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                                    FORM 10-K

                United States Securities and Exchange Commission
                             Washington, D.C. 20549



(Mark One)

(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended June 30, 1997
                                       or

( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the Transition Period from _____ to _____

Commission File Number:   0-26412


                          UNION ACCEPTANCE CORPORATION
             (Exact name of registrant as specified in its charter)


           Indiana                                        35-1908796
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                        Identification Number)
         


250 N. Shadeland Avenue, Indianapolis, IN                      46219
 (Address of principal executive office)                     (Zip Code)

Registrant's telephone number, including area code:  317-231-6400

Securities Registered Pursuant to Section 12(b) of the Act:  NONE

Securities  Registered  Pursuant  to  Section  12(g) of the Act:  Class A Common
Stock, without par value

Indicate by check mark whether  registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required to file such reports),  and (2) has been subject to filing requirements
for the past 90 days.     Yes (X) No ( )

Indicate by check mark if disclosure of delinquent  filers pursuant to Item 405,
Regulation S-K (Section  229.405 of this chapter) is not contained  herein,  and
will not be contained,  to the best of the Registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )

The  aggregate  market value of the  3,974,413  shares of the  issuer's  Class A
Common Stock held by  non-affiliates,  as of August 28, 1997,  was  $38,998,928.
There is no trading market for the issuer's Class B Common Stock.

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date:

The  number of shares of Class A Common  Stock of the  Registrant,  without  par
value,  outstanding as of August 28, 1997, was 4,016,788  shares.  The number of
shares of Class B Common Stock of the Registrant,  without par value, as of such
date was 9,200,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders  are
incorporated into Part III.


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<PAGE>




                  UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

                                    FORM 10-K

                                      INDEX


                                               PART I                      Page

Item 1.      Business........................................................  3

Item 2.      Properties...................................................... 18

Item 3.      Legal Proceedings............................................... 18

Item 4.      Submission of Matters to a Vote of Security Holders............. 18

                                       PART II

Item 5.      Market for Registrant's Common Equity and   
             Related Stockholder Matters..................................... 18

Item 6.      Selected Consolidated Financial Data............................ 19

Item 7.      Management's Discussion and Analysis of   
             Financial Condition and Results of Operations................... 20

Item 8.      Financial Statements and Supplementary Data..................... 34

Item 9.      Changes in and Disagreements with Accountants     
             on Accounting and Financial Disclosure.......................... 55

                                       PART III

Item 10.     Directors and Executive Officers of the Registrant.............. 55

Item 11.     Executive Compensation.......................................... 55

Item 12.     Security Ownership of Certain Beneficial    
             Owners and Management........................................... 55

Item 13.     Certain Relationships and    
             Related Transactions............................................ 55

                                       PART IV

Item 14.     Exhibits, Financial Statement Schedules, and      
             Reports on Form 8-K............................................. 55

SIGNATURES   ................................................................ 56

<PAGE>



                                     PART I
Item 1.           Business

         Note: Certain  capitalized terms used but not otherwise defined in this
report are defined in the  "Glossary"  set forth at the  conclusion  of "Item I,
Business."  Unless  otherwise  indicated,  references to the  "Company"  through
fiscal 1995 and before the Spin-off  refer to the conduct of the business by the
Union Division and Union  Acceptance  Corporation  ("UAC") and Subsidiaries as a
combined  business.  References to the "Company"  following  consummation of the
Spin-off by Union Federal  Savings Bank of  Indianapolis of the Company refer to
UAC and Subsidiaries.

Overview

         The Company is a specialized  finance  company engaged in acquiring and
servicing   automobile  retail   installment   sales  contracts   originated  by
dealerships  affiliated  with major  domestic  and  foreign  manufacturers.  The
Company  focuses  its  efforts on  acquiring  loans on late model used and, to a
lesser extent, new automobiles made to purchasers who exhibit a favorable credit
profile ("Prime  lending").  The Company  currently  acquires loans in 29 states
from over 3,200 manufacturer-franchised auto dealerships nationwide. The Company
also operates a "Non-prime  lending  program"  funding  loans to borrowers  with
adequate  credit  quality who would not qualify for the Company's  prime lending
program.  The Non-prime  lending program operates within the same dealer network
as the prime lending operations. In June 1996, the Company began acquiring loans
under the  "Marine  lending  program",  and  currently  serves  over 190  marine
dealers.  The customer  profile for the Marine lending program is similar to the
Company's  Prime  lending  program.  The  Company's  focus is on the prime  auto
lending  market.  Non-prime and marine loan  acquisitions  accounted for 4.1% of
total loan acquisitions during fiscal 1997.

         The  Company  was  incorporated  in  Indiana  in  December  1993,  as a
subsidiary  of Union Federal  Savings Bank of  Indianapolis  ("Union  Federal"),
which is a federally-chartered  savings bank. Union Federal entered the indirect
automobile  finance  business in 1986.  On August 7, 1995,  the  Spin-off of the
Company by Union Federal was consummated concurrently with the Company's initial
public offering of 4,000,000 shares of its Class A Common Stock.

         The Company's  headquarters are located at 250 North Shadeland  Avenue,
Indianapolis,  Indiana,  46219, and the telephone number is (317) 231-6400.  See
"Item 2, Properties."

Market and Competition

         Based on the  Company's  knowledge  and  research  with  respect to the
automobile and finance industry,  manufacturer-franchised  dealers in the United
States sold  approximately  19.0 million used  automobiles at retail in calendar
1996 at an average  price of $11,600 for a total sales  volume of  approximately
$220.4  billion.  Based on its knowledge of the industry,  the Company  believes
that  dealership  finance   departments   typically   originate  or  direct  the
origination of approximately  45%, or $99.2 billion in 1996, of the financing of
used car loans. The Company believes that it currently funds  approximately 1.0%
of dealer-directed used-car financing in the United States.

         Competition  in the  field  of  financing  retail  automobile  sales is
intense.  The auto finance market is highly fragmented and historically has been
serviced  by a variety of  financial  entities  including  the  captive  finance
affiliates  of major  automotive  manufacturers,  banks,  savings  associations,
independent finance companies, credit unions and leasing companies. Providers of
retail automobile financing have traditionally competed on the basis of interest
rates charged,  the quality of credit  accepted,  the  flexibility of loan terms
offered and the quality of service  provided  to the dealers and  customers.  In
seeking to establish  itself as one of the  principal  financing  sources at the
dealerships  it  serves,  the  Company  competes  predominantly  on the basis of
providing a high level of dealer  service  (including  evening and weekend hours
and  quick  application  response  time),  offering  flexible  loan  terms,  and
developing strong  relationships  with  dealerships.  While the Company seeks to
offer rates that are  competitive  in each of its markets,  the Company does not
currently  seek to compete by offering the lowest  rates or by  accepting  lower
quality  credit  (although its  Non-prime  lending  program  competes in a lower
credit-quality market segment).

         The Company's  competition varies among its geographic  markets. In the
Prime  lending  market  segment,  the Company has  experienced  its most intense


                                        4
<PAGE>

competition  in the Midwest,  particularly  in Indiana and Ohio.  The  Company's
primary  competitors  for Prime loans are regional banks and the captive finance
affiliates  of major  automotive  manufacturers.  Competition  in the  Non-prime
sector comes predominantly from independent finance companies.

Dealer Marketing and Service

         The Company has entered into dealer  agreements  with over 3,200 retail
automobile dealers in 29 states. The Company's objective is to enter into dealer
agreements  with a broad  spectrum  of large  domestic  and  foreign  automotive
manufacturer-franchised  dealerships in targeted major  metropolitan  areas. The
Company  believes that  manufacturer-franchised  dealerships  are most likely to
provide the Company with loans that meet the Company's  underwriting  standards.
No  individual  dealer nor group of affiliated  dealers  accounted for more than
2.00% of the  Company's  loan  purchases  during the fiscal  year ended June 30,
1997.

         The Company's  ability to acquire Prime loans depends to a large extent
on its ability to establish and maintain  relationships  with dealerships and to
induce finance managers to offer customer loan applications to the Company.  The
Company's  marketing and loan  purchasing  staff  emphasizes  dealer service and
conveniently  accommodating  dealers' needs for customer financing.  The Company
believes its loan purchasing  operations are structured to be more responsive to
these needs than the operations of its competitors.

         The Company believes that by responding rapidly to loan applications it
is more likely to be the first financing source to indicate acceptance of a loan
and,  therefore,  is more likely to receive the loan for purchase.  With that in
mind,  the Company has  developed the capacity to process a large volume of loan
applications  rapidly.  The Company's average response time to loan applications
during  fiscal 1997 was under 1 hour.  Although the  Company's  loan  purchasing
process is highly  automated,  the  Company  maintains  a strong  commitment  to
personalized  dealer  service.  Sales  representatives  and credit buyers are in
frequent  contact  with  dealership  personnel.  Management  believes  that this
personal  contact  and  follow-through  on the part of the  Company's  employees
builds strong  relations and maximizes loan  acquisition  volume from individual
dealerships.  The Company's  credit  scoring models and  centralized  purchasing
assure dealers that the Company applies consistent purchasing standards and is a
reliable  financing  source.  The Company's  flexibility in offering longer loan
terms to qualified  borrowers  enhances the  dealers'  ability to offer  desired
financing terms to customers.

         The Company has  regional or field sales  representatives  who give the
Company a presence in local  markets.  Company sales  representatives  generally
have auto dealer finance or sales  backgrounds and are generally  recruited from
within the markets  they serve.  The Company  believes  this helps to  establish
rapport and credibility with dealership personnel. The sales representatives are
in frequent contact with the Company's  dealers and are available to receive and
respond to comments and  complaints  and to explain new  programs  and forms.  A
portion of the sales  representatives'  compensation is commissions based on the
volume of loans  from  their  territories  that are  approved  and funded by the
Company,  and, in some cases, may be based on new dealer agreements  obtained in
new markets.  However,  the sales  representatives  have no authority to approve
credit applications.

         When  approaching  a new  dealer,  the  Company  sales  representatives
explain the Company's  programs and describe the ways the dealer can expect more
timely  and  reliable  service  from the  Company  than that  provided  by other
financing  sources.  Dealers  who decide to  establish a  relationship  with the
Company are provided  with a dealer  agreement  and supplied  with copies of the
Company's forms for all loan documentation and forms of drafts (which authorized
dealer personnel submit for payment of the amount of each purchase).  Also, most
new dealer agreements  include  provisions for ACH ("Automated  Clearing House")
fund transfers.  ACH agreements provide for the electronic  transfer of funds to
individual  dealer accounts for the purchase  amount of loans  originated by the
dealers and purchased by the Company.  The Company is encouraging the use of ACH
payment as opposed to drafts with all of its new dealers, and is making attempts
to convert its existing dealer base to the ACH program.  Currently,  over 51% of
the   Company's   dealers  have  ACH   agreements   in  place.   The   Company's
representatives  train dealer personnel in the proper  completion and use of the
Company's  documentation.  The dealer agreement provides the standard terms upon
which the Company  purchases loans from dealers,  contains  representations  and
warranties of the dealer and prescribes the calculation of the Dealer Premium.

Loan Origination and Purchasing

         Retail automobile buyers are customarily directed to a dealer's finance
and insurance  department to finalize  their  purchase  agreements and to review
potential financing sources and rates available from the dealer. If the customer
elects  to pursue  financing  at the  dealership,  an  application  is taken for
submission to the dealer's  financing sources.  Typically,  a dealer submits the
purchaser's  application  to more than one  financing  source  for  review.  The
dealership  finance  manager  decides  which source will finance the  automobile
purchase based upon the rates being offered,  the Dealer Premium,  the terms for
approval  and other  factors  (such as  incentives  offered by the  lender.) The
Company  believes  that its rapid  response to an  application  coupled with its
commitment to dealer  service,  and flexibility in terms enhances the likelihood
that the dealership will direct the loan to the Company, even though the Company
may not offer the lowest rate available. See "Item 1.
Business -- Market and Competition."

         Generally,  on a monthly  basis,  the Company  quotes rates at which it
will buy loans from  dealers  (the "Buy  Rate").  Buy Rates are based on several
factors  including the age of the car and the term of the loan. The Company sets
rates  generally  with a view to  maintaining a  predetermined  spread above the
relevant treasury  security,  based on the weighted average expected life of the
loans being  acquired.  The Company  publishes  different Buy Rates in different
markets  depending on its  assessment of  competitive  conditions.  See "Item 7.
Management's  Discussion  and Analysis of Results of  Operations  and  Financial
Condition."

         Centralization  of  loan  purchasing  at  the  Company's   Indianapolis
headquarters  enables the Company to assure uniform  application of underwriting
criteria.  It also enables the Company to respond very rapidly to a large volume
of  loan  applications   with  a  high  level  of  efficiency.   Upon  receiving
applications  by  facsimile  transmission,  certain  data are  entered  into the
Company's computer system and the application is assigned to a credit buyer. The
Company's  computer  system obtains a credit bureau  report,  applies the Credit
Scoring model and generates  summary credit  analysis for the credit buyer.  The
credit buyer then  analyzes the  application  data,  the summary  data,  and the
credit  bureau  report and sends a response  by  facsimile  transmission  to the
dealer.

         Approximately 60% of the Company's origination  department,  including,
sales  and  credit   employees,   have  prior  business   experience  with  auto
dealerships,  many as dealership  finance  managers.  The Company  believes this
common  experience  tends to  strengthen  their  relationships  with dealers and
enhances  dealers'  respect  for  their  credit  decisions.   The  Company  also
frequently  arranges for its account  representatives to visit dealers and their
finance  managers,  both to develop dealer rapport and to maintain  awareness of
local  economic  trends.  The Company has a  two-tiered  underwriting  structure
whereby  an  account  representative  reviews  the  loan  application,   obtains
additional information as necessary, prepares documentation, verifies employment
and income ratios,  and makes a preliminary credit  recommendation.  The account
representative   has  no  lending   authority;   although  he  may,  in  certain
circumstances,  decline a loan  application  without the  approval of the credit
analyst.  A credit  analyst  with  lending  authority  will then review the loan
package and make the final credit decision.  The commission  component of credit
analysts  compensation  is based on the average  credit  score and the  weighted
average net yield on loans originated during the period.

         The Company  utilizes a computerized  credit scoring system to evaluate
an applicant's  credit profile.  The Company  continually  evaluates its scoring
methodologies and makes  adjustments based on its experience.  In July 1996, the
Company  implemented an upgraded version of its customized  credit scoring model
developed by an independent  firm. In February 1997, the Company  analyzed seven
months of  originations  and  compared  the  predictive  ability of actual  loss
experience  between the  customized  credit  scoring  model and a new  scorecard
model.  In March 1997,  the Company  implemented  the new scorecard  model as it
appeared to be more predictive in rank-ordering  risk than the customized credit
scoring model.

         The Company's purchasing philosophy generally focuses on acquiring high
quality  credits  and not  solely  on  generating  volume.  The  quality  of the
Company's loan purchasing is due in large part to the  experience,  training and
judgment of the credit analysts.  While the Company employs  computerized Credit
Scoring,  credit analysts have discretion to override the approval  indicated by
the Credit Scoring system. In addition, the credit analysts have discretion,  in
appropriate circumstances,  to override the scoring system on the "low side" and
accept a loan with an  otherwise  insufficient  score if the  borrower's  credit
history and other credentials justify approval.  The prior experience of most of
the Company's credit employees as dealership  finance managers is valuable,  not


                                       5
<PAGE>

only in assuring sound credit analysis,  but also in protecting the Company from
attempts  by dealers  or their  customers  to obtain  approval  of  unacceptable
credits.  Management monitors and regularly audits credit buyers' decisions. The
Company tracks the  delinquency  and charge-off  rates of all loans purchased by
each individual credit analyst.

         Of the prime loan  applications  received from  dealerships in the year
ended June 30, 1997, the Company approved  approximately  19.7%  unconditionally
and  approximately  11.6% with  conditions.  Of the approved  and  conditionally
approved loans,  approximately 37.3% were ultimately  acquired.  In fiscal 1997,
the Company acquired approximately $1.1 billion in prime loans.

      If the Company  approves a loan and is selected to provide the  financing,
the automobile  buyer enters into a  simple-interest  retail  installment  sales
contract  with the dealer or a  simple-interest  installment  loan and  security
interest contract with the Company.  The Company also acquires some pre-computed
interest  installment  sale contracts in  California.  The retail sales contract
includes  an  assignment  of the  loan  to the  Company.  In  Ohio,  because  of
regulatory  provisions,  the Company enters into the contract  directly with the
borrower. In connection with the loan acquisition and the preparation of Company
forms, in many states the Company charges the borrower a loan  origination  fee.
Dealerships  in some  markets  utilize a  generic  state-approved  contract  (as
opposed  to the  Company's  contract  form).  Most of the  generic  forms do not
include  provisions for origination  fees. The use of generic contract forms has
become more prevalent  during fiscal 1997.  For dealers that  participate in the
ACH program,  ACH payments are made only after all loan  documentation  has been
received, and the loan has been recorded on the Company's system. The use of ACH
payments  greatly  reduces the Company's risk of fraudulent  draft use, and also
presents a cash flow  benefit as the loans are not funded  until they are booked
by the Company.  For non-ACH  dealers,  when the dealer has completed and mailed
the Company's loan documents and taken actions  required to perfect the security
interest on the vehicle,  authorized  dealer  personnel may complete and remit a
Company-supplied  draft for payment of the amount financed.  Because the Company
provides forms of drafts to dealers in advance of particular loan  acquisitions,
it  assumes  the  risk  that  such  drafts  may  be  used   fraudulently,   with
corresponding loss to the Company.  Historically,  the Company has not sustained
any material  losses due to such uses but there is no assurance that such losses
will not occur.  The Company  does not utilize  dealer  drafts in its  Non-prime
lending program (the "PAC Program").

         Dealers  quote loan rates to customers  at an average of  approximately
1.50% - 2.00% over the Buy Rate.  This  difference,  in most states,  represents
compensation  to the  dealership  in the  form of a Dealer  Premium  paid by the
Company, in addition to the amount financed.  See "Glossary." The Dealer Premium
is paid to the dealer each month for all loans  acquired  from the dealer during
the preceding month. In most cases, the dealer is paid the entire Dealer Premium
in  advance,  and if the loan is  prepaid or  defaults  at any time prior to its
scheduled  maturity  date, the amount of the premium is prorated and the portion
allocated to the remaining  scheduled term is  reimbursable to the Company as an
offset against the premiums to be paid with respect to subsequent  loans through
the  dealer's  reserve  account.  In some cases,  the Company may advance only a
portion of the Dealer  Premium,  with an offset  against  the dealer only if the
loan is prepaid or defaults  within a limited period of time,  regardless of the
length of the term. In Ohio,  because the Company enters into  installment  loan
contracts  directly  with  dealers'  customers,  it generally  pays the dealer a
referral  fee based on a percentage  of the note  amount.  From time to time the
Company may adjust its Dealer  Premium  payment  methods  based on  management's
assessment of the market.  The Company also pays a Dealer Premium in conjunction
with loan  acquisitions  under its Marine lending program.  The Company does not
pay a Dealer  Premium to dealers in its PAC Program.  See "Item 7.  Management's
Discussion  and Analysis of Results of  Operations  and  Financial  Condition --
Liquidity and Capital Resources."


                                       6
<PAGE>

Geographic Concentration

         The  following  table sets forth  certain  information  concerning  the
states in which the Company is  operating or has  previously  operated its Prime
business.

<TABLE>
<CAPTION>
                                                    Loans Acquired For The
                                                      Twelve Months Ended                    At June 30,1997
                                                           June 30,               --------------------------------------   
                     Date        Re-entry   -----------------------------------    Servicing     Number Of     Number Of
State              Established     Date         1997        1996        1995       Portfolio    Metro Areas      Dealers
-----              -----------     ----         ----        ----        ----       ---------    -----------      -------
                                                          (Dollars in Thousands)
<S>                 <C>          <C>      <C>          <C>         <C>           <C>                  <C>         <C>
Indiana ..........   Jan-86                $   40,858   $   38,755   $   30,148   $   80,739            1          175
Ohio .............   Apr-88                    69,928       58,123       60,834      133,012            3          246
Kentucky .........   Jan-90       Oct-96        4,701           --           --        4,417            1           35
Arizona ..........   Jun-91                    40,452       55,955       45,138       95,232            1           85
Colorado .........   Dec-91                    17,861       31,984       23,124       40,897            1           83
Kansas ...........   Jan-92                     8,591       11,559        3,918       15,320            1           31
Missouri .........   Jan-92                    25,034       16,643       20,468       48,447            1           79
Texas ............   Jun-92                   140,576      153,174      148,930      294,263            3          296
Minnesota ........   Aug-92       Apr-97        1,167           --           --        2,361            1           22
Utah .............   Sep-92       Jun-97           --           --           --           68            1            1
Oklahoma .........   Oct-92                    50,459       60,022       62,083      108,796            1           73
Florida ..........   Apr-93                    81,815       55,292       52,821      127,325            5          204
North Carolina ...   Jul-93                   105,920      113,131      105,226      199,710            3          172
Georgia ..........   Apr-94                    28,610       20,981       27,932       47,781            2          109
Virginia .........   May-94                    70,134       68,688       48,418      114,591            2          167
South Carolina ...   Jul-94                    35,353       15,175        9,697       42,024            2           71
Iowa .............   Aug-94                    23,672       13,673        3,276       29,036            2           78
Illinois .........   Sep-94                    78,508       85,716       66,683      133,509            2          227
California .......   Nov-94                   134,702      129,220       48,666      202,739            5          523
Nebraska .........   Nov-94                     2,528        1,053           --        2,949            1           20
New Mexico .......   Dec-94                     9,058       11,492        7,022       15,711            1           27
Wisconsin ........   Apr-95                    14,316       18,007        2,588       22,400            2           73
Oregon ...........   Jun-95                     5,116        9,861           --        8,525            1           41
Washington .......   Jun-95                     9,257        9,022           --       12,369            1           56
Maryland .........   Nov-95                    25,699        7,418           --       26,793            2           82
Tennessee ........   Feb-96                    21,770        6,704           --       23,275            1           67
Michigan .........   May-96                    23,181        2,869           --       21,835            1           76
Pennsylvania .....   May-96                     4,606          317           --        4,214            1           51
Nevada ...........   Jan-97                     2,192           --           --        1,934            1           34
                                           ---------------------------------------------------------------------------
   TOTAL..........                         $1,076,064   $  994,834   $  766,972   $1,860,272           50        3,204
                                           ===========================================================================
</TABLE>

         The Company  intends to continue  its  strategy of  expanding  into new
markets. In considering  potential markets for expansion,  the Company carefully
reviews the regulatory and competitive  environment and economic and demographic
factors  such  as the  number  of  auto  registrations  and  dealerships  in the
metropolitan area.

      Because  the  Company  is  highly  centralized,  the  incremental  cost of
entering  new  markets  is  relatively  low and it can enter new  markets  quite
rapidly. Alternatively, the Company's centralized operations give it the ability
to vacate a market  quickly and without great  expense,  if competitive or other
factors  arise in the market that make it no longer  suitable for the  Company's
operations.  The Company's level of loan acquisitions in particular metropolitan
areas may fluctuate  significantly over time depending on competitive conditions
and other factors in those markets.


                                       7
<PAGE>

Loan Processing and Customer Service

         When original  loan  documents  and the dealer's  draft (after  deposit
through  the  dealer's  bank)  arrive at the  Company's  headquarters,  they are
processed onto the Company's  servicing  system. In the case of a loan submitted
under the ACH program,  the original loan documents are received by the Company,
and the loan is processed in much the same way as a loan in which the dealer has
completed a draft.  Once the loan is processed,  the Company's  computer  system
triggers an ACH payment to the dealer. The Company's operations computer network
interfaces  with its loan approval  system to retrieve the  information  entered
when the  borrower's  application  was received,  saving time on data entry with
respect  to loan  processing.  The  system  transmits  new  loans  daily  to the
Company's outside data processing  servicer.  Twice weekly,  this servicer sends
data  on all  new  accounts  to the  Company's  document  service  agency  which
generates payment coupon books and sends them directly to the borrower.
Customer payments are sent directly to a lockbox.

         The Company has a separate  remote  outsourcing  agreement  with a data
processing servicer. Under the agreement, the data processing service conducts a
wide array of  applications  in both batch and  on-line  modes,  and it provides
interfacing  with a  number  of  Company-developed  systems.  The  service  also
provides off-site data storage at its data centers. The Company provides much of
the hardware to facilitate  the on-line  transmission  of data,  which is routed
through  different  data centers to provide  redundancy  in the event of a power
failure.

         The Customer  Service  Department  utilizes an automated voice response
system which allows customers to access standard account  information as well as
general  information  24 hours a day,  seven days a week.  This system directs a
total of approximately thirty thousand calls per month. Approximately 40% of the
total calls are handled entirely by the automated  system.  This system provides
many  efficiencies  for the  Company and is  user-friendly  and  convenient  for
customers.

Loan Servicing and Servicing Portfolio

                  Under the terms of its Warehouse Facilities and securitization
transactions,  the Company acts as servicer or  subservicer  with respect to the
related  automobile loans.  Since August 1995, Prime loan acquisitions have been
funded  through a $350  million  Warehouse  Facility  through  Union  Acceptance
Funding Corporation  ("UAFC"),  a wholly-owned  company subsidiary.  The Company
receives monthly servicing fees; the contractual fee,  typically one percent per
annum on the outstanding  principal balance of the securitized loans, is paid to
the Company through the securitized  trusts. The Company services the loan pools
by collecting  payments due from  borrowers  and remitting  payments to the pool
trustee in  accordance  with the terms of the servicing  agreement.  The Company
maintains  computerized records with respect to each loan to record all receipts
and  disbursements  and prepares  related reports.  As servicer,  the Company is
obligated  to  monitor  collections  and  collect  delinquent  accounts  and use
diligence to obtain current payment of accounts.  The following  tables describe
the composition of the Company's Prime lending  servicing  portfolio at June 30,
1997.

<TABLE>
<CAPTION>
                                                         Percent of                     Weighted
                           Aggregate       Aggregate      Aggregate      Average        Average       Weighted
                           Number of       Principal      Principal       Loan         Remaining       Average
                             Loans          Balance        Balance       Balance       Term (1)         Rate
                             -----          -------        -------       -------       --------         ----
                                                      (dollars in thousands, except average balances)

<S>                       <C>          <C>               <C>          <C>               <C>           <C>   
New auto / van ..........    33,814      $  457,099        24.6%        $13,518           59.4          12.53%
Used auto / van .........   139,879      $1,403,173        75.4%        $10,031           55.1          13.39%
                            -------      ----------       -----   
    Total ................  173,693      $1,860,272       100.0%        $10,710           56.1          13.18%
                            =======      ==========       =====         
                                                                                                     
Loans held for sale .....     7,192      $   90,331         4.9%        $12,560           70.0          13.09%
Other loans serviced(2) .   166,501      $1,769,941        95.1%        $10,630           55.4          13.18%
                            -------      ----------       -----   
   Total ................   173,693      $1,860,272       100.0%        $10,710           56.1          13.18%
                            =======      ==========       =====         
</TABLE>
                                                                
--------------------------------------------------------------------------------
(1)     Terms are shown in months.

(2)     Amounts include,  prime fixed rate auto loans  securitized  under
        trusts  as well as a small  portfolio  of prime  fixed  rate auto
        loans serviced under agreements with Union Federal (approximately
        $38,000)



                                       8
<PAGE>

         In addition to servicing securitized loans, the Company also services a
portfolio of Union Federal fixed and variable rate loans on mobile homes,  boats
and autos,  which  portfolio  was  approximately  $2.3 million at June 30, 1997.
During July of 1996, the Company began servicing  receivables  under  agreements
with  individual  dealerships.  These  agreements  provide for the  servicing of
dealer  originated  loans for a servicing  fee, but do not currently  entail any
advances by the Company for the purchase of the vehicle.  The Company,  however,
may consider  partial funding of loans in conjunction  with dealer  servicing in
the future. At June 30, 1997, the Company was servicing  approximately  $217,000
in loans under these agreements.

         At  June  30,  1997,  the  Prime  servicing  portfolio,  including  the
principal  balance of auto loans held for sale and securitized  auto loans,  was
over $1.8 billion in aggregate  principal  balance.  Approximately  75.4% of the
servicing  portfolio,  as of  June  30,  1997,  represented  financing  of  used
vehicles;  the remainder  represented  financing of new vehicles.  The Company's
loans consist  primarily of  simple-interest  contracts  which provide for equal
monthly  payments (as well as  pre-computed  loans acquired in  California).  As
payments are received under a simple-interest  contract, the interest accrued to
date is paid  first and the  remaining  payment  is applied to reduce the unpaid
principal  balance.  In the  case  of a  liquidation  or  repossession,  amounts
recovered are applied first to the expenses of  repossession  and then to unpaid
principal.

Non-prime lending program

      The Company began  operating the Non-prime  lending program in the fall of
1994,  to fund loans to borrowers  with  adequate  credit  quality who would not
qualify for the  Company's  Prime  lending  program.  The Company  operates  the
Non-prime program under the name "Performance Acceptance Corporation (PAC)."

      Non-prime  operations,  which are  centralized at the Company's  principal
offices, are substantially  similar to the Company's Prime lending operations in
many respects.  The Non-prime program,  however,  features more extensive credit
review  and  verification.  Also,  greater  emphasis  is placed  on  income  and
employment  stability,  the borrower's  ability to afford  monthly  payments and
loan-to-value ratios, and other collateral-based  lending standards. The Company
does not offer as prompt a response to Non-prime loan  applications as it offers
on Prime program applications to permit more extensive credit checking.  None of
the Company's  credit buyers are  responsible  for both Prime and Non-prime loan
acquisition  in the same  market.  The  Company's  collection  and  repossession
procedures  relating to Non-prime  loans provide for more rapid response to late
payments,   and  include   additional   arrangements   in  order  to  facilitate
repossessions  at an earlier stage of delinquency than is customary in the Prime
lending  program.   The  Company,   under  the  name   "Performance   Acceptance
Corporation,"  commenced  Non-prime loan  acquisitions  in Indiana and has since
expanded the Program into markets at dealerships  affiliated  with the Company's
Prime lending program.

The following table describes the composition of the Company's Non-prime lending
servicing portfolio at June 30, 1997:

<TABLE>
<CAPTION>
                                                         Percent of                     Weighted
                           Aggregate       Aggregate      Aggregate      Average        Average       Weighted
                           Number of       Principal      Principal       Loan         Remaining       Average
                             Loans          Balance        Balance       Balance       Term (1)         Rate
                             -----          -------        -------       -------       --------         ----
                                                      (dollars in thousands, except average balances)

<S>                       <C>             <C>               <C>          <C>               <C>           <C>   
New auto / van ....          880            $12,395         18.2%       $14,085            57.11         18.48% 
Used auto / van ...        5,176            $55,894         81.8%       $10,799            53.05         19.87%
   Total ..........        6,056            $68,289        100.0%       $11,276            53.79         19.62%
                                                                                                         
Loans held for sale        1,628            $19,829         29.0%       $12,180            61.24         19.47%
Securitized loans .        4,428            $48,460         71.0%       $10,944            50.74         19.68%
   Total ..........        6,056            $68,289        100.0%       $11,276            53.79         19.62%
</TABLE>
--------------------------------------------------------------------------------
(1)  Terms are shown in months.



                                       9
<PAGE>

The Company purchases  Non-prime loans at face value at an appropriate  interest
rate  generally  in the  range  of 6.00%  to  8.00%  above  the rate at which it
purchases  loans in its Prime lending  program.  The Company's  Non-prime  loans
experience  higher  default  rates than those  historically  experienced  by the
Company  with  respect to its Prime  lending  operations,  but also earn  higher
interest rates. The Company does not, however, pay Dealer Premiums to dealers in
connection with the acquisition of Non-prime loans,  which reduces its cash flow
requirements for Non-prime  operations.  Since September,  1995,  Non-prime loan
acquisitions have been funded through a separate $50 million Non-prime Warehouse
Facility through Performance Funding Corporation ("PFC"), a wholly-owned Company
subsidiary. The Company, through its wholly-owned,  special-purpose  subsidiary,
Performance    Securitization    Corporation   ("PSC"),   effected   its   first
securitization  of  Non-prime  loans in the third  quarter of fiscal  1996,  and
completed  its second  Non-prime  securitization  during  the second  quarter of
fiscal 1997.

         Of  the  loan  applications   received  from  dealerships  through  the
Non-prime  program  in the  year  ended  June 30,  1997,  the  Company  approved
approximately 5.3%  unconditionally and approximately 11.5% with conditions.  Of
the  approved  and  conditionally  approved  loans,   approximately  19.4%  were
ultimately  acquired.  In fiscal 1997, the Company acquired  approximately $39.6
million in Non-prime loans.

Marine lending program

         The Company began the Marine  program in June of 1996, to fund boat and
personal  watercraft loans to borrowers who are classified as low risk.  Through
the Marine lending  program,  the Company has entered into  agreements with over
190 dealers and is currently providing financing to individuals in 14 states.

         The standards for the Marine lending are substantially similar to UAC's
high quality  lending  operation.  Marine  lending does,  however,  utilize more
extensive credit review and verification. As a consequence,  Marine lending does
not offer as prompt a  response  time to loan  applications  as  offered  to UAC
customers to permit more extensive  credit  checking.  The Company believes that
its response time compares favorably to competitors in this market segment.

         Of the loan  applications  received  from  dealers  through  the Marine
program in the year ended June 30,  1997,  the  Company  approved  approximately
21.3%  unconditionally  and approximately 9.0% with conditions.  Of the approved
and conditionally approved loans,  approximately 31.9% were ultimately acquired.
In fiscal 1997, the Company acquired approximately $6.6 million in Marine loans.

         Marine  dealers  quote  loan  rates  to  customers  at  an  average  of
approximately 1.50% to 2.00% over the Buy Rate. This difference, in most states,
represents  compensation  to the  dealers in the form of a Dealer  Premium.  The
Company currently offers two programs to Marine dealers.  The first program is a
buy rate retention  program.  This program pays the dealer as much as 90% of the
spread for short-term  financing,  and as little as 30% for long-term  financing
with the remaining portion eligible to be paid on an "as earned" basis after the
48th month. There are no charge-backs after 120 days on this program. The second
program pays the dealer a percentage  of the amount  financed  based on the rate
the  customer  is  charged  and the  term.  The  dealer  has the  potential  for
charge-backs,  based on a straight-line  calculation,  of either 180 or 360 days
depending on the percentage of reserve paid.

         Since April 1997,  Marine loan  acquisitions have been funded through a
separate $50 million Marine  Warehouse  Facility  through Union  Acceptance Boat
Funding Corporation ("UABFC"), a wholly-owned Company subsidiary. Marine lending
follows UAC's strategy in booking  quality boat and personal  watercraft  loans.
The following table  describes the  composition of the Company's  Marine lending
service portfolio at June 30, 1997:



                                       10
<PAGE>

<TABLE>
<CAPTION>

                                       Percent of                 Weighted
                           Aggregate   Aggregate     Aggregate    Average      Average     Weighted
                           Number of   Principal     Principal     Loan       Remaining     Average
                             Loans      Balance       Balance     Balance      Term (1)       Rate
                             -----      -------       -------     -------      --------       ----
                                                     (Dollars in thousands, except average balances)
<S>                           <C>       <C>              <C>       <C>           <C>          <C>   
New boat / jet ski....        359       $ 5,262          84.5%     $14,658       144.5        11.22%
Used boat / jet ski...        113       $   965          15.5%     $ 8,534       115.1        12.15%
                              ---       -------         -----                              
   Total .............        472       $ 6,227         100.0%     $13,192       139.9        11.36%
                              ===       =======         =====                              
Loans held for sale...        472       $ 6,227         100.0%     $13,192       139.9        11.36%
                              ===       =======         =====                              
</TABLE>
--------------------------------------------------------------------------------
(1)  Terms are shown in months.



                                       11
<PAGE>



Delinquency, Collection and Repossession

      The  Company  seeks  to  maintain  low  levels  of  delinquency   and  net
charge-offs  first by  ensuring  and  monitoring  the  integrity  of its  credit
purchasing.  The Company  tracks the  delinquency  rate of all loans approved by
each credit  buyer to provide  each credit  buyer with an  incentive to maintain
loan  quality.  The  Company  also seeks to limit  delinquency  and  charge-offs
through highly automated and efficient collection and repossession procedures.

      The  collections  area is highly  automated and is supported by a separate
computerized  collections  system  provided  by the  Company's  data  processing
servicer and an automatic  telephone  dialing system.  Delinquent  borrowers are
contacted  by phone,  mail,  telegram,  and in special  circumstances,  personal
visits. Notices to delinquent borrowers are dispatched automatically by computer
when loans are 10 days delinquent.  The collections area operates during regular
business hours, weekday evenings,  and on Saturdays.  Consistent with the growth
of its  servicing  portfolio,  including  its  Non-prime  program,  the  Company
increased  its  collection  staff  by  nearly  60.0%  during  fiscal  1997.  See
"Employees" on page 14.

      The Company utilizes an automatic,  computer-controlled multiple telephone
line system which dials phone  numbers of  delinquent  borrowers  from a file of
records extracted from the Company's  database.  The system typically  generates
750-1,000  calls per hour and allows the Company to prioritize  calls based on a
wide variety of factors.  Once a call has been placed,  the system  monitors the
call and transfers the call to a collector if it has reached a live human voice.
Collectors  will handle  approximately  400 calls per day. The Company  provides
incentive  bonuses  to  its  collections  personnel  based  on  the  volume  and
promptness of payments collected from delinquent borrowers.

      After  delinquent  borrowers  fail to respond to the Company or to fulfill
oral commitments made to bring their loans current,  the Company repossesses the
automobile  securing the loan.  Repossessions  are effected for the Company by a
contracted  repossession  agent.  The  repossession  agent transfers most of the
autos to an independent auto auction company which  reconditions the repossessed
autos and sells them for the Company.  Some autos repossessed in central Indiana
that are determined to be eligible for retail sales are  reconditioned  and sold
at an  Indianapolis  location owned by the Company.  The Company is implementing
plans to expand its capacity to sell  repossessed  autos at retail by opening an
expanded  used  car  outlet  near its  principal  offices,  featuring  a new car
franchise. A number of regulatory considerations affect the timing and manner of
repossession and liquidation. See "Item 1. Business--Regulation."

      The decision to repossess and charge-off is generally made after a loan is
at least 90 days but no more  than  120 days  delinquent,  absent  extraordinary
circumstances,  such as bankruptcy or refusal to pay,  requiring earlier action.
See "Item 7.  Management's  Discussion and Analysis of Results of Operations and
Financial Condition -- Delinquency and Credit Loss Experience."

Financing and Sale of Loans

      Loan  Funding.  The  Company  relies  upon  external  sources  to  provide
financing  for its loan  purchases,  Dealer  Premiums  and  other  ongoing  cash
requirements.  The Company  utilizes a $350 million Prime Warehouse  Facility to
provide  funding  for its  Prime  loan  acquisitions,  a $50  million  Non-prime
Warehouse Facility to fund Non-prime loan acquisitions, and a $50 million Marine
Warehouse  Facility to fund boat and  personal  watercraft  loans.  See "Item 7.
Management's  Discussion  and Analysis of Results of  Operations  and  Financial
Condition -- Liquidity and Capital Resources."

      Hedging.  Because the loans purchased by the Company are fixed-rate loans,
the Company bears the risk of interest-rate  increases during the period between
the  setting  of the Buy Rate for the  acquisition  of loans and their sale in a
securitization  transaction. In order to mitigate this risk, the Company employs
a hedging strategy in which it executes short sales of U.S. Treasury  securities
having a maturity  approximating  the  average  maturity of loans to be acquired
during the relevant period.  The Company's  hedging strategy is an integral part


                                       12
<PAGE>

of its practice of periodically  securitizing  loans. See "Item 7.  Management's
Discussion and Analysis of Results of Operations and Financial  Condition" for a
discussion of hedging risks and related issues.

      Securitizations.   The   Company   sells  its   loans  in   securitization
transactions to increase the Company's liquidity, to provide for redeployment of
capital and to reduce risks  associated  with  interest rate  fluctuations.  The
Company  applies the net  proceeds  from  securitization  transactions  to repay
amounts  owed to  short-term  financing  sources,  thereby  making such  sources
available for future loan  purchases.  The Company  currently  plans to continue
securitizing  pools  of  loans,  generally  on  a  quarterly  basis.  Management
continually  evaluates  alternative  financing  sources and, in the future,  may
consider funding its loan acquisitions through a permanent warehouse facility or
some other  source or  combination  of  sources.  Since  1988,  the  Company has
securitized  approximately  $4.4 billion in auto loan  receivables  in 25 public
offerings  and  completed  two private  placements  of  Asset-backed  Securities
summarized  below.  In each of the public  offerings,  the  senior  Asset-backed
Securities  have  been  rated  "AAA"  or its  equivalent  by one or more  rating
agencies including Standard & Poor's Corporation,  Moody's Investors Service and
Fitch Investors Service, Inc. Such ratings are not recommendations of the rating
agencies to invest in the  securitizations  and may be modified or  withdrawn by
them at any time.

                           Securitization Transactions

<TABLE>
<CAPTION>
                                                      Remaining Balance     Weighted
                                      Original          at June 30,        Average Loan     Certificate       Gross         Net
 Securitization                        Amount              1997                Rate             Rate        Spread (1)   Spread (2)
 --------------                        ------              ----                ----             ----        ----------   ----------
                                                                                    (dollars in thousands)
<S>                                <C>                 <C>                   <C>              <C>            <C>          <C>  
UACSC 1997-B  Auto Trust            $       295,759     $   285,528           13.21%           6.57%          6.64%        5.15%
UACSC 1997-A Auto Trust             $       293,348     $   254,111           13.29%           6.33%          6.96%        5.43%
UACSC 1996-D Auto Trust             $       283,085     $   222,597           13.53%           6.14%          7.39%        5.37%
UACSC 1996-C Auto Trust             $       310,999     $   221,758           13.26%           6.44%          6.82%        5.11%
UACSC 1996-B Auto Trust             $       245,102     $   158,409           12.96%           6.45%          6.51%        5.58%
UACSC 1996-A Auto Trust             $       203,048     $   111,445           13.13%           5.40%          7.73%        5.68%
UACSC 1995-D Auto Trust             $       205,550     $   106,514           13.74%           5.97%          7.77%        6.04%
UACSC 1995-C Auto Trust             $       236,410     $   102,796           14.08%           6.42%          7.65%        6.12%
UACSC 1995-B Grantor Trust          $       220,426     $    82,574           13.91%           6.61%          7.30%        4.88%
UACSC 1995-A Grantor Trust          $       173,482     $    58,696           13.22%           7.77%          5.45%        3.88%
UFSB 1994-D Grantor Trust           $       114,070     $    34,300           12.51%           7.69%          4.82%        3.91%
UFSB 1994-C Grantor Trust           $       150,725     $    34,070           12.05%           6.77%          5.28%        4.04%
UFSB 1994-B Grantor Trust           $       142,613     $    30,603           10.74%           6.46%          4.28%        3.54%
UFSB 1994-A Grantor Trust           $       119,960     $    19,771            9.98%           5.08%          4.90%        3.60%
UFSB 1993-C Auto Trust              $       141,811     $    21,918           11.00%           4.88%          6.12%        4.82%
UFSB 1993-B Auto Trust              $       212,719     $    24,813           11.50%           4.45%          7.05%        5.31%
UFSB 1993-A Grantor Trust           $       133,091     $         -           11.49%           4.53%          6.96%        4.96%
UFSB 1992-C Grantor Trust           $       119,280     $         -           11.64%           5.80%          5.84%        4.48%
UFSB 1992-B Grantor Trust           $       116,266     $         -           12.39%           4.90%          7.49%        5.49%
UFSB 1992-A Grantor Trust           $       103,619     $         -           13.66%           6.70%          6.96%        5.80%
UFSB 1991-B Grantor Trust           $       106,612     $         -           13.64%           7.15%          6.49%        4.94%
UFSB 1991-A Grantor Trust           $       150,436     $         -           12.52%           8.40%          4.12%        2.25%
UFSB 1989-B Grantor Trust           $        66,469     $         -           14.09%          Variable              -      2.82%
UFSB 1989-A Grantor Trust           $       113,080     $         -           13.24%           8.75%          4.49%        1.97%
UFSB 1988 Grantor Trust             $       105,179     $         -           12.73%           9.50%          3.23%        1.71%
                                   ----------------    ------------ 
  Total Prime Securitized Trusts    $     4,363,139     $ 1,769,903

PSC 1996-2 Grantor Trust            $        31,108     $    26,776           19.65%           6.40%         13.25%        9.00%
PSC 1996-1 Grantor Trust            $        34,488     $    21,684           19.87%           6.87%         13.00%        8.79%
                                   ----------------    ------------
  Total Non-Prime 
     Securitized Trusts             $        65,596     $    48,460
                                   ================    ============
       Grand Total..............    $     4,428,735     $ 1,818,363
                                   ================    ============
</TABLE>
================================================================================
(1)  Difference between weighted average loan rate and Certificate Rate.
(2)  Difference  between weighted average loan rate and Certificate Rate, net of
     upfront costs,  servicing  fees,  ongoing credit  enhancements  and trustee
     fees, and the hedging gain or loss.
================================================================================
                                       13
<PAGE>



      In securitization transactions,  the Company transfers automobile loans to
a  newly-formed   trust,   which  issues  one  or  more  classes  of  fixed-rate
Certificates to investors (the "Certificateholders"). Through the 1994-A Grantor
Trust, the  Certificates  were generally  credit-enhanced  by a letter of credit
from an  independent  financial  institution.  The  letter  of  credit  provided
Certificateholders with additional assurance, to the extent of the amount of the
letter of credit,  that their  receipt of required  payments from the pool would
not be adversely  affected by loan losses.  Typically,  the letter of credit was
obtained in the amount,  represented  as a percentage of the pool,  necessary to
obtain the desired  investment grade ratings for the  Certificates.  The Company
subsequently  employed  the use of  subordinated  classes of  Certificates  as a
credit enhancement device.  Surety bonds have been utilized as additional credit
enhancements in the Company's Prime  securitizations since the UACSC 1995-D Auto
Trust.  These credit  enhancement  features  allow the offered  Certificates  to
achieve the desired  investment  grade rating.  In future  securitizations,  the
Company  may employ any of the above  devices or may employ  alternative  credit
enhancement devices.

      Gains  from  the  sale  of  loans  in  securitization   transactions  have
historically  provided a significant  portion of the net earnings of the Company
and are likely to continue to represent a  significant  portion of the Company's
net earnings. If the Company were unable or elected not to securitize loans in a
financial  reporting  period,  net earnings  would  likely be lower  relative to
periods in which securitizations  occurred. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition -- General."

      Commencing  with the  1995-A  Grantor  Trust,  the  Company  has  effected
securitizations   through  a  wholly-owned   special-purpose   subsidiary,   UAC
Securitization Corporation.  Its Non-prime securitizations were effected through
Performance  Securitization  Corporation,  also a wholly-owned  special  purpose
subsidiary.  In the future,  the Company may pursue  alternative  structures for
securitizations,  such as an owners' trust structure in which the securitization
trust  issues  both  Certificates  and debt  securities,  and the  Company  will
continue to assess other structured  financing  alternatives which may enable it
to fund loans  and/or  deploy its capital with  greater  efficiency  or at lower
cost.

Employees

      The  Company   employs   personnel   experienced  in  all  areas  of  loan
acquisition,  documentation,  collection  and  administration.   Currently,  the
Company has 396  full-time  employees and 20 part-time  employees,  including 70
full-time and 4 part-time employees in the operations department,  171 full-time
and 15 part-time employees in the collection department,  75 full-time employees
in loan  purchasing,  21 full-time  and 1 part-time  employee in the  accounting
department and 23 full-time systems and administrative  employees.  In addition,
the Company had 35 sales  representatives  who reside and work in the  Company's
loan purchasing market areas at such date, and 1 employee in retail  operations.
None of the employees is covered by a collective bargaining agreement.

Regulation

      The  Company's  operations  are subject to  regulation,  supervision,  and
licensing  under various  federal,  state and local  statutes,  ordinances,  and
regulations.  The  Company's  business  operations  are  conducted  primarily in
Arizona,  California,  Colorado,  Florida,  Georgia,  Illinois,  Indiana,  Iowa,
Kansas, Kentucky, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New
Mexico, North Carolina, Ohio, Oklahoma,  Oregon,  Pennsylvania,  South Carolina,
Tennessee, Texas, Utah, Virginia, Washington and Wisconsin and, accordingly, the
laws and regulations of such states govern the Company's operations conducted in
those states. The Company is required to be, and is, licensed as a sales finance
company in Arizona, Florida, Illinois,  Maryland,  Michigan, Missouri, Nebraska,
New Mexico, North Carolina,  Pennsylvania and Wisconsin.  In Colorado,  Indiana,
Iowa,  Texas and Utah, the Company has either filed the necessary  notifications
or registered to accept assignments of installment sale contracts,  and in Ohio,
the  Company is  licensed  to make  direct  loans.  As the  Company  expands its
operations into additional  states,  it will be required to comply with the laws
of those states.

      Numerous   federal  and  state  consumer   protection   laws  and  related
regulations impose substantial  requirements upon sellers, holders and servicers
involved in consumer finance.  These laws include the Truth-in-Lending  Act, the
Equal Credit  Opportunity  Act, the Federal Trade  Commission Act, the Fair Debt


                                       14
<PAGE>

Credit  Billing Act,  the Fair Credit  Reporting  Act, the Fair Debt  Collection
Practices  Act, the  Magnuson-Moss  Warranty  Act, the Federal  Reserve  Board's
Regulations B and Z, state  adaptations of the National  Consumer Act and of the
Uniform  Consumer  Credit Code,  state "lemon" laws,  state motor vehicle retail
installment sales acts,  retail  installment sales acts, and other similar laws.
Also,  state laws impose  finance  charge  ceilings  and other  restrictions  on
consumer  transactions  and require  contract  disclosures  in addition to those
required  under  federal  law.  These  requirements  impose  specific  statutory
liabilities  upon  creditors who fail to comply with their  provisions.  In some
cases,  this  liability  could  affect the  Company's  ability  to  enforce  the
installment sale contracts it purchases.

         The  so-called   "Holder-in-Due-Course"   Rule  of  the  Federal  Trade
Commission (the "FTC Rule"), the provisions of which are generally duplicated by
the Uniform  Consumer Credit Code,  other state statutes,  or the common laws in
certain  states,  has the effect of subjecting  purchasers of installment  sales
contracts and even some direct lenders in consumer  credit  transactions  to all
claims and defenses  which the obligor in the  transaction  could assert against
the seller of the goods. The installment sale contracts purchased by the Company
and direct loans made by it are generally  subject to the  provisions of the FTC
Rule. Accordingly,  the Company (or the trust to which a contract is assigned in
a securitization),  as holder of the contracts or as the direct lender,  will be
subject to any claims or defenses  that the  purchaser  of the related  financed
vehicle may assert  against the seller of the vehicle.  Liability  under the FTC
Rule is limited to the amounts paid by the obligor under the  contract,  but the
holder of the contract may also be unable to collect any balance  remaining  due
thereunder from the obligor.

         The dealer  selling an  installment  sale  contract to the Company will
generally  warrant that the completion of each installment sale contract and the
sale of the vehicle to the borrower complies with all requirements of law in all
material  respects.  Accordingly,  if a borrower has a claim against the Company
for violation of any law and such claim  materially  and  adversely  affects the
Company's  interest  in an  installment  sale  contract,  such  violation  often
constitutes a breach of the dealer's  warranties  under the dealer agreement and
related  assignment  and would create an  obligation of the dealer to repurchase
the contract unless the breach is cured.

         All states in which the Company  operates have adopted a version of the
Uniform  Commercial Code ("UCC").  Except where limited by other state laws, the
UCC governs the Company's rights upon the obligor's default.  Generally, the UCC
allows the  secured  party to conduct a  self-help  repossession,  then sell the
collateral and collect any  deficiency if the proceeds of sale are  insufficient
to pay off the  outstanding  obligation.  The UCC requires the secured  party to
provide the obligor with  reasonable  notice of any sale of the  collateral,  as
well as an opportunity to redeem the collateral  prior to sale. Other state laws
may  expand an  obligor's  rights,  for  example  by  providing  the  obligor an
opportunity to cure default prior to repossession, or by eliminating the secured
party's right to collect a deficiency balance.  In addition,  federal bankruptcy
laws and  related  state  laws may  interfere  with or affect  the  ability of a
secured party to realize upon collateral or enforce a deficiency judgment.


                                       15
<PAGE>

GLOSSARY

Asset-backed   Securities  -  A  general   reference  to  securities,   such  as
Certificates,  that are backed by financial assets,  such as automobile loans or
leases,  credit  card or trade  receivables,  home  equity  loans or  equipment.

Business Transfer - The transfer of certain assets related to the Union Division
from  Union  Federal  to the  Company  and the  assumption  of  certain  related
liabilities by the Company.  

Buy Rate - A rate  quoted by the  Company  to  dealers,  generally  on a monthly
basis, at which the Company will buy loans.

Certificates  -  Asset-backed   Securities  representing  fractional  beneficial
interests or  indebtedness  issued to investors by a trust that purchases a pool
of  loans  in  a  Securitization.   Such  securities  are  generally  fixed-rate
securities payable solely from cash flows from the pooled receivables.

Credit Facilities - Certain external  financing  arrangements  negotiated by the
Company with an independent financial  institution  consisting of a $350 million
Warehouse facility (the "Prime Warehouse  Facility") to fund the Company's Prime
loan  acquisitions,  a $50 million Non-prime  Warehouse facility (the "Non-prime
Warehouse  Facility") to fund loan  acquisitions  through its Non-prime  lending
program and a $50 million  Marine  Warehouse  facility  (the  "Marine  Warehouse
Facility") to fund loan  acquisitions  through its Marine lending program.  Upon
renewal of the Marine  Warehouse  Facility in April 1998, the Company may opt to
increase the borrowing capacity to $75 million.

Credit  Scoring  -  The  process  of  utilizing  standard  models  in  the  loan
acquisition  process to evaluate an  applicant's  credit profile to arrive at an
estimate  of the  associated  credit  risk based on  statistical  evaluation  of
several  common  characteristics  that  bear  on  credit  worthiness  and  their
correlation with credit risk.

Dealer  Premium - The amount paid to the dealer for the purchase of a loan above
the principal amount financed.  In states other than Ohio, the Dealer Premium is
based  upon the  finance  charge  that  would  be paid on the loan if it  earned
interest at a rate equal to the  difference  between the  contract  rate and the
Company's  periodically  published Buy Rate.  The  difference in rates  averages
between 1.50% - 2.00%.  Dealer Premiums paid to Ohio dealers is generally in the
form of referral fees are  calculated as the product of the principal  amount of
the loan and a  periodically  adjusted  referral rate set forth on the Company's
rate sheets for loans with similar terms,  note rate and age of collateral.  All
or a portion of a Dealer  Premium may be paid in advance at the time the loan is
acquired,  subject to being charged back against the dealer if that loan prepays
or defaults. The Dealer Premium is generally advanced to the dealer in the month
following  purchase  of  the  loan,  creating  the  Dealer  Premium  asset.  The
unamortized  portion of such  advance,  depending  on the dealer  agreement,  is
recoverable from the dealer if the loan is prepaid or defaults.  Dealer premiums
are included in the carrying amount of loans prior to securitization.

Excess Servicing - Excess Servicing  represents the Company's  retained interest
in loans sold.  Excess Servicing is determined by the allocation of the carrying
amount of loans sold based on the  relative  fair market value of loans sold and
expected Future Servicing Cashflows  discounted at current market rates for like
securities.  An allowance  for  estimated  credit  losses is  established  using
information  from scoring models and historical loss statistics which is applied
based on the  composition of the portfolio to be  securitized.  Market  discount
rates are based on current market  conditions,  and prepayment  assumptions  are
based  on  historical  experience.   The  Company's  contractual  servicing  fee
approximates  adequate  compensation.  Accrued  interest  through  the  date  of
securitization, which will be returned to the Company through the trust, is also
classified  under  the  provisions  of  SFAS  125 as  Excess  Servicing.  Excess
Servicing is reduced by actual servicing cash flows as received over the life of
the securitization.  Excess Servicing is classified as available-for-sale and is
carried at market  based upon the  application  of  current  assumptions  to the
remaining  expected  cash flows.  Unrealized  gains and losses are excluded from
earnings and are reported net of related income taxes as a separate component of
shareholders' equity until realized.  Excess Servicing is reviewed  periodically
for permanent impairment with impairment, if any, charged to operations.

Future Servicing  Cashflows - Future Servicing  Cashflows are the projected cash
flows resulting from the difference  between the weighted average coupon rate of
the loans sold and the  Certificate  Rate paid to investors  in the  securitized
trusts, less an allowance for estimated credit losses, the Company's contractual
servicing fee of 1% (on prime),  and ongoing trust and credit  enhancement fees,
plus estimated dealer premium rebates.

Gain on  Sales of Loans - Gain on  sales  of  loans  represents  the  difference
between the sales proceeds and the carrying  amount of loans after reduction for
amounts  allocated to Excess  Servicing,  less  expenses of the sale and hedging
gains or losses.


                                       16
<PAGE>

Non-prime Warehouse Facility - See definition of Credit Facilities, above.

Non-prime lending - The Company's  practice of acquiring loans made to borrowers
who generally  would not be eligible for credit under Prime  lending.  Loans are
acquired from automotive  dealers under a dealer agreement that provides for the
acquisition of loans at par without provision for payment of any Dealer Premium.
A Non-prime borrower is characterized as a borrower with some credit problems in
his or her past which have  subsequently been resolved and who has reestablished
an acceptable  payment  history.  To finance a new or  late-model  used car, the
Non-prime borrower may not qualify for a loan from a captive finance subsidiary,
but may access credit through  non-traditional finance sources. 

Marine Warehouse Facility - See definition of Credit Facilities, above.

Marine  lending - The Company's  practice of acquiring  loans made to borrowers,
generally with high quality credit, through a boat or personal watercraft dealer
agreement  that provides for the  acquisition of loans at a par plus the payment
of a Dealer  Premium to the dealer.  Borrowers  generally  have a credit history
with no or few minor defaults and can finance their purchase  through a bank, or
an independent finance company that focuses on Prime credit.

Pooling  - The  accumulation  of a  group  of  loans  to  create  a  package  of
receivables for sale through a trust to investors in a Securitization.

Prime  lending - The  Company's  practice of acquiring  loans made to borrowers,
generally with high quality credit,  through an automotive dealer under a dealer
agreement that provides for the  acquisition of loans at par plus the payment of
a Dealer Premium to the dealer. A Prime borrower has a credit history with no or
few minor defaults and can finance a new car purchase  through a bank, a captive
finance  subsidiary  of an automobile  manufacturer  or an  independent  finance
company that focuses on Prime credit.


Prime  Warehouse  Facility  -  See  definition  of  Credit  Facilities,   above.

Securitization  - The  process  through  which loans and other  receivables  are
pooled and sold to a trust which issues Certificates to investors.

Senior  Notes - Unsecured  Senior  Notes of the Company of $110  million and $65
million issued August 1995 and March 1997 respectively.

Senior Subordinated Notes- Unsecured Senior Subordinated Notes of the Company in
the aggregate principal amount of $46 million issued April 1996.

Spin-off - The pro rata  distribution of the 9,200,000  shares of Class B Common
Stock formerly held by Union Federal to the shareholders of its holding company,
immediately  prior to consummation  of the Company's  initial public offering in
August 1995.

Spread Account - A cash collateral  account or spread account  maintained by the
trustee of a  securitization  trust into which Future  Servicing  Cash Flows are
deposited  initially,  to  protect   Certificateholders  (and  any  provider  of
third-party credit enhancement) against credit losses. The terms of the account,
which  vary  with  each  securitization,  state  a  maximum  balance,  generally
expressed as a  percentage  of the current  principal  balance.  Generally,  the
initial  cash  deposit,  if  required,   is  funded  by  the  Company  from  the
securitization  proceeds  and is  expressed  as a  percentage  of  the  original
balance.  The initial  deposit amount is typically less than the minimum balance
("floor").  The "floor"  amount  required is  determined  based on the  original
principal  balance.  Excess  Servicing cash flows from the pool of loans, net of
credit  losses,  are  credited  to the account  and  retained  until the account
balance  reaches the maximum  balance.  Once the  maximum  balance is  attained,
excess  servicing  cash flows and any surplus in the Spread Account are remitted
to the Company. Should the interest and principal collected by the trust be less
than the required  payments to the  Certificateholders,  the shortfall is funded
from the Spread  Account and Future  Servicing Cash Flows are retained until the
maximum  balance is  reestablished.  Any  remaining  Spread  Account  balance is
released to the Company  upon  termination  of the  securitization.  There is no
recourse to the Company for loan losses beyond the balance in the Spread Account
and Future Servicing Cash Flows from the trust.

Union  Division  - The  indirect  automobile  lending  business  conducted  as a
division of Union Federal through fiscal 1994.

Warehouse - A method whereby loans are financed by financial  institutions  on a
short-term basis. In a Warehouse arrangement, loans are accumulated or pooled on
a daily or less  frequent  basis and  assigned  or  pledged  as  collateral  for
short-term borrowings until they are sold in a Securitization.


                                       17
<PAGE>


Item 2.           Properties

         The Company's  operations are centered in a commercial  office building
owned by Waterfield Mortgage Company,  Inc.  ("Waterfield," a Company affiliate)
in  Indianapolis,  Indiana.  The Company occupies office space of 115,555 square
feet under leases with Waterfield. The Company sublets a portion of the building
to two other tenants (one of which in Union Federal).  In addition,  the Company
leases  a  garage  of  5,000   square  feet  for  vehicle   reconditioning   and
re-marketing,  an office of 500 square  feet and a 75-car  lot  located in Beech
Grove,  Indiana,  from an independent party. These facilities are currently used
to  recondition  and sell the financed  vehicles  repossessed  by the Company in
central Indiana.  In July 1997, the Company  purchased a 6.5 acre (60,000 square
foot) facility near its principal offices in Indianapolis at which it intends to
establish  a  used  car  retail  operation  to  expand  its  reconditioning  and
remarketing  operations  with respect to repossessed  vehicles.  The facility is
expected to commence operations in January 1998.

Item 3.           Legal Proceedings

         The Company is party to litigation in the ordinary  course of business,
generally  involving liability claims by borrowers under the consumer protection
laws described above. The Company does not expect any pending proceeding, either
individually or  collectively,  to have a material adverse effect on the Company
or its results of operations.

Item 4.           Submission of Matters to a Vote of Security Holders

         None.
                                     PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder
                  Matters

         The Company  commenced  its initial  public  offering of Class A Common
Stock on August 7, 1995  concurrently  with the Spin-off by Union Federal of the
Company.  Shares of Class A Common Stock are quoted on the Nasdaq Stock Market's
National Market under the symbol "UACA." The following table sets forth the high
and low sales price per share of Class A Common Stock for each quarter in fiscal
1997 and 1996:

          Fiscal Year Ended June 30,           1997                 1996
          ---------------------------          ----                 ----
                                         High       Low       High       Low
          First Quarter                  19 1/4   12 1/4     19 1/2      16
          Second Quarter                 19 3/4   16 1/4     21 1/4      14
          Third Quarter                  22 1/2   13 1/4     17          11 3/4
          Fourth Quarter                 14 5/8    7 1/2     16 3/4      13 1/2

         As of  August  28,  1997,  there  were 122  holders  of  record  of the
Company's Class A Common Stock and 8 persons holding Class B Common Stock of the
Company of record.  There is no market for Class B Common Stock,  and management
has no plans to list the Class B Common Stock on Nasdaq or any exchange.

         The  Company  currently  intends  to  retain  earnings  for  use on the
operation and expansion of its business and therefore does not anticipate paying
cash  dividends  on  Class A  Common  Stock  or  Class  B  Common  Stock  in the
foreseeable  future.  The payment of dividends is within the  discretion  of the
Board of Directors and will depend,  among other things, upon earnings,  capital
requirements,  any financing  agreement covenants and the financial condition of
the Company. In addition, provisions of the Senior and Senior Subordinated Notes
limit distributions to shareholders.


                                       18
<PAGE>



Item 6.  Selected Consolidated Financial Data

The following table sets forth certain selected financial information reflecting
the operations and financial  condition of the Company for each year in the five
year period ended June 30, 1997.  This data should be read in  conjunction  with
the Company's  consolidated  financial  statements and related notes thereto and
"Item 7.  Management's  Discussion  and  Analysis of Results of  Operations  and
Financial Condition" included herein.

<TABLE>
<CAPTION>

                                                                                     Year Ended June 30,
                                                                 ------------------------------------------------------------------
                                                                     1997          1996          1995          1994          1993
                                                                 ----------    ----------    ----------    ----------    ----------
                                                                                       (Dollars in thousands)
Income Statement Data:
<S>                                                              <C>           <C>           <C>           <C>           <C>       
Interest income ..............................................   $   40,644    $   34,160    $   18,638    $   14,260    $   11,378
Interest expense(1) ..........................................       25,688        22,275        12,961         7,769         7,177
                                                                 ------------------------------------------------------------------
  Net interest margin ........................................       14,956        11,885         5,677         6,491         4,201
Provision for credit losses ..................................        4,188         2,875         1,074           484           436
                                                                 ------------------------------------------------------------------
  Net interest margin after provision ........................       10,768         9,010         4,603         6,007         3,765

Gain on sales of loans, net ..................................        2,613        30,357         8,684         4,643         5,502
Servicing fees, net ..........................................       25,337        16,926        14,628        11,570         7,149
Other revenue ................................................        3,819         3,096         2,783         2,735         1,995
                                                                 ------------------------------------------------------------------
     Total revenues ..........................................       42,537        59,389        30,698        24,955        18,411

Operating expenses ...........................................       29,941        23,841        14,913         8,995         7,055
                                                                 ------------------------------------------------------------------
  Earnings before provision for income taxes .................       12,596        35,548        15,785        15,960        11,356
  Provision for income taxes .................................        5,195        14,406         6,396         6,384         4,542
                                                                 ------------------------------------------------------------------
     Net earnings ............................................   $    7,401    $   21,142    $    9,389    $    9,576    $    6,814
                                                                 ==================================================================

Operating Data:
Prime auto receivables acquired ..............................    1,076,064    $  994,834    $  766,972    $  614,627    $  435,227
Non-prime auto receivables acquired ..........................       39,610        36,030        21,511            --            --
Marine receivables acquired ..................................        6,590            50            --            --            --
                                                                 ------------------------------------------------------------------
     Total receivables acquired (dollars) ....................   $1,122,264    $1,030,914    $  788,483    $  614,627    $  435,227
Prime auto receivables acquired ..............................       75,844        71,070        58,409        49,307        38,360
Non-prime auto receivables acquired ..........................        3,050         2,870         1,770            --            --
Marine receivables acquired ..................................          496             6            --            --            --
                                                                 ------------------------------------------------------------------
     Total receivables acquired (number of loans) ............       79,390        73,946        60,179        49,307        38,360
Prime auto loans securitized .................................    1,183,190    $  890,110    $  658,703    $  617,103    $  368,638
Non-prime auto loans securitized .............................       31,108        34,488            --            --            --
                                                                 ------------------------------------------------------------------
     Total auto loans securitized ............................   $1,214,298    $  924,598    $  658,703    $  617,103    $  368,638

Ratio of operating expenses as a % of
  average servicing portfolio ................................         1.64%         1.73%         1.49%         1.21%         1.42%
Servicing fees, net, as a % of operating
  expenses ...................................................         84.6%         71.0%         98.1%        128.6%        101.3%

Prime credit losses as a % of avg. servicing portfolio .......         2.40%         1.58%         1.36%         0.69%         0.64%
Non-prime credit losses as a % of avg. servicing portfolio....         5.18%         2.37%         2.97%          N/A           N/A
Marine credit losses as a % of avg. servicing portfolio ......         0.25%          N/A           N/A           N/A           N/A

Prime delinquencies of 30 days or more as a
     % of servicing portfolio ................................         2.96%         1.84%         1.40%         1.40%         0.93%
Non-prime delinquencies of 30 days or more as a
     % of servicing portfolio ................................         6.18%         3.35%         1.25%          N/A           N/A
Marine deliquencies of 30 days or more as a
     % of servicing portfolio ................................         0.10%          N/A           N/A           N/A           N/A

</TABLE>



                                       19
<PAGE>

Item 6.  Selected Consolidated Financial Data (Continued)

<TABLE>
<CAPTION>
At June 30,                                         1997         1996         1995        1994         1993
                                                    -----------------------------------------------------------
                                                                   (Dollars in thousands)
Balance Sheet Data(2):
<S>                                               <C>          <C>          <C>          <C>          <C>       
Loans, net ....................................   $  121,381   $  259,290   $  201,022   $   96,101   $  134,678
Excess servicing ..............................       98,841       83,434       60,662       41,265       31,575
Spread accounts ...............................       71,744       63,590       57,414       37,333       24,052
Total assets ..................................      392,166      451,195      349,283      181,516      196,242
Due to Union Federal ..........................           --           --      338,958      177,577      171,896
Amounts due under warehouse facilities ........       44,455      187,756           --           --           --
Long-term debt ................................      221,000      156,000           --           --           --
 Total shareholder equity(3) ..................       86,115       78,624            2            2           --
                                              
Other Data:                                   
Prime auto servicing portfolio ................   $1,860,272   $1,548,538   $1,159,349   $  843,245   $  581,858
Non-prime auto servicing portfolio ............       68,289       47,062       19,858           --           --
Marine servicing portfolio ....................        6,227           50           --           --           -- 
Other receivables serviced ....................        2,488        3,420        5,203           --           -- 
                                                  --------------------------------------------------------------
     Total servicing portfolio ................   $1,937,276   $1,599,070   $1,184,410   $  843,245   $  581,858
Average Prime auto servicing portfolio ........    1,759,666    1,343,770      982,875      744,149      496,758
Average Non-prime auto servicing portfolio ....       63,305       33,124        9,448           --           -- 
Average Marine servicing portfolio ............        2,357           NM           --           --           -- 
Other receivables average servicing portfolio..        2,799        4,222        6,643           --           -- 
                                                  --------------------------------------------------------------
     Total average servicing portfolio ........   $1,828,127   $1,381,116   $  998,966   $  744,149   $  496,758
Number of Prime auto loans                     
          serviced (at period end) ............      173,693      147,722      117,837       91,837       71,301
Number of Non-prime auto                       
     loans serviced (at period end) ...........        6,056        4,067        1,687           --           --
Number of Marine loans                         
     serviced (at period end) .................          472            6           --           --           --
Number of Other loans                          
     serviced (at period end) .................          402          537          836           --           --
                                                  --------------------------------------------------------------
     Total number of loans                     
          serviced (at period end) ............      180,623      152,332      120,360       91,837       71,301
Number of dealers .............................        3,204        2,523        1,604          884          831
Number of employees                            
     (full-time equivalents) ..................          387          313          215          142          115
----------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Interest  expense for the years  ended June 30,  1993,  1994 and 1995,  was
     based upon the  average  monthly  balance  "Due to Union  Federal" at Union
     Federal's all-inclusive cost of funds.

(2)  All  balance  sheet  amounts,  except the amounts  "Due to Union  Federal",
     represent actual recorded assets and liabilities of the Company's business.
     The amount Due to Union Federal includes  division funding by Union Federal
     as well as inter-company funding.

(3)  The  consolidated  financial  statements  reflect  no  allocation  of Union
     Federal's  historical  equity.  Earnings of the Company are  transferred to
     Union Federal  through the Due to Union  Federal  account at June 30, 1993,
     1994, and 1995.


Item 7.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations

         Note: Certain  capitalized terms used but not otherwise defined in this
report are defined in the  "Glossary"  set forth at the  conclusion  of "Item 1.
Business."

General

         The  Company  derives  substantially  all  of  its  earnings  from  the
purchase,  securitization  and  servicing  of  automobile  loans  originated  by
dealerships  affiliated with major domestic and foreign  manufacturers.  To fund
the purchase of loans prior to  securitization,  the Company utilizes  revolving
warehouse  credit  facilities,  discussed in "Liquidity and Capital  Resources."
Through  securitizations,  the Company  periodically  pools and sells loans to a
trust which issues Certificates to investors representing interests in the loans
sold.  When the Company sells loans in a  securitization,  it records a gain (or
loss) on the sale of loans and establishes excess servicing as an asset.  Excess
servicing  cashflows are received  over the life of the related  securitization.
See the "Glossary"  under "Item 1. Business" for definitions of accounting terms
pertaining to securitizations.



                                       20
<PAGE>

         The following  table  illustrates  changes in the Company's  total loan
acquisition  volume and  information  with respect to Gain on Sales of Loans and
Securitizations  during  the  past  eight  quarters.   More  complete  quarterly
statements of earnings  information is set forth in Note 14 of the  Consolidated
Financial Statements.

<TABLE>
<CAPTION>
                                                      For Quarters in the Fiscal Years Ended June 30,
                              ------------------------------------------------------------------------------------------------------
                                                     1997                                            1996
                              ------------------------------------------------------------------------------------------------------
                                First      Second (3)    Third      Fourth        First       Second        Third (3)       Fourth
                              --------     ----------    ------     ------        -----       ------        ---------       ------
<S>                           <C>          <C>          <C>        <C>          <C>        <C>             <C>           <C>       
Loans acquired............    $296,601     $307,420     $279,847   $238,396     $239,794   $  205,686      $  256,510    $  328,924

Gain (loss) on Sales
     of Loans.............       6,875        7,790        8,283    (20,335)(4)    6,724        8,483           7,760         7,390
Servicing portfolio
     at period end.........  1,709,917     1,835,662   1,910,455  1,937,276    1,278,805    1,344,914       1,445,517     1,599,070

Selected
Securitization Data:          1996-C     1996-D/1996-2      1997-A     1997-B     1995-C      1995-D      1996-A/1996-1      1996-B
--------------------          ------     -------------      ------     ------     ------      ------      -------------      ------
Original amount ...........   310,099    283,085/31,102     93,348    295,758    236,410      205,550      203,048/34,482    45,102
Weighted avg. loan rate ...     13.26%     13.53%/19.65%     13.29%     13.21%     14.08%       13.74%       13.13%/19.87     12.96%
Weighted avg ..............                                                                             
  remaining maturity (mos.)     67.41      67.75/62.70       71.35      69.18      64.82        67.62         66.01/56.90     69.15
Certificate rate ..........      6.44%      6.14%/6.40%       6.33%      6.57%      6.42%        5.97%         5.40%/6.87%     6.45%
Gross spread (1) ..........      6.82%      7.39%/13.25%      6.96%      6.64%      7.65%        7.77%        7.73%/13.00%     6.51%
Net spread (2) ............      5.11%      5.37%/ 9.00%      5.43%      5.15%      6.12%        6.04%         5.68%/8.79%     5.58%
</TABLE>           

(1)  Difference between weighted average loan rate and Certificate Rate.
(2)  Difference  between weighted average loan rate and Certificate Rate, net of
     upfront costs,  servicing  fees,  ongoing surety bond and trustee fees, and
     hedging gains or losses.
(3)  Two  securitizations  were effected  during the  presented  quarters -- one
     public  securitization  (prime  securitization)  and one private  placement
     (non-prime securitization)
(4)  Includes a $27.0 million pre-tax charge to increase allowance for estimated
     credit losses. The gain on the 1997-B transaction was $6.7 million.


         Acquisition   Volume.  The  Company  currently  acquires  loans  in  51
metropolitan  areas in 29 states  from over 3,200  manufacturer-franchised  auto
dealerships.  The  Company  primarily  acquires  loans  on  automobiles  made to
borrowers who exhibit a favorable credit profile ("Prime lending").  The Company
also  offers a Non-prime  lending  program to  borrowers  with  adequate  credit
quality,  but who would not qualify for a loan under the Company's Prime lending
program  ("Non-prime  lending").  Over  the  past  year,  the  Company  has also
developed  a Marine  lending  program to fund loans to  borrowers  for boats and
personal  watercraft.  The Company's  focus is on the prime  automobile  lending
market; only 4.1% of total loan acquisitions represented loans made to borrowers
under the Non-prime and Marine  programs.  The Company  continued its geographic
expansion  during the year by entering  several new areas in Arizona,  Colorado,
Florida, Georgia, Illinois, Ohio, North Carolina, South Carolina, and Texas, and
also extended  operations  into the state of Nevada.  Additionally,  the Company
re-entered markets in Kentucky, Minnesota and Utah.

         The  Company's  total  loan  acquisitions  increased  8.9% to  $1,122.3
million for the year ended June 30, 1997, from $1,030.9  million in fiscal 1996.
The increase  resulted  primarily from the expansion into and the development of
new markets that were established in fiscal 1996 and 1997. Additionally,  growth
in the Marine and Non-prime  programs  contributed  to overall loan  acquisition
growth.  Marine loan  acquisitions  totaled $6.6 million for the year ended June
30,  1997,  compared to $50,000 for fiscal  1996.  Non-prime  loan  acquisitions
totaled  $39.6  million  for the year ended  June 30,  1997,  compared  to $36.0
million in fiscal 1996. The Company made some strategic decisions with regard to
pricing and underwriting  with a view to improving the overall credit quality of
the portfolio over the long-term. These changes coupled with intense competition
in the consumer-finance markets resulted in lower loan acquisition volume in the
third and fourth quarters of fiscal 1997. Because of the competitive environment
and tightened credit  standards,  the Company's loan  acquisition  growth in the
first  quarter  of fiscal  1998 was not  substantial.  The  Company's  servicing
portfolio  increased 21.2% to nearly $2.0 billion at June 30, 1997,  compared to


                                       21
<PAGE>

approximately  $1.6  billion at June 30,  1996.  Serviced  loans  increased as a
result of increased  loan  acquisition  volume in excess of loan  repayments and
gross charge-offs. The volume of loans sold in securitizations increased to $1.2
billion  for the year ended June 30,  1997,  from  $924.6  million for the prior
year.  The  increased  volume  of  loans  securitized  is a  combination  of the
increased volume in Prime loan  acquisitions,  and the timing of the fiscal 1997
fourth quarter securitization which included four months of loan volume compared
to only three months in the fourth quarter of fiscal 1996.  Management continues
to focus on controlled growth, recognizing that the underlying credit quality of
the portfolio is one of the most  important  factors  associated  with long-term
profitability.

Delinquency and Credit Loss Experience

         There has been a general  deterioration  in the consumer credit markets
over the past year  despite  relatively  good  economic  conditions.  Management
believes that this decline comes as a result of higher  consumer debt levels and
the  consumer's  increased  readiness  to declare  bankruptcy.  The  Company has
experienced  increased  delinquency as well as increased  credit  losses.  UAC's
prime servicing  portfolio has continued to suffer  deterioration since June 30,
1997, in delinquency  and credit losses,  especially  among loans  originated in
1995.  Management is making improvements in both the underwriting and collection
processes  to address  credit  quality.  The  Company has  tightened  its credit
standards and is utilizing new computerized  scoring tools to re-score  existing
portfolios which enhance the Company's ability to identify areas for improvement
on the  underwriting  side. The collection  staff  increased by nearly 60% since
June 30, 1996.  The new scoring  tools also allow the  collection  efforts to be
focused in the most effective manner.


         Set forth below is certain information concerning the experience of UAC
pertaining  to  delinquencies,  and credit losses on the Prime fixed rate retail
automobile,  light truck and van receivables serviced by the Company.  There can
be no  assurance  that  future  delinquency  and credit loss  experience  on the
receivables  will be  comparable  to that set forth below.  See  "Discussion  of
Forward-Looking Statements".

                          Prime Delinquency Experience

<TABLE>
<CAPTION>
                                                     At June 30,
                                 ----------------------------------------------------
                                           1997                       1996
                                                (Dollars in thousands)
                                  Number of                    Number of
                                    Loans       Amount           Loans        Amount

<S>                                 <C>        <C>              <C>        <C>       
Servicing portfolio ..........      173,693    $1,860,272       147,722    $1,548,538
Delinquencies
     30-59 days ..............        2,487        27,373         1,602        17,030
     60-89 days ..............        1,646        18,931           694         7,629
     90 days or more .........          723         8,826           333         3,811
Total delinquencies ..........        4,856        55,130         2,629        28,470
Total delinquencies
    as a percent of 
    servicing portfolio.......         2.80%         2.96%         1.78%         1.84%
</TABLE>


         As  indicated  in  the  above  table,   delinquency  rates  based  upon
outstanding  loan  balances of accounts 30 days past due and over  increased  to
2.96% at June 30,  1997,  from  1.84% at June 30,  1996,  for the Prime  lending
portfolio.  The increased delinquency from a year ago is a product of changes in
consumer  credit  trends  as  discussed  above,  and,  to a lesser  extent,  the
tightening of the Company's  deferral policy  (effective in February 1997) which
applied more stringent standards for the deferment of delinquent accounts.  This
tightening  served to increase  delinquency and accelerate  credit losses in the
third and fourth quarters of fiscal 1997.



                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                        For the Years Ended June 30,
                             ------------------------------------------------------------------------------
                                     1997                       1996                       1995
                             ----------------------     ----------------------      -----------------------
                              Number                      Number                     Number
                             of Loans      Amount        of Loans     Amount         of Loan        Amount
                                                        (Dollars in thousands)
Avg. servicing
<S>                           <C>        <C>              <C>        <C>              <C>        <C>       
   portfolio .............    164,858    $1,759,666       132,363    $1,343,770       104,455    $  982,875

Gross charge-offs ........      6,280        70,830         3,663        40,815         3,493        28,628
Recoveries ...............                   28,511                      19,543                      15,258
                                             ------                  ----------                  ----------
 Net credit losses .......                   42,319                  $   21,272                  $   13,370
                                             ======                  ==========                  ==========

Gross charge-offs
   as a % of avg
   servicing portfolio ...       3.81%         4.03%         2.77%         3.04%         3.34%         2.91%
Recoveries as a %
    of gross charge-offs..                    40.25%                      47.88%                      53.30%
Net credit losses as a %
    of avg. servicing
    portfolio ............                     2.40%                       1.58%                       1.36%
</TABLE>

         As  indicated  in the table  above,  credit  losses  on the prime  auto
portfolio  totaled  $42.3  million for the fiscal year ended June 30,  1997,  or
2.40% as a  percentage  of the average  servicing  portfolio,  compared to $21.3
million or 1.58% for the  fiscal  year ended  June 30,  1996.  Increased  credit
losses are a result of higher gross  charge-off  rates,  as well as a decline in
recovery rates.  Although  recovery rates are down compared to last fiscal year,
there was a slight  improvement  in the fourth  quarter of fiscal  1997 over the
third quarter.

         The  allowance for  estimated  credit losses  inherent in loans sold is
included as an element of the fair market  value of excess  servicing  cashflows
used to allocate  the  carrying  amount of loans sold.  In view of the  consumer
credit trends  discussed  above,  the Company recorded a charge of $27.0 million
pre-tax in late fiscal 1997 to  increase  the  allowance  for  estimated  credit
losses.  After  giving  effect  of this  charge,  management  believes  that the
allowance  for  estimated  credit  losses  on  securitized  loans  represents  a
conservative  estimate of potential  credit losses.  The allowance for estimated
credit loss as a percentage of outstanding securitized loans was 4.35% and 3.22%
at June 30, 1997 and 1996, respectively.

         Set forth below is  information  pertaining to  delinquency  and credit
loss information on the Company's Non-prime portfolio. There can be no assurance
that future  delinquency and credit loss  experience on the receivables  will be
comparable  to  that  set  forth  below.  See  "Discussion  of   Forward-Looking
Statements".

                        Non-prime Delinquency Experience

                                             At June 30,
                              ----------------------------------------
                                       1997                1996
                              ------------------    ------------------
                                        (Dollars in thousands)
                              Number of             Number of
                                Loans     Amount      Loans    Amount
                                -----     ------      -----    ------
Servicing portfolio .......     6,056    $68,289      4,067    $47,062
Delinquencies
     30-59 days ...........       236      2,807         94      1,120
     60-89 days ...........       123      1,412         40        455
     90 days or more ......        --         --         --         --
Total delinquencies .......       359    $ 4,219        134    $ 1,575
Total delinquencies
    as a percent of
    servicing portfolio....      5.93%      6.18%      3.29%      3.35%




                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                 For the Years Ended June 30,
                            --------------------------------------------------------------------
                                  1997                   1996                   1995
                            -----------------    ---------------------    ----------------------
                             Number               Number                   Number
                            of Loans   Amount    of Loans      Amount     of Loans    Amount
                            --------   ------    --------      ------     --------    ------
                                                (Dollars in thousands)
<S>                          <C>      <C>          <C>         <C>            <C>    <C>    
Avg. servicing
   portfolio ............    5,491    $63,305      2,869       $33,124        797    $ 9,448
Gross charge-offs .......      379    $ 4,698        136         1,455         27        333
Recoveries ..............               1,420                      670                   146
                                      -------                  -------               -------
Net credit losses .......               3,278                      785                   187
                                      =======                  =======               =======
Gross charge-offs
   as a % of avg
   servicing portfolio ..     6.90%      7.42%      4.74%         4.39%      5.08%      5.29%(1)
Recoveries as a %
    of gross charge-offs.               30.23%                   46.07%                43.87%
Net credit losses as a %
    of avg. servicing
    portfolio ...........                5.18%                    2.37%                 2.97%(1)
</TABLE>
--------------------------------------------------------------------------------

(1)     Non-prime loans were only outstanding for eight (8) months during
        fiscal 1995.  Therefore,  the  percentages  reflect an annualized
        calculation.

Non-prime portfolio  delinquency was 6.18% based on outstanding loan balances of
accounts 30 days past due and over at June 30,  1997,  compared to 3.35% at June
30, 1996.  Credit  losses  during fiscal 1997 totaled $3.3 million or 5.18% as a
percentage of the average  Non-prime  servicing  portfolio  compared to 2.37% in
fiscal  1996.  The Company  began  acquiring  Non-prime  loans in October  1994.
Management  expects  fluctuations  in  delinquency  and credit loss rates on the
Non-prime portfolio as it becomes more seasoned.  The Non-prime  delinquency and
credit  loss  statistics  are in line with  management's  expectations,  and the
somewhat  greater credit risk  associated with a non-prime  product.  Additional
credit risk associated  with the Non-prime  product is considered in pricing and
underwriting.

Marine Delinquency and Credit Loss

         Delinquency related to the newer Marine portfolio was minimal (.10%) as
the portfolio has not matured.  The Company began  acquiring the Marine  (prime)
loans in June 1996.  The credit  loss is .25% of the  average  marine  servicing
portfolio.  Management expects increases in marine delinquency and credit losses
as the portfolio becomes seasoned.


                                       24
<PAGE>


Results of Operations

         The following table illustrates the Company's financial results for the
past eight fiscal quarters.  More complete earnings  information can be found in
the Consolidated Financial Statements and the Notes thereto.

<TABLE>
<CAPTION>
                                               1996                                       1997
                           -----------------------------------------    ------------------------------------------
                             First     Second      Third     Fourth       First      Second     Third      Fourth
                           --------   --------   --------   --------    --------   --------   --------   --------
<S>                        <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
Interest on loans ......   $  9,233   $  9,096   $  7,685   $  8,126    $  6,946   $  7,232   $  6,732   $  7,802
Interest on spread
      accounts and
      restricted cash ..      1,510      1,545      1,654      1,795       1,370      1,386      1,317      1,375
                           --------   --------   --------   --------    --------   --------   --------   --------
   Total interest income     10,743     10,641      9,339      9,921       8,316      8,618      8,049      9,177
Interest expense .......      6,410      6,265      6,118      6,895       5,289      5,556      5,359      6,071
                           --------   --------   --------   --------    --------   --------   --------   --------
   Interest margin .....      4,333      4,376      3,221      3,026       3,027      3,062      2,690      3,106
Provision for
      credit losses ....        855        993      1,180      1,160       1,150        300        600        825
                           --------   --------   --------   --------    --------   --------   --------   --------
   Net interest margin .      3,478      3,383      2,041      1,866       1,877      2,762      2,090      2,281
Gain (loss) on sales
      of loans, net ....      6,875      7,790      8,283    (20,335)      6,724      8,483      7,760      7,390

Servicing fees, net ....      5,826      6,258      6,860      6,393       3,966      2,584      4,796      5,580
Other revenues .........        934        910      1,011        964         750        724        798        824
Operating expenses .....      7,146      7,832      7,545      7,418       4,719      5,602      6,658      6,862
Net earnings/(loss) ....   $  5,918   $  6,193   $  6,309   $(11,019)   $  5,116   $  5,246   $  5,313   $  5,467
</TABLE>

Years Ended June 30, 1997 and 1996

         Net earnings  decreased to $7.4 million or $0.56 per share for the year
ended June 30, 1997,  compared to $21.1  million or $1.60 per share for the year
ended June 30,  1996.  The  decrease in net  earnings is primarily a result of a
fourth quarter after-tax charge of $16.1 million ($27.0 million pre-tax) for the
impairment  of excess  servicing  related to an  increase in the  allowance  for
estimated credit losses on the securitized portfolio. The charge was taken based
on current trends with respect to credit loss and delinquency, and their effects
on the valuation of the excess servicing  assets.  Exclusive of the charge,  net
earnings would have been $23.5 million or $1.78 per share.

         Net Interest  Margin After  Provision  increased 19.5% to $10.8 million
for the year ended June 30, 1997,  compared to $9.0 million for fiscal 1996. The
increased interest margin as compared to prior year is a result of a combination
of factors,  but is primarily  due to an increase in the average  loans held for
sale  balance,  and a decrease in the cost of funds on the  average  outstanding
borrowings.

         Interest on loans  increased  18.9% to $34.1 million for the year ended
June 30, 1997, compared to $28.7 million for last year. The increase in interest
income  resulted  from an increase in the average  outstanding  balance of loans
held for sale to $228.3  million for the year ended June 30,  1997,  from $186.6
million  for fiscal  1996,  which was a result of  increased  loan  acquisitions
during the year and the timing of the fourth  quarter  securitization.  The 1997
fourth quarter  securitization  was effected in June instead of May (as compared
to previous years); therefore, an additional one month of interest was earned by
the  Company.  Interest  earned on the  Non-prime  and  Marine  portfolios  were
approximately $3.8 million and $255,000, respectively.

         Interest  earned on Spread Accounts and Restricted Cash increased 19.4%
to $6.5 million for the year ended June 30,  1997,  compared to $5.4 million for
the year ended June 30,  1996.  The  increase is a result of  increased  average
balances on cash  collection and spread  accounts.  The average balance of these
accounts was $127.4 million in fiscal 1997, compared to $110.3 million in fiscal
1996. The increased  restricted  cash balances result from the increased size of
the securitized servicing portfolio. Cash collection accounts represent customer


                                       25
<PAGE>

payments held in trust until disbursement by the trustee.  Interest is earned by
the Company on these funds prior to  distribution of such funds to investors and
Servicer.  Average  securitized  loan balances were $1,445.4  million during the
current fiscal year, compared to $1,179.4 million in fiscal 1996. Spread account
balances  represent a credit  enhancement on the securitized  pools;  the spread
account  requirements  are  affected  by the size of the  securitized  servicing
portfolio as well as loss and delinquency trends which may trigger higher spread
requirements.  The average  interest yield on the spread accounts and restricted
cash accounts  improved  approximately 15 basis points which  contributed to the
increase as well.

         Interest  expense  increased  15.3% to $25.7 million for the year ended
June 30, 1997, from $22.3 million for the year ended June 30, 1996. The increase
was primarily a result of an increase in the average  outstanding  borrowings to
$347.7  million for the year ended June 30,  1997,  from $288.4  million for the
year ended June 30, 1996. The average cost of funds actually  decreased to 7.39%
for the year ended June 30,  1997,  from 7.72% for the year ended June 30, 1996.
Cost of  funds  in the  prior  year  included  interest  expense  in the form of
amortization   of  upfront   borrowing  fees  paid  in   conjunction   with  the
establishment of the Prime and Non-prime  Warehouse  Facilities.  The agreements
provided for an initial term of one year to be renewed annually;  therefore, the
total upfront fees paid to establish the Facilities were amortized during fiscal
1996.  Upfront  fees paid in fiscal  1996  related to the  Warehouse  Facilities
totaled  approximately $1.5 million.  The renewal of the Warehouse Facilities do
not  require  payment  of  additional  fees.  Interest  rates  on the  Warehouse
Facilities are variable in nature and are affected by changes in market rates of
interest.

         Provision for estimated credit losses increased to $4.2 million for the
year ended June 30,  1997,  compared to $2.9 million for the year ended June 30,
1996.  Increased  provisions were made in response to, and in  anticipation  of,
increased losses and delinquency trends being experienced by the Company and the
industry  in  general.   Management  believes  that  the  provision   represents
conservative estimates of potential credit losses on loans held for sale.

         Gain on Sales of Loans  continues  to be a  significant  element of the
Company's  net  earnings.  The gain on sales of  loans is  affected  by  several
factors,  but is primarily  affected by the amount of loans  securitized and the
net spread.  The Company  adjusts its pricing  frequently  and employs a hedging
strategy to help ensure an  adequate  net spread in the ensuing  securitization,
while  mitigating  the risks of increasing  interest rates and the volatility in
net spreads. Gain on sales of loans decreased to $2.6 million for the year ended
June 30, 1997.  The decrease in gains  recognized  by the Company in the current
fiscal year is due to a fourth  quarter  pre-tax charge of $27.0 million for the
impairment  of excess  servicing  assets  primarily  related to the  increase in
allowance for  estimated  credit losses  related to its  securitized  portfolio.
Exclusive  of the charge,  gains  recorded in  conjunction  with the fiscal 1997
securitization  transactions  were $29.6  million  compared to $30.4  million in
fiscal  1996.  Although  the  volume  of loans  securitized  increased  31.3% to
$1,214.3  million for the year ending June 30, 1997,  compared to $924.6 million
in  fiscal  1996,  the  weighted  average  net  spread  on  the   securitization
transactions  decreased  to 5.36% in fiscal  1997,  compared  to 5.96% in fiscal
1996. Additionally, the allowance for estimated credit losses established at the
time of the sale was 3.87% (excluding the charge) as a percentage of total loans
securitized  in fiscal  1997,  compared  to 3.57% in fiscal  1996.  Credit  loss
assumptions on the prime transactions were 3.25% throughout most of fiscal 1997;
however,   the   Company   began   providing   for  losses  at  3.50%  on  prime
securitizations  in the fourth  quarter of fiscal 1997.  Allowance for estimated
credit  losses  were  established  at 3.00% for the  majority  of  fiscal  1996.
Allowance for estimated credit losses have  historically  been made at 10.00% on
the non-prime securitizations.

         Gross and Net Spreads. Market interest rates were higher in fiscal 1997
as  compared  to  the  corresponding   periods  of  fiscal  1996.  Market  rates
experienced an upward trend  beginning in the fourth quarter of fiscal 1996, but
demonstrated  relatively  small  fluctuations  throughout  fiscal 1997.  Because
changes in loan rates on  automobile  loans tend to lag behind  fluctuations  in
market  rates of  interest,  spreads  are  adversely  affected  in a rising rate
environment.  The  increased  market  rates in  fiscal  1997 had the  effect  of
reducing gross and net spreads on Prime securitizations compared to fiscal 1996.
Gross spread is defined as the difference between the weighted average loan rate
and the  Certificate  rate. Net spread is defined as gross spread less servicing
fees,  upfront  costs,  ongoing  credit  enhancement  fees and trustee fees, and
hedging gains or losses.

         Looking ahead,  management is currently  targeting net spreads of 5.00%
to 5.50% on Prime  securitizations  (assuming a pricing spread for  Asset-backed
Certificates  over the  two-year  Treasury  Note of 50 basis  points) for fiscal
1998.  Management  believes that by targeting a spread of 7.00% to 7.50% between
loan rates and the  two-year  treasury  rate that the net spread  targets can be


                                       26
<PAGE>

achieved.  Although management believes these spreads can be achieved,  material
factors  affecting  the net  spreads  are  difficult  to predict and could cause
management's  projections  to be materially  inaccurate.  These include  current
market  conditions  with  respect  to  market  interest  rates  and  demand  for
Asset-backed Securities generally,  and for Certificates  representing interests
in Securitizations  sponsored by the Company. See "Discussion of Forward-Looking
Statements,".

         Servicing  Fees,  Net is  comprised  of fees  earned by the  Company as
Servicer  of the  securitized  loan  portfolio  (typically  1% per  annum),  the
scheduled accretion of discount established on the excess servicing asset at the
time of  securitization,  and rebates  received in excess of original  estimates
recorded inherent in the gain  calculation.  Servicing fees, net increased 49.7%
to $25.3 million for the year ended June 30, 1997, compared to $16.9 million for
the year ended June 30, 1996. Servicing fees, net as a percentage of the average
securitized  servicing  portfolio increased to 1.75% for fiscal 1997, from 1.42%
in fiscal 1996.  The increase in servicing  fees, net is primarily a result of a
22.6% increase in the average  securitized  loan balances in fiscal 1997 to $1.4
billion,  compared  to $1.2  billion  in fiscal  1996.  Servicing  fees are also
impacted by the timing of excess servicing cashflows and excess rebates.  Excess
rebates  received  during the current year were $2.3  million,  compared to $2.8
million in the prior year. The Company's rebate  receivable was marked to market
as a component of the excess  servicing asset in accordance with SFAS 125 during
the fourth quarter of fiscal 1997; the Company does not expect to receive excess
rebates in fiscal 1998.

         Other Revenues  increased 23.4% to $3.8 million for the year ended June
30, 1997,  from $3.1  million for the year ended June 30, 1996.  The increase in
the current year resulted  primarily from increases in late charge fee income to
$2.6 million from $1.9 million in the prior year.

         Salaries and Benefits Expense  increased 26.1% to $15.1 million for the
year ended June 30, 1997,  from $12.0  million for the year ended June 30, 1996.
This  increase  resulted  primarily  from an  increase in  full-time  equivalent
("FTE")  employees.  Average  FTE's for the year ended June 30,  1997,  were 333
compared to 270 for the year ended June 30,  1996.  The Company has  experienced
growth  in  credit,  sales  and  operations,  collections,  and  support.  These
increases are in response to, and in anticipation  of,  continued  expansion and
loan acquisition  growth as well as a growing  servicing  portfolio.  Additional
levels of management  and support staff have been added to ensure  efficiency in
operations as the Company's acquisition volume and servicing portfolio continues
to grow.  Increases in salary and benefit  expense were also due to annual merit
increases for the Company's existing employees.

         Other Operating Expense includes occupancy and equipment costs, outside
and professional services, loan expenses,  promotional expenses,  travel, office
supplies and other. Other operating expense increased 25.1% to $14.8 million for
the year ended June 30,  1997,  from $11.9  million  for the year ended June 30,
1996.  Many of these  expenses  vary directly with  increased  loan  acquisition
volume and the increased size of the servicing portfolio.  Both loan acquisition
volume and the servicing portfolio were increased during the year ended June 30,
1997,  compared to the year ended June 30,  1996.  Occupancy  expense  increased
reflecting a full twelve  months of rent expense in fiscal 1997 at the Company's
new headquarters,  compared to only six months in fiscal 1996. Equipment expense
was also impacted by a full year of expense from its  collections  and telephone
systems implemented at the Company's new headquarters in January 1996.

Years Ended June 30, 1996 and 1995

         Net earnings  more than doubled to $21.1 million or $1.60 per share for
the year ended June 30,  1996,  compared to $9.4 million for the year ended June
30, 1995.

         Net Interest Margin After Provision increased 95.7% to $9.0 million for
the year  ended  June 30,  1996,  compared  to $4.6  million  for  fiscal  1995.
Increased Prime loan volume, growth in the Non-prime portfolio, and modification
of the securitization  structure during fiscal 1996 contributed to increased net
interest margin.

          Interest on loans  increased 95.3% to $28.7 million for the year ended
June 30, 1996, compared to $14.7 million for last year. The increase in interest
income  resulted,  in part,  from an increase in the average  monthly balance of
loans held for sale to $186.6  million  for the year ended June 30,  1996,  from
$127.1  million  for  fiscal  1995,   which  was  a  result  of  increased  loan


                                       27
<PAGE>

acquisitions  during the year. The Non-prime  portfolio also  contributed to the
increase  in  interest  income.  The  Company  carried  an average of over $22.2
million in Non-prime  receivables  held for sale during the year which  produced
over $4.4 million in interest income.  Further,  the current method with respect
to securitization  structure  implemented in fiscal 1996 increased the amount of
interest  income  recognized  relative  to  prior  periods.  The  change  in the
securitization   structure  significantly  impacted  both  interest  income  and
servicing  fees,  net.  All  of  the  fiscal  1996  Prime  securitizations  were
structured  such that the Company  continued  to earn  interest  income from the
cutoff date through the closing date (approximately  13-22 days), and therefore,
earned   servicing   fees  only  after  the  closing   date.   In  all  previous
securitizations,  the Company  began  earning  servicing  fees  beginning on the
cutoff date.  As a result,  the Company  reports more  interest  income and less
servicing fee income, and records a lower gain on sale. An estimated  additional
$6.1 million in interest on loans was  recognized  during fiscal 1996 due to the
new  securitization  structure.  The structure  was altered in  accordance  with
provisions of the Warehouse  Facility  Agreements which require that the Company
collect  and  remit  interest  on  loans  from  cutoff  date  to  closing  of  a
securitization  transaction to the warehouse provider.  The Company continues to
pay  interest on the amount  financed  with  respect to  warehoused  loans until
closing.

         Interest  earned on Spread Accounts and Restricted Cash increased 38.4%
to $5.4 million for the year ended June 30,  1996,  compared to $3.9 million for
the year ended June 30,  1995.  The  increase is a result of  increased  average
balances due to additional  securitizations during the year. The average balance
of these accounts was $108.8  million in fiscal 1996,  compared to $68.2 million
in fiscal  1995.  Earnings  on spread  accounts  relative  to the  growth in the
securitized  servicing  portfolio  were  somewhat  decreased  as a result of the
structuring  of  the  fiscal  1996  securitizations  whereby  additional  credit
enhancements   were  utilized  in  lieu  of  initial  spread  account  deposits.
Additionally  interest  earned on these  accounts were somewhat  lower in fiscal
1996 compared to fiscal 1995 as market rates of interest declined throughout the
latter half of fiscal 1995 and the first half of fiscal 1996.

          Interest  expense  increased 71.9% to $22.3 million for the year ended
June 30, 1996, from $13.0 million for the year ended June 30, 1995. The increase
was a result of both an increased  average cost of funds and  increased  average
outstanding  borrowings.  The average  cost of funds  increased to 7.72% for the
year ended June 30,  1996,  from  5.60% for the year  ended June 30,  1995.  The
increase  in cost of funds was a result  of the  Company  obtaining  alternative
financing sources after its Spin-off from its parent in August of 1995. Included
in fiscal 1996 interest  expense is the  amortization of upfront  borrowing fees
paid in conjunction with the establishment of the Prime and Non-prime  Warehouse
Facilities.  The agreements provided for an initial term of one year and must be
renewed  annually;  therefore,  the total  upfront  fees paid to  establish  the
Facilities were amortized  during fiscal 1996.  Upfront fees paid in fiscal 1996
related to the Warehouse Facilities totaled approximately $1.5 million. The fees
paid to secure the Warehouse Facilities are non-recurring in nature; the renewal
of such  agreements  does not require the payment of  additional  fees.  Average
outstanding  borrowings  increased to $288.4 million for the year ended June 30,
1996, from $231.4 million for the year ended June 30, 1995.

         Provision for estimated credit losses increased to $2.9 million for the
year ended June 30,  1996,  compared to $1.1 million for the year ended June 30,
1995. A large portion,  $1.1 million, of that provision was related to the newer
Non-prime portfolio. The additional provision related to the Non-prime portfolio
was a result of both the time period the  Non-prime  portfolio was held prior to
securitization,  as well as the increased  level of credit risk  associated with
the Non-prime loans as compared to the Prime loans.

         Gain on Sales of Loans  increased  249.6% to $30.4 million for the year
ended June 30, 1996, from $8.7 million for fiscal 1995. The increase in gain was
mainly due to improved  net spreads as well as  increased  volume of Prime loans
securitized.  The weighted average loan rate on the Prime  securitized loans was
13.48%  while the  weighted  average  certificate  rate was  6.09% The  weighted
average  gross and net  spreads  on the  fiscal  1996 loan  sales were 7.38% and
5.85%,  respectively,  compared to 5.92% and 4.26% in fiscal 1995. These spreads
earned the  Company a $29.5  million  gain in 1996 after net  hedging  losses of
approximately  $2.6 million.  The Company  securitized  $890.1  million in Prime
loans and $34.5  million in Non-prime  loans in fiscal 1996,  compared to $658.7
million in Prime loans in fiscal 1995.  Additionally,  the Company completed its
first Non-prime  securitization during the third quarter of 1996.  Approximately
$34.5 million in Non-prime automobile  receivables were securitized in a private
placement that earned the Company nearly $850,000 after a $112,000 hedging loss.
The weighted average loan rate on the Non-prime portfolio securitized was 19.87%
while the weighted average certificate rate was 6.87%. The gross and net spreads
on the sale were 13.00% and 8.79%, respectively.



                                       28
<PAGE>

         Servicing Fees, Net increased 15.7% to $16.9 million for the year ended
June 30,  1996,  compared  to $14.6  million  for the year ended June 30,  1995.
Although the average securitized  portfolio increased  significantly,  servicing
fees have not.  Servicing  fees, net as a percentage of the average  securitized
servicing  portfolio  decreased to 1.42% for fiscal  1996,  from 1.71% in fiscal
1995.  The  decrease in  servicing  fees  relative  to the  average  securitized
portfolio  resulted  primarily from the modified  securitization  structure,  as
discussed above.  Servicing fees on all fiscal 1996 Prime  securitizations  were
not earned until after the closing date of the securitization  transaction.  The
net effect is that  interest on loans was earned for an  additional  13-22 days,
and  servicing  fee  income was not earned for 13-22 days for each of the fiscal
1996  Prime  securitizations.  Additionally,  the  Company  recognized  somewhat
smaller  gains under this  structure.  Because  additional  interest  income was
earned on the loans to be securitized,  those loans generate lower Future Excess
Servicing  Cashflows  after the  securitization.  The net present value of these
future cash flows is recorded as an Excess Servicing asset as a component of the
gain calculation.

         The Company's  ratio of servicing  fees, net to operating  expenses was
71.0% and 98.1% for the years  ending  June 30,  1996,  and 1995,  respectively.
Although the securitization  structure  discussed above impacted this ratio, the
growth of the Non-prime program also impacted this ratio.  Because the Non-prime
receivables  had not been  securitized  until March 1996,  the Company earned no
servicing fees on this portfolio.  The impact of the additional costs to acquire
and service these loans were offset by increased  interest spreads earned on the
Non-prime  portfolio.  Increased salaries and benefits also affected this ratio.
The  Company  has added  significantly  to its  collections  staff over the past
several quarters in response to, and in anticipation of, continued growth in the
servicing  portfolio.  Additional  support staff in systems and accounting  have
also been added,  as well as additional  levels of management  needed to support
the Company's growth.

         Other Revenues  increased 11.2% to $3.1 million for the year ended June
30, 1996,  from $2.8 million for the year ended June 30, 1995.  The increase for
the year resulted primarily from increases in late charge fee income.

         Salaries and Benefits Expense  increased 81.0% to $12.0 million for the
year ended June 30,  1996,  from $6.6  million for the year ended June 30, 1995.
This increase resulted  primarily from increased  full-time  equivalent  ("FTE")
employees.  Average FTE's for the year ended June 30, 1996, were 270 compared to
169 for the year ended June 30, 1995. The Company  experienced growth in credit,
sales and operations, collections, and support. These increases were in response
to, and in anticipation of continued  expansion and loan  acquisition  growth as
well as a growing  servicing  portfolio.  Additional  levels of  management  and
support  staff were added to ensure  efficiency  in  operations as the Company's
acquisition  volume and  servicing  portfolio  continues  to grow.  Increases in
salary  and  benefit  expense  were  also due to  increased  profitability-based
incentives during the year ended June 30, 1996.

         Other Expense  increased 43.0% to $11.9 million for the year ended June
30, 1996,  from $8.3 million for the year ended June 30, 1995.  Other  operating
expenses  include  occupancy  and  equipment  costs,  outside  and  professional
services,  loan expenses,  promotional  expenses,  travel,  office  supplies and
other.  Many of these  expenses vary directly with  increased  loan  acquisition
volume and the increased size of the servicing portfolio.  Both loan acquisition
volume and the servicing portfolio were increased during the year ended June 30,
1996,  compared to the year ended June 30, 1995.  Occupancy and equipment  costs
were  increased as a result of the  Company's  move to its new  headquarters  in
fiscal 1996.  The  employee  growth  experienced  by the Company  required  both
additional square footage and furniture and equipment.  The Company also updated
its  phone  system in  conjunction  with the move to its new  headquarters.  The
Company  obtained new  equipment  through an operating  lease and  implemented a
voice  messaging  system.  The Company  also  replaced its  collections  system,
incurring a loss on the disposal of the former system.  Additionally,  increased
telephone usage  resulting from an increase in collections  staff and collection
hours contributed to increased office expense.


                                       29
<PAGE>

Financial Condition

         Loans, Net and Servicing  Portfolio.  Loans, net includes the principal
balance of loans held for sale,  net of  unearned  discount  and  allowance  for
credit  losses,  loans in  process,  and prepaid  dealer  premiums.  Loans,  net
decreased to $121.4  million at June 30, 1997,  from $259.3  million at June 30,
1996.  This decrease was due primarily to the decrease in loan  acquisitions  in
the fourth  quarter of fiscal  1997,  compared  to the fourth  quarter of fiscal
1996, and the timing of the securitization of loans in June 1997, as compared to
May 1996.  Loan  acquisitions  were $238.4  million during the fourth quarter of
fiscal 1997,  compared to $328.9  million in the fourth  quarter of fiscal 1996.
Allowance for credit losses on loans held for sale decreased  $319,000 from June
30, 1996.  The Company  serviced  $1.8  billion and $1.4 billion in  securitized
loans and the total servicing  portfolio was $1.9 billion and $1.6 billion as of
June 30, 1997, and June 30, 1996, respectively.

         Excess  Servicing  increased to $98.8  million at June 30,  1997,  from
$83.4  million  at  June  30,  1996.  This  balance  increased  by  the  amounts
capitalized upon consummation of the various Prime and Non-prime securitizations
(including  estimated  dealer premium  rebates).  The amounts  capitalized  were
offset by actual Excess Servicing  Cashflows received during the year ended June
30, 1997. The increase in excess servicing was offset by the effect of the $27.0
million adjustment recorded during the fourth quarter of fiscal 1997.  Allowance
for estimated  credit losses on securitized  loans is included as a component of
the Excess  Servicing  asset.  At June 30, 1997, the allowances  related to both
Prime and  Non-prime  securitized  loans  totaled  $79.0 million or 4.35% of the
total securitized loan portfolio, compared to $43.5 million or 3.22% at June 30,
1996.  Accrued  interest due the Company at the cutoff date on securitized  loan
pools is also included as a component of Excess Servicing.

         Spread Accounts increased to $71.7 million at June 30, 1997, from $63.6
million at June 30,  1996.  These  balances  were  increased  by the deposits of
Excess Servicing Cashflows and have been reduced by any withdrawal of funds from
the  Spread  Accounts.  Withdrawals  of spread  account  funds are made when the
balance of the Spread Accounts are in excess of the  requirements  stipulated in
the  servicing  agreement.  No  initial  spread  account  deposits  were made in
connection with the Prime  securitizations  as a result of the structuring which
utilized  alternative  credit  enhancements  in lieu of initial  spread  account
deposits.

         Amounts due under Warehouse Facilities and Long-term Debt. Beginning in
August 1995, after the Spin-off from its parent, the Revolving  Warehouse Credit
Facilities and Senior Notes  constituted the Company's  primary funding sources.
The Company issued in a private  placement $46.0 million in Senior  Subordinated
Notes in April 1996 and $65.0 million in Senior Notes in March 1997. The balance
of  the  Revolving  Warehouse  Credit  Facilities  and  the  Senior  and  Senior
Subordinated  Notes was $265.5  million  at June 30,  1997,  compared  to $343.8
million at June 30, 1996.

Liquidity and Capital Resources

         Sources and Uses of Cash in Operations. The Company's business requires
significant  amounts of cash to support  operations.  Its  primary  uses of cash
include:  (i) purchases and financing of loans; (ii) payment of Dealer Premiums;
(iii)  securitization  costs  including cash held in Spread Accounts and similar
cash  collateral  accounts under revolving  Warehouse  Credit  Facilities;  (iv)
servicer  advances of payments on securitized  loans pursuant to  securitization
trusts;  (v) losses on hedging  transactions  realized  in  connection  with the
closing of securitization transactions where interest rates have declined during
the period  covered by the hedge;  (vi)  operating  expenses;  (vii)  payment of
income taxes; and (viii) interest  expense.  The Company's  sources of cash from
operations include: (i) standard servicing fees; generally 1.0% per annum of the
Prime  securitized  portfolio;  (ii) Excess  Servicing  Cashflows;  (iii) Dealer
Premium Rebates;  (iv) gains on hedging transactions realized in connection with
the closing of securitization  transactions  where interest rates have increased
during the periods  covered by the hedge;  (v)  interest  income;  (vi) sales of
loans  in  securitization   transactions;   and  (vii)  proceeds  from  sale  of
interest-only strips in conjunction with securitization  transactions.  Net cash
provided by operating  activities increased to $126.0 million for the year ended
June 30,  1997,  from a use of $55.8  million for the year ended June 30,  1996,
which was primarily attributable to an increase in loans securitized relative to
loans  acquired  and an  increase  in  proceeds  from the sale of  interest-only
strips.  Proceeds from the sale of interest-only  strips generated $31.8 million
in cash for the period  ended June 30, 1997,  compared to $26.7  million for the
period  ended June 30,  1996.  Additionally,  the Company  continues  to defer a
portion of the Gain on Sales of Loans for tax purposes.  The Company  realized a
$11.1 million cash benefit by doing so during fiscal 1997.



                                       30
<PAGE>

         Hedging  transactions  may represent a source or a use of cash during a
given period depending on changes in interest rates. During fiscal 1997, hedging
transactions  have required a net use of cash of $6.3 million,  compared to $2.8
million used during fiscal 1996.

         Financing Activities and Credit Facilities.  Net cash used by financing
activities  for fiscal  1997 was $79.7  million,  compared  to a source of $61.1
million in the prior year. The decrease was a result of the Company's ability to
pay down its revolving credit  facilities due to increased cash from operations.
The  Company's  sources  of  liquidity  are  currently  funds  from  operations,
securitizations  and external financing sources.  Historically,  the Company has
used  the  securitization  of loan  pools as its  primary  source  of  long-term
funding,  and  intends  to  continue  to do so,  although  management  regularly
considers alternative funding mechanisms with a view to optimizing profitability
and cash flows.  Securitization  transactions  enable the Company to improve its
liquidity, to recognize gains from the sales of the loan pools while maintaining
the servicing rights to the loans, and to control interest rate risk by matching
the repayment of amounts due to investors in the securitizations with the actual
cash flows from the securitized assets.

         The Company has borrowing  arrangements  with an independent  financial
institution  for the Prime  Warehouse  Facility  of up to $350.0  million  and a
similar Non-prime Warehouse Facility of up to $50.0 million.  Additionally,  the
Company  has a  Marine  Warehouse  Facility  of up to  $50.0  million  that  was
established in April 1997. The Prime  Warehouse  Facility  provides  funding for
loan  acquisitions  at a  purchase  price  of up to  100.0%  of the  outstanding
principal  balance  of  eligible  loans at the time of  purchase  to the  extent
allocable to loans which, upon acquisition,  provided for 72 monthly payments or
less.  Additional  funding is provided for  eligible  loans with greater than 72
monthly  payments  at a  purchase  price of 92.0% of the  outstanding  principal
balance.  The advance rate is adjusted monthly based upon actual loss statistics
in order to maintain the necessary  enhancement  level. The Non-prime  Warehouse
Facility  provides funding for loan acquisitions at a purchase price of 87.0% of
the outstanding principal balance of eligible loans at the time of purchase. The
Marine Warehouse  Facility  provides funding for loan acquisitions at a purchase
price of 85.0% for any boat loan and 65.0% for personal watercraft loans with 49
- 60 scheduled monthly payments.  Additionally  funding is provided for eligible
loans  with less than 49 monthly  payments  at a  purchase  price of 80.0%.  The
Company  also  issued  $110.0  million in Senior  Notes in  connection  with the
Spin-off  of the  Company by Union  Federal  and the  Company's  initial  public
offering  and  completed  a  private   placement  of  $46.0  million  in  Senior
Subordinated  Notes in April 1996 and $65 million in Senior Notes in March 1997,
as discussed  below.  Between  securitization  transactions,  the Company relies
primarily on the  revolving  Warehouse  Credit  Facilities  to fund ongoing loan
acquisitions  (not including Dealer  Premiums).  In addition to loan acquisition
funding,  the Company also requires  substantial  capital on an ongoing basis to
fund  the  advances  of  Dealer  Premiums,   securitization   costs,   servicing
obligations and other cash  requirements  described above. The Company's ability
to borrow under the Credit  Facilities is dependent upon its compliance with the
terms  and  conditions  thereof.  The  Company's  ability  to  obtain  successor
facilities  or  similar  financing  will  depend on,  among  other  things,  the
willingness  of financial  institutions  to  participate  in funding  automobile
financing  businesses  and the  Company's  financial  condition  and  results of
operations.   Moreover,  the  Company's  growth  may  be  inhibited,   at  least
temporarily,  if the Company is not able to obtain  additional  funding  through
these or other  facilities  or if it is unable to  satisfy  the  conditions  for
borrowing under the Credit Facilities.

         To accommodate its anticipated cash and liquidity  requirements for the
near term, the Company  determined  during the third quarter to seek  additional
capital.  The Company  completed a private  placement of $65.0 million of Senior
Notes with an effective rate of 7.80% in March 1997. The securities have a 5 1/2
year average life and are due in December 2002. The securities were rated BBB by
Fitch  Investors  Service L.P.  The  additional  debt will affect the  Company's
weighted  average cost of funds as well as the interest  expense  recognized  in
future  periods.  The  proceeds  of the sale of the  securities  will be used to
enhance  liquidity  and  fund  the  Company's  continued  nationwide  expansion.
Management  believes  that  the  proceeds  from  the  Company's  initial  public
offering,  the Senior Notes,  the Senior  Subordinated  Notes,  the other Credit
Facilities  described above,  future earnings,  and periodic  securitization  of
loans should  provide the necessary  capital and  liquidity  for its  operations
during the remainder of fiscal 1998.

         The period during which its existing capital resources will continue to
be  sufficient  will,  however,  be  affected  by the  factors  described  above
affecting  the  Company's  cash  requirements.  A number  of these  factors  are
difficult  to  predict,   particularly  including  the  cash-effect  of  hedging
transactions,  the availability of outside credit enhancement in securitizations


                                       31
<PAGE>

or  other  financing  transactions  and  other  factors  affecting  the net cash
provided  by  securitizations.  Depending  on the  Company's  ongoing  cash  and
liquidity requirements, market conditions and investor interest, the Company may
seek to issue additional debt or equity securities in the near term. The sale of
additional  equity,  including  Class A Common Stock or preferred  stock,  would
dilute the interests of current shareholders.

Discussion of Forward-Looking Statements

         The above discussions  contain  forward-looking  statements made by the
Company regarding its results of operations, cash flow needs and liquidity, loan
origination  volume,  target spreads and other aspects of its business.  Similar
forward-looking  statements  may be made by the Company from time to time.  Such
forward-looking  statements  are subject to a number of  important  factors that
cannot be predicted  with  certainty and which could cause such  forward-looking
statements to be materially inaccurate. Among these factors are the following:

         Capital Requirements and Availability. The Company requires substantial
amounts of cash to support its business and growth as described  above. Its cash
requirements can vary depending on the cash-effect of hedging transactions,  the
availability  of  external  credit   enhancement  in  securitizations  or  other
financing  transactions  and the other factors that affect the net cash provided
by  securitizations  (at  closing  and over time) as well as the  percentage  of
principal  amount of loans  acquired for which the Company can obtain  Warehouse
financing.  The  Company's  ability to meet  these  ongoing  cash and  liquidity
requirements  depends  on several  factors.  First is the  Company's  ability to
effect  periodic  securitizations  of its loan  portfolio  and the terms of such
securitizations  which are  dependent on market  factors  generally,  changes in
interest rates, demand for asset-backed  securities and the Certificates offered
in the Company's securitizations  particularly.  Another important factor is the
Company's  ability to continue to comply with the terms of its Senior and Senior
Subordinated Notes and Warehouse facilities and/or its ability to obtain funding
to replace and/or  supplement such facilities  should it become  necessary to do
so. The Company's  ability to obtain successor  facilities or similar  financing
will depend on, among other things, the willingness of financial institutions to
participate  in  funding  automobile  financing  businesses  and  the  Company's
financial  condition and results of operations.  Moreover,  the Company's growth
may be  inhibited,  at least  temporarily,  if the Company is not able to obtain
additional  funding  through  these or other  facilities  or if it is  unable to
satisfy the conditions to borrow under the Credit Facilities.

         Loan  Acquisition  Volume,  Spread and Growth.  Many factors affect the
Company's loan acquisition  volume and spread,  which have significant impact on
the  Company's net  earnings.  Volume is affected by overall  demand for new and
used automobiles in the economy generally, the willingness of automobile dealers
to forward  prospective  borrowers' loan applications to the Company, as well as
the number of qualified  borrowers  whose loans are approved and whose loans are
ultimately  acquired by the Company.  Competition can impact  significantly both
acquisition  volume and the note rate at which loans are originated.  Generally,
competition  in the Company's  business is intense.  The Buy Rate offered by the
Company is a significant  competitive  factor. A competitor offering a lower Buy
Rate may be more likely to acquire a loan. The continued growth of the Company's
servicing  portfolio  will  depend  significantly  on  the  receptivity  to  the
Company's  program of new dealers in existing markets as well as new markets and
the continued stability of the Company's  relationships with its existing dealer
network.

         Interest  Rate Risk.  The  Company's  sources of funds  generally  have
variable rates of interest and its loan portfolio bears interest at fixed rates.
It therefore  bears interest rate risk on loans until they are  securitized  and
employs a hedging strategy to mitigate this risk. There is no assurance that its
strategy will completely  offset changes in interest rates. In particular,  such
strategy depends on management's estimates of loan acquisition volume.

         Loan Losses and Prepayment Rates. The Company bears the primary risk of
loss due to defaults in its servicing  portfolio.  Default and credit loss rates
are  impacted by general  economic  factors  that affect  borrowers'  ability to
continue to make timely payments on their indebtedness.  Prepayments on loans in
the  servicing  portfolio  reduce  the  size of the  portfolio  and  reduce  the
Company's  servicing income.  The Gain on Sales of Loans in connection with each
securitization transaction and the amount of Excess Servicing recognized in each
transaction reflect deductions for estimates of future defaults and prepayments.
The carrying value of Excess  Servicing may be adjusted  periodically to reflect
differences  between  estimated and actual credit losses and prepayments on past
securitizations. The Company's results of operations could be adversely affected
if default or prepayment  rates on securitized  loans  substantially  exceed the
estimated levels.



                                       32
<PAGE>

         Regulation.  The Company's  business is subject to numerous federal and
state consumer  protection laws and regulations  which,  among other things: (i)
require the Company to obtain and maintain certain licenses and  qualifications;
(ii) limit the interest rates,  fees and other charges the Company is allowed to
charge; (iii) limit or prescribe certain other terms of the Company's contracts;
(iv)  require  specified  disclosures;  and (v) define the  Company's  rights to
repossess and sell  collateral.  Changes in existing laws or regulations,  or in
the  interpretation  thereof,  or the  promulgation  of any  additional  laws or
regulation could have an adverse effect on the Company's business.

Other Matters

         As a part of the ongoing  development of its business plan, the Company
is researching the possibilities of engaging in other finance-related businesses
such as leasing and other non-auto consumer lending.  Additionally,  the Company
is  researching  the  possibility  of  expanding  its  dealer  base  to  include
nationally    recognized    used    rental   car    outlets    which   are   not
manufacturer-franchised  dealerships.  Based on this  research,  the Company may
expand  its   current   operations   to  include   some  or  all  of  the  above
finance-related  businesses. It is management's philosophy to continually search
for new products and markets to grow and expand the Company in order to maximize
profits and shareholder value.

Impact of Current Accounting Pronouncements

In February  1997,  the FASB issued SFAS No. 128,  "Earnings  Per Share"  ("SFAS
128"). SFAS 128 provides computation,  presentation, and disclosure requirements
for earnings per share.  The current  presentation  of primary and fully diluted
earnings per share will be replaced  with basic and diluted  earnings per share.
The Statement is effective for financial  statements for both interim and annual
periods  ending  after  December  15,  1997,  and  earlier  application  is  not
permitted. Basic earnings per share under SFAS 128 excludes dilutive securities.
Because unexercised stock options do not have a dilutive effect on the Company's
earnings per share  calculation,  management expects that the new basic earnings
per share will not be significantly different than primary earnings per share.

In connection  with SFAS 128, the FASB also issued SFAS No. 129,  "Disclosure of
Information about Capital  Structure" ("SFAS 129").  While SFAS 128 applies only
to  public  companies,  SFAS 129 is  applicable  to both  public  and  nonpublic
companies.  This  statement  is not  expected  to  have  a  material  impact  on
disclosures made by the Company.

In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income"
("SFAS  130"),   which  establishes   standards  for  reporting  and  displaying
comprehensive   income  and  its   components  in  the   financial   statements.
Comprehensive  income is the total of net  income  and all  nonowner  changes in
shareholders'  equity.  This  Statement is effective for fiscal years  beginning
after December 15, 1997, with earlier application permitted.  The Statement will
require new  disclosures by the Company,  but is not expected to have a material
impact on the financial statements or the results of operations.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  About Segments of an
Enterprise and Related  Information" ("SFAS 131"), which introduces new guidance
on segment  reporting.  The  Statement is effective  for fiscal years  beginning
after December 15, 1997, with earlier application  encouraged.  The Statement is
not expected to have a material impact on the financial  condition or results of
operations of the Company.


                                       33
<PAGE>

Item 8.           Financial Statements and Supplementary Data

Independent Auditors' Report


The Board of Directors
Union Acceptance Corporation:

We have  audited  the  accompanying  consolidated  balance  sheets  of the Union
Acceptance  Corporation  and  Subsidiaries  as of June 30,  1997 and  1996,  the
related consolidated statements of earnings and cash flows for each of the years
in the  three-year  period  ended  June 30,  1997 and the  related  consolidated
statement  of  shareholders'  equity for the years ended June 30, 1997 and 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of the Union Acceptance
Corporation  and  Subsidiaries  as of June 30, 1997 and 1996, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended June 30, 1997 in  conformity  with  generally  accepted  accounting
principles.

As discussed in note 1 to the  consolidated  financial  statements,  the Company
adopted the provisions of the Financial  Accounting  Standards Board's Statement
of Financial Accounting Standard No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, on January 1, 1997.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP
July 30, 1997
Indianapolis, IN


                                       34
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 1997 and 1996

(in thousands, except share data)

<TABLE>
<CAPTION>
===================================================================================================================
       Assets                                                                               1997           1996
-------------------------------------------------------------------------------------------------------------------

<S>                                                                                     <C>                 <C>   
Cash                                                                                    $   58,801          13,459
Restricted cash                                                                             16,657          14,789
Loans, net                                                                                 121,381         259,290
Accrued interest receivable                                                                  1,232           2,127
Furniture and equipment, net                                                                 2,150           2,026
Excess servicing                                                                            98,841          83,434
Spread accounts                                                                             71,744          63,590
Other assets                                                                                21,360          12,480
-------------------------------------------------------------------------------------------------------------------

          Total Assets                                                                   $ 392,166         451,195
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------

       Liabilities
-------------------------------------------------------------------------------------------------------------------

Amounts due under warehouse facilities                                                      44,455         187,756
Long-term debt                                                                             221,000         156,000
Accrued interest payable                                                                     5,793           5,820
Amounts due to trusts                                                                       16,067           7,931
Dealer premiums payable                                                                      1,372           3,381
Other payables and accrued expenses                                                          2,318           3,326
Deferred income tax payable                                                                 15,046           8,357
-------------------------------------------------------------------------------------------------------------------
          Total Liabilities                                                                306,051         372,571
-------------------------------------------------------------------------------------------------------------------

       Shareholders' Equity
-------------------------------------------------------------------------------------------------------------------

Preferred Stock, without par value, authorized 10,000,000 shares;
    none issued and outstanding                                                              -               -

Class A Common Stock, without par value, authorized 30,000,000 shares; 4,016,788
    and 4,011,358 shares issued and outstanding at June 30, 1997
    and June 30, 1996, respectively                                                         58,270          58,180

Class B Common Stock, without par value, authorized 20,000,000 shares; 9,200,000
    shares issued and outstanding at June 30, 1997 and
    June 30, 1996, respectively                                                              -               -

Retained earnings                                                                           27,845          20,444
-------------------------------------------------------------------------------------------------------------------
          Total Shareholders' Equity                                                        86,115          78,624
-------------------------------------------------------------------------------------------------------------------

          Total Liabilities & Shareholders' Equity                                       $ 392,166         451,195
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.



                                       35
<PAGE>



UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings

Years ended June 30, 1997, 1996 and 1995

(in thousands, except share data)

<TABLE>
<CAPTION>
===================================================================================================================
                                                                               1997           1996          1995
-------------------------------------------------------------------------------------------------------------------

<S>                                                                         <C>              <C>            <C>   
Interest on loans                                                           $ 34,140         28,712         14,702
Interest on spread accounts and restricted cash                                6,504          5,448          3,936
-------------------------------------------------------------------------------------------------------------------
        Total interest income                                                 40,644         34,160         18,638
Interest expense                                                              25,688         22,275         12,961
-------------------------------------------------------------------------------------------------------------------
        Net interest margin                                                   14,956         11,885          5,677
Provision for estimated credit losses                                          4,188          2,875          1,074
-------------------------------------------------------------------------------------------------------------------
        Net interest margin after provision                                   10,768          9,010          4,603

Gain on sales of loans, net                                                    2,613         30,357          8,684
Servicing fees, net                                                           25,337         16,926         14,628
Other                                                                          3,819          3,096          2,783
-------------------------------------------------------------------------------------------------------------------
        Total revenues                                                        42,537         59,389         30,698
-------------------------------------------------------------------------------------------------------------------

Salaries and benefits                                                         15,112         11,985          6,622
Other                                                                         14,829         11,856          8,291
-------------------------------------------------------------------------------------------------------------------
        Total operating expenses                                              29,941         23,841         14,913
-------------------------------------------------------------------------------------------------------------------

Earnings before provision for income taxes                                    12,596         35,548         15,785
Provision for income taxes                                                     5,195         14,406          6,396
-------------------------------------------------------------------------------------------------------------------

        Net earnings                                                       $   7,401         21,142          9,389
===================================================================================================================
Net earnings per common share                                            $      0.56           1.60             NM
===================================================================================================================

Weighted average number of common shares outstanding                      13,215,112     13,209,378             NM
===================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.



                                       36
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 1997, 1996 and 1995

(in thousands)

<TABLE>
<CAPTION>
===================================================================================================================
                                                                               1997           1996          1995
-------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
<S>                                                                   <C>                    <C>             <C>  
  Net earnings                                                        $        7,401         21,142          9,389
    Adjustments to reconcile net earnings to net cash
     provided (used) by operating activities:
       Loan originations in excess of liquidations                        (1,087,065)      (982,800)      (760,091)
       Dealer premiums paid in excess of dealer premium
           rebates received on loans held for sale                           (53,461)       (50,059)       (35,245)
       Securitization of loans held for sale                               1,214,298        924,598        658,703
       Gain on sales of loans                                                (40,977)       (37,900)       (16,935)
       Proceeds on sale of interest only strip                                31,773         26,686          -
       Return of excess servicing cash flows                                  24,626         37,871         30,049
       Impairment of excess servicing                                         27,000          -              -
       Provision for estimated credit losses                                   4,188          2,875          1,074
       Amortization and depreciation                                           3,754          4,395          2,049
       Spread accounts                                                        (8,154)        (6,176)       (20,081)
       Restricted cash                                                        (1,868)        (5,934)        (7,734)
       Other assets and accrued interest receivable                           (3,590)        (6,788)        (6,745)
       Amounts due to trusts                                                   8,136          2,030          3,761
       Other payables and accrued expenses                                       (99)        14,281            939
-------------------------------------------------------------------------------------------------------------------
            Net cash provided (used) by operating activities                 125,962        (55,779)      (140,867)
-------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
  Purchase of fixed assets                                                      (967)        (1,347)          (995)
-------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
  Net change in warehouse credit facilities                                 (143,301)       187,756         -
  Proceeds from issuance of senior notes                                      65,000        110,000         -
  Proceeds from issuance of senior subordinated notes                          -             46,000         -
  Payment of borrowing fees                                                   (1,352)        (3,231)          (647)
  Net proceeds from issuance of common stock                                   -             58,000          -
  Net change in Due to Union Federal, including
     regulatory equity distribution                                            -           (337,423)       151,992
-------------------------------------------------------------------------------------------------------------------
            Net cash provided (used) from financing activities               (79,653)        61,102        151,345
-------------------------------------------------------------------------------------------------------------------

Change in cash                                                                45,342          3,976          9,483

Cash, beginning of year                                                       13,459          9,483         -
-------------------------------------------------------------------------------------------------------------------

Cash, end of year                                                      $      58,801         13,459          9,483
===================================================================================================================

Supplemental disclosures of cash flow information:
-------------------------------------------------------------------------------------------------------------------

  Income taxes paid                                                   $        4,288         10,680          6,396
===================================================================================================================
  Interest paid                                                        $      26,475         15,648         12,961
===================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       37
<PAGE>


UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

For the years ended June 30, 1997 and 1996

(in thousands, except share data)

<TABLE>
<CAPTION>
===================================================================================================================
                                                 Number of
                                               Common Stock                                             Total
                                             Shares Outstanding           Common        Retained    Shareholders'
                                            Class A        Class B         Stock        Earnings       Equity
-------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>              <C>            <C>           <C>   
Balance at June 30, 1995                           1              1    $          2       -                  2

    Issuance of common stock
       through initial public offering     4,000,000      9,200,000          58,000       -             58,000

    Regulatory equity distributions
       related to spin-off                        (1)            (1)             (2)        (698)         (700)

    Grants of common stock                    11,358       -                    180        -               180

    Net earnings                            -              -                  -           21,142        21,142
-------------------------------------------------------------------------------------------------------------------

Balance at June 30, 1996                   4,011,358      9,200,000          58,180       20,444        78,624

    Grants of common stock                     5,430       -                     90        -                90

    Net earnings                            -              -                  -            7,401         7,401
-------------------------------------------------------------------------------------------------------------------

Balance at June 30, 1997                   4,016,788      9,200,000        $ 58,270       27,845        86,115
===================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.




                                       38
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 1997, 1996 and 1995

================================================================================
(1)    Summary of Significant Accounting Policies

       Basis of Presentation

       Union Acceptance  Corporation and Subsidiaries  ("UAC" or the "Company"),
       formerly a division of Union Federal  Savings Bank of  Indianapolis  (the
       "Union Division"),  specializes in the acquisition, sale and servicing of
       prime retail installment loans (primarily automobile loans) acquired from
       a network of over 3,200 manufacturer-franchised  dealerships in 29 states
       from  whom  such  loans  are  regularly  purchased.  Loans  acquired  are
       subsequently  sold  to  investors  through  asset-backed   securitization
       transactions.

       In  contemplation  of a public  offering  to sell common  stock,  UAC was
       formed as a  wholly-owned  subsidiary  of Union  Federal  Savings Bank of
       Indianapolis  ("Union  Federal") in December  1993.  During  fiscal 1995,
       Union Acceptance Funding  Corporation,  UAC  Securitization  Corporation,
       Performance   Funding   Corporation   and   Performance    Securitization
       Corporation were formed as wholly-owned  subsidiaries of UAC and selected
       assets and operations of the Union  Division were  transferred to UAC. In
       August  of  1995,  the  Company  completed  an  initial  public  offering
       simultaneously  with a tax free spin-off from its parent,  Union Federal.
       During fiscal 1996,  UAC Boat Funding Corp.  was formed as a wholly-owned
       subsidiary of UAC. In fiscal 1997, UAC Finance  Corporation was formed as
       a wholly-owned subsidiary of UAC.

       The accompanying  consolidated  financial statements include the accounts
       of UAC and the Union  Division  prior to the transfer and  spin-off.  All
       significant  intercompany  accounts and transactions have been eliminated
       in the  consolidation.  The consolidated  financial  statements have been
       prepared in conformity with generally accepted accounting  principles and
       with those in the general practice of the consumer finance industry.

       The  consolidated  financial  statements  reflect no  allocation of Union
       Federal's historical equity.  Earnings of the Company were transferred to
       Union  Federal  through  the Due to Union  Federal  account  prior to the
       spin-off.

       Cash

       The Company  considers all investments with a maturity of three months or
       less when purchased to be cash equivalents.

       Restricted Cash

       Restricted cash primarily  consists of funds held in reserve  accounts in
       compliance with the terms of the Warehouse Facility Agreements.



                                       39
<PAGE>


UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

       Loans, Net

       All loans in the Company's  prime and non-prime  portfolios  are held for
       sale and include automobile, light-truck, van, and marine loans including
       dealer  premiums  (on prime  loans).  Such  loans are  packaged  and sold
       through asset-backed securitization transactions and are carried at their
       principal  amount  outstanding  (amortized  cost) which  approximates the
       lower of cost or market,  net of  unearned  discount.  Interest  on these
       loans is accrued and  credited to  interest  income  based upon the daily
       principal  amount  outstanding.  The Company  provides an  allowance  for
       credit losses from the date of origination to the date of securitization.
       The allowance is shown as a reduction to loans.

       Loans,  net includes dealer premiums which are incentives paid to dealers
       in connection with the acquisition of loans. Dealer premiums are deferred
       in accordance  with Statement of Financial  Accounting  Standards No. 91,
       Accounting for  Nonrefundable  Fees and Costs Associated with Originating
       or Acquiring  Loans and Initial Direct Costs of Leases.  A portion of the
       dealer  premiums  are  refundable  to the  Company  in the  event of loan
       prepayment or default.

       Accrued Interest Receivable

       Accrued interest receivable  represents interest earned but not collected
       on loans held for sale.

       Furniture and Equipment, Net

       Furniture and equipment are recorded at cost.  Depreciation is determined
       on accelerated  methods over the estimated useful lives of the respective
       assets.

       Excess Servicing

       In June 1996, the Financial  Accounting  Standards  Board issued SFAS No.
       125,  Accounting  for  Transfers  and  Servicing of Financial  Assets and
       Extinguishments of Liabilities ("SFAS 125"). SFAS 125 provides accounting
       and reporting  standards for transfers and servicing of financial  assets
       and  extinguishments of liabilities based on consistent  application of a
       financial  components  approach that focuses on control. It distinguishes
       transfers  of  financial  assets that are sales from  transfers  that are
       secured  borrowings.  The financial  components  approach  focuses on the
       assets and liabilities that exist after the transfer.  The  pronouncement
       prescribes the methodology for recognition of gain or loss upon the sales
       of  loans  as well as the  valuation  of  excess  servicing.  SFAS 125 is
       effective  for   transfers   and   servicing  of  financial   assets  and
       extinguishment  of liabilities  occurring after December 31, 1996, and is
       to be applied  prospectively.  Retroactive  application is not permitted.
       The Company  adopted  SFAS 125 on January 1, 1997.  During  fiscal  1997,
       implementation  of  SFAS  125  did  not  have a  material  impact  on the
       Company's consolidated financial statements.


                                       40
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

       Excess servicing is the Company's retained interest in loans sold. Excess
       servicing is determined by allocating  the carrying  amount of loans sold
       based on the  relative  fair market  value of loans sold and the expected
       future  cash flows  discounted  at current  market  rates.  The  expected
       discounted  future  servicing  cash  flows  is the  projected  difference
       between  the  weighted  average  coupon  rate of the  loans  sold and the
       certificate  rate to investors less the Company's  contractual  servicing
       fee  (typically  1%), an allowance for estimated  credit losses and other
       trust and credit enhancement fees, plus dealer premium rebates. Allowance
       for  estimated   credit  losses  is  based  on  current  scoring  models,
       historical  loss rates and the loan  composition  of the  securitization.
       Allowance  for  estimated  credit  losses is deemed  adequate  for credit
       losses over the life of the respective  securitizations.  Market discount
       rates are based on current market  conditions and prepayment  assumptions
       are based on historical  experience.  The Company's contractual servicing
       fee approximates adequate compensation. Accrued interest through the date
       of  securitization,  which will be returned  to the  Company  through the
       securitization  trust is also  classified  as  excess  servicing.  Excess
       servicing  is reduced by excess cash flows as  received  over the life of
       the securitization.

       Excess servicing is classified as an  available-for-sale  security and is
       carried  at  its  market  value  based  on  the  application  of  current
       assumptions to the remaining cash flows.  Unrealized gains and losses are
       reported  net  of  related  income  taxes  as  a  separate  component  of
       shareholders'  equity  until  realized.   Excess  servicing  is  reviewed
       periodically for other than temporary impairment with impairment, if any,
       charged to operations through gain on sales of loans, net.

       Gain on Sales of Loans, Net

       Gain on sales of loans,  net represents the difference  between the sales
       proceeds and the  carrying  amount of loans after  reduction  for amounts
       allocated  to excess  servicing,  less  expenses  of the sale and hedging
       gains and losses. Gains are credited to operations at the closing of each
       securitization.  The Company  retains the  servicing  rights on the loans
       sold.

       Spread Accounts

       Spread accounts are intended to protect the securitization  investors and
       any letter of credit provider or credit  enhancer  against credit losses.
       The initial  deposit,  if required,  and net excess  servicing cash flows
       earned are  retained  for each  securitization  until the spread  account
       balance increases to a specified  percentage of the pool balance.  Spread
       account requirements vary with each securitization's delinquency and loss
       experience.  Funds in excess of specified percentages are remitted to the
       Company over the remaining life of the securitization.  Should the spread
       account be insufficient to cover losses,  each trust is further supported
       by additional credit enhancements.  Selected trusts are secured by either
       a letter of credit or surety bond  provided  by a financial  institution.
       Other trusts have been formed with a subordinated  class of  certificates
       whereby the senior  certificateholders  are protected  against  losses by
       having  their  interests  senior to the  subordinate  certificateholders'
       interests.  Subordinated certificateholders assume a higher risk of loss,
       but earn a higher yield on their  certificates.  For each trust, there is
       no recourse  against the Company beyond the balance in the spread account
       and the trust's future earnings.


                                       41
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

       Common Stock

       In  election  of  directors,  the  holders  of Class B Common  Stock  are
       entitled to five votes per share and Class A Common Stock are entitled to
       one vote per share.  On all matters other than the election of directors,
       holders  of Class B and A have one  vote per  share  and vote as a single
       class.

       Income Taxes

       Deferred tax assets and  liabilities  are  recognized  for the future tax
       consequences  attributable to differences between the financial statement
       carrying  amounts of existing assets and liabilities and their respective
       tax basis. Deferred tax assets and liabilities are measured using enacted
       tax rates expected to apply to taxable income in the years in which those
       temporary differences are expected to be recovered or settled. The effect
       on  deferred  tax  assets  and  liabilities  of a  change  in tax rate is
       recognized in income in the period that includes the enactment  date. Tax
       expense has been computed  assuming the Company was a stand-alone  entity
       (prior to spin-off).

       Amounts Due to Trusts

       Amounts  due to trusts  represent  monies  collected  but not paid to the
       trustee  for  principal  and  interest  remittances  as well as  recovery
       payments in respect of securitized  loans.  All amounts  collected by the
       Company  are  remitted  to the  trustee  within two  business  days,  and
       subsequently  distributed by the trustee to the investors,  servicer, and
       credit enhancers on a monthly basis.

       Servicing Fees, Net

       Servicing fees, net include the contractual fee,  typically 1% per annum,
       earned from each trust plus the accretion of discounted excess servicing,
       plus excess dealer premium rebates.

       Hedging


       Loan  production  is  hedged  periodically  to  such  time  as  the  next
       securitization  is  estimated  to  occur.  Securitizations  of the  prime
       portfolio  occur  approximately  every three months.  The primary hedging
       vehicle is a short sale of Treasury Notes having a maturity approximating
       the average  maturity of the loan production  during the relevant period.
       At such time as a  securitization  is committed,  the hedge is covered by
       the purchase of a like volume of Treasury  Notes.  Gains or losses on the
       hedge   are   recognized   concurrently   with   the   gain  or  loss  at
       securitization.

       Earnings Per Share

       The initial public offering was completed on August 7, 1995. Earnings per
       share  for the year  ended  June 30,  1997 and  1996,  were  computed  by
       dividing net earnings by the average common shares outstanding during the
       period.  Shares  outstanding from August 7, 1995,  through  September 30,
       1995,  were assumed to be  outstanding  for the entire three months ended
       September 30, 1995. The effect of  unexercised  stock options on earnings
       per share has not been included in the  calculation  because they are not
       dilutive.


                                       42
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

       Use of Estimates

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions that affect the reported amounts of assets and liabilities at
       the date of the financial statements and the reported amounts of revenues
       and expenses  during the reporting  period.  Actual  results could differ
       from those estimates.

(2)    Loans, Net

       Loans, net are as follows (in thousands, except average loan balance) at:
<TABLE>
<CAPTION>
                                                                                                    June 30,
                                                                                             1997         1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>             <C>    
              Principal balance of prime loans held for sale,
               net of unearned discount                                                  $   90,331       228,391
              Principal balance of non-prime loans held for sale,
               net of unearned discount                                                      19,829        15,512
              Principal balance of marine loans held for sale                                 6,227            50
              Loans in process                                                                1,189         5,363
              Dealer premiums                                                                 4,585        11,073
              Allowance for credit losses                                                      (780)       (1,099)
-------------------------------------------------------------------------------------------------------------------

                                                                                          $ 121,381       259,290
===================================================================================================================
              Weighted average interest rate (prime)                                          13.09%        13.24%
              Weighted average interest rate (non-prime)                                      19.47         19.70
              Weighted average interest rate (marine)                                         11.36         14.68
              Average loan balance (prime)                                               $   12,560        14,049
              Average loan balance (non-prime)                                               12,180        12,479
              Average loan balance (marine)                                                  13,192         8,304

</TABLE>
       Allowance  for  estimated  credit  losses  on  loans  held  for  sale (in
thousands):

<TABLE>
<CAPTION>
                                                                                          Year ended June 30,
                                                                                   1997         1996        1995
-------------------------------------------------------------------------------------------------------------------

<S>                                                                              <C>              <C>          <C>
              Balance at the beginning of the period                             $ 1,099          453          171
                  Charge-offs                                                     (7,361)      (4,556)      (2,605)
                  Recoveries                                                       2,854        2,327        1,813
                  Provision for estimated credit losses                            4,188        2,875        1,074
              Balance at the end of the period                                  $    780        1,099          453
===================================================================================================================
</TABLE>


                                       43
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================


       The geographic concentration of loans serviced are as follows:

                                                        Percent of Total
                                                             June 30,
                       State                           1997             1996
--------------------------------------------------------------------------------

                  Texas                                16.4%            18.2%
                  North Carolina                       11.0             11.2
                  California                           10.5              8.8
                  Ohio                                  7.2              8.0
                  Illinois                              7.1              6.7
                  Florida                               7.0              6.1
                  Virginia                              6.2              5.5
                  Oklahoma                              5.7              7.2
                  Arizona                               5.1              6.9
                  Indiana                               4.7              5.8
                  Georgia                               2.5              2.2
                  Missouri                              2.5              3.0
                  Colorado                              2.2              3.2
                  South Carolina                        2.2              1.2
                  Iowa                                  1.5              0.9
                  Maryland                              1.4              0.4
                  Tennessee                             1.2              0.4
                  Wisconsin                             1.2              1.0
                  Michigan                              1.1              0.2
                  Kansas                                0.8              0.9
                  New Mexico                            0.8              0.8
                  Washington                            0.6              0.5
                  Oregon                                0.4              0.5
                  Kentucky                              0.2              0.1
                  Pennsylvania                          0.2               -
                  Minnesota                             0.1              0.2
                  Nebraska                              0.1              0.1
                  Nevada                                0.1               -
--------------------------------------------------------------------------------

                                                      100.0%           100.0%
================================================================================



                                       44
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

       Loans serviced are as follows (in thousands) at:
<TABLE>
<CAPTION>

                                                                                                 June 30,
                                                                                          1997            1996
-------------------------------------------------------------------------------------------------------------------

              Loans held for sale
<S>                                                                                 <C>                  <C>    
                 Prime (net of unearned discount)                                   $      90,331        228,391
                 Non-prime (net of unearned discount)                                      19,829         15,512
                 Marine                                                                     6,227             50
-------------------------------------------------------------------------------------------------------------------
                                                                                          116,387        243,953

              Securitized loans
                 Prime                                                                  1,769,903      1,319,930
                 Non-prime                                                                 48,460         31,550
-------------------------------------------------------------------------------------------------------------------
                                                                                        1,818,363      1,351,480

              Other loans serviced                                                          2,526          3,637
-------------------------------------------------------------------------------------------------------------------

                                                                                      $ 1,937,276      1,599,070
===================================================================================================================
</TABLE>

       Notional  amounts and unrealized  losses  related to  outstanding  hedges
follow (in thousands) at:

<TABLE>
<CAPTION>
                                                                                 June 30,
                                                                          1997         1996
------------------------------------------------------------------------------------------------

<S>                                                                    <C>            <C>    
              Notional amounts outstanding                             $ 204,000      415,000
              Unrealized losses on hedging transactions                      909          711
=================================================================================================
</TABLE>

       Notional  amounts  of $180  million,  $18  million  and $6  million  were
       expected to be closed in September  1997,  December  1997 and March 1998,
       respectively,  for the amounts  outstanding  at June 30,  1997,  and $340
       million, $55 million and $20 million were closed in August 1996, November
       1996 and December 1996, respectively, for amounts outstanding at June 30,
       1996.

       Hedging  realized losses were  approximately  $6,293,000,  $2,733,000 and
       $5,515,000 during fiscal 1997, 1996 and 1995, respectively.


                                       45
<PAGE>


UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

(3)    Furniture and Equipment, Net

       Furniture and equipment, net are as follows (in thousands) at:

<TABLE>
<CAPTION>
                                                                                                      June 30,
                                                                                              1997         1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>            <C>  
                 Furniture, equipment and leasehold improvements                            $ 4,724        3,858
                 Accumulated depreciation                                                    (2,574)      (1,832)
-------------------------------------------------------------------------------------------------------------------

                                                                                            $ 2,150        2,026
===================================================================================================================
</TABLE>

(4)    Excess Servicing

       The carrying amount of excess servicing is as follows (in thousands) at:
<TABLE>
<CAPTION>


                                                                                                    June 30,
                                                                                            1997           1996
-------------------------------------------------------------------------------------------------------------------
              Estimated value of excess servicing cash flows,
<S>                                                                                    <C>                 <C>    
                 net of estimated prepayments                                          $    148,788        112,564
              Estimated dealer premium rebates                                               28,175         13,467
              Allowance for estimated credit losses on securitized loans                    (79,013)       (43,516)
              Discount to present value                                                     (11,916)        (9,535)
-------------------------------------------------------------------------------------------------------------------
                                                                                             86,034         72,980
              Accrued interest on securitized loans                                          12,807         10,454
-------------------------------------------------------------------------------------------------------------------

                                                                                      $      98,841         83,434
==================================================================================================================


              Outstanding balance of loans serviced
                 through securitized trusts                                             $ 1,818,363      1,351,480
                                                                                                  -

              Allowance for estimated credit losses as a
                 percentage of securitized loans serviced                                    4.35%          3.22%

</TABLE>


                                       46
<PAGE>


UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

       Excess servicing activity is as follows (in thousands):
<TABLE>
<CAPTION>


                                                                                          Year ended June 30,
                                                                                   1997        1996        1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>          <C>   
              Balance at beginning of period                                    $ 83,434       60,622       41,265

              Amounts capitalized (including estimated
                  dealer rebates)                                                 64,681       56,436       47,693
              Change in accrued interest on securitized loans                      2,353        4,247        1,713
              Return of excess cash flows, net of present value effect           (24,627)     (37,871)     (30,049)
-------------------------------------------------------------------------------------------------------------------
              Impairment of excess servicing asset                               (27,000)       -            -

              Balance at end of period                                          $ 98,841       83,434       60,622
==================================================================================================================
</TABLE>

       Because of current  trends with  respect to credit loss and  delinquency,
       and their effects on the  valuation of the excess  servicing  asset,  the
       Company  recorded a pre-tax  charge of $27 million for the  impairment of
       the excess  servicing asset in accordance with the provisions of SFAS 125
       during the fourth  quarter of fiscal 1997.  The carrying  value of excess
       servicing approximated its fair value as of June 30, 1997 and 1996.

 (5)   Spread Accounts

       The weighted average yield on spread accounts was 4.97% and 5.32% at June
30, 1997 and 1996, respectively.

(6)    Other Assets

       Other assets are as follows (in thousands) at:

<TABLE>
<CAPTION>


                                                                                                    June 30,
                                                                                             1997         1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>              <C>  
                 Income tax receivable                                                    $   7,427        1,584
                 Repossessed assets                                                           5,048        1,716
                 Deferred borrowing fees                                                      3,078        2,173
                 Accrued servicing fees                                                       2,511        5,131
                 Advances of delinquent interest                                              1,056          506
                 Other                                                                        2,240        1,370
-------------------------------------------------------------------------------------------------------------------

                                                                                           $ 21,360       12,480
===================================================================================================================
</TABLE>



                                       47
<PAGE>


UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

(7)     Amounts Due Under Warehouse Facilities

        At June 30, 1997, the Company, through its wholly-owned  special-purpose
        subsidiaries,  had borrowing  arrangements with a financial  institution
        which   provided  for  three   revolving   Warehouse   Facilities   (the
        "Facilities")  with an  aggregate  borrowing  capacity of $450  million.
        Borrowings  under these facilities are  collateralized  by certain loans
        held for sale.  There are separate  Facilities  for the funding of prime
        auto,   non-prime  auto,  and  marine  loan  acquisitions.   Outstanding
        borrowings   of  the   Facilities   at  June  30,  1997  and  1996  were
        approximately $44,455,000 and $187,756,000,  respectively.  The weighted
        average  cost of funds of the  Facilities  for the years  ended June 30,
        1997 and 1996 was 5.42% and 6.19%, respectively.

        The cost of funds includes a variable  interest rate on the  outstanding
        commercial   paper,  fees  on  the  used  and  unused  portions  of  the
        Facilities,  and the amortization of prepaid warehouse fees. The largest
        portion of the cost of funds  related to the  Facilities is the variable
        rate interest on the commercial  paper issued by the financing  conduit.
        The weighted average commercial paper rate on outstanding issues at June
        30, 1997 and 1996 was 5.66% and 5.40%,  respectively.  Upfront warehouse
        fees are  non-recurring  costs  related  to the  initial  set-up  of the
        Facilities. The Facilities agreements specify a term of one year and are
        renewable  annually.  Both the prime auto and non-prime auto  Facilities
        have been renewed for an  additional  year,  and expire in June and July
        1998, respectively. The marine Facility expires April 1998.

(8)     Long-term Debt

        In connection with the Company's  initial public  offering,  the Company
        issued, in a private  placement,  $110 million principal amount of 8.53%
        Senior  Notes  due  2002.  Interest  on  the  Senior  Notes  is  payable
        semi-annually  on February 1 and August 1 of each year, and commenced on
        February 1, 1996, with annual principal reductions  commencing on August
        1, 1998.  The Senior Notes are  redeemable,  in whole or in part, at the
        option of the Company,  in a principal  amount not less than $1 million,
        together with accrued and unpaid  interest to the date of redemption and
        a yield-maintenance premium as defined in the note agreement.

        In April 1996, the Company issued $46 million in a private  placement of
        9.99%  Senior  Subordinated  Notes  due  2003.  Interest  on the  Senior
        Subordinated  Notes is payable quarterly on March 30, June 30, September
        30 and December 30 of each year,  and  commenced  on June 30, 1996.  The
        Senior  Subordinated  Notes are redeemable,  in whole or in part, at the
        option of the Company,  in a principal  amount not less than $1 million,
        together with accrued and unpaid  interest to the date of redemption and
        a yield-maintenance premium as defined in the note agreement.



                                       48
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================


        In March 1997, the Company issued, in a private  placement,  $50 million
        Series A 7.75%  Senior  Notes  due 2002 and $15  million  Series B 7.97%
        Senior  Notes  due  2002.  Interest  on  the  Senior  Notes  is  payable
        semi-annually  on March 15 and  September  15 of each  year,  commencing
        September 15, 1997,  with a principal  reduction  occurring on March 15,
        2002.  The  Senior  Notes are  redeemable,  in whole or in part,  at the
        option of the Company,  in a principal  amount not less than $1 million,
        together with accrued and unpaid  interest to the date of redemption and
        a yield-maintenance premium as defined in the note agreement.

       Scheduled  contractual  maturities  of  long-term  debt at June 30,  1997
follows (in thousands):

                      1998                $            -
                      1999                          22,000
                      2000                          22,000
                      2001                          22,000
                      2002                          43,667
                      2003                         111,333
----------------------------------------------------------------------------

                                                 $ 221,000
============================================================================
(9)    Other Revenue and Expenses

       Other revenue and expenses follow (in thousands):
                                                      Year ended June 30,
                                                 1997         1996        1995
--------------------------------------------------------------------------------

       Other revenues:
           Late charges                      $   2,618        1,922        1,447
           Origination fees                      1,019        1,072        1,210
           Other                                   182          102          126
--------------------------------------------------------------------------------

                                             $   3,819        3,096        2,783
================================================================================
       Other expenses:
           Loan expenses                         2,948        2,202        1,841
           Outside services                      2,767        2,515        1,492
           Office, telephone and postage         2,626        2,207        1,158
           Occupancy                             1,433          891          396
           Equipment                             1,013          839          511
           Other                                 4,042        3,202        2,893
--------------------------------------------------------------------------------

                                              $ 14,829       11,856        8,291
================================================================================



                                       49
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================


(10)   Income Taxes

       The composition of income taxes follows (in thousands):

<TABLE>
<CAPTION>

                                                                                          Year ended June 30,
                                                                                   1997         1996        1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>             <C>          <C>  
                  Current expense (benefit)                                     $ (1,494)       9,096        6,458
                  Deferred expense (benefit)                                       6,689        5,310          (62)
-------------------------------------------------------------------------------------------------------------------

                                                                                $  5,195       14,406        6,396
-------------------------------------------------------------------------------------------------------------------
</TABLE>

       The effective income tax rate for the year ended June 30, 1997, is 40.5%.
       Income taxes were allocated using statutory federal and state rates which
       resulted  in  effective  income tax rate of  approximately  40.5% for the
       years ended June 30, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                   Year ended June 30,
              (Dollars in thousands)                               1997           1996
-----------------------------------------------------------------------------------------
              Deferred tax assets:
<S>                                                             <C>               <C>
                  Allowance for estimated credit losses         $     316         445
                  Mark to market and allowance for
                     excess servicing losses                        1,160         912
-----------------------------------------------------------------------------------------
                                                                    1,476       1,357
-----------------------------------------------------------------------------------------

              Deferred tax liabilities:
                  Excess servicing                                 16,522       5,349
                  Mark to market - excess servicing                 -           4,365
-----------------------------------------------------------------------------------------
                                                                   16,522       9,714
-----------------------------------------------------------------------------------------

                      Deferred income tax payable                $ 15,046       8,357
=========================================================================================
</TABLE>
(11)            Estimated Fair Value of Financial Instruments

         Loans  held for sale - Cost  approximates  fair value as loans are sold
         shortly after origination.

         Accrued interest receivable - Cost approximates fair value.

         Excess servicing - In 1997,  amount carried at fair value in accordance
         with SFAS 125. During 1996,  cost  approximated  fair value  determined
         based  upon  discounting  future  cash  flows  at  market  rates  using
         historical prepayment speeds and loss provisions.

         Spread  accounts - Cost  approximates  fair value as the interest  rate
         earned is at a variable rate.


                                       50
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

       Repossessed assets - Cost approximates fair market value.

       All liabilities, except long-term debt - Cost approximates fair value.

       Long-term debt - Carrying amount of $221,000,000 and $156,000,000 at June
       30, 1997 and 1996, respectively, has been calculated to have a fair value
       of  approximately   $221,000,000  and  $152,000,000,   respectively,   by
       discounting  the scheduled loan payments to maturity using rates that are
       believed  to be  currently  available  for  debt  of  similar  terms  and
       maturities.

(12)   Commitments and Contingencies

       Future minimum payments under noncancelable  operating leases on premises
       and  equipment  with terms of one year or more as of June 30, 1997 are as
       follows (in thousands):

                      1998                                    $ 1,236
                      1999                                      1,150
                      2000                                        985
                      2001                                        911
                      2002                                        911
                      Thereafter                                  759
--------------------------------------------------------------------------------

                      Total                                   $ 5,952
================================================================================

       These agreements include,  in certain cases,  various renewal options and
       contingent rental  agreements.  Rental expense for premises and equipment
       amounted to  approximately  $1,640,000  and  $645,000 for the years ended
       June 30, 1997 and 1996,  respectively.  A majority of the rental  expense
       relates to the lease of the  Company's  principal  offices with a company
       owned by the majority shareholders of UAC.

       The  Company  is also  involved  as a party to certain  immaterial  legal
       proceedings incidental to its business.  Management of the Company, based
       on the  advice of  outside  counsel,  believes  that the  outcome of such
       proceedings  will  not  have a  material  effect  upon  its  business  or
       financial condition.

(13)   Stock-Based Compensation

       The Company has one  stock-based  compensation  plan,  which is described
       below.  The Company  applies APB  Opinion  No. 25,  Accounting  for Stock
       Issued to Employees and related  Interpretations  in accounting for these
       plans. Had  compensation  cost been determined based on the fair value at
       the grant date for awards under those plans consistent with the method of
       Statement of  Financial  Accounting  Standards  No. 123,  Accounting  for
       Stock-Based  Compensation  ("SFAS  123"),  the  Company's  net income and
       earnings  per share  would  have been  reduced  to the pro forma  amounts
       indicated below (in thousands, except share data):



                                       51
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================


                                                                  June 30,
For the Years Ended:                                       1997         1996
--------------------------------------------------------------------------------

              Net income:
                 As reported                              $ 7,401       21,142
                 Pro forma                                  6,018       19,449
              Earnings per share:
                 As reported                                  .56         1.60
                 Pro forma                                    .46         1.47
================================================================================

       The effects of  applying  SFAS 123 in this Pro Forma  disclosure  are not
       indicative  of future  amounts.  The  Statement  does not apply to awards
       prior to fiscal 1996, and additional awards in the future are expected.

       The Union  Acceptance  Corporation  1994 Incentive Stock Plan ("Incentive
       Stock Plan") is the Company's  long-term  incentive  plan for  directors,
       executive  officers and other key  employees.  The  Incentive  Stock Plan
       authorizes  the  Company's  Compensation  Committee  to  award  executive
       officers  and other  key  employees  incentive  and  non-qualified  stock
       options and restricted shares of Class A Common Stock. A total of 500,000
       shares of Class A Common Stock have been reserved for issuance  under the
       Incentive  Stock Plan,  of which  options  for 271,875  shares of Class A
       Common  Stock were  granted at an issue  price of $16 per share to senior
       officers upon  consummation  of the Company's  initial public offering of
       the Class A Common Stock.

       Options or other  grants to be  received by  executive  officers or other
       employees  in the  future  are within  the  discretion  of the  Company's
       Compensation  Committee and are not  determinable.  Stock options granted
       under the Incentive  Stock Plan are  exercisable at such times (not after
       ten years and one day from the date of the  grant)  and at such  exercise
       prices (not less than 85% of the fair market  value of the Class A Common
       Stock at date of grant) as the Committee  determines and will,  except in
       limited  circumstances,  terminate if the grantee's employment terminates
       prior to exercise.  The outstanding  options'  maximum term is ten years.
       Such options vest over a period of five years,  with  one-fifth  becoming
       exercisable on each anniversary of the option grant.

       The fair value of each  option  grant is  estimated  on the date of grant
       using the Black-Scholes options pricing model with the following weighted
       average  assumptions used for grants in 1997 and 1996;  dividend yield of
       0.0% for both years; expected volatility of 100% for both years; weighted
       average  risk-free  interest  rates of 6.55%  and 6.41% for 1997 and 1996
       grants, respectively; and expected lives of ten years for both years.



                                       52
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================


       A summary of the status of the  Company's  stock  option plans as of June
       30,  1997 and 1996  changes  during  the  years  ended on those  dates is
       presented below:

<TABLE>
<CAPTION>
                                                                  1997                            1996
                                                                         Weighted                        Weighted
                                                                          average                         average
                                                                         exercise                        exercise
                                                           Shares          price            Shares         price
-------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>                          <C>       
              Options outstanding at beginning of
                 year                                         276,915    $ 16.03                   -  $     0.00
              Options granted                                  39,750      16.00             280,600       16.04
              Options exercised                                     -       0.00                   -        0.00
              Options canceled                                  2,180      17.48               3,685       16.31
-------------------------------------------------------------------------------------------------------------------

              Options outstanding at end of year              314,485    $ 16.02             276,915     $ 16.03
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------

              Weighted average fair value of
                 options granted during the year                   $ 14.71                       $ 14.79
====================================================================================================================
</TABLE>

       The  following  table  summarizes  information  about fixed stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
                          Options Outstanding                                             Options Exercisable
                                  Weighted average        Weighted                                        Weighted
       Range of                        number             remaining       Average           Number         average
       exercise                      outstanding         contractual     exercise         exercisable     exercise
       prices                        at 6/30/97             date           price          at 6/30/97        price
-------------------------------------------------------------------------------------------------------------------

<S>                                     <C>                 <C>         <C>                <C>           <C>    
       $16.00 - 16.00                    311,125             8.25        $ 16.00            54,375        $ 16.00
       $17.88 - 17.88                      3,360             8.25          17.88               672          17.88
-------------------------------------------------------------------------------------------------------------------

                                         314,485             8.25        $ 16.02            55,047        $ 16.03
===================================================================================================================
</TABLE>

       In addition  to the  options  outstanding  at June 30,  1997,  there were
       168,727  shares of Class A Common Stock  available  for future  grants or
       awards.

       The Incentive  Stock Plan also provides that each director of the Company
       who is not also an executive  officer is automatically  granted shares of
       Class A Common Stock with a fair market value of $15,000  following  each
       annual meeting of shareholders. Shares so granted have a six-month period
       of restriction  during which they may not be transferred.  Shares granted
       under this section of the  Incentive  Stock Plan totaled 5,430 and 11,358
       in fiscal 1997 and 1996,  respectively,  and  compensation  cost  charged
       against income was $90,000 and $180,000 in 1997 and 1996, respectively.




                                       53
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

(14)   Quarterly Financial Information (unaudited)

       Quarterly financial information is as follows (in thousands, except share
       data):

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                      First        Second        Third       Fourth       Total
------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1997
<S>                                                <C>              <C>          <C>          <C>         <C>   
Interest on loans                                  $   9,233        9,096        7,685        8,126       34,140
Interest on spread accounts and restricted cash        1,510        1,545        1,654        1,795        6,504
Interest expense                                      (6,410)      (6,265)      (6,118)      (6,895)     (25,688)
Provision for estimated credit losses on
------------------------------------------------------------------------------------------------------------------
     loans held for sale                                (855)        (993)      (1,180)      (1,160)      (4,188)
------------------------------------------------------------------------------------------------------------------
     Net interest margin after provision               3,478        3,383        2,041        1,866       10,768
Gain on sales of loans                                 6,875        7,790        8,283      (20,335)       2,613
Servicing fees, net                                    5,826        6,258        6,860        6,393       25,337
Other revenues                                           934          910        1,011          964        3,819
------------------------------------------------------------------------------------------------------------------
     Total revenues                                   17,113       18,341       18,195      (11,112)      42,537
------------------------------------------------------------------------------------------------------------------
Salaries and benefits                                  3,632        3,900        4,065        3,515       15,112
Other expenses                                         3,514        3,932        3,480        3,903       14,829
------------------------------------------------------------------------------------------------------------------
     Operating expenses                                7,146        7,832        7,545        7,418       29,941
------------------------------------------------------------------------------------------------------------------
Provision for income taxes                             4,049        4,316        4,341       (7,511)       5,195
------------------------------------------------------------------------------------------------------------------
     Net earnings (loss)                           $   5,918        6,193        6,309      (11,019)       7,401
==================================================================================================================

Earnings (loss) per common share                 $     0.45          0.47         0.48        (0.83)        0.56
==================================================================================================================

Weighted average common shares outstanding        13,211,358   13,215,515   13,216,788   13,216,788   13,215,112
==================================================================================================================

Year ended June 30, 1996

Interest on loans                                  $   6,946        7,232        6,732        7,802       28,712
Interest on spread accounts and restricted cash        1,370        1,386        1,317        1,375        5,448
Interest expense                                      (5,289)      (5,556)      (5,359)      (6,071)     (22,275)
Provision for estimated credit losses on
------------------------------------------------------------------------------------------------------------------
     loans held for sale                              (1,150)        (300)        (600)        (825)      (2,875)
------------------------------------------------------------------------------------------------------------------
     Net interest margin after provision               1,877        2,762        2,090        2,281        9,010
Gain on sales of loans                                 6,724        8,483        7,760        7,390       30,357
Servicing fees, net                                    3,966        2,584        4,796        5,580       16,926
Other revenues                                           750          724          798          824        3,096
------------------------------------------------------------------------------------------------------------------
     Total revenues                                   13,317       14,553       15,444       16,075       59,389
------------------------------------------------------------------------------------------------------------------
Salaries and benefits                                  2,321        3,059        3,232        3,373       11,985
Other expenses                                         2,398        2,543        3,426        3,489       11,856
------------------------------------------------------------------------------------------------------------------
     Operating expenses                                4,719        5,602        6,658        6,862       23,841
------------------------------------------------------------------------------------------------------------------
Provision for income taxes                             3,482        3,705        3,473        3,746       14,406
------------------------------------------------------------------------------------------------------------------
     Net earnings                                  $   5,116        5,246        5,313        5,467       21,142
==================================================================================================================

Earnings per common share                        $     0.39          0.40         0.40         0.41         1.60
==================================================================================================================

Weighted average common shares outstanding        13,205,622   13,209,173   13,211,358   13,211,358   13,209,378
==================================================================================================================
</TABLE>


                                       54
<PAGE>

UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

================================================================================

Item 9.           Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure

Not Applicable
                                                     PART III

Item 10.          Directors and Executive Officers of the Registrant

         The  information  required by this item with  respect to  directors  is
incorporated  by  reference  to pages 3 through 5 of the  Company's  1997  Proxy
Statement for its 1997 Annual Shareholder Meeting (the "1997 Proxy Statement").

Item 11.          Executive Compensation

         Only the  information  required by this item to be  included  with this
report  is  incorporated  by  reference  to  pages  8 and 9 of  the  1997  Proxy
Statement.

Item 12.          Security Ownership of Certain Beneficial Owners and Management

         The  information  required by this item is incorporated by reference to
pages 2 and 3 of the 1997 Proxy Statement.

Item 13.          Certain Relationships and Related Transactions

         The  information  required by this item is incorporated by reference to
page 11 of the 1997 Proxy Statement.

                                                     PART IV

Item 14.          Exhibits, Financial Statement Schedules and Reports on Form 
                  8-K

(a)               List the following documents filed as part of the report:

                  Financial Statements -- Included Under Item 8:

                  Report of KPMG Peat Marwick LLP, Independent Auditors

                  Consolidated Balance Sheets as of June 30, 1997 and 1996

                  Consolidated Statements of Earnings for the Years Ended
                  June 30, 1997, 1996, 1995

                  Consolidated Statements of Cash Flows for the Years Ended
                  June 30, 1997, 1996, 1995

                  Consolidated Statement of Shareholders' Equity for the Years
                  Ended June 30, 1997 and 1996

(b)               Reports on Form 8-K

                  Registrant filed no reports on Form 8-K during the quarter 
                  ended June 30, 1997

(c)               The exhibits filed herewith or incorporated by reference
                  herein are set forth  following the signature page which
                  appears on page 56.




                                       55
<PAGE>

SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.

                                                    UNION ACCEPTANCE CORPORATION

September 12, 1997                                  By: /s/   John M. Stainbrook
                                                        ------------------------
                                                        John M. Stainbrook
                                                        President

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934, as amended,  this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.

      Signature                        Title                 Date

(1)   Principal Executive Officer:                          )
                                                            )
      /s/  John M. Stainbrook          President            )
      -------------------------                             )
      John M. Stainbrook                                    )
                                                            )
(2)   Principal Financial/
      Accounting Officer:                                   )
                                                            )
                                       Vice President,      )
      /s/ Rick A. Brown                Treasurer and Chief  )
      -------------------------                             )
      Rick A. Brown                    Financial Officer    )
                                                            )
(3)   A Majority of the 
      Board of Directors:                                   )
                                                            )
      /s/ Howard L. Chapman            Director             )
      -------------------------                             )
      Howard L. Chapman                                     )
                                                            )
      /s/ John M. Davis                Director             ) September 12, 1997
      -------------------------                             )
      John M. Davis                                         )
                                                            )
      /s/ Fred M. Fehsenfeld           Director             )
      -------------------------                             )
      Fred M. Fehsenfeld                                    )
                                                            )
      /s/ Donald A. Sherman            Director             )
      -------------------------                             )
      Donald A. Sherman                                     )
                                                            )
      /s/ John M. Stainbrook           Director             )
      -------------------------                             )
      John M. Stainbrook                                    )
                                                            )
      /s/ Jerry D. Von Deylen          Director             )
      -------------------------                             )
      Jerry D. Von Deylen                                   )
                                                            )
      /s/ Richard D. Waterfield        Director             )
      -------------------------                             )
      Richard D. Waterfield                                 )
                                                            )
      /s/ Thomas M. West               Director             )
      -------------------------                             )
      Thomas M. West                                        )
                                                            )



                                       56
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.           Description                                 Page (Ex. No.
                                                             Cross Reference)(1)
-------------------------------------------------------------------------------
3.1         Registrant's  Articles of  Incorporation,  as amended       S-1, 3.1
            and restated.

3.2         Registrant's   Code  of   By-Laws,   as  amended  and       S-1, 3.2
            restated.

3.3         Form of Share Certificate for Class A Common Stock.         S-1, 3.3

4.1         Articles  V and VI of the  Registrant's  Articles  of       S-1, 4.1
            Incorporation  respecting  the  terms * of  shares of
            Common Stock,  are  incorporated  by reference to the
            Registrant's    Articles   of   Incorporation   filed
            hereunder as Exhibit 3.1

4.2         Article III -  "Shareholder  Meetings,"  Article VI -       S-1, 4.2
            "Certificates  for Shares,"  Article VII - "Corporate
            Books  and  Records  -  Section  3" and  Article  X -
            "Control   Share   Acquisitions   Statute"   of   the
            Registrant's  Code of  By-Laws  are  incorporated  by
            reference  to  the  Registrant's   Restated  Code  of
            By-Laws filed herewith as Exhibit 3.2.

4.3         Transfer   and    Administration    Agreement   among      S-1, 4.3
            Enterprise  Funding  Corporation,   Union  Acceptance
            Funding Corporation and Union Acceptance Corporation,
            dated as of June 27, 1995.

4.3(a)      Amendment  No.  1  to  Transfer  and   Administration       10Q 9/95
            Agreement dated September 8, 1995                             4.3(a)

4.3(b)      Amendment  No.  2  to  Transfer  and   Administration       10Q 9/95
            Agreement dated September 29, 1995                            4.3(b)

4.3(c)      Letter    Agreement     regarding     Transfer    and       10K 1996
            Administration Agreement dated November 13, 1995              4.3(c)

4.3(d)      Amendment  No.  3  to  Transfer  and   Administration       10K 1996
            Agreement dated March 1, 1996                                 4.3(d)

4.3(e)      Letter    Agreement     regarding     Transfer    and       10K 1996
            Administration Agreement dated May 30, 1996                   4.3(e)

4.3(f)      Amendment  No.  4  to  Transfer  and   Administration       10K 1996
            Agreement dated September 5, 1996                             4.3(f)

4.3(g)      Amendment  No.  5  to  Transfer  and   Administration           ____
            Agreement dated October 31, 1996

4.3(i)      Amendment  No.  6  to  Transfer  and   Administration      10Q 12/96
            Agreement dated December 23, 1996                                4.1

4.3(h)      Amendment  No.  7  to  Transfer  and   Administration           ____
            Agreement dated March 31, 1997         

4.3(j)      Letter  Agreement  No. 3 with respect to Transfer and           ____
            Administration Agreement, dated April 28, 1997

4.4         Note  Purchase  Agreement  between  Union  Acceptance       10K 1995
            Corporation and certain lenders dated as of August 7,            4.4
            1995.

4.4(a)      Amendment  No.  1 to Note  Purchase  Agreement  dated      10Q 12/95
            November 22, 1995                                             4.4(a)

4.5         Transfer   and    Administration    Agreement   among       S-1, 4.5
            Enterprise Funding  Corporation,  Performance Funding
            Corporation and Union Acceptance  Corporation,  dated
            as of July 24, 1995.


                                       57
<PAGE>

4.5(a)      Amendment  No.  1  to  Transfer  and   Administration      10Q 12/95
            Agreement dated September 8, 1995                             4.5(a)

4.5(b)      Letter    Agreement     regarding     Transfer    and       10K 1996
            Administration Agreement dated October 12, 1995               4.5(b)

4.5(c)      Amendment  No.  2  to  Transfer  and   Administration       10K 1996
            Agreement dated May 10, 1996                                  4.5(c)

4.5(d)      Letter    Agreement     regarding     Transfer    and       10K 1996
            Administration Agreement dated July 11, 1996                  4.5(d)

4.5(e)      Letter    Agreement     regarding     Transfer    and       10K 1996
            Administration Agreement dated August 20, 1996                4.5(e)

4.5(f)      Amendment  No.  3  to  Transfer  and   Administration      10Q 12/96
            Agreement,  dated  December  23, 1996                            4.2

4.5(g)      Letter    Agreement  No. 4  to   Transfer  and              ____
            Administration Agreement dated April 25, 1997

4.5(h)      Amendment  No.  5  to  Transfer  and   Administration       ____
            Agreement dated June 6, 1997

4.5(i)      Letter   Agreement   with  regard  to  Transfer   and       ____
            Administration Agreement dated June 24, 1997

4.5(j)      Amendment No. 6 to Transfer and Administration Agreement    ____
            dated as of July 29, 1997

4.6         Note  Purchase  Agreement  dated as of April 3,  1996       10Q 3/96
            among  Union   Acceptance   Corporation  and  several            4.1
            purchasers of Senior Subordinated Notes due 2003

4.7         Note Purchase Agreement,  dated March 24, 1997, among       10Q 3/97
            Union Acceptance  Corporation and certain  purchasers           10.1
            of Senior Notes, due 2002.

4.8(a)      Note  Purchase  Agreement,  dated April 3, 1997 among       ____
            UAC   Boat   Funding   Corp.,    Enterpirse   Funding
            Corporation and NationsBank, N.A.

4.8(b)      Security Agreement, dated April 3, 1997, among UAC Boat     ____
            Funding Corp., Enterpirse Funding Corp., et. al.

9(a)        Voting Trust Agreement  among Richard D.  Waterfield,      S-1, 9(a)
            as trustee,  and  certain  existing  shareholders  of
            Union Holding Company, Inc., dated June 10, 1994.

9(b)        First  Amendment to Voting Trust Agreement dated June      S-1, 9(b)
            1, 1995.

10.1        Remittance  Processing Agreement by and between Union     S-1, 10.5
            Federal  Savings  Bank  of  Indianapolis   and  Union
            Acceptance Corporation dated June 29, 1994.

10.2        Mail and Printing  Services  Agreement by and between     S-1, 10.6
            Union Federal Savings Bank of Indianapolis  and Union
            Acceptance Corporation dated June 29, 1994.

10.3        Telephone  Equipment  Lease  Agreement by and between     S-1, 10.7
            Union Federal Savings Bank of Indianapolis  and Union
            Acceptance Corporation dated June 29, 1994.

10.4        Telecommunications  Agreement  by and  between  Union     S-1, 10.8
            Federal  Savings  Bank  of  Indianapolis   and  Union
            Acceptance Corporation dated June 29, 1994.

10.5        Communications  Equipment and Software License by and     S-1, 10.9
            between  Union Federal  Savings Bank of  Indianapolis
            and Union Acceptance Corporation dated June 29, 1994.


                                       58
<PAGE>

10.6        Software  License and  Maintenance  Agreement  by and    S-1, 10.10
            between  Union Federal  Savings Bank of  Indianapolis
            and Union Acceptance Corporation dated June 29, 1994.

10.7        Loan Servicing Agreement by and between Union Federal    S-1, 10.11
            Savings  Bank of  Indianapolis  and Union  Acceptance
            Corporation dated June 29, 1994.

10.8        General  Subservicing  Agreement by and between Union    S-1, 10.12
            Federal  Savings  Bank  of  Indianapolis   and  Union
            Acceptance Corporation dated as of January 1, 1995.

10.9        Loan  Collection   Agreement  by  and  between  Union    S-1, 10.13
            Federal  Savings  Bank  of  Indianapolis   and  Union
            Acceptance Corporation dated June 29, 1994.

10.10       Letter  respecting  Terms of Bank Accounts from Union    S-1, 10.14
            Federal   Savings  Bank  of   Indianapolis  to  Union
            Acceptance Corporation dated May 25, 1994.

10.11       Supplement  to Account  Agreement  Re:  Drafts by and    S-1, 10.15
            between  Union Federal  Savings Bank of  Indianapolis
            and Union Acceptance Corporation dated June 29, 1994.

10.12       Tax Allocation Agreement by and between Union Holding    S-1, 10.16
            Company,  Inc. and its subsidiaries dated February 1,
            1991, as amended.

10.13       Form of Remote  Outsourcing  Agreement by and between    S-1, 10.18
            Systematics   Financial  Services,   Inc.  and  Union
            Acceptance Corporation.

10.13(a)    Letter Agreement by and among  Systematics  Financial  S-1, 10.18(a)
            Services,   Inc.,   Union  Federal  Savings  Bank  of
            Indianapolis and Union Acceptance  Corporation  dated
            July 13, 1994 respecting Provision of Data Processing
            Services.

10.13(b)    Memorandum respecting Billing Procedure in connection  S-1, 10.18(b)
            with Remote  Outsourcing  Agreement from  Systematics
            System  Financial  Services,  Inc.  to Union  Federal
            Savings  Bank of  Indianapolis  and Union  Acceptance
            Corporation dated October 25, 1994.

10.14       Union  Acceptance  Corporation  Annual Bonus Plan For     S-1, 10.23
            Senior Officers.


                                       59
<PAGE>

10.15   Union Acceptance Corporation Incentive Stock Plan.            S-1, 10.24

10.16   Letter  respecting  Access  to  Records  from  Union          S-1, 10.25
        Acceptance Corporation to Union Federal Savings Bank
        of Indianapolis dated September 13, 1994.

10.17   Letter   Agreement  by  and  between  Union  Federal         S-1,  10.26
        Savings Bank of  Indianapolis  and Union  Acceptance
        Corporation  dated  December  14, 1994  amending and
        initiating    terms   of    certain    Inter-Company
        Agreements.

10.18   Letter  respecting  terms  and  conditions  of  bank          S-1, 10.27
        accounts   from  Union   Federal   Savings  Bank  of
        Indianapolis to Union Acceptance  Corporation  dated
        December 16, 1994.

10.19   Lease Agreement between Waterfield Mortgage Company,           10Q 12/95
        Incorporated, and Union Acceptance Corporation dated               10.19
        as of November 1, 1995

10.20   Purchase  Agreement among Union  Acceptance  Funding            10Q 3/96
        Corporation,  Union Acceptance Corporation and Union                10.1
        Federal  Savings  Bank of  Indianapolis  dated as of
        January 18, 1996

10.21   Sublease    Agreement   between   Union   Acceptance            10K 1996
        Corporation   and  Union  Federal  Savings  Bank  of               10.26
        Indianapolis dated as of August 1, 1996

21      Subsidiaries of the Registrant                                     _____

23      Consent of KPMG Peat Marwick LLP.                                  _____

27      Financial Data Schedule                                            _____

--------------------

(1)  Exhibits  set  forth  above  that are not  included  with this  filing  are
     incorporated by reference to the Registrant's previously filed registration
     statement or reports (and the indicated exhibit number) as indicated in the
     right hand column above, as follows:

     S-1 -- Refers to Registrant's  Registration Statement on Form S-1 (Reg. No.
     33-82254

     10K 1995 -- Refers to  Registrant's  Form 10-K for the year  ended June 30,
     1995
     
     10K 1996 -- Refers to  Registrant's  Form 10-K for the year  ended June 30,
     1996

     10Q (month/year) -- Refers to Registrant's  Form 10-Q for the quarter ended
     at the end of such month in such calendar year



                                       60