-pocket expenses (including (i) securities transaction charges not waived due to the Collateral Agent's receipt of a payment from a financial institution with respect to certain Eligible Investments, as specified by the Debtor and 69 (ii) the compensation and expenses of its counsel and agents) pursuant to a separate letter agreement between the Collateral Agent and the Debtor. All such amounts shall be payable from funds available therefor in accordance with Section 2.3(a)(iii) hereof with any increase in such amounts to be approved by the Insurer. Subject to the terms of such letter agreement, the Collateral Agent shall be required to pay the ex penses incurred by it in connection with its activities hereunder from its own account. Notwithstanding any other provisions in this Agreement, the Collateral Agent shall not be liable for any liabilities, costs or expenses of the Debtor arising under any tax law, including without limitation any Federal, state or local income or franchise taxes or any other tax imposed on or measured by income (or any interest or penalties with respect thereto or from a failure to comply therewith). (a) The Debtor shall indemnify the Collateral Agent, its officers, directors, employees and agents for, and hold it harmless against any loss, liability or expense incurred without willful misconduct, gross negligence or bad faith on its part, arising out of or in connection with (i) the acceptance or administration of this Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement and (ii) the negligence, willful misconduct or bad faith of the Debtor in the performance of its duties hereunder. All such amounts shall be payable in accordance with Section 2.3(a)(iii) hereof. The provisions of this Section 8.2 shall survive the termination of this Agreement. SECTION 8.3 Representations, Warranties and Covenants of the Collateral Agent. The Collateral Agent agrees to make the following representations, warranties and covenants, and further agrees that the Secured Parties shall be deemed to have relied upon such representations, warranties and covenants in accepting their interest in the Receivables. (a) Organization and Good Standing. The Collateral Agent is a national banking association duly organized, validly existing and in good standing under the laws of the United States of America, and has full corporate power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement. (b) Due Authorization. The execution, delivery, and performance of this Agreement and any other Transactions Documents to which the Collateral Agent is a party have been duly authorized by the Collateral Agent by all necessary corporate action on the part of the Collateral Agent. 70 (c) Binding Obligation. This Agreement and the other Transaction Documents to which the Collateral Agent is a party each constitutes a legal, valid and binding obligation of the Collateral Agent, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereinafter in effect, affecting the enforcement of creditors' rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity). (d) No Conflict. The execution and delivery by the Collateral Agent of this Agreement and the other Transaction Documents to which the Collateral Agent is a party, and the performance of the transactions contemplated by this Agreement and the other Transaction Documents and the fulfillment of the terms hereof and thereof applicable to the Collateral Agent, will not conflict with, violate, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, any Requirement of Law applicable to the Collateral Agent or any indenture, contract, agreement, mortgage, deed of trust or other instrument to which the Collateral Agent is a party or by which it is bound. SECTION 8.4 Liability of the Collateral Agent. (a) The Collateral Agent shall be liable in accordance here with only to the extent of the obligations specifically undertaken by the Collateral Agent in such capacity herein. No implied covenants or obligations shall be read into this Agreement against the Collateral Agent and, in the absence of bad faith on the part of the Collateral Agent, the Collateral Agent may conclusively rely on the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Collateral Agent and conforming to the requirements of this Agreement. (b) The Collateral Agent shall not be liable for an error of judgment made in good faith by a Trust Officer, unless it shall be proved that the Collateral Agent shall have been negligent in ascertaining the pertinent facts. (c) The Collateral Agent shall not be liable with respect to any action taken, suffered or omitted to be taken in good faith in accordance with this Agreement or at the direction of a Secured Party relating to the exercise of any power conferred upon the Collateral Agent under this Agreement. 71 (d) The Collateral Agent shall not be charged with knowl edge of any Termination Event unless a Trust Officer assigned to the Collateral Agent's Corporate Trust Office obtains actual knowledge of such event or the Collat eral Agent receives written notice of such event from the Debtor, the Company, any Bank Investor, the Insurer or the Agent, as the case may be. (e) Without limiting the generality of this Section 8.4, the Collateral Agent shall have no duty (i) to see to any recording, filing or depositing of this Agreement or any other Transaction Document or any financing statement or continuation statement evidencing a security interest in the Receivables or the Financed Vehicles, or to see to the maintenance of any such recording or filing or depositing or to any recording, refiling or redepositing of any thereof, (ii) to see to any insurance of the Financed Vehicles or Obligors or to effect or maintain any such insurance, (iii) to see to the payment or discharge of any tax, assessment or other governmental charge or any Lien or encumbrance of any kind owing with respect to, assessed or levied against, any part of the Receivables, (iv) to confirm or verify the contents of any reports or certificates of the Collection Agent or the Debtor delivered to the Collateral Agent pursuant to this Agreement believed by the Collateral Agent to be genuine and to have been signed or presented by the proper party or parties or (v) to inspect the Financed Vehicles at any time or ascertain or inquire as to the performance or observance of any of the Debtor's or the Collection Agent's repre sentations, warranties or covenants or the Collection Agent's duties and obligations as Collection Agent and as custodian of books, records, files and computer records relating to the Receivables. (f) The Collateral Agent shall not be required to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability shall not be reasonably assured to it, and none of the provisions contained in this Agreement shall in any event require the Collateral Agent to perform, or be responsible for the manner of performance of, any of the obligations of the Collection Agent under this Agreement. (g) The Collateral Agent may rely and shall be protected in acting or refraining from acting upon any resolution, officer's certificate, any Settle ment Statement, certificate of auditors, or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond or other paper or 72 document reasonably believed by it to be genuine and to have been signed or pre sented by the proper party or parties. (h) The Collateral Agent may consult with counsel and any opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it under this Agreement in good faith and in accordance with such opinion of counsel. (i) The Collateral Agent shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement or to institute, conduct or defend any litigation under this Agreement or in relation to this Agree ment, at the request, order or direction of the Agent pursuant to the provisions of this Agreement, unless the Agent shall have offered to the Collateral Agent reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby; nothing contained in this Agreement, however, shall relieve the Collateral Agent of its obligations, upon the occurrence of a Termination Event (that shall not have been cured or waived), to exercise such of the rights and powers vested in it by this Agreement, and to use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (j) The Collateral Agent shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement. (k) Prior to the occurrence of a Termination Event and before the Collateral Agent has received notice of such Termination Event and after the waiver of any Termination Event that may have occurred, the Collateral Agent shall not be bound to make any investigation into the facts of matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing so to do by a Secured Party; provided, however, that if the payment within a reasonable time to the Collateral Agent of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation shall be, in the opinion of the Collateral Agent, not reasonably assured by the Debtor, the Collateral Agent may require reasonable indemnity against such cost, expense or liability as a condition to so proceeding. The reasonable expense of every such examination shall be paid by the Debtor or, if paid by the Collateral Agent, shall be reimbursed by the Debtor upon demand. 73 (l) The Collateral Agent may execute any of the trusts or powers hereunder or perform any duties under this Agreement either directly or by or through agents or attorneys or a custodian. The Collateral Agent shall not be respon sible for any misconduct or negligence of any such Agent or custodian appointed with due care by it hereunder. SECTION 8.5 Merger or Consolidation of, or Assumption of the Obligations of, the Collateral Agent. The Collateral Agent shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (i) the corporation formed by such consoli dation or into which the Collateral Agent is merged or the Person which acquires by conveyance or transfer the properties and assets of the Collateral Agent substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia and, if the Collateral Agent is not the surviving entity, shall expressly assume, by an agreement supplemental hereto, executed and delivered to the Secured Parties in form satisfactory to the Secured Parties, the performance of every covenant and obligation of the Collateral Agent hereunder; and (ii) the Collateral Agent has delivered to the Secured Parties an officer's certificate and an opinion of counsel each stating that such consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 8.5 and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.6 Limitation on Liability of the Collateral Agent and Others. The directors, officers, employees or agents of the Collateral Agent shall not be under any liability to the Agent, any Secured Party or any other Person hereunder or pursuant to any document delivered hereunder, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consider ation for, the execution of this Agreement; provided, however, that this provision shall not protect the directors, officers, employees and agents of the Collateral Agent against any liability which would otherwise be imposed by reason of willful misfea sance, bad faith or gross negligence in the performance of duties or by reason of reck less disregard of obligations and duties hereunder. Except as provided in Section 8.4, the Collateral Agent shall not be under any liability to any Secured Party or any other 74 Person for any action taken or for refraining from the taking of any action in its capacity as Collateral Agent pursuant to this Agreement whether arising from express or implied duties under this Agreement; provided, however, that this provision shall not protect the Collateral Agent against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross negligence in the perfor mance of duties or by reason of reckless disregard of obligations and duties hereun der. The Collateral Agent may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Collateral Agent shall not be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its duties to administer the Collections and the Collection Account in accordance with this Agreement which in its reasonable opinion may involve it in any expense or liability. SECTION 8.7 Indemnification of the Secured Parties. The Collateral Agent shall indemnify and hold harmless the Agent and the Secured Parties from and against any loss, liability, expense, damage or injury suffered or sustained by reason of willful misfeasance, bad faith, or gross negligence in the performance of the duties of the Collateral Agent or by reason of reckless disregard of obligations and duties of the Collateral Agent hereunder or by reason of the acts, omissions or alleged acts or omissions of the Collateral Agent pursuant to this Agreement. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. ARTICLE IX MISCELLANEOUS SECTION 9.1 Term of Agreement. This Agreement shall terminate following the Termination Date when the Net Investment has been reduced to zero, all accrued Carrying Costs have been paid in full and all other Aggregate Unpaids have been paid in full; provided, however, that (i) the rights and remedies of the Collateral Agent and the Secured Parties with respect to any representation and warranty made or deemed to be made by the Debtor or UAC pursuant to this Agree ment, (ii) the indemnification and payment provisions of Article VIII, and (iii) the agreement set forth in Section 9.9, shall be continuing and shall survive any termina tion of this Agreement. 75 SECTION 9.2 Waivers; Amendments. (a) No failure or delay on the part of the Collateral Agent or any of the Secured Parties in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other further exercise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. (b) Any provision of this Agreement may be amended or waived if, but only if, such amendment is in writing and is signed by the Debtor, the Collection Agent, the Insurer and the Majority Investors (and, if Article VI or the rights or duties of the Collateral Agent are affected thereby, by the Collateral Agent); provided, that no such amendment or waiver shall, unless signed by each Bank Investor directly affected thereby, (i) increase the Commitment of a Bank Investor, (ii) reduce the Net Investment or rate of interest to accrue thereon or any fees or other amounts payable hereunder, (iii) postpone any date fixed for the payment of any scheduled distribution in respect of the Net Investment or interest with respect thereto or any fees or other amounts payable hereunder or for termination of any Commitment, (iv) change the percentage of the Commitments or the number of Bank Investors, which shall be required for the Bank Investors or any of them to take any action under this Section or any other provision of this Agreement, (v) extend or permit the extension of the Commitment Termination Date, (vi) reduce or impair Collections or the payment of fees payable hereunder to the Bank Investors or delay the scheduled dates for payment of such amounts, (vii) increase the Servicing Fee to a percentage greater than 1.0% per annum of the aggregate Outstanding Balance of the Receivables as of the first day of the related Settlement Period, (viii) modify any provisions of this Agreement or the Sale and Purchase Agreement relating to the timing of payments required to be made by the Issuer or UAC or the application of the proceeds of such payments, or (ix) provide for the appointment of any Person (other than the Agent) as a successor Collection Agent. In the event the Collateral Agent requests the Com pany's or a Bank Investor's consent pursuant to the foregoing provisions and the Collateral Agent does not receive a consent (either positive or negative) from the Company or such Bank Investor within 10 Business Days of the Company's or Bank Investor's receipt of such request, then the Company or such Bank Investor (and its percentage interest hereunder) shall be disregarded in determining whether the Collateral Agent shall have obtained sufficient consent hereunder. 76 SECTION 9.3 Notices. Except as provided below, all communica tions and notices provided for hereunder shall be in writing (including bank wire, telex, telecopy or electronic facsimile transmission or similar writing) and shall be given to the other party at its address or telecopy number set forth below or at such other address or telecopy number as such party may hereafter specify for the purposes of notice to such party. Each such notice or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and confirmation is received, (ii) if given by mail 3 Business Days following such posting, or (iii) if given by any other shall mean, when received at the address specified in this Section. Notice to Moody's and S&P will be provided for all waivers, consents, approvals, amendments and extensions with respect to or under the Transaction Documents. Each of the Debtor and the Collection Agent agrees to deliver promptly to the Collateral Agent, for distribution to each of the Secured Parties, a written confirmation of each telephonic notice signed by an authorized officer of Debtor or the Collection Agent, as applicable. However, the ab sence of such confirmation shall not affect the validity of such notice. If the written confirmation differs in any material respect from the action taken by the Company, the records of the Company shall govern absent manifest error. If to the Company: ENTERPRISE FUNDING CORPORATION c/o Merrill Lynch Money Markets Inc. World Financial Center--South Tower 225 Liberty Street New York, New York 10218 Telephone: (212) 236-7200 Telecopy: (212) 236-7584 Payment Information: Bankers Trust Company ABA# 021001033 Account# 01419647 Reference Enterprise Funding - UAC (with a copy to the Administrative Agent) If to the Debtor: UNION ACCEPTANCE FUNDING CORPORATION 9240 Bonita Beach Road, Suite 1109-C 77 Bonita Springs, Florida 34135-4250 Attn: Leeanne W. Graziani, Vice President Telephone: (941) 948-1852 Telecopy: (941) 948-1855 Payment Information: Union Federal Savings Bank of Indianapolis ABA #: 2740-7048-4 Account #: 590070304 Reference: Nations Line If to UAC: UNION ACCEPTANCE CORPORATION 250 North Shadeland Avenue Indianapolis, Indiana 46219 Attn: Ashley Vukovits, Finance Officer Telephone: (317) 231-2717 Telecopy: (317) 231-7926 If to the Collateral Agent: NATIONSBANK, N.A. NationsBank Corporate Center--10th Floor Charlotte, North Carolina 28255 Attention: Michelle M. Heath-- Investment Banking Telephone: (704) 386-7922 Telecopy: (704) 388-9169 If to the Administrative Agent: NATIONSBANK, N.A. NationsBank Corporate Center--10th Floor Charlotte, North Carolina 28255 Attention: Michelle M. Heath-- Investment Banking Telephone: (704) 386-7922 Telecopy: (704) 388-9169 78 If the to Insurer: MBIA INSURANCE CORPORATION 113 King Street Armonk, New York 10504 Attn: Insured Portfolio Management - SF Telephone: (914) 273-4949 Telecopy: (914) 765-3163 Payment Information: MBIA Insurance Corporation ABA #: 021-000-021 Account #: 910-2-721728 Reference: UAFC Enterprise Auto WH If the to Agent: NATIONSBANK, N.A. NationsBank Corporate Center 100 North Tryon Street Charlotte, North Carolina 28255 NC1-007-10-07 Telephone: (704) 386-7922 Telecopy: (704) 388-9169 Payment Information: NationsBank, N.A. ABA #: 053000196 Account #: 1093601650000 Reference: UAC If to S&P: STANDARD & POOR'S RATINGS SERVICES 25 Broadway New York, New York 10004-1064 Attention: Michael Bilello Telephone: (212) 208-5531 Telecopy: (212) 208-0030 If to Moody's: MOODY'S INVESTORS SERVICE 79 99 Church Street, 4th Floor New York, New York 10007 Attention: Marc Cohen Telephone: (212) 553-4898 Telecopy: (212) 553-3856 SECTION 9.4 Governing Law; Submission to Jurisdiction; Integration. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Each of the Debtor, UAC and the Collection Agent hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in The City of New York for purposes of all legal proceedings arising out of or relating to this agreement or the transactions contemplated hereby. Each of the Debtor, UAC and the Collection Agent hereby irrevocably waives, to the fullest extent it may effectively do so, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Nothing in this Section 9.4 shall affect the right of the Company to bring any action or proceeding against the Debtor, UAC or the Collection Agent or their respective properties in the courts of other jurisdictions. (b) This Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire Agreement between the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. SECTION 9.5 Severability; Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Any provisions of this Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unen forceable such provision in any other jurisdiction. 80 SECTION 9.6 Successors and Assigns. (a) This Agreement shall be binding on the parties hereto and their respective successors and assigns; provided, however, that neither the Debtor, UAC nor the Collection Agent may assign any of its rights or delegate any of its duties hereunder without the prior written consent of the Collateral Agent and the Insurer. No provision of this Agreement shall in any manner restrict the ability of the Collateral Agent to assign, participate, grant security interests in, or otherwise transfer any portion of the Collateral. (b) Each of the Debtor and UAC hereby agrees and con sents to the assignment by the Company from time to time of all or any part of its rights under, interest in and title to this Agreement and the Note to any Liquidity Pro vider. SECTION 9.7 Waiver of Confidentiality. Each of the Debtor and UAC hereby consents to the disclosure of any non-public information with respect to it received by the Company or the Administrative Agent to any of the Company, any nationally recognized rating agency rating the Company's commercial paper, the Administrative Agent, the Insurer, the Liquidity Provider or the Credit Support Provider in relation to this Agreement. SECTION 9.8 Confidentiality Agreement. Each of the Debtor and UAC hereby agrees that it will not disclose the contents of this Agreement or any other proprietary or confidential information of any of the Secured Parties, the Collateral Agent, the Administrative Agent, the Liquidity Provider or the Credit Support Provider to any other Person except (i) its auditors and attorneys, employees or financial advisors (other than any commercial bank) and any nationally recognized rating agency, provided such auditors, attorneys, employees, financial advisors or rating agencies are informed of the highly confidential nature of such information or (ii) as otherwise required by applicable law, under the Securities Exchange Act of 1934, as amended, in connection with an offering of securities issued by the Debtor or an Affiliate thereof, or order of a court of competent jurisdiction (provided, however, that no such disclosure shall occur without the prior review by the Administrative Agent of the material to be disclosed). 81 SECTION 9.9 No Bankruptcy Petition Against the Company. Each of the Debtor, UAC, the Insurer and the Collection Agent hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Commercial Paper or other indebtedness of the Company (or, if the Net Investment (or any portion thereof) has been assigned to a Conduit Assignee, one year and one day after the payment in full of all Commercial Paper issued by such Conduit Assignee), it will not institute against, or join any other Person in instituting against, the Company any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. SECTION 9.10 No Recourse Against Stockholders, Officers or Directors. Notwithstanding anything to the contrary contained in this Agreement, the obligations of the Company under this Agreement and all other Transaction Docu ments are solely the corporate obligations of the Company and shall be payable solely from the assets of the Company in excess of funds necessary to pay matured and maturing Commercial Paper. No recourse under any obligation, covenant or agree ment of the Company contained in this Agreement shall be had against Merrill Lynch Money Markets Inc. (or any affiliate thereof), or any stockholder, officer or director of the Company, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and understood that this Agreement is solely a corporate obligation of the Company, and that no personal liability whatsoever shall attach to or be incurred by Merrill Lynch Money Markets Inc. (or any affiliate thereof), or the stockholders, officers or directors of the Company, as such, or any of them, under or by reason of any of the obligations, covenants or agreements of the Company contained in this Agreement, or implied therefrom, and that any and all personal liability for breaches by the Company of any of such obligations, covenants or agreements, either at common law or at equity, or by statute or constitution, of Merrill Lynch Money Markets Inc. (or any affiliate thereof) and every such stockholder, officer or director of the Company is hereby expressly waived as a condition of and consideration for the execution of this Agreement. SECTION 9.11 Further Assurances. The Debtor agrees to do such further acts and things and to execute and deliver to the Secured Parties, the Adminis trative Agent or the Collateral Agent such additional assignments, agreements, powers and instruments as are required by the Collateral Agent or the Insurer to carry into effect the purposes of this Agreement or to better assure and confirm unto the Collateral Agent or the Insurer its rights, powers and remedies hereunder. 82 SECTION 9.12 Exercise of Rights by Insurer. All rights granted to the Insurer pursuant to this Agreement shall terminate during the pendency of a payment default by the Insurer under the Policy or during the pendency of a Surety Insolvency (as defined in the Insurance Agreement as in effect on the date hereof) and during such time the Insurer's rights may be exercised by the Collateral Agent or Company, provided, however, the Insurer's rights shall be reinstated in full, immedi ately upon the cure of such default. SECTION 9.13 Characterization of the Transactions Contemplated by the Agreement; Tax Treatment. The parties hereto agree that this Agreement shall constitute a security agreement under applicable law. The Debtor hereby assigns to the Collateral Agent, for the benefit of the Secured Parties, all of its rights to pay ment (i) under the Sale and Purchase Agreement and the PFC Sale and Purchase Agreement with respect to the Receivables and with respect to any obligations there under of UAC or PFC, as applicable, with respect to the Receivables and (ii) under or in connection with any Hedging Arrangement. The Collateral Agent agrees that upon any release of a Receivable or Contract to the Debtor, the Collateral Agent shall be deemed to have released its security interest therein and reassigned to the Debtor all of the Collateral Agent's rights under the Sale and Purchase Agreement or the PFC Sale and Purchase Agreement, as applicable, with respect to such Receivable or Con tract. The Debtor agrees that neither it nor the Collection Agent shall give any con sent or waiver required or permitted to be given under the Sale and Purchase Agree ment with respect to the Receivables or the Contracts without the prior consent of either the Collateral Agent, the Administrative Agent or the Insurer. (a) Each of the parties hereto agrees to treat the transac tions contemplated by this Agreement as a financing for federal income tax purposes and further agree to file on a timely basis all federal and other income tax returns consistent with such treatment. 83 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Security Agreement as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Company By: _______________________________ Name: Title: UNION ACCEPTANCE FUNDING CORPORATION, as Debtor By: _______________________________ Name: Title: UNION ACCEPTANCE CORPORATION, individually and as Collection Agent By: _______________________________ Name: Title: MBIA INSURANCE CORPORATION, as Insurer By: _______________________________ Name: Title: 84 EX-21 4 SUBSIDIARIES OF UNION ACCEPTANCE CORPORATION Exhibit 21 Subsidiaries of the Registrant Subsidiary State of Incorporation Performance Funding Corporation Delaware Performance Securitization Corporation Delaware UAC Securitization Corporation Delaware Union Acceptance Funding Corporation Delaware UAC Boat Funding Corp. Delaware UAC Finance Corp. Indiana Circle City Car Company Indiana Union Acceptance Receivables Corporation Delaware EX-27 5 FDS FOR UNION ACCEPTANCE CORPORATION
5 This schedule contains summary financial information extracted from the Registrant's consolidated financial statements for the twelve month's ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000927790 Union Acceptance Corporaton 1,000 U.S. Dollars 12-MOS JUN-30-1998 JUL-1-1997 JUN-30-1998 1.000 93,435 0 121,220 (1,916) 0 212,739 11,410 (3,489) 411,533 25,362 303,698 58,360 0 0 24,113 411,533 0 52,025 0 35,546 0 8,050 26,107 (17,678) (7,856) (9,822) 0 0 0 (9,822) (0.74) (0.74)
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