<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file Number 1-10993
SPS TRANSACTION SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3798295
(State of incorporation) (I.R.S. Employer
Identification No.)
2500 Lake Cook Road, Riverwoods, IL 60015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 405-3400
Indicate by check mark whether the 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 such
filing requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1997, the Registrant had 27,205,109 shares of common stock,
$0.01 par value, outstanding.
Page 1 of 16 pages
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 19,552 $ 15,205
Investments held to maturity - at amortized cost 55,759 41,675
Credit card loans 1,498,421 1,637,507
Allowance for loan losses (84,394) (88,397)
---------- ----------
Credit card loans, net 1,414,027 1,549,110
Accrued interest receivable 19,270 21,141
Accounts receivable 35,369 42,202
Due from affiliated companies 3,967 9,900
Premises and equipment, net 26,241 25,294
Deferred income taxes 37,272 38,266
Prepaid expenses and other assets 17,060 17,992
---------- ----------
TOTAL ASSETS $1,628,517 $1,760,785
========== ==========
LIABILITIES:
Deposits:
Noninterest-bearing $ 4,353 $ 9,012
Interest-bearing 474,188 454,423
---------- ----------
Total deposits 478,541 463,435
Accounts payable, accrued expenses and other 51,486 50,019
Income taxes payable 12,177 17,756
Due to affiliated companies 831,706 982,547
Accrued recourse obligation 22,636 22,636
---------- ----------
Total liabilities 1,396,546 1,536,393
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 100,000
shares authorized; none issued or outstanding
Common stock, $.01 par value, 40,000,000 and
40,000,000 shares authorized; 27,252,659 and
27,242,207 shares issued; 27,202,273 and
27,187,462 shares outstanding at March 31, 1997
and December 31, 1996, respectively 273 272
Capital in excess of par value 81,247 81,096
Retained earnings 151,736 144,345
Common stock held in treasury, at cost, $.01
par value, 50,386 and 54,745 shares at March 31,
1997 and December 31, 1996, respectively (1,242) (1,312)
Stock compensation plan 483 453
Employee stock benefit trust (483) (413)
Unearned stock compensation (43) (49)
---------- ----------
Total stockholders' equity 231,971 224,392
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,628,517 $1,760,785
========== ==========
See notes to unaudited consolidated financial statements.
</TABLE>
2
<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
------- -------
(Unaudited)
<S> <C> <C>
Processing and service revenues $75,309 $74,330
Merchant discount revenue 3,138 7,844
------- -------
78,447 82,174
Interest revenue 64,076 55,952
Interest expense 20,382 22,643
------- -------
Net interest income 43,694 33,309
Provision for loan losses 31,711 26,472
------- -------
Net credit income 11,983 6,837
------- -------
Net operating revenues 90,430 89,011
Salaries and employee benefits 29,523 24,200
Processing and service expenses 28,327 26,671
Other expenses 20,541 20,341
------- -------
Total operating expenses 78,391 71,212
------- -------
Income before income taxes 12,039 17,799
Income tax expense 4,648 6,764
------- -------
Net income $ 7,391 $11,035
======= =======
Net Income per Common Share $ 0.27 $ 0.41
======= =======
Weighted Average Common Shares
Outstanding 27,197 27,117
See notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
-------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,391 $ 11,035
Adjustments to reconcile net income to
net cash flows from operating activities
Depreciation and amortization 3,294 3,467
Imputed interest on notes payable -- 15
Provision for loan losses 31,711 26,472
Deferred income taxes 994 (1,363)
(Increase) decrease in operating assets:
Cash and due from banks - restricted -- 29,000
Amounts due from affiliated companies 5,933 (5,198)
Accrued interest receivable and accounts receivable 8,704 922
Prepaid expenses and other assets 677 425
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other 1,584 (5,861)
Income taxes payable (5,579) 3,919
Due to affiliated companies 2,743 7,163
Accrued recourse obligation -- (410)
-------- -------
Net cash from operating activities 57,452 69,586
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments held to maturity - purchases (56,084) (52,746)
Investments held to maturity - maturities 42,000 47,750
Net principal collected (disbursed) on credit
card portfolios 101,905 (15,934)
Purchases of premises and equipment, net (2,519) (1,905)
-------- --------
Net cash from investing activities 85,302 (22,835)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in noninterest-bearing deposits (4,659) (3,849)
Net increase in interest-bearing deposits 19,765 14,052
Due to affiliated companies (153,584) (49,289)
Repayment of notes payable -- (2,110)
Proceeds from exercise of stock options 1 411
Change in treasury stock, net 70 925
-------- --------
Net cash from financing activities (138,407) (39,860)
-------- --------
Increase in cash and due from banks 4,347 6,891
Cash and due from banks, beginning of period 15,205 8,879
-------- --------
Cash and due from banks, end of period $ 19,552 $ 15,770
======== ========
See notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
- -------------------------------------------------------------------------------
A. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SPS Transaction
Services, Inc. (the "Company") and its subsidiaries. The Company is a 73.6%
majority owned subsidiary of NOVUS Credit Services Inc., which in turn is a
wholly owned, direct subsidiary of Dean Witter, Discover & Co. ("DWD").
On February 5, 1997, DWD and Morgan Stanley Group Inc. announced a definitive
agreement to merge. The new company will be named Morgan Stanley, Dean Witter,
Discover & Co. The transaction, which is expected to be completed by mid-1997,
is subject to certain regulatory approvals and the approval of shareholders of
both companies.
The Company provides a range of technology outsourcing services including the
processing of credit and debit card transactions, consumer private label credit
card programs, commercial account processing services, and call center customer
service activities in the United States. SPS Payment Systems, Inc. ("SPS"), a
wholly owned subsidiary of the Company, is incorporated in the State of
Delaware. Hurley State Bank ("HSB"), a wholly owned subsidiary of the Company,
is chartered as a bank by the State of South Dakota and is a member of the
Federal Deposit Insurance Corporation.
The Consolidated Balance Sheet as of March 31, 1997, and the Consolidated
Statements of Income and Cash Flows for the three months ended March 31, 1997
and 1996 are unaudited; however, in the opinion of management, all adjustments,
consisting only of normal recurring accruals necessary for fair presentation,
have been reflected. All material intercompany balances and transactions have
been eliminated. Certain reclassifications have been made to prior year
amounts to conform to current presentation. The preparation of the
consolidated financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the financial statements. Actual results
could differ from these estimates.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1996 Annual Report to Stockholders and Annual Report on Form 10-K. The results
of operations for the interim periods should not be considered indicative of
results to be expected for the full year.
B. RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which is effective for transfers of
financial assets made after December 31, 1996, except for transfers of certain
financial assets for which the effective date has been delayed for one year.
SFAS No. 125 provides financial reporting standards for the derecognition and
recognition of financial assets, including the distinction between transfers of
financial assets which should be recorded as sales and those which should be
recorded as secured borrowings. The adoption of SFAS No. 125 had no material
effect on the Company's financial position or results of operations.
5
<PAGE>
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share" ("EPS"), effective for periods ending after December 15, 1997, with
restatement required for all prior periods. SFAS No. 128 maintains the current
EPS category of net income per common share with "basic" EPS, which similarly
reflects no dilution from common stock equivalents, and requires "diluted" EPS
which reflects dilution from common stock equivalents based on the average
price per share of the Company's common stock during the period. For the three
months ended March 31, 1997, both basic and diluted EPS would have been $0.27.
For the three months ended March 31, 1996, basic EPS would have been $0.41,
while diluted EPS would have been $0.40.
C. ALLOWANCE FOR LOAN LOSSES AND ACCRUED RECOURSE OBLIGATION
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(In Thousands)
1997 1996
------- -------
<S> <C> <C>
Balance, beginning of period $88,397 $63,704
Additions:
Provision for loan losses 31,711 26,472
Deductions:
Charge-offs (41,361) (30,646)
Less: recoveries 5,647 6,722
------- -------
Net charge-offs (35,714) (23,924)
------- -------
Balance, end of period $84,394 $66,252
======= =======
</TABLE>
At March 31, 1997, there were $74.2 million in loans past due 30 days through
89 days, and $56.8 million in loans past due 90 days through 179 days.
Credit card loans were reduced by $580.0 million at both March 31, 1997 and
1996, due to the sale with limited recourse of such loans through
securitization transactions. The accrued recourse obligation related to
securitized loans was $22.6 million and $26.7 million at March 31, 1997 and
1996, respectively.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's net operating revenues consist of processing and service
revenues, merchant discount revenue and net credit income, which are derived as
a result of its four principal business services: Network Transaction Services,
TeleServices, Commercial Accounts Processing and Consumer Credit Card Services.
Processing and service revenues consist of four components (as described
below): Transaction processing services, Managed programs, HSB programs and
Servicing fees on securitized loans.
Transaction processing services include revenues received as a result of
TeleServices and Network Transaction Services such as electronic transaction
processing, the sale and servicing of point-of-sale terminals, and a System
Access Agreement with NOVUS Services, Inc., an affiliated company. Revenues
from Network Transaction Services typically are based on the number of
electronic point-of-sale transactions processed rather than the dollar
transaction amount. Revenues from TeleServices typically are based upon the
number and type of customer contacts processed through service activities such
as customer billing inquiries, dispatch services, technical help-desk inquiries
and catalog order processing.
Managed programs includes revenues received as a result of Commercial Account
Processing and those Consumer Credit Card Services which the Company
administers, but for which it does not act as the card issuer or own the credit
card loans. Managed Program revenues are derived from fees based on the volume
of the services provided and on services provided in the administration of
credit life insurance programs.
HSB programs refers to those Consumer Credit Card Services for which the
Company issues the credit card on behalf of the client and owns the credit card
loans that are generated through the use of the card. The revenues derived from
the administration of HSB programs that are included as part of processing and
service revenues primarily consist of late fees.
Servicing fees on securitized loans are revenues derived from credit card
loans that have been sold to investors through asset securitizations. Such
revenues are the result of the fees earned for servicing the underlying credit
card accounts. Loan securitizations have the effect of converting portions of
net credit income, merchant discount revenue and credit card fees to a
component of processing and service revenues for the credit card accounts that
are securitized.
Merchant discount revenue is derived from the Company's owned Consumer Credit
Card Services, portions of which are currently deferred and amortized to
interest revenue. Generally, credit card sales are subject to a discount
charged to the merchant based upon contractual percentages. This percentage
varies by portfolio and by the type of credit plan offered.
Interest revenue represents finance charges derived from owned Consumer
Credit Card Services, investment interest and the amortization of deferred
merchant discount revenue. Net credit income is calculated by subtracting
interest expense and the provision for loan losses from interest revenue.
7
<PAGE>
Recent Events
On May 9, 1997, the Company announced that Thomas C. Schneider, 59, has been
elected Chairman of the Board of Directors. Schneider succeeds Philip J.
Purcell, who will remain on the Company's Board.
Schneider has served as Chief Financial Officer and a Director of the Company
since its formation in 1992. He will continue in his role as CFO. He is also
Executive Vice President and Chief Financial Officer of Dean Witter, Discover &
Co. When the proposed merger of DWD and Morgan Stanley Group Inc. is completed,
Schneider will be Chief Strategic and Administrative Officer of the new
company, Morgan Stanley, Dean Witter, Discover & Co.
Robert L. Wieseneck, SPS President and Chief Executive Officer, also
announced changes in responsibilities for several of the Company's officers
designed to define business unit accountability.
Robert W. Archer, formerly Senior Vice President, Sales, was named Senior
Vice President, Sales and Operations and will assume added management
responsibility for all SPS operations centers.
Richard F. Atkinson, formerly Senior Vice President, Operations, was named
Senior Vice President, Consumer Credit Card Services and Serge Uccetta,
formerly Vice President, Card Services, was named Vice President, Commercial
Accounts Services, giving each accountability for the performance of those
respective businesses.
David J. Peterson was promoted to the new position, Senior Vice President,
Commercial Technology Services. He will add responsibility for TeleServices and
the Company's subsidiaries Med-Link Technologies, Inc. and Ruf Corporation to
his current Network Transaction Services and Corporate Development duties.
On February 5, 1997, DWD and Morgan Stanley Group Inc. announced a definitive
agreement to merge. The new company will be named Morgan Stanley, Dean Witter,
Discover & Co. The transaction, which is expected to be completed by mid-1997,
is subject to certain regulatory approvals and the approval of shareholders of
both companies.
8
<PAGE>
The following table presents, for the periods indicated, the percentage
relationship that certain statement of income items bear to net operating
revenues and the period-to-period percentage dollar increase or decrease in
each item.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Period-to-Period
---------------------
1997 1996 Change
------ ------ ------
<S> <C> <C> <C>
NET OPERATING REVENUES:
Processing and service revenues 83.3% 83.5% 1.3%
Merchant discount revenue 3.4 8.8 (60.0)
Net credit income 13.3 7.7 75.3
----- -----
100.0 100.0 1.6
OPERATING EXPENSES:
Salaries and employee benefits 32.7 27.2 22.0
Processing and service expenses 31.3 30.0 6.2
Other expenses 22.7 22.8 1.0
----- -----
86.7 80.0 10.1
Income before income taxes 13.3 20.0 (32.4)
Income tax expense 5.1 7.6 (31.3)
----- -----
Net income 8.2% 12.4% (33.0)%
===== =====
</TABLE>
Net income for the three months ended March 31, 1997 was $7.4 million, a
decrease of $3.6 million, or 33.0%, over the same period a year ago. Net
income per common share for the three month period was $0.27, compared to $0.41
in the prior year's first quarter.
Net operating revenues for the first quarter of 1997 grew to $90.4 million,
an increase of 1.6% over the same period last year. The increase in net
operating revenues resulted primarily from an increase in net interest income
and processing and service revenues partially offset by an increase in
provision for loan losses expense and a decrease in merchant discount revenue.
Processing and service revenues increased 1.3% to $75.3 million for the three
months ended March 31, 1997, as compared to $74.3 million for the same period
last year. Processing and service revenues, representing 83.3% and 83.5% of
net operating revenues for the three months ended March 31, 1997 and 1996,
respectively, consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(In Thousands)
1997 1996
------- -------
(Unaudited)
<S> <C> <C>
Transaction processing services $24,462 $21,434
Managed programs 23,395 23,121
HSB programs 14,019 11,640
Servicing fees on securitized loans 13,433 18,135
------- -------
$75,309 $74,330
======= =======
9
<PAGE>
SUPPLEMENTAL INFORMATION
Components of Servicing Fees on Securitized Loans
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(In Thousands)
1997 1996
------- -------
(Unaudited)
<S> <C> <C>
Processing and service revenues $ 4,529 $ 3,634
Merchant discount revenue 1,121 1,066
Interest revenue 28,071 30,283
Interest expense (8,154) (8,479)
Provision for loan losses (12,134) (8,369)
------- -------
Servicing Fees on Securitized Loans $13,433 $18,135
======= =======
</TABLE>
The increase in revenues from transaction processing services resulted
primarily from the addition of new clients and increased revenue per customer
contact processed in our TeleServices business as well as increased revenues
from the sale and servicing of point-of-sale terminals and a higher volume of
Network Transaction Services point-of-sale transactions processed. The number
of TeleServices customer contacts processed totaled 2.4 million, down 7.7% from
2.6 million in the same period in 1996. However, the decrease in the number of
customer contacts was offset by an increase in revenues per customer contact
processed. For the three months ended March 31, 1997, the number of point-of-
sale transactions processed totaled 101.9 million, up 4.8% from 97.2 million in
the same period in 1996. The increase in revenues from Managed programs
resulted primarily from an increase in the volume of Commercial Account
Processing Services provided, offset by a decrease in credit life insurance
program revenues. The increase in revenues from HSB programs was due to an
increase in late fee revenue resulting from a higher level of credit card loan
delinquencies, coupled with changes in late fee terms initiated in 1996. The
decrease in servicing fees on securitized loans was due primarily to a higher
rate of credit losses on securitized loans.
Merchant discount revenue decreased 60.0% to $3.1 million for the three
months ended March 31, 1997, as compared to $7.8 million for the same period
last year. The decrease in merchant discount revenue resulted from decreased
sales activity and from the deferral of $2.3 million of merchant discount
revenues in the first quarter of 1997 related to interest deferred promotional
payment plans. As of March 31, 1997, $5.9 million of merchant discount revenue
has been deferred which will be amortized and recognized as interest income
over the life of the promotional payment plans. Merchant discount revenue was
3.4% and 8.8% of net operating revenues for the three months ended March 31,
1997 and 1996, respectively.
For the three months ended March 31, 1997, net credit income increased 75.3%
to $12.0 million from the same period a year ago as a result of higher net
interest income partially offset by an increase in the provision for loan
losses. The increase in interest revenue resulted primarily from the
amortization of $5.7 million of deferred merchant discount revenue into
interest income during the first quarter of 1997 related to interest-deferred
promotional payment plans and an increase in the yield on credit card loans due
in part to performance-based pricing initiatives implemented in 1996, partially
offset by higher charge-offs of interest revenue. The decrease in interest
expense was due to a decrease in average borrowings due to a decrease in credit
card loans, coupled with lower interest rates on borrowings. The increase in
the provision for loan losses is attributable to an increase in the net charge-
off rate, partially offset by a decline in the amount of credit card loans
outstanding resulting from post-holiday paydowns during the first quarter of
1997 and from the Company's portfolio improvement program designed to limit the
Company's exposure to higher risk accounts. Net charge-offs as a percentage of
average credit card loans on an owned basis increased to 9.09% in the first
quarter of 1997 from 6.35% in the first quarter of 1996, however, the
10
<PAGE>
Company did experience a sequential decline in delinquency rates from December
31, 1996 to March 31, 1997. The industry-wide trend of increasing credit loss
rates, which the Company believes is related to increased consumer debt levels
and bankruptcy rates, contributed to the increase in the Company's net charge-
off rate. The Company believes that this industry-wide trend may continue and
that the Company could experience a higher net charge-off rate for the full
year 1997 as compared to 1996. In 1996, the Company took corrective measures
to reduce future charge-offs by implementing a portfolio improvement program
that analyzes credit risk and credit behavior scores for existing accounts,
taking into consideration their current financial condition; re-scoring
existing accounts and reducing credit lines or closing accounts as appropriate;
accelerating the development schedule for new credit scoring models; and
increasing collection efforts by adding collectors, expanding call hours, and
identifying high-risk accounts to accelerate contacts. To help mitigate the
impact of higher charge-offs, the Company has also instituted changes in
cardholder terms and has instituted the implementation of certain client
pricing revisions, including those for promotional programs. The Company
believes these actions, along with other operational changes, will have an
increasingly positive impact over time and will serve to moderate the effects
of a difficult credit environment.
The Company's expectations about future charge-off rates and portfolio
improvements are subject to uncertainties that could cause actual results to
differ materially from the Company's expectations, as described above. Factors
that influence the level and direction of credit card loan delinquencies and
charge-offs include changes in consumer loan payment patterns, bankruptcy
trends, the seasoning of the Company's loan portfolio, interest rate movements
and their impact on consumer behavior, and the rate and magnitude of changes in
the Company's credit card loan portfolio, including the overall mix of
accounts, products and loan balances within the portfolio.
For the three months ended March 31, 1997, total operating expenses of $78.4
million represented an increase of 10.1% over the same period last year. Total
operating expenses as a percentage of net operating revenues rose to 86.7% for
the three months ended March 31, 1997, as compared to 80.0% for the same period
a year ago.
For the three months ended March 31, 1997, salaries and employee benefits
totaled $29.5 million, an increase of 22.0% from $24.2 million from the same
period a year ago. The Company added approximately 856 additional full-time
equivalent employees since March 31, 1996. Nearly all of these new employees
were assigned to field processing facilities to address increased collection
efforts and to provide for increased TeleServices training and activities.
Processing and service expenses include data processing, communications and
account processing expenses, which are influenced, in part, by changes in
transaction volume. For the three months ended March 31, 1997, such expenses
rose to $28.3 million, or 6.2% on a period-to-period basis. The increase in
processing and service expenses resulted from a higher volume of transactions
processed and increased expenses associated with private label services and
TeleServices. Processing and service expenses as a percentage of net operating
revenues increased to 31.3% for the three months ended March 31, 1997, as
compared to 30.0% for the comparable prior year period.
Other expenses include expenses relating to business development, merchant
marketing, occupancy, advertising and promotion, cost of terminals sold, credit
card fraud and other miscellaneous employee and administrative expenses. For
the three months ended March 31, 1997 and 1996, other expenses totaled $20.5
million and $20.3 million, respectively. The slight increase in other expenses
resulted from increased collection expenses, administrative expenses and
occupancy expenses, offset by decreased merchant marketing incentives expense.
Other expenses were 22.7% and 22.8% of net operating revenues for the three
months ended March 31, 1997 and 1996, respectively.
11
<PAGE>
The table below sets forth owned credit card loan net charge-off and loan
delinquency information with supplemental total loan information regarding the
Company's credit card loan portfolio as of and for the year-to-date periods
indicated.
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996 December 31, 1996
----------------------------------------------------------------------
Total Total Total
Owned Loans* Owned Loans* Owned Loans*
----- ----- ----- ----- ----- -----
Dollars in Thousands (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Average credit card loans $1,593,771 $2,173,771 $1,633,261 $2,221,466 $1,512,986 $2,095,026
Period-end credit card
loans $1,498,421 $2,078,421 $1,611,376 $2,191,376 $1,637,507 $2,217,507
Net charge-offs as a % of
average credit card loans 9.09% 8.93% 6.35% 6.26% 7.82% 7.66%
Accruing loans contractually
past due as to principal and
interest payments
30-89 days 4.95% 4.71% 5.05% 4.81% 4.97% 4.88%
90-179 days 3.79% 3.61% 3.10% 3.01% 4.15% 3.89%
* Total loans represents both owned and securitized credit card loans.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Through its liquidity policies, the Company seeks to ensure access to cost
effective funding in all business environments. This objective is accomplished
through diversification of funding sources, extension of funding terms and
staggering of liability maturities.
The Company's capital policies seek to maintain a strong balance sheet
consistent with the Company's business risks as well as regulatory
requirements. The Company's subsidiary bank, HSB, targets the maintenance of
capital levels considered for regulatory purposes to be "well-capitalized" as
defined by the FDIC Improvement Act of 1991.
The Company finances its operations from three principal sources: deposit
taking activities utilizing certificates of deposit ("CDs")in denominations of
$100,000 or more; securitizations of credit card loans; and borrowings from
DWD.
HSB administers a certificate of deposit program through which CDs are issued
to investors in denominations of $100,000 or more. Such CDs are issued to
investors under two programs - an institutional CD program and a retail CD
program. CDs under the institutional CD program are issued directly by HSB to
the investor and generally have a maturity of one to twelve months. CDs under
the retail CD program are issued to investors through Dean Witter Reynolds
Inc., a subsidiary of DWD, and generally have a maturity of two to 10 years.
As of March 31, 1997, CDs outstanding were $474.2 million, of which
institutional CDs represented $221.0 million and retail CDs represented $253.2
million.
HSB maintains a loan securitization program with Receivables Capital
Corporation ("RCC"), and at March 31, 1997, outstanding loans sold under such
program were $280.0 million. HSB also maintains a loan securitization program
with Barton Capital Corporation ("BCC"), and at March 31, 1997, outstanding
loans sold under such program were $300.0 million. At March 31, 1997, $580.0
million or 27.9% of the HSB Program loans had been sold through loan
securitizations.
12
<PAGE>
The RCC loan securitization program, which was scheduled to expire in April
1997, has been amended so that it now expires June 30, 1997. In April 1997 the
then expiring BCC program agreement was amended and restated. The amended and
restated agreement with BCC includes the elimination of the DWD guarantee
(which provided credit support in the transaction) and its replacement with a
funded cash account. Funding for this cash account will initially be provided
by a special purpose corporation established as a subsidiary of the Company.
This updated BCC facility is scheduled to expire in April 1998. The Company
expects to renew or replace these facilities on or prior to their expiration
dates. If these programs are not extended on or prior to their expiration
dates, collections allocable to RCC and BCC following the expiration dates of
the programs will be paid to RCC or to BCC, as applicable, and the interests of
RCC and of BCC in the applicable securitization pool will gradually decline to
zero. Any receivables originated after the applicable program's expiration
date would remain on the Company's consolidated balance sheet.
The Company has an Amended and Restated Borrowing Agreement (as amended, the
"Borrowing Agreement") and a facility fee letter agreement (as amended, the
"Facility Fee Agreement"), with DWD, pursuant to which DWD has agreed to
provide financing to the Company. DWD and the Company have agreed in principle
to extend the term of the Borrowing Agreement to April 11, 1998 and to reduce
the maximum amount available under the Borrowing Agreement to $1.2 billion from
$1.25 billion. At April 30, 1997, the Company had $812.8 million outstanding
under the Borrowing Agreement. Under the Facility Fee Agreement, the Company
has agreed to pay certain monthly facility fees in connection with its
financing arrangements with DWD.
Cash flows from operating activities resulted in net proceeds of cash of
$57.5 million and $69.6 million for the three months ended March 31, 1997 and
1996, respectively.
Cash flows from investing activities for the three months ended March 31,
1997 resulted in net proceeds of cash of $85.3 million, primarily consisting of
net principal collected on credit card loans, representing the difference
between sales made using the cards and payments received from cardholders
($101.9 million), partially offset by investments in short-term U.S. Treasury
bills resulting in net uses of cash ($14.1 million). Cash flows from investing
activities for the three months ended March 31, 1996 resulted in net uses of
cash of $22.8 million, primarily consisting of net principal disbursed on
credit card loans ($15.9 million) and from investments in short-term U.S.
Treasury bills resulting in net uses of cash of $5.0 million.
Cash flows from financing activities for the three months ended March 31,
1997 resulted in net uses of cash of $138.4 million, primarily consisting of a
net decrease in borrowings due to affiliated companies ($153.6 million),
partially offset by a net increase in interest-bearing deposits resulting from
the issuance of jumbo certificates of deposit ($19.8 million). Cash flows from
financing activities for the three months ended March 31, 1996 resulted in net
uses of cash of $39.9 million, primarily consisting of a net decrease in
borrowings due to affiliated companies ($49.3 million) and from final payments
made on short-term notes payable with Tandy Corporation ($2.1 million),
partially offset by a net increase in interest-bearing deposits resulting from
the issuance of jumbo certificates of deposit ($14.1 million). At March 31,
1997 and 1996, the Company had cash and cash equivalents of $19.6 million and
$15.8 million, respectively.
The Company currently has no material commitments requiring capital
expenditures. The Company has not paid any dividends on its Common Stock and
anticipates retaining future operating cash flows for the foreseeable future to
finance growth and business expansion rather than to pay dividends to its
stockholders. Any future determination as to the payment of dividends will
depend upon results of operations, capital requirements, financial condition of
the Company and such other factors as the Board of Directors of the Company in
its discretion shall determine. Periodically, SPS and HSB have paid dividends
to the Company. The amount of dividends that can be paid to the Company by HSB
is restricted by applicable banking regulations.
13
<PAGE>
INTEREST RATE RISK
The Company's interest rate risk policies are designed to reduce the
volatility of earnings resulting from changes in interest rates. This is
accomplished primarily through matched financing, where possible, which entails
matching the repricing schedules of credit card loans and the related
financing. Matched financing includes the funding of variable rate credit card
loans that are primarily indexed to the prime rate with floating rate financing
that is primarily indexed to commercial paper rates and the federal funds rate.
The Company generally retains basis risk between the prime rate and commercial
paper/federal funds rates on variable rate credit card loans. Fixed rate credit
card loans are generally funded with fixed rate financing (financing with an
initial term of one year or greater).
The Company also funds fixed rate credit card loans with floating rate
financing by utilizing interest rate swaps, cost of funds agreements and
interest rate caps to adjust the repricing characteristics of its financing to
fixed rate financing. Under interest rate swaps and cost of funds agreements,
the Company effectively exchanges the interest payments on its financing with
those of a counterparty. Interest rate cap agreements effectively establish a
maximum interest rate on certain of the Company's floating rate borrowings.
Interest rate swap agreements are entered into with an affiliate. Interest rate
cap agreements are entered into with institutions that are established dealers
in these instruments and that maintain certain minimum credit criteria
established by the Company. Costs of funds agreements are entered into as part
of agreements pursuant to which the Company owns the credit card loan portfolio
and provides private label credit card processing services to certain of its
credit card merchant clients.
To reduce the volatility of interest expense from changes in interest rates,
the Company had outstanding interest rate swaps and cost of funds agreements of
$460.8 million and $746.3 million at March 31, 1997 and 1996, respectively.
At March 31, 1997 and 1996, the Company had $10.0 million and $40.0 million
of interest rate cap agreements, respectively. At March 31, 1997, the current
variable rates on all interest rate cap agreements exceeded the specified cap
rates.
At March 31, 1997 and 1996, the Company's interest rate swap agreements had
maturities ranging from October 1997 to December 2000 and from December 1996 to
December 2000, respectively. At March 31, 1997, the Company's interest rate cap
agreement had a maturity of September 1997. At March 31, 1996, the Company's
interest rate cap agreements had maturities ranging from February 1997 to
September 1997, respectively.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, the Company is involved in litigation
incidental to the business. The consequences of these matters are not
presently determinable but, in the opinion of management after consultation
with counsel, the ultimate liability, if any, will not have a material adverse
effect on the consolidated results of operations or financial position of the
Company.
Some of these lawsuits and proceedings arise in jurisdictions such as Alabama
that permit punitive damages disproportionate to the actual damages alleged.
In light of the uncertainties inherent in any litigation, no assurances can be
given as to the ultimate outcome of these lawsuits and proceedings. However,
the Company and its subsidiaries believe that there are meritorious defenses
for all of these claims and are defending them vigorously.
Item 2. Changes in Securities.- None.
Item 3. Defaults Upon Senior Securities.- None
Item 4. Submission of Matters to a Vote of Security Holders.- None.
Item 5. Other Information.- None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Third Amendment to the Amended and Restated Borrowing Agreement dated
as of January 31, 1997, between the Company and DWD.
10.2 Amended and Restated Credit Card Receivables Purchase Agreement dated
as of April 15, 1997, among HSB, the Company, SPS, DWD and Societe
Generale.
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on form 8-K, dated May 8, 1997, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the
Company's new Chairman and organizational changes.
A Current Report on form 8-K, dated January 23, 1997, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the
Company's fourth quarter earnings release.
A Current Report on form 8-K, dated April 15, 1997, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the
Company's first quarter earnings release.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPS TRANSACTION SERVICES, INC.
------------------------------
(Registrant)
Date: May 13, 1997 By:/s/ Russell J. Bonaguidi
------------ -----------------------------------
Russell J. Bonaguidi
Vice President and Controller (Duly
Authorized Officer and Principal
Accounting Officer)
16
<PAGE>
EDGAR
Exhibit Description of Exhibits
- ------- -----------------------
10.1 Third Amendment to the Amended and Restated
Borrowing Agreement dated as of January 31, 1997, between the
Company and DWD.
10.2 Amended and Restated Credit Card Receivables Purchase Agreement
dated as of April 15, 1997, among HSB, the Company, SPS, DWD and
Societe Generale.
27.0 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
THIRD AMENDMENT
TO THE
AMENDED AND RESTATED BORROWING AGREEMENT
THIS THIRD AMENDMENT TO THE AMENDED AND RESTATED BORROWING AGREEMENT (the
"Amendment") dated as of January 31, 1997, is between SPS TRANSACTION SERVICES,
INC. ("Borrower") and DEAN WITTER, DISCOVER & CO. ("Lender").
WHEREAS, Borrower and Lender are parties to an Amended and Restated
Borrowing Agreement, dated as of September 1, 1995, a First Amendment to the
Amended and Restated Borrowing Agreement, dated as of May 6, 1996, and a Second
Amendment to the Amended and Restated Borrowing Agreement, dated as of
September 30, 1996 (collectively, the "Borrowing Agreement"), pursuant to which
Lender has made certain loans to the Borrower; and
WHEREAS, the Borrower and Lender desire to further amend the Borrowing
Agreement.
NOW THEREFORE, the Borrowing Agreement is amended as follows:
1. Each capitalized term used in this Amendment (and not otherwise defined
herein) shall have the same meaning as set forth in the Borrowing
Agreement.
2. Section 2.01(a) of the Borrowing Agreement is hereby amended in its
entirety and henceforth shall read as follows:
(a) Revolving Loan Commitment. Subject to the terms and conditions of
this Borrowing Agreement and relying upon representations, warranties
and covenants of Borrower set forth herein, Lender shall make loans (all
such loans made pursuant to this Section 2.01(a) being referred to
herein collectively as the "Loans") to Borrower at any time and from
time to time prior to the Commitment Termination Date, in an aggregate
principal amount not exceeding at any one time outstanding
$1,250,000,000 (the "Commitment"). Prior to the Commitment Termination
Date, Lender shall have no obligation to make advances to the extent any
requested advance would cause the principal amount outstanding under the
Revolving Notes to exceed the Commitment, provided, that Lender may
elect (but shall not be obligated) from time to time to make advances in
excess of the Commitment.
3. Except as provided herein, the terms and conditions of the Borrowing
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as of the date first written above.
SPS TRANSACTION SERVICES, INC. DEAN WITTER, DISCOVER & CO.
By: Thomas M. Goldstein By: Birendra Kumar
Title: Vice President - Finance Title: Treasurer
<PAGE>
EXHIBIT 10.2
- -------------------------------------------------------------------------------
AMENDED AND RESTATED CREDIT CARD
RECEIVABLES PURCHASE AGREEMENT
___________________________
among
HURLEY STATE BANK,
as Seller,
SPS PAYMENT SYSTEMS, INC.,
as Servicer,
DEAN WITTER, DISCOVER & CO.,
as Limited Guarantor,
BARTON CAPITAL CORPORATION,
as Purchaser,
and
SOCIETE GENERALE,
as Agent
_______________________
dated as of April 15, 1997
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
ARTICLE I DEFINITIONS 1
Section 1.1 Definition 1
ARTICLE II PURCHASE AND SALE OF PURCHASED INTEREST 2
Section 2.1 Purchase and Sale of Purchased Interest 2
Section 2.2 Issuance of Barton Certificate; Payment of Original Certificate
Amount 2
Section 2.3 Voluntary Termination of Commitment or Reduction of Program
Amount; Increase in Program Amount 2
Section 2.4 Increase of Certificate Amount 3
Section 2.5 Additional Accounts 3
Section 2.6 Removal of Accounts; Removal of Inactive Accounts 5
Section 2.7 Special Removal of Accounts 6
Section 2.8 Commercial Paper 7
Section 2.9 Clean-Up Option 7
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS 8
Section 3.1 Representations and Warranties of HSB, the Servicer and the
Limited Guarantor 8
Section 3.2 Representations, Warranties and Covenants Concerning the
Receivables and the Accounts 11
Section 3.3 Transfer of Purchased Interest; Transfer of Ineligible
Receivables 12
Section 3.4 Covenants of HSB 14
Section 3.5 Covenants of the Servicer 16
Section 3.6 Covenants of the Limited Guarantor 18
ARTICLE IV ADMINISTRATION, COLLECTIONS AND OTHER OBLIGATIONS 19
Section 4.1 Designation of Servicer; Compensation of Servicer 19
Section 4.2 Duties of Servicer 19
Section 4.3 Establishment of Accounts 20
Section 4.4 Allocations of Collections 21
Section 4.5 Determination Date Statement 22
Section 4.6 Purchased Percentage of Finance Charge Collections 22
Section 4.7 Purchased Percentage of Principal Collections 24
Section 4.8 Termination 24
Section 4.9 Remittances to the Company 25
Section 4.10 Other Rights of the Agent 25
Section 4.11 Adjustments for Reversals 26
Section 4.12 Annual Accountants Report 26
Section 4.13 Annual Statement as to Compliance 26
ARTICLE V MERGER AND CONSOLIDATION 26
Section 5.1 Merger or Consolidation of HSB, SPS or Limited Guarantor 26
ARTICLE VI TERMINATION EVENTS; SERVICING TRANSFER EVENTS 27
Section 6.1 Termination Events 27
Section 6.2 Remedies 28
Section 6.3 Successor Servicer 29
Section 6.4 Agent to Act; Appointment of Successor 30
Section 6.5 Monitoring 31
ARTICLE VII INDEMNIFICATION 31
Section 7.1 Indemnification 31
Section 7.2 Yield Protection 32
Section 7.3 Withholding Taxes 34
ARTICLE VIII CONDITIONS OF PURCHASE 35
Section 8.1 Conditions Precedent 35
Section 8.2 Conditions Precedent to Effectiveness, Additional Accounts,
Removed Accounts and Maintenance of Net Certificate Amount 36
ARTICLE IX THE LIMITED GUARANTEE 36
Section 9.1 Limited Guarantee 36
ARTICLE X THE AGENT 38
Section 10.1 Authorization and Action 38
Section 10.2 Agent's Reliance, Etc 38
Section 10.3 Agent and Affiliates 38
ARTICLE XI ASSIGNMENT OF PURCHASED INTEREST 38
Section 11.1 Restrictions on Assignments 38
Section 11.2 Rights of Assignee 39
Section 11.3 Evidence of Assignment; Endorsement on Barton Certificate 39
Section 11.4 Rights of the Banks and Collateral Agent 39
ARTICLE XII MISCELLANEOUS 39
Section 12.1 Notices, etc 39
Section 12.2 Successors and Assigns 41
Section 12.3 Severability Clause 41
Section 12.4 Amendments; Governing Law 42
Section 12.5 HSB's Obligations 42
Section 12.6 No Bankruptcy Petition Against the Company 42
Section 12.7 Setoff 42
Section 12.8 No Recourse 42
Section 12.9 Costs and Expenses 42
Section 12.10 No Waiver; Remedies 42
Section 12.11 Further Assurances 43
Section 12.12 Confidentiality 43
Section 12.13 Company's Purchase Decision 43
Section 12.14 Rating Agency Notices 44
Section 12.15 Counterparts 44
Section 12.16 Headings 44
APPENDIX A
DEFINITIONS A-1
SCHEDULES
Schedule I Annual Receivables Information
Schedule II Annual Accountants Report
Schedule III Confidentiality Contact List
Schedule IV Concentration Percentages
Schedule V Locations of Records
EXHIBITS
Exhibit A Form of Barton Certificate (existing)
Exhibit B Form of Supplemental Conveyance
Exhibit C Form of Reassignment
Exhibit D Form of Inactive Account Reassignment
Exhibit E Form of Special Reassignment
Exhibit F Account Schedule
Exhibit G Opinion of In-house counsel
Exhibit H Opinion of Faegre & Benson LLP -- RE: Perfection
in Cash Collateral Account
Exhibit I [reserved]
Exhibit J Form of Assignment
Exhibit K Form of Credit Card Agreement
Exhibit L Form of Determination Date Statement
Exhibit M Form of Merchant Agreement
Exhibit N Form of Certificate of Hurley State Bank
AMENDED AND RESTATED CREDIT CARD RECEIVABLES
PURCHASE AGREEMENT
AMENDED AND RESTATED CREDIT CARD RECEIVABLES PURCHASE AGREEMENT (as amended
or supplemented from time to time, this "Agreement"), dated as of April 15,
1997, among BARTON CAPITAL CORPORATION, a Delaware corporation (together with
its successors and assigns, the "Company"), SOCIETE GENERALE, a French banking
corporation ("Societe Generale"), as agent for the Company (in such capacity,
the "Agent"), HURLEY STATE BANK, a South Dakota bank (together with its
successors and assigns, "HSB"), DEAN WITTER, DISCOVER & CO., a Delaware
corporation, as limited guarantor (together with its successors and assigns,
the "Limited Guarantor"), and SPS PAYMENT SYSTEMS, INC., a Delaware corporation
("SPS"), as servicer (together with its successors and assigns, the
"Servicer").
WITNESSETH:
WHEREAS, the parties hereto are party to a Credit Card Receivables Purchase
Agreement dated as of December 30, 1992, as heretofore amended, which the
parties now desire herewith to amend and restate in its entirety pursuant to
the terms and subject to the conditions hereinafter set forth;
WHEREAS, subject to the terms and conditions of this Agreement, HSB desires
to continue to transfer and assign to the Company, and the Company desires to
acquire from HSB, a fractional undivided interest in all of HSB's right, title
and interest in, to and under the Receivables (as hereinafter defined) now
existing or hereafter created and certain related property;
WHEREAS, the Company's interest in the Receivables is evidenced by a
certificate (the "Barton Certificate") representing an interest in the
Receivables now existing and hereafter created in the Accounts (as hereinafter
defined) set forth on the Account Schedule (as hereinafter defined),
substantially in the form set forth in Exhibit A hereto;
WHEREAS, subject to the terms and conditions of this Agreement, HSB has sold
such Barton Certificate to the Company;
WHEREAS, the Company has requested SPS to undertake the collection and
servicing responsibilities in respect of its interest in the Receivables; and
WHEREAS, Societe Generale has been requested, and is willing, to continue to
act as the Agent for the Company.
NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
(a) For all purposes of this Agreement, except as otherwise expressly
provided herein or unless the context otherwise requires, capitalized terms not
otherwise defined herein shall have the meanings specified in Appendix A. All
other capitalized terms used herein shall have the meanings specified herein.
(b) As used in this Agreement and in any certificate or other document made
or delivered pursuant hereto or thereto, accounting terms not defined in
Appendix A, and accounting terms partly defined in Appendix A, to the extent
not defined, shall have the respective meanings given to them under generally
accepted accounting principles. To the extent that the definitions of
accounting terms herein are inconsistent with the meanings of such terms under
generally accepted accounting principles, the definitions contained herein
shall control.
(c) The words "hereof", "herein" and "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement; and Section, subsection, clause,
Schedule and Exhibit references contained in this Agreement are references to
Sections, subsections, clauses, Schedules and Exhibits in or to this Agreement
unless otherwise specified.
ARTICLE II
PURCHASE AND SALE OF PURCHASED INTEREST
Section 2.1 Purchase and Sale of Purchased Interest. By execution of this
Agreement, HSB does hereby assign, transfer and convey to the Company, and the
Company does hereby purchase and accept, without recourse, a fractional
undivided interest in all of its right, title and interest in, to and under (i)
all Receivables now existing or hereafter created and arising under Accounts,
(ii) all now existing or hereafter arising instruments, documents, agreements,
books and records relating to the foregoing (including, without limitation,
computer tapes and disks on which data relating to the Transferred Property is
stored, but excluding computer hardware and proprietary or licensed software),
(iii) all Merchant Fees remitted by the Seller to the Collection Account, (iv)
all Recoveries, (v) all monies due or to become due with respect to the
foregoing and (vi) all proceeds (as defined in Section 9-306 of the Uniform
Commercial Code) of the foregoing (the "Transferred Property").
The foregoing conveyance constitutes a purchase and assumption of the
Transferred Property only and does not constitute an assumption by the Company
of any obligations of HSB, the Servicer or any other Person in connection with
the Accounts, the Receivables or under any agreement or instrument relating
thereto, including, without limitation, any obligation to any Obligor. In the
event such assignment, transfer and conveyance is not deemed to be a sale of
the Transferred Property by HSB to the Company, HSB hereby grants to the Agent
for the benefit of the Company a security interest in the Transferred Property.
HSB hereby further grants to the Agent for the benefit of the Company a
security interest in the Cash Collateral Account and any amounts on deposit
therein. This Agreement shall be deemed to constitute a security agreement (as
defined in Section 9-105(1)(1) of the Uniform Commercial Code).
Section 2.2 Issuance of Barton Certificate; Payment of Original Certificate
Amount. In consideration of the payment of the Original Certificate Amount,
the receipt of which is hereby acknowledged, HSB has issued to the Company,
without recourse, except to the extent expressly specified herein, the Barton
Certificate in the form of Exhibit A.
Section 2.3 Voluntary Termination of Commitment or Reduction of Program
Amount; Increase in Program Amount.
(a) HSB may, upon at least thirty Business Days' notice to the Agent,
terminate the Commitment in whole or reduce in part the Program Amount;
provided, however, that (i) each partial reduction shall be in an amount equal
to $5,000,000 and in integral multiples of $1,000,000 thereafter, unless such
partial reduction is in connection with a removal under Section 2.7, in which
case there shall be no minimum amount, and (ii) after giving effect to such
reduction, the remaining Program Amount shall not be less than the lesser of
(x) $100,000,000 and (y) the Net Certificate Amount.
(b) The Program Amount may be increased from time to time, by written notice
of request given by HSB to the Agent at least twenty Business Days before the
requested effective date of such requested increase, and by written notice of
acceptance given by the Company and the Agent not later than five Business Days
prior to such requested effective date. The Agent shall notify the Rating
Agencies of any request to increase the Program Amount and the Agent and the
Company shall not agree to any such increase unless the Rating Agencies shall
have notified the Agent in writing that such increase will not result in a
reduction or withdrawal of its rating of the Commercial Paper.
Section 2.4 Increase of Certificate Amount. Subject to the conditions set
forth in Section 8.2, and, in the case of Additional Accounts, Section 2.5,
upon the request of HSB, the Company shall acquire on any Business Day prior to
the Termination Date a fractional undivided ownership interest in the
Receivables existing in Accounts in a specified amount (the "Additional
Certificate Amount") that is in addition to the then outstanding Certificate
Amount; provided, that after giving effect to such acquisition, (a) the
Purchased Interest shall not exceed 95%, (b) the Certificate Amount shall not
exceed the Program Amount and (c) the Cash Collateral Account shall be Fully
Funded. The Company shall make a payment to HSB in immediately available funds
equal to such Additional Certificate Amount on the date of such acquisition.
Each such acquisition shall be made upon at least three Business Days' prior
written notice from HSB to the Agent. Any Additional Certificate Amount shall
be reflected in the grid attached to the Barton Certificate or otherwise in the
Company's records. The increase in the Certificate Amount resulting from the
Additional Certificate Amount shall be deemed effective at the close of
business on the immediately preceding Collection Period End Date.
Section 2.5 Additional Accounts.
(a) From time to time prior to the Termination Date, the Company and the
Agent agree that, subject to the conditions set forth in Section 2.5(b) and the
limitation contained in Section 2.5(c), HSB may designate additional revolving
credit accounts to be included as Accounts hereunder the Receivables of which
shall be subject to the Purchased Interest ("Additional Accounts") as of the
close of business on any Collection Period End Date (the "Additional Cut-Off
Date").
(b) HSB and the Agent agree that any such designation pursuant to subsection
(a) of Additional Accounts shall be subject to the satisfaction of the
following conditions:
(i) On or before the seventh Business Day prior to the date of transfer
(the "Addition Date") or, if the Seller Amount on any Collection Period End
Date, as calculated on the fifth Business Day after such Collection Period End
Date is less than 5% of the Receivables Balance, on or before the Business Day
prior to the Addition Date (which Addition Date shall be the second Business
Day after the date of such calculation), HSB shall give the Company and the
Agent written notice that Additional Accounts will be included as Accounts and
specifying (A) the estimated aggregate balance of the Principal Receivables
that are Eligible Receivables as of the Additional Cut-Off Date in such
Additional Accounts (which shall be definitively updated on or before the
Addition Date), (B) the Merchants with respect to such Additional Accounts and
(C) the most recently available historical information with respect to all
individual revolving credit accounts maintained by HSB pursuant to the Merchant
Agreements to which each of such Merchants is a party, presented separately for
each Merchant. The Agent shall provide such information with respect to such
Additional Accounts to the Rating Agencies;
(ii) In connection with the addition of such Additional Accounts, the
Agent shall not have notified HSB in writing on or before the third Business
Day after the Agent's receipt of the notice described in clause (i) above,
that, in the reasonable determination of the Agent (accompanied by a
calculation set forth in writing in reasonable detail and on the basis of the
historical information provided by HSB pursuant to such clause (i) above), such
addition would have a material adverse effect on the Portfolio Yield or the
Delinquency Ratio;
(iii) Either (A) each Rating Agency shall have notified the Agent in
writing that the addition of such Additional Accounts will not result in a
reduction or withdrawal of its rating of the Commercial Paper or (B) if (I) as
of the last day of the immediately preceding calendar year, the number of
Accounts designated as Additional Accounts pursuant to this Section 2.5 with
respect to such calendar year or the amount of Principal Receivables in such
Accounts, as applicable, as of the Additional Cut-Off Date with respect to each
such Additional Account, is less than a number equal to 20% of the number of
Accounts or the Receivables Balance, as applicable, in each case as of the
first day of such calendar year; and, as of the last day of the immediately
preceding three calendar month period, the number of Accounts designated as
Additional Accounts pursuant to this Section 2.5 with respect to such three
month period, or the amount of Principal Receivables in such Accounts, as
applicable, as of the Addition Date with respect to each such Additional
Account, is less than a number equal to 15% of the number of Accounts or the
Receivables Balance, as applicable, in each case as of the first day of such
three month period, and (II) the Merchants with respect to the Additional
Accounts are Merchants which have been reviewed by the Rating Agencies in
connection with the Agreement, each Rating Agency will receive prior notice of
the addition of such Additional Accounts (together with the names of the
Merchants related to such Additional Accounts), but will not be required to
affirm its rating of the Commercial Paper; provided, that in connection with an
addition of Accounts because the Seller Amount is less than 5% of the
Receivables Balance, such Rating Agency confirmation shall not be required;
(iv) If the Agent does not provide the notice as described in clause (ii)
above, HSB shall randomly select from Accounts generated with respect to the
proposed Merchants, Eligible Additional Accounts having Principal Receivables
that are Eligible Receivables with an aggregate unpaid balance as of such
Additional Cut-Off Date substantially similar to that notified to the Agent
pursuant to the parenthetical to Section 2.5(b)(i)(A).
(v) The aggregate balance of the Principal Receivables in the Additional
Accounts as of the Additional Cut-Off Date shall not be less than $100,000;
(vi) Each Additional Account shall be an Eligible Additional Account;
(vii) HSB shall have remitted to the Servicer all Collections with respect
to such Additional Accounts since the Additional Cut-Off Date;
(viii) On or prior to the Addition Date, HSB, the Agent and the Company
shall have executed a supplemental conveyance in substantially the form of
Exhibit B (the "Supplemental Conveyance"), provided that it shall be understood
that the microfiche attached to Exhibit B may be delivered within five Business
Days of such Addition Date;
(ix) The conditions precedent set forth in Section 8.2 shall have been
satisfied;
(x) On or prior to the Addition Date, HSB shall have executed and filed
any and all amendments to the UCC financing statements previously filed as the
Agent may reasonably request;
(xi) In connection with any addition of Accounts requiring the approval of
the Rating Agencies, HSB shall have delivered to the Agent, on or before the
seventh Business Day preceding the related Addition Date, the information
required by the Rating Agencies; and
(xii) In connection with any addition of Accounts not requiring the
approval of the Rating Agencies, HSB shall have delivered to the Agent on or
before the seventh Business Day preceding the related Addition Date, a
calculation demonstrating compliance with Section 2.5(b)(iii)(B) as well as a
schedule demonstrating continued compliance with the Concentration Limit.
(c) HSB hereby agrees that, if at any time the rating of the long-term
unsecured debt of UAL Corporation is reduced (but only for so long as any such
rating shall be so reduced) to below BB by S&P or Ba2 by Moody's, thereafter,
it shall not designate as Additional Accounts pursuant to Section 2.5(a)
Accounts with respect to which UAL Corporation is the Merchant. HSB hereby
further agrees that, if at any time the rating of the long-term unsecured debt
of AMR Corp. is reduced (but only for so long as any such rating shall be so
reduced) to below BB by S&P or Ba2 by Moody's, thereafter, it shall not
designate as Additional Accounts pursuant to Section 2.5(a) Accounts with
respect to which American Airlines, Inc. is the Merchant.
Section 2.6 Removal of Accounts; Removal of Inactive Accounts.
(a) Subject to the conditions set forth in Section 2.6(b) below, HSB may,
but shall not be obligated to, designate from time to time prior to the
Termination Date, certain Accounts for removal from the definition of Account
and for reassignment of the Purchased Interest in the Receivables existing
thereunder ("Removed Accounts") as of the close of business on the Collection
Period End Date (the "Removal Date").
(b) HSB shall be permitted to designate and remove Accounts and require the
reassignment to it of the Purchased Interest in Receivables existing thereunder
pursuant to subsection (a) only upon satisfaction of the following conditions:
(i) On or before the seventh Business Day prior to the Removal Date (the
"Removal Notice Date"), HSB shall have given the Company and the Agent written
notice that the Purchased Interest in such Receivables and Removed Accounts is
to be reassigned to HSB on the specified Removal Date and on or before the
Removal Date HSB shall have specified the aggregate balance of the Principal
Receivables as of the Removal Date in such Removed Accounts, stated separately
by Merchant. The Agent shall provide such information with respect to such
Removed Accounts to the Rating Agencies;
(ii) In connection with the removal of such Removed Accounts, the Agent
shall not have notified HSB in writing on or before the third Business Day of
the Agent's receipt of the notice described in clause (i) above, that, in the
reasonable determination of the Agent (accompanied by a calculation set forth
in writing in reasonable detail), (A) such removal would have a material
adverse effect on the Portfolio Yield or the Delinquency Ratio or (B) cause a
Termination Event to occur;
(iii) Each Rating Agency shall have notified the Agent in writing that the
removal of such Removed Accounts will not result in a reduction or withdrawal
of its rating of the Commercial Paper;
(iv)[reserved];
(v)The aggregate balance of the Principal Receivables in the Removed
Accounts shall not be less than $100,000 as of the Removal Date;
(vi) After giving effect to the removal of the Removed Accounts on the
Removal Date, the Seller Amount shall neither be less than $5,000,000 nor less
than 5% of the Receivables Balance;
(vii) The conditions precedent set forth in Section 8.2 shall have been
satisfied; and
(viii) On or prior to the Removal Date, HSB shall have delivered to the
Company for execution a written assignment in substantially the form of Exhibit
C (the "Reassignment"); provided that it shall be understood that the
microfiche attached to Exhibit C may be delivered within five Business Days of
such Removal Date.
Upon satisfaction of the above conditions, the Company shall execute and
deliver the Reassignment to HSB, and the Purchased Interest shall no longer
include an interest in such Receivables existing in the Removed Accounts and
such Removed Accounts shall no longer be included in the definition of Account.
(c) Notwithstanding the provisions of paragraphs (a) and (b) above and
Section 2.7, HSB may designate from time to time at any time prior to the
Termination Date any Inactive Account for removal from the definition of
Accounts and reassignment to it of the Purchased Interest in the Receivables
existing thereunder. HSB shall notify the Company and the Agent in writing of
any such removal and shall deliver to the Company for execution a written
assignment in substantially the form of Exhibit D (the "Inactive Account
Reassignment") with respect to any such Inactive Account. The Company shall
execute and deliver the Inactive Account Reassignment to HSB, and the Purchased
Interest shall no longer include the Receivables existing under such Inactive
Account and such Inactive Account shall be deleted from the definition of
Account.
Section 2.7 Special Removal of Accounts.
(a) If at any time a Merchant notifies HSB of its intention to purchase all
or any substantial portion of the Receivables outstanding under the Merchant
Agreement to which such Merchant is a party, subject to the conditions set
forth below, HSB shall designate the Accounts with respect to such Merchant for
removal of the Purchased Interest in the Receivables existing thereunder and
removal of such Accounts from the definition of Account (the "Removed Merchant
Accounts") on any Business Day (the "Special Removal Date").
(b) HSB shall be permitted to remove Removed Merchant Accounts pursuant to
subsection (a) and remove the Purchased Interest in the Receivables existing
thereunder only upon satisfaction of the following conditions:
(i) At least forty-five days prior to the Special Removal Date (the
"Special Removal Notice Date"), HSB shall have given the Company and the Agent
written notice that the Purchased Interest in such Receivables and Removed
Merchant Accounts is to be reassigned to HSB and on or before the Business Day
preceding the Special Removal Date HSB shall have specified the aggregate
balance of the Principal Receivables in such Removed Merchant Accounts as of
the Special Removal Date based on a cut-off date five Business Days preceding
such Special Removal Date. The Agent shall provide such information with
respect to such Removed Merchant Accounts to the Rating Agencies;
(ii) If the removal of the Receivables in the Removed Merchant Accounts
would cause the Seller Amount to be less than 5% of the Receivables Balance on
the Special Removal Date, after giving effect to the addition of Eligible
Receivables in Additional Accounts pursuant to Section 2.5 on or prior to such
date, HSB shall, on the Special Removal Date, remit an amount equal to the
amount by which such reduced Seller Amount would be less than 5% of the
Receivables Balance to the Servicer; and
(iii) On or prior to the Special Removal Date, HSB shall have delivered to
the Company for execution a written assignment in substantially the form of
Exhibit E (the "Special Reassignment"); provided that it shall be understood
that the microfiche attached to Exhibit E may be delivered within five Business
Days of such Special Removal Date.
Upon satisfaction of the above conditions, the Company shall execute and
deliver the Special Reassignment with respect to the Removed Merchant Accounts
to HSB, and the Purchased Interest shall no longer include an interest in such
Receivables and Removed Merchant Accounts. Any remittance by HSB to the
Servicer as provided in clause (ii) above shall be considered Principal
Collections and shall be applied, prior to the Termination Date, in accordance
with Section 4.7(a)(ii) and, on and after the Termination Date, in accordance
with Section 4.7(b).
Section 2.8 Commercial Paper. The Agent shall select the term of the
Commercial Paper from time to time in its discretion, after consultation with
HSB; provided, however, that the Agent shall use reasonable efforts, taking
into account market conditions, to accommodate HSB's preferences.
Section 2.9 Clean-Up Option.
(a) On any Remittance Date on or after any date on which the aggregate
balance of the Purchased Percentage of Receivables is equal to or less than 5%
of the highest Program Amount, HSB shall have the right to repurchase the
Purchased Interest in the Transferred Property. HSB shall give the Agent and
the Company at least five Business Days' prior written notice of such
repurchase. In lieu of the remittances otherwise to be made pursuant to
Sections 4.6 and 4.7 on the Remittance Date on which the repurchase is
scheduled to be made, HSB shall, on such Remittance Date, make available for
distribution by the Servicer pursuant to Sections 4.6 and 4.7 an amount equal
to (i) the Net Certificate Amount on such date, plus (ii) an amount equal to
all interest accrued but unpaid on the Barton Certificate at the
Certificateholder's Interest Rate to such Remittance Date plus (iii) an amount
equal to the sum of (A) the amount of the Company's existing obligations which
comprise Carrying Costs but which have not yet accrued, been reserved for or
paid, including the Interest Component on all outstanding Commercial Paper used
to fund the Purchased Interest that will not mature on or prior to such
Remittance Date but that will accrue in the future, but excluding the amount of
any Program Fee or Commitment Fee which has not yet accrued and (B) the amount
of the Purchased Percentage of the Servicing Fee payable pursuant to Section
4.1(c) on such Remittance Date. Such payment of the repurchase price
(excluding the amount described in clause (B) above) shall be considered a
payment in full of the entire amount, if any, to be distributed to the holder
of the Barton Certificate.
(b) On the Remittance Date on which the amount described in Section 2.9(a)
above (less the amount described in clause (B) thereof) has been paid to the
Company by the Servicer, the Company shall automatically and without further
action be deemed to transfer, assign, set-over and otherwise convey to HSB,
without recourse, representation or warranty, other than a representation by
the Company that it has not created any liens or similar encumbrances on the
Transferred Property which have not been released, all the right, title and
interest of the Company in and to the Transferred Property and shall return to
HSB the Barton Certificate for cancellation. The Company shall execute such
documents and instruments of transfer or assignment and take such other actions
as shall reasonably be requested by HSB to effect the conveyance of the
Purchased Interest in the Transferred Property pursuant to this Section 2.9(b).
(c) The Agent, on behalf of the Company, shall invest any amounts received
from HSB pursuant to Section 2.9(a) with respect to outstanding Commercial
Paper which has not yet matured and Carrying Costs which have not yet accrued
in Permitted Investments. If the Agent receives any such amounts by 10:00
a.m., New York City time, on the Remittance Date, the Agent shall invest such
amounts in Permitted Investments described in clause (ii) of the definition
thereof maturing, in each case, no later than the date on which such Commercial
Paper matures or such Carrying Costs are payable by the Company, as the case
may be. If the Agent receives any such amounts after 10:00 a.m., New York City
time, on the Remittance Date, the Agent shall invest such amounts in Permitted
Investments described in clause (iii) thereof until the next Business Day and,
thereafter, shall invest such amounts in Permitted Investments described in
clause (ii) of the definition thereof maturing, in each case, no later than the
date on which such Commercial Paper matures or such Carrying Costs are payable
by the Company, as the case may be. Within two Business Days of the payment by
the Company of any Commercial Paper or Carrying Costs, as the case may be, the
Agent shall remit to HSB the investment income on the amount paid by the
Company.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1 Representations and Warranties of HSB, the Servicer and the
Limited Guarantor. Each of HSB, the Servicer and the Limited Guarantor
represents and warrants, but in each case solely as to itself, to the Company
and the Agent that:
(a) In the case of the Servicer and the Limited Guarantor, it has been duly
organized and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and, in the case of HSB, it is a
banking corporation duly organized and existing and is authorized to transact
banking business under the laws of the State of South Dakota and, in each case,
is duly qualified to do business, and is in good standing as a foreign
corporation, and has obtained all necessary licenses and approvals, in each
jurisdiction in which the conduct of its business requires such qualification,
licenses and approvals, except where the failure to so qualify or obtain
licenses or approvals would not have a material adverse effect on its ability
to perform its obligations under this Agreement.
(b) It has full corporate power and authority to own its properties and to
conduct its business as presently conducted, and to execute, deliver and
perform its obligations under this Agreement and to consummate the transactions
contemplated hereby, including, without limitation, in the case of HSB, to
issue the Barton Certificate.
(c) The execution, delivery and performance by it of this Agreement, the
issuance of the Barton Certificate by HSB and the consummation of the
transactions contemplated hereby have been, and, as of each Addition Date, the
execution, delivery and performance by HSB of the related Supplemental
Conveyance will have been, duly and validly authorized by all requisite
corporate action and will not conflict with or result in a breach of any of the
material terms or provisions of, or constitute (with or without notice or lapse
of time or both) a default under, or result in the creation or imposition of
any Lien upon any of its property or assets pursuant to the terms of, any
material indenture, mortgage, deed of trust, loan agreement, receivables
purchase agreement or other agreement or instrument by which it is bound or to
which it is a party or any of its property or assets is subject, nor will such
action result in any violation of any Requirement of Law applicable to it; no
consent, approval, authorization, order, registration, filing, qualification,
license, notice or permit of, to or with any Governmental Authority is required
to be obtained by or with respect to it in connection with the execution,
delivery and performance by it of this Agreement and the consummation of the
transactions contemplated hereby, including the issuance by HSB of the Barton
Certificate; and, as of each Addition Date, no consent, approval,
authorization, order, registration, filing, qualification, license, notice or
permit of, to or with any Governmental Authority is required to be obtained by
or with respect to it in connection with the execution, delivery and
performance by HSB of the related Supplemental Conveyance and the consummation
of the transactions contemplated thereby.
(d) This Agreement has been duly and validly executed and delivered by it
and constitutes its valid and legally binding obligation, enforceable against
it in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting creditors'
rights generally (including creditors of South Dakota state banks), and subject
as to enforceability to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(e) The Barton Certificate has been duly and validly authorized, executed
and delivered by HSB in accordance with the terms hereof, and is validly issued
and outstanding, enforceable against HSB by the holder thereof in accordance
with its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditors' rights generally (including
creditors of South Dakota state banks), and subject as to enforceability to
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(f) As of each Addition Date, the related Supplemental Conveyance will have
been duly and validly authorized, executed and delivered by HSB and will
constitute the valid and legally binding obligation of HSB, enforceable against
HSB in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting creditors'
rights generally, and subject as to enforceability to general principals of
equity (regardless of whether enforcement is sought in a proceeding in equity
or law).
(g) There are no actions, proceedings or investigations pending or, to the
best of its knowledge, threatened, before any court, administrative agency or
other tribunal (i) which, in its good faith judgment, is reasonably likely to
have a material adverse effect on its business, operations, properties, assets
or financial condition, (ii) asserting the invalidity of this Agreement, the
Barton Certificate or, as of each Addition Date, the related Supplemental
Conveyance, (iii) questioning the consummation by it of any of the transactions
contemplated by this Agreement or the Barton Certificate, or (iv) which is
reasonably likely to have a material adverse effect on its ability to perform
its obligations under, or the validity or enforceability of, this Agreement,
the Barton Certificate or the Accounts.
(h) It is not in default in the due performance or observance of any
material term, covenant or condition contained in any indenture, mortgage, deed
of trust, loan agreement, receivables purchase agreement or other agreement or
instrument by which it is bound or to which it is party or any of its property
or assets is subject, the effect of which default would be reasonably likely to
have a material adverse effect on its business, operations, properties, assets
or financial condition taken as a whole or its ability to perform its
obligations under this Agreement or the Barton Certificate and is not in
violation of any Requirement of Law applicable to it, the effect of which
violation would be reasonably likely to have a material adverse effect on its
business, operations, properties, assets or financial condition taken as a
whole or its ability to perform its obligations under this Agreement or the
Barton Certificate.
(i) The audited consolidated balance sheet of the Limited Guarantor and its
subsidiaries as at December 31, 1991, together with the related statements of
income and cash flow for the period then ended, and the related notes, have
been prepared in accordance with generally accepted accounting principles
consistently applied, except as otherwise indicated in the notes to such
financial statements. All of such financial statements, copies of which have
been furnished to the Agent and the Company, fairly present in all material
respects the financial position or the results of operations, as the case may
be, of the Limited Guarantor and its subsidiaries at the date or for the period
indicated.
(j) [reserved].
(k) The Reports of Condition and Income of HSB for the years ended December
31, 1991 and December 31, 1990, respectively, fairly present in all material
respects the financial position and the results of operations of HSB at the
dates and for the periods indicated.
(l) The Report of Condition and Income of HSB for the quarter ended June 30,
1992 fairly presents in all material respects the financial position and the
results of operations of HSB at the date and for the period indicated therein.
(m) Each of HSB, the Servicer and the Limited Guarantor has filed or caused
to be filed all tax returns which, to the knowledge of HSB, the Servicer or the
Limited Guarantor, respectively, are required to be filed, and each has paid
all taxes shown to be due and payable on said returns or any assessments made
against it or any of its property or assets and all other taxes imposed on it
or any of its property or assets by any Governmental Authority (other than the
amount or validity of which are currently being contested in good faith by
appropriate proceedings and with respect to which reserves in conformity with
generally accepted accounting principles have been provided on the books of
HSB, the Servicer or the Limited Guarantor, as the case may be); and no tax
lien has been filed and, to the knowledge of HSB, the Servicer or the Limited
Guarantor, respectively, no claims are being asserted with respect to any such
taxes, fees or other charges which would be reasonably likely to have a
material adverse effect on the business, operations, properties, assets or
financial condition of HSB, the Servicer or the Limited Guarantor in each case
taken as a whole, or which would be reasonably likely to have a material
adverse effect on the ability of HSB, the Servicer or the Limited Guarantor to
perform its respective obligations hereunder.
(n) HSB has Stockholder's Equity of at least $23,000,000.
(o) There has been no material adverse change in its financial condition or
results of operations since September 30, 1992, no event has occurred which
materially adversely affects the collectibility of the Receivables and no other
event has occurred which materially adversely affects its ability to perform
its obligations under this Agreement.
(p) Its chief place of business and chief executive office is located at the
address designated as such on the signature page to this Agreement, and the
locations of the offices where the Servicer keeps all its principal
instruments, documents, agreements, books and records relating to the
Receivables and the Accounts are located at the locations listed on Schedule V
hereto (or at such other locations, notified to the Agent in accordance with
Section 3.5(j), in jurisdictions where all action required by Section 3.5(j)
has been taken and completed).
(q) The use of all funds obtained by HSB under this Agreement or from the
sale of the Barton Certificate will not conflict with or contravene any of
Regulations G, T, U and X promulgated by the Board of Governors of the Federal
Reserve System from time to time.
(r) No transaction contemplated by this Agreement requires compliance with
any bulk sales act or similar law.
(s) After giving effect to the transfer of the Purchased Interest, the
Seller Amount shall not be less than 5% of the Receivables Balance on the
Closing Date.
Upon a determination by HSB, the Servicer or the Limited Guarantor that a
breach of any of the representations and warranties set forth in this Section
3.1 has occurred as of the date made or deemed made, the party making such
determination shall give prompt written notice thereof to the other parties.
Section 3.2 Representations, Warranties and Covenants Concerning the
Receivables and the Accounts. Each of HSB and the Servicer represents and
warrants (in each case solely with respect to itself) to, and covenants with,
the Company and the Agent that:
(a) The information in the Account Schedule set forth in Exhibit F is, and,
on each Addition Date, will be, true and complete in all material respects.
HSB, or the Servicer on behalf of HSB, will prepare and maintain, and deliver
to the Agent, a schedule (in a medium acceptable to the Agent), together with
all amendments thereto, identifying, with respect to each Account, the Merchant
and an account number unique to such Account, which schedule, together with all
amendments thereto, shall be true and complete in all material respects, shall
be made available to the Agent for inspection upon request as contemplated by,
and shall constitute the "Account Schedule" referred to in, the UCC financing
statements filed pursuant to this Agreement.
(b) With respect to each Receivable existing on the Closing Date or, in the
case of Additional Accounts, on the Addition Date with respect thereto, all
consents, licenses, approvals or authorizations of or registrations or
declarations with any Governmental Authority required to be obtained, effected
or given in connection with the conveyance of the Purchased Interest in such
Receivable have been duly obtained, effected or given and are and will be in
full force and effect.
(c) HSB had at the Closing Date, immediately prior to the conveyance
pursuant to Section 2.1, sole legal title to the Accounts and the Receivables,
and, on each Addition Date, will have, immediately prior to the conveyance
pursuant to Section 2.5, sole legal title to the Additional Accounts and the
Receivables therein.
(d) There is no effective UCC financing statement (or similar statement or
instrument of registration under the law of any jurisdiction) now on file or
registered in any public office covering any interest of any kind in the
Transferred Property evidenced by the Barton Certificate, nor will there be on
file in any public office any effective UCC financing statement (or similar
statement or instrument of registration under the laws of any jurisdiction) or
statements relating to the Transferred Property evidenced by the Barton
Certificate, except any UCC financing statements naming the Company as the
secured party and filed in respect of and covering the transfer of the Barton
Certificate, the Receivables or the Accounts pursuant to this Agreement.
(e) All filings and recordings (including pursuant to the Uniform Commercial
Code) required to perfect the interest of the Company in the Transferred
Property evidenced by the Barton Certificate issued hereunder have been
accomplished and are in full force and effect.
(f) Upon the filing of the UCC financing statements described in Section
3.2(e) and, in the case of the Receivables hereafter created and the proceeds
thereof, upon the creation thereof, the Company shall have a first priority
perfected ownership or security interest in the Purchased Interest in such
property.
(g) On each Addition Date, the aggregate balance of the Receivables in the
Additional Accounts will not include any amounts which have been, or which
should have been, charged-off by SPS prior to such date in accordance with the
Credit and Collection Policy.
(h) Each Account, was on the date of its inclusion as an Account under this
Agreement, an Eligible Account.
(i) On the Additional Cut-Off Date, each Receivable in an Additional Account
is an Eligible Receivable.
(j) Beginning in 1997, HSB shall furnish to the Company, the Agent and each
Rating Agency, within 60 days after the end of each of its fiscal years, a
certificate of HSB, in substantially the form of Exhibit N.
Upon a determination by HSB or the Servicer that a breach of any of the
representations and warranties set forth in this Section 3.2 has occurred as of
the date made or deemed made, the party making such determination shall give
prompt written notice to the other parties.
Section 3.3 Transfer of Purchased Interest; Transfer of Ineligible
Receivables.
(a) In the event (i) of a breach of any representation and warranty set
forth in Section 3.1(c), 3.1(d), 3.1(e) or 3.2(c) or (ii) that this Agreement
or, in the case of Additional Accounts, the related Supplemental Conveyance,
does not either effect a valid sale, transfer and assignment to the Company of
the Purchased Interest in all right, title and interest of HSB in the
Transferred Property, or effect a grant of a "security interest" (as defined in
the Uniform Commercial Code) in such property to the Company, which, in the
case of existing Receivables and the proceeds thereof, is enforceable upon
execution and delivery of this Agreement or the Supplemental Conveyance, as the
case may be, and which will be enforceable with respect to such Receivables
hereafter created and the proceeds thereof upon such creation, upon the earlier
to occur of the discovery of such breach or such event by HSB or the Servicer
or receipt by HSB of written notice of such breach or such event given by the
Agent, the Agent may by written notice direct HSB to acquire the Purchased
Interest in all of the Transferred Property within 45 days of such notice, or
within such longer period (not to exceed 60 days) as may be specified in such
notice, and HSB shall be obligated to acquire the Purchased Interest in the
Transferred Property on a Remittance Date occurring within such applicable
period on the terms and conditions set forth below; provided, however, that no
such acquisition shall be required to be made if, during such applicable period
such breach or such event shall have been cured in all material respects.
In lieu of the remittances otherwise to be made under 4.6 and 4.7 on such
Remittance Date, HSB shall make available on the applicable Remittance Date an
amount equal to the acquisition price for the Purchased Interest in the
Transferred Property for distribution by the Servicer pursuant to Sections 4.6
and 4.7. The price for such acquisition will be equal to (i) the Net
Certificate Amount on such date, plus (ii) an amount equal to all interest
accrued but unpaid on the Barton Certificate at the Certificateholder's
Interest Rate to such Remittance Date plus (iii) an amount equal to the sum of
(A) the amount of the Company's existing obligations which comprise Carrying
Costs but which have not yet accrued, been reserved for or paid, including the
Interest Component on all outstanding Commercial Paper used to fund the
Purchased Interest that will not mature on or prior to such Remittance Date but
that will accrue in the future, but excluding the amount of any Program Fee or
Commitment Fee which has not yet accrued and (B) the amount of the Purchased
Percentage of the Servicing Fee payable pursuant to Section 4.1(c) on such
Remittance Date. Such payment (less the amount described in clause (B)) of the
acquisition price shall be considered a payment in full of the entire amount,
if any, to be distributed to the holder of the Barton Certificate.
The Agent, on behalf of the Company, shall invest any amounts received from
HSB with respect to outstanding Commercial Paper which has not yet matured and
Carrying Costs which have not yet accrued in Permitted Investments. If the
Agent receives any such amounts by 10:00 a.m., New York City time, on the
Remittance Date, the Agent shall invest such amounts in Permitted Investments
described in clause (ii) of the definition thereof maturing, in each case, no
later than the date on which such Commercial Paper matures or such Carrying
Costs are payable by the Company, as the case may be. If the Agent receives
any such amounts after 10:00 a.m., New York City time, on the Remittance Date,
the Agent shall invest such amounts in Permitted Investments described in
clause (iii) thereof until the next Business Day and, thereafter, shall invest
such amounts in Permitted Investments described in clause (ii) of the
definition thereof maturing, in each case, no later than the date on which such
Commercial Paper matures or such Carrying Costs are payable by the Company, as
the case may be. Within two Business Days of the payment by the Company of any
Commercial Paper or Carrying Costs, as the case may be, the Agent shall remit
to HSB the investment income on the amount paid by the Company.
On the Remittance Date on which the amount described in Section 2.9(a) above
(less the amount described in clause (B) thereof) has been paid to the Company
by the Servicer, the Company shall automatically and without further action be
deemed to transfer, assign, set-over and otherwise convey to HSB, without
recourse, representation or warranty, other than a representation by the
Company that it has not created any liens or similar encumbrances on the
Transferred Property which have not been released, all the right, title and
interest of the Company in and to the Transferred Property and shall return to
HSB the Barton Certificate for cancellation. The Company shall execute such
documents and instruments of transfer or assignment and take such other actions
as shall reasonably be requested by HSB to effect the conveyance of the
Transferred Property pursuant to this subsection.
(b) In the event (i) there is a breach of any representations and warranties
set forth in Section 3.2(b), 3.2(f), 3.2(g), 3.2(h) or 3.2(i) with respect to
any Receivable, and such breach is not cured within 30 days of the earlier to
occur of the discovery of such breach by HSB or the Servicer or receipt by HSB
of written notice of such breach from the Agent or (ii) any of the Transferred
Property, including any Receivable, is subject to any Lien of any kind and such
Lien is not released or otherwise satisfied within 30 days of the earlier to
occur of the discovery of such Lien by HSB or the Servicer or receipt by HSB of
written notice of such Lien by the Agent, such Ineligible Receivable shall be
automatically removed from the Purchased Interest by reducing the aggregate
balance of Principal Receivables that are Eligible Receivables used to
calculate the Receivables Balance which is used to calculate the Purchased
Percentage and the Seller Amount for the Collection Period in which such
Ineligible Receivable is removed. In the event that such reduction would cause
the Seller Amount to be less than 5% of the Receivables Balance on the date
such Ineligible Receivable is removed, HSB shall either (i) designate
Additional Accounts hereunder with sufficient Eligible Receivables by the next
following Collection Period End Date in accordance with Section 2.5, such that
the Seller Amount will be at least equal to 5% of the Receivables Balance after
such reduction or (ii) remit by the following Remittance Date an amount equal
to the amount by which the Seller Amount would be reduced to less than 5% of
the Receivables Balance to the Servicer. Any such remittance or deposit shall
be considered a payment in full of such Ineligible Receivable and shall be
applied, prior to the Termination Date, in accordance with Section 4.7(a)(ii)
and, on and after the Termination Date, in accordance with Section 4.7(b).
Upon each removal of an Ineligible Receivable and the receipt of the payment
required above, if applicable, the Company shall automatically and without
further action be deemed to transfer, assign, set-over and otherwise convey to
HSB, without recourse, representation or warranty, other than a representation
by the Company that it has not created a lien or similar encumbrance on such
Ineligible Receivable which has not been released, all the right, title and
interest of the Company in and to such Ineligible Receivable, all monies due or
to become due with respect thereto and all proceeds thereof. Upon the removal
of all of the Receivables in an Account pursuant to this Section 3.3 and the
receipt of the payment required above, if applicable, the Company shall
automatically and without further action be deemed to transfer, assign,
set-over and otherwise convey to HSB, without recourse, representation or
warranty, other than a representation by the Company that it has not created
any lien or similar encumbrance on the Account which have not been released,
all the right, title and interest of the Company in and to such Account. The
Company shall execute such documents and instruments of transfer or assignment
and take such other actions as shall reasonably be requested by HSB to effect
the conveyance of such Account pursuant to this subsection.
Section 3.4 Covenants of HSB.
(a) HSB shall comply, in all material respects, with all Requirements of Law
applicable to it or to the Accounts and the Credit Card Agreements or any part
thereof and preserve and maintain its corporate existence and all material
rights, franchises, qualifications and privileges.
(b) HSB shall do nothing to impair the rights of the Company in the
Transferred Property and shall take no action to cause any Receivable to be
evidenced by any instrument (other than an instrument which constitutes chattel
paper) (each as defined in the Uniform Commercial Code), except in connection
with the enforcement or collection of an Account.
(c) In the event that HSB receives Collections, HSB shall pay the Servicer
all payments received by HSB in respect of the Receivables as soon as
practicable after receipt thereof by HSB, but in no event later than four
Business Days after the receipt by HSB thereof.
(d) HSB shall not execute any UCC financing statement (or similar statement
or instrument of registration under the laws of any jurisdiction) or statements
relating to the Transferred Property evidenced by the Barton Certificate,
except any UCC financing statements filed in respect of and covering the
transfer of the Barton Certificate to the Company pursuant to this Agreement.
(e) HSB shall not create and shall defend the Purchased Interest in the
Transferred Property against, and take such other actions as are necessary to
remove, any Lien in, to or on the Purchased Interest in the Transferred
Property, and shall defend the right, title and interest of the Company in and
to the Purchased Interest in the Transferred Property against the claims and
demands of all Persons whomsoever.
(f) HSB shall, at its expense, perform all acts and execute all documents
reasonably requested by the Agent at any time to evidence, perfect, maintain
and enforce the interest of the Company in the Transferred Property evidenced
by the Barton Certificate and the first priority thereof. HSB shall execute
and deliver for filing UCC financing statements (reasonably satisfactory in
form and substance to the Agent). HSB shall execute and deliver for filing
such continuation statements and any other documents reasonably requested by
the Agent or which may be required by law to fully preserve and protect the
interest of the Company hereunder in and to the Transferred Property evidenced
by the Barton Certificate. The Company hereby agrees to execute any UCC
financing statement or continuation statement which the Agent requests it to
execute.
(g) HSB shall advise the Company and the Agent promptly, in reasonable
detail: (i) of any Lien asserted against any of the Transferred Property; (ii)
of the occurrence of any breach by HSB of any of its covenants contained
herein; (iii) of the occurrence of a Termination Event or any event which, with
the giving of notice or lapse of time or both, would constitute a Termination
Event; (iv) of the occurrence of the Termination Date; (v) of any (A)
litigation, investigation or proceeding known to HSB which may exist at any
time between HSB and any Governmental Authority, which in either case, if not
cured or if adversely determined, as the case may be, may be reasonably likely
to have a material adverse effect on the business, operations, properties,
assets or financial condition of HSB taken as a whole or (B) litigation or
proceeding affecting HSB (x) in which the amount involved is $10,000,000 or
more and not covered by insurance or (y) in which injunctive or similar relief
is sought, which in either case, may be reasonably likely to have a material
adverse effect on the business, operations, properties, assets or financial or
other condition of HSB; and (vi) of a material adverse change in the business,
operations, properties, assets or financial condition of HSB.
(h) HSB shall furnish to the Company and the Agent:
(i) as soon as available and in any event within 50 days after the end of
each of the first three quarters of each fiscal year of HSB, the Report of
Condition and Income of HSB for each such quarter;
(ii) as soon as available and in any event within 100 days after the end
of each fiscal year of HSB, the Report of Condition and Income of HSB for each
such fiscal year;
(iii) if publicly available, as soon as available and in any event within
50 days after the end of each of the first three quarters of each fiscal year
of HSB, unaudited quarterly financial statements (including a balance sheet,
statement of results of operations and statement of cash flow) for HSB, all of
which financial statements shall be prepared in accordance with generally
accepted accounting principles applied on a consistent basis;
(iv) if publicly available, as soon as available and in any event within
100 days after the end of each fiscal year of HSB, audited annual financial
statements (including a balance sheet, statement of results of operation and
statement of cash flow) for HSB, together with the report of a nationally
recognized independent accounting firm on such audit, all of which financial
statements must be prepared in accordance with generally accepted accounting
principles applied on a consistent basis, which report shall not contain a
"going concern" or like qualification or exception or qualification arising out
of the scope of the audit, accompanied by a certificate on behalf of HSB signed
by an officer of HSB to the effect that such financial statements are fairly
stated in all material respects when considered as a whole;
(v) concurrently with the delivery of the reports referred to in
subsections (i) and (ii) above, a certificate of HSB signed by an officer of
HSB stating, on behalf of HSB, that, to the best knowledge of the officer
signing such certificate, HSB during the period then ended has observed or
performed in all material respects all of its covenants and other agreements,
and satisfied every condition in all material respects, contained in this
Agreement to be observed, performed or satisfied by it and that such officer
has obtained no knowledge of any Termination Event or any event that would with
the giving of notice or the lapse of time or both, constitute a Termination
Event, except as specified in such certificate;
(vi) after the filing or receiving thereof, copies of all reports and
notices with respect to any Reportable Event defined in Article IV of ERISA for
which the 30-day notice requirement is not waived pursuant to the regulations
thereunder which HSB or any subsidiary of HSB files under ERISA with the
Internal Revenue Service or the Pension Benefit Guaranty Corporation or the
U.S. Department of Labor or which HSB or any subsidiary of HSB receives
therefrom;
(vii) as soon as available and in any event within 45 days after the end
of each fiscal year of HSB, the information with respect to the Receivables
described on Schedule I; and
(viii) promptly, from time to time, such other information, documents,
records or reports respecting the Receivables or the conditions or operations,
financial or otherwise, of HSB as the Agent may from time to time reasonably
request in order to protect the interests of the Company and the Agent
hereunder; provided, that HSB shall not be obligated to deliver any such
information to the extent that such delivery would violate any Requirement of
Law applicable to it, any attorney-client privilege or work product rule
applicable to such information or any confidentiality agreement to which HSB is
a party, provided, that, at the Agent's request, HSB shall use its best efforts
to obtain a release of any such confidentiality agreement.
(i) HSB shall duly fulfill all material obligations on its part to be
fulfilled under or in connection with the Receivables and the Accounts and
shall comply in all material respects with all of the provisions of the Credit
Card Agreements and the Credit and Collection Policy.
(j) HSB shall not rescind or cancel any Receivable or modify any
Receivable in a manner which could reasonably be expected to have a material
adverse effect on the Company or extend any term or provision of any Receivable
without the prior written consent of the Agent, except in the ordinary course
of business and consistent with the provisions of the Credit and Collection
Policy and except as required by law.
(k) HSB shall not, without providing 30 days' prior written notice to the
Agent and without filing such amendments to any previously filed UCC financing
statements as the Agent may require, (i) change the location of its principal
executive office or the location of the offices where its principal records
relating to the Receivables are kept, (ii) change its name, identity or
corporate structure in any manner which would, could or might make any UCC
financing statement or continuation, statement filed in accordance with Section
3.2(e) or Section 3.4(f) seriously misleading within the meaning of Sec. 9-
402(7) of any applicable enactment of the Uniform Commercial Code and (iii)
delete or otherwise modify the marking, if any, on the electronic ledger
referred to in Section 3.5(a), other than to reflect the addition and removal
of Accounts and Receivables pursuant to the terms hereof.
(l) HSB shall not make any change in the character of its business or in the
Credit and Collection Policy, which change would in the best judgment of HSB,
in either case, materially impair the collectibility of the Receivables.
(m) Except as otherwise required by a Requirement of Law, HSB shall not
change the terms of the Credit Card Agreements (including without limitation
the amount and timing of finance charges, fees and charge-offs) if such change
would, in the reasonable belief of HSB cause a Termination Event to occur.
(n) HSB shall not (i) permit to exist any accumulated funding deficiency, as
defined in Section 302(a) of ERISA and Section 412(a) of the Internal Revenue
Code, or funding deficiency with respect to any Benefit Plan other than a
Multi-employer Plan; (ii) fail to make any payments to any Multi-employer Plan
that HSB or any ERISA Affiliate may be required to make under the agreement
relating to such Multi-employer Plan or any law pertaining thereto; (iii)
terminate any Benefit Plan so as to result in any liability; or (iv) permit to
exist any occurrence of any reportable event described in Title IV of ERISA
which represents a material risk of a liability of HSB or any ERISA Affiliate
under ERISA or the Internal Revenue Code, if such accumulated funding
deficiencies, payments, terminations and reportable events occurring within any
fiscal year of HSB, in the aggregate are reasonably likely to result in the
imposition of a Lien against the assets of HSB.
(o) As of each Collection Period End Date, the Seller Amount owned by HSB
shall at least equal 5% of the Receivables Balance.
Section 3.5 Covenants of the Servicer.
(a) The Servicer shall, at its own cost and expense, (i) retain the
electronic ledger used by the Servicer as a master record of the Receivables
and copies of all documents relating to each Account as custodian for the
Company and (ii) upon the request of the Company or the Agent, mark such
electronic ledger to the effect that interests in the Receivables and Accounts
listed thereon have been transferred and assigned to the Company pursuant to
this Agreement.
(b) The Servicer shall comply, in all material respects, with all
Requirements of Law applicable to it or to the Accounts and the Receivables or
any part thereof and shall preserve and maintain its corporate existence and
all material rights, franchises, qualifications and privileges.
(c) The Servicer shall do nothing to impair the right of the Company in the
Transferred Property and shall take no action to cause any Receivable to be
evidenced by any instrument (other than an instrument which constitutes chattel
paper) (each as defined in the Uniform Commercial Code), except in connection
with the enforcement or collection of an Account.
(d) The Servicer shall not rescind or cancel any Receivable or modify in a
manner which could reasonably be expected to have a material adverse effect on
the Company or extend any term or provision of any thereof without the prior
written consent of the Agent, except in the ordinary course of business and
consistent with the provisions of the Credit and Collection Policy.
(e) The Servicer shall not create and shall defend the Purchased Interest in
the Transferred Property against, and take such other actions as are necessary
to remove, any Lien in, to or on the Purchased Interest in the Transferred
Property, and shall defend the right, title and interest of the Company in and
to the Purchased Interest in the Transferred Property against the claims and
demands of all Persons whomsoever.
(f) The Servicer shall advise the Company promptly, in reasonable detail:
(i) of any Lien asserted against any of the Purchased Interest; (ii) of the
occurrence of any breach by the Servicer of any of its covenants contained
herein; (iii) of the occurrence of a Servicer Transfer Event or any event
which, with the giving of notice or lapse of time or both, would constitute a
Servicer Transfer Event; (iv) of the occurrence of a Termination Event; (v) of
any (A) litigation, investigation or proceeding known to the Servicer which may
exist at any time between the Servicer and any Governmental Authority, which in
either case, if not cured or if adversely determined, as the case may be, would
be reasonably likely to have a material adverse effect on the business,
operations, properties, assets or financial condition of the Servicer taken as
a whole or (B) litigation or proceeding affecting the Servicer (x) in which the
amount involved is $10,000,000 or more and not covered by insurance or (y) in
which injunctive or similar relief is sought, which in either case, may be
reasonably likely to have a material adverse effect on the business,
operations, properties, assets or financial condition of the Servicer; and (vi)
of a material adverse change in the business, operations, properties, assets or
financial condition of the Servicer.
(g) The Servicer shall maintain administrative and operating procedures
(including, without limitation, an ability to recreate records evidencing the
Receivables in the event of the destruction of the originals thereof) and keep
and maintain all documents, books, records and other information reasonably
necessary or customary for the collection of all Receivables (including,
without limitation, records adequate to permit the daily identification of each
new Receivable and all Collections of and adjustments to each existing
Receivable).
(h) The Servicer shall not make any change in the character of its business
or in the Credit and Collection Policy, which change would in the best judgment
of the Servicer, in either case, materially impair the collectibility of the
Receivables.
(i) No more than once annually and at any time after the occurrence and
continuance of a Termination Event (if the Agent in its reasonable and good
faith judgment determines that the following actions are necessary to determine
that Receivables are bona fide and that reports provided pursuant hereto are
accurate and complete), the Servicer shall permit the Agent, or its agents or
representatives, upon (A) prior to the occurrence and continuance of a
Termination Event, five Business Days' notice and (B) after the occurrence and
continuance of a Termination Event, two Business Days' notice, but in either
case during regular business hours, (I) to examine and make copies of and
abstracts from all books, records and documents (including, without limitation,
computer tapes and disks) in the possession or under the control of HSB or the
Servicer relating to the Receivables and the Accounts, including, without
limitation, the related Credit Card Agreements, and (II) to visit the offices
and properties of HSB or the Servicer for the purpose of examining such
materials described in clause (I) above, and to discuss HSB's or the Servicer's
performance hereunder with any of the officers of HSB and the Servicer and with
the permission of such officers (which permission shall not be unreasonably
withheld), the permitted employees of HSB or the Servicer; provided that such
employees are directly concerned with performance hereunder, except for such
matters as are privileged under applicable law or related rules relating to
communications among attorneys or accountants or other similar parties with
their respective clients, including work product and other related privileges
(j) The Servicer shall not, without providing 30 days' prior written notice
to the Agent and without filing such amendments to any previously filed UCC
financing statements as the Agent may require, (i) change the location of its
principal executive office or the location of the offices where the principal
records relating to the Receivables are kept, (ii) change its name, identity or
corporate structure in any manner which would, could or might make any
financing statement or continuation, statement filed in accordance with Section
3.2(e) or Section 3.4(f) seriously misleading within the meaning of Sec.9-
402(7) of any applicable enactment of the Uniform Commercial Code and (iii)
delete or otherwise modify the marking, if any, on the electronic ledger
referred to in Section 3.5(a), other than to reflect the addition and removal
of Accounts and Receivables pursuant to the terms hereof.
3.6 Covenants of the Limited Guarantor.
(a) The Limited Guarantor will advise the Company promptly, in reasonable
detail, (i) of any (A) litigation, investigation or proceeding which may exist
at any time between the Limited Guarantor and any Governmental Authority, which
in either case, if not cured or if adversely determined, as the case may be,
would be reasonably likely to have a material adverse effect on the business,
operations, properties, assets or financial condition of the Limited Guarantor
or (B) litigation or proceeding affecting the Limited Guarantor (x) in which
the amount involved is $100,000,000 or more and not covered by insurance or (y)
in which injunctive or similar relief is sought, which in either case, if
adversely determined, would be reasonably likely to have a material adverse
effect on the business, operations, properties, assets or financial condition
of the Limited Guarantor; and (ii) of a material adverse change in the
business, operations, properties, assets or financial condition of the Limited
Guarantor.
(b) The Limited Guarantor shall furnish to the Company and the Agent:
(i) as soon as publicly available and in any event within 50 days after
the end of each of the first three quarters of each fiscal year of the Limited
Guarantor, copies of the Limited Guarantor's quarterly financial reports on
Form 10-Q, as filed with the Securities and Exchange Commission; and
(ii) as soon as publicly available and in any event within 100 days after
the end of each fiscal year of the Limited Guarantor, a copy of the Limited
Guarantor's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission (or, if the Limited Guarantor is not required to file such
Form 10-K, audited annual financial statements (including a balance sheet,
statement of results of operation and statement of cash flow) for the Limited
Guarantor and its consolidated subsidiaries, together with the report of a
nationally recognized independent accounting firm on such audit, all of which
financial statements must be prepared in accordance with generally accepted
accounting principles applied on a consistent basis, which reports shall not
contain a "going concern" or like qualification or exception or qualification
arising out of the scope of the audit, accompanied by a certificate on behalf
of the Limited Guarantor signed by an officer of the Limited Guarantor to the
effect that such financial statements are fairly stated in all material
respects when considered as a whole).
ARTICLE IV
ADMINISTRATION, COLLECTIONS
AND OTHER OBLIGATIONS
Section 4.1 Designation of Servicer; Compensation of Servicer.
(a) The servicing, administering and collection of the Receivables shall be
conducted by such Person (the "Servicer") so designated from time to time in
accordance with this Section 4.1. Until a Successor Servicer shall have been
appointed by the Agent pursuant to Section 6.4, SPS is hereby designated by
HSB, the Company and the Agent as, and hereby agrees to perform the duties and
obligations of, the Servicer pursuant to the terms hereof.
(b) The Servicer may, with the prior written consent of the Company and the
Agent, which shall not be unreasonably withheld, appoint an Affiliate of the
Limited Guarantor to perform the duties and obligations of the Servicer
pursuant to the terms hereof (an "Affiliate Successor Servicer"). Any such
Affiliate shall assume the responsibilities and obligations of the Servicer as
Servicer and shall accept its appointment by a written assumption in a form
acceptable to the Agent. Upon its appointment, the Affiliate Successor
Servicer shall be the successor in all respects to SPS with respect to
servicing functions under this Agreement and shall be subject to all the
responsibilities, duties and liabilities relating thereto placed on SPS by the
terms and provisions hereof, and all references in this Agreement to SPS as
servicer shall be deemed to refer to the Affiliate Successor Servicer. An
Affiliate Successor Servicer shall be entitled to the same compensation to
which SPS was entitled pursuant to Section 4.1(c).
(c) As compensation for its servicing activities hereunder, the Servicer
shall be entitled to receive the Servicing Fee in respect of each Collection
Period. The portion of the Servicing Fee allocable to the Purchased Interest
shall be payable on the related Remittance Date pursuant to clause (iv) of
Section 4.6(a).
(d) The Servicer may subcontract with other Persons for servicing,
administering or collecting the Receivables, provided that the Servicer shall
remain liable for the performance of the duties and obligations of the Servicer
pursuant to the terms hereof and, provided, further that, prior to any such
subcontract with a Person, the Servicer shall (i) have provided seven Business
Days' prior written notification to the Agent, if such Person is not an
Affiliate of the Servicer, or (ii) give prior written notice thereof to the
Agent, if such Person is an Affiliate of the Limited Guarantor.
Section 4.2 Duties of Servicer.
(a) The Servicer and/or HSB, as applicable, shall take or cause to be taken
all such actions as are reasonable and may be necessary or customary to collect
each Receivable from time to time, all in accordance with applicable laws,
rules and regulations, with reasonable care and diligence, and in accordance
with the Credit and Collection Policy. The Servicer shall have full power and
authority, acting alone or through any party properly designated by it
hereunder, to do any and all things in connection with such servicing and
administration which it may deem necessary or desirable. Without limiting the
generality of the foregoing, the Servicer or its designee is hereby authorized
and empowered (i) to execute and deliver any and all instruments of
satisfaction or cancellation, or of partial or full release or discharge, and
all other comparable instruments, with respect to the Receivables, (ii) after
the delinquency of any Receivable and to the extent permitted under and in
compliance with applicable Requirements of Law, to commence enforcement
proceedings with respect to such Receivables and (iii) to make withdrawals
from, and payments to, the Collection Account.
(b) HSB shall deliver to the Servicer, and the Servicer shall hold in trust
for HSB and the Company in accordance with their respective interests, all its
principal instruments, documents, agreements, books and records (including,
without limitation, computer tapes and disks on which data relating to the
Transferred Property is stored, but excluding computer hardware and proprietary
or licensed software) that evidence or relate to the Receivables and the
Accounts.
(c) The Servicer shall not resign from the obligations and duties hereby
imposed on it as Servicer except upon determination that (i) the performance of
its duties hereunder is no longer permissible under applicable law and (ii)
there is no reasonable action which the Servicer could take to make the
performance of its duties hereunder permissible under applicable law. Any such
determination permitting the resignation of the Servicer shall be evidenced as
to clause (i) above by an opinion of counsel to such effect delivered to the
Company and the Agent, which counsel shall be reasonably acceptable to the
Agent. No such resignation shall become effective until an Affiliate Successor
Servicer or a Successor Servicer shall have assumed the responsibilities and
obligations of the Servicer as Servicer in accordance with this Agreement.
Section 4.3 Establishment of Accounts.
(a) Upon the receipt of notice from the Agent of the occurrence of an
Intermediate Event, the Servicer shall promptly (but no later than five
Business Days after receipt of such notice) establish and maintain for the
benefit of the Company a segregated trust account (the "Collection Account") in
the corporate trust department of a financial institution reasonably acceptable
to the Agent. The Collection Account shall be under the sole dominion and
control of the Agent, and HSB shall have no rights to withdraw amounts from the
Collection Account; provided, that prior to the occurrence and continuance of a
Termination Event (and thereafter with the consent of the Agent, which may be
given or withheld in the Agent's discretion), the Servicer shall have the right
of access to the Collection Account. Funds on deposit in the Collection
Account shall be invested by the Agent at the written direction of SPS in
Permitted Investments that mature, or that are payable, or redeemable upon
demand of the holder thereof, on each Remittance Date as set forth in
Sections 4.3(c) through 4.3(g); provided, that for so long as no Termination
Event shall have occurred and been continuing SPS shall make such investments
in Permitted Investments directly (it being understood that Sections 4.3(c),
(d), (f) and (g) shall not apply to such investments by SPS). On each
Remittance Date, all interest and other investment income (net of losses and
investment expenses) on funds in the Collection Account shall be paid out of
the Collection Account to HSB.
(b) The Servicer shall establish and maintain for the benefit of the Company
a segregated trust account (the "Cash Collateral Account") in the corporate
trust department of First Bank National Association (the "Cash Collateral
Holder") in the name of the Agent for the benefit of the Company. The Cash
Collateral Account shall be under the sole dominion and control of the Agent;
provided, that prior to the occurrence and continuance of a Termination Event
(and thereafter with the consent of the Agent, which may be given or withheld
in the Agent's discretion), the Servicer shall have the right of access to the
Cash Collateral Account. Funds on deposit in the Cash Collateral Account shall
be invested in Permitted Investments by the Cash Collateral Holder on behalf of
the Agent at the written direction of SPS as set forth in Sections 4.3(c)
through 4.3(g); provided, that for so long as SPS shall be the Servicer, SPS
shall make such investments in Permitted Investments directly (it being
understood that Sections 4.3(c), (d), (f) and (g) shall not apply to such
investments by SPS). On each Remittance Date, all interest and other
investment income (net of losses and investment expenses) on funds in the Cash
Collateral Account shall be paid by the Agent to the Servicer and shall be
allocated and applied (pursuant to instructions by the Agent to the Cash
Collateral Holder) in accordance with the Cash Collateral Deposit Agreement.
(c) Investments. Subject to Sections 4.3(a) and (b), pursuant to one or
more SPS Orders received from SPS, all or a portion of the amounts in the
Collection Account and the Cash Collateral Account shall be invested and
reinvested by the Agent in one or more Permitted Investments. Subject to the
restrictions on the maturity of investments set forth in Section 4.3(e), each
such SPS Order may authorize the Agent to make the specific Permitted
Investments set forth therein, to make Permitted Investments from time to time
consistent with the general instructions set forth therein, or to make specific
Permitted Investments pursuant to instructions received in writing or by
facsimile transmission from the employees or agents of SPS, identified therein,
in each case in such amounts as such SPS Order shall specify. HSB agrees to
report as income for financial reporting and tax purposes (to the extent
reportable) all investment earnings on amounts in the Collection Account and
the Cash Collateral Account.
(d) Investments in the Absence of a SPS Order. In the event that (i) SPS
shall have failed to give investment directions to the Agent by 2:00 p.m. New
York City, time on any Business Day on which there may be uninvested cash or
(ii) a Termination Event shall have occurred and be continuing, then the Agent
shall invest such funds in Permitted Investments. All investments made by the
Agent shall mature no later than the maturity date therefor permitted by
Section 4.3(e).
(e) Maturity of Investments. No investment of any amount held in the
Collection Account or the Cash Collateral Account shall mature later than the
Remittance Date which is scheduled to occur immediately following the date of
investment for application in accordance with the provisions of this Agreement.
(f) Form of Investment. Any investment of funds in the Collection Account
or the Cash Collateral Account shall be made under the following terms and
conditions:
(i) each such investment shall be made in the name of the Agent (in its
capacity as such) or in the name of a nominee of the Agent; and
(ii) any certificate or other instrument evidencing such investment shall
be delivered directly to the Agent or its agent and the Agent shall have sole
possession of such instrument and all income on such investment.
(g) Agent Not Liable. The Agent shall not in any way be held liable by
reason of any insufficiency in the Collection Account or the Cash Collateral
Account resulting from losses on investments made in accordance with the
provisions of this Section 4.3 (but the institution serving as Agent shall at
all times remain liable for its own debt obligations, if any, constituting part
of such investments). The Agent shall not be liable for any investment made by
it in accordance with this Section 4.3 on the grounds that it could have made a
more favorable investment.
Section 4.4 Allocations of Collections.
(a) (i) All Collections allocated to the Company and held by the Servicer at
any time shall be held in trust by the Servicer for the benefit of the Company
and, from and after the establishment of the Collection Account pursuant to
Section 4.3 after receipt of notice from the Agent of the occurrence of an
Intermediate Event, shall be deposited, or caused to be deposited, by the
Servicer, into the Collection Account; provided, that the Servicer shall
deposit directly into the Collection Account all Collections allocated to the
Company, as promptly as possible after the Date of Processing thereof, but in
no event later than two Business Days following such Date of Processing (the
"Deposit Date"). Prior to the occurrence of an Intermediate Event, the
Servicer shall not be required to segregate or otherwise hold separate any
Collections.
(ii) On each Business Day during each Collection Period prior to the
Termination Date, the Servicer shall allocate all Collections processed on the
related Date of Processing and available on such day as follows:
(A) the Seller Percentage of Principal Collections and Finance Charge
Collections processed on the related Date of Processing shall be paid to HSB.
(B) the Purchased Percentage of Finance Charge Collections processed on the
related Date of Processing shall be allocated to the Company and applied on the
related Remittance Date as provided in Section 4.6; and
(C) the Purchased Percentage of Principal Collections processed on the
related Date of Processing shall be applied in accordance with Section 4.7(a).
(iii) On each Business Day during each Collection Period on or after the
Termination Date, the Servicer shall allocate all Collections processed on the
related Date of Processing and available on such day as follows:
(A) the Seller Percentage of Principal Collections and Finance Charge
Collections processed on the related Date of Processing shall be paid to HSB;
and
(B) the Purchased Percentage of Finance Charge Collections and Principal
Collections processed on the related Date of Processing shall be allocated to
the Company and applied on the related Remittance Date as provided in Section
4.6 and Section 4.7(b).
(b) On or prior to each Determination Date, HSB shall pay to the Servicer an
amount equal to the aggregate amount of Merchant Fees received by HSB for the
immediately preceding Collection Period under the Merchant Agreements. The
Servicer shall hold all amounts paid by HSB pursuant to this Section 4.4(b) in
trust for the benefit of the Company. Prior to the receipt of notice by the
Servicer of the occurrence of an Intermediate Event, the Servicer shall not be
required to segregate or hold separate such amounts. After the receipt of
notice by the Servicer of the occurrence of an Intermediate Event, the Servicer
shall deposit all amounts then held by HSB pursuant to this Section 4.4(b) into
the Collection Account as promptly as possible but in no event later than two
Business Days after receipt thereof. On each Remittance Date, all amounts paid
by HSB to the Servicer pursuant to this Section 4.4(b) shall be applied
pursuant to Section 4.6.
Section 4.5 Determination Date Statement. On or before each Determination
Date, the Servicer shall make the determinations contained in the Determination
Date Statement and deliver a copy thereof to the Company and the Agent on the
following Remittance Date, together with the remittance to such Person, if any,
required hereunder.
Section 4.6 Purchased Percentage of Finance Charge Collections .
(a) On each Remittance Date, the Purchased Percentage of Finance Charge
Collections processed by the Servicer during the immediately preceding
Collection Period as specified by the Servicer in the related Determination
Date Statement shall be applied in the following order of priority:
(i) to the Agent's Account for distribution to the Company to the extent
of the amount of Carrying Costs for the related Remittance Date (the amount
determined by the Servicer pursuant to clause (M-vi) of the related
Determination Date Statement);
(ii) if and to the extent the amount determined pursuant to clause (P) of
the related Determination Date Statement is positive, application as an offset
to the Purchased Percentage of Charge-Offs for the immediately preceding
Collection Period (the amount determined by the Servicer pursuant to clause (O)
of the related Determination Date Statement), such amount being applied in
accordance with the provisions of Section 4.7 governing Principal Collections;
(iii) to the Agent's Account for distribution to the Company to the extent
of any Carry-Over Interest (the amount determined by the Servicer pursuant to
clause (R) of the related Determination Date Statement);
(iv) to the Servicer, an amount equal to the Purchased Percentage of the
Servicing Fee for such Collection Period (the amount determined by the Servicer
pursuant to clause (U) of the related Determination Date Statement);
(v) application as an offset to Carry-Over Charge-Off Deficiencies for the
immediately preceding Collection Period (the amount determined by the Servicer
pursuant to clause (D)-(i) of the related Determination Date Statement), with
such amounts applied as follows: (A) if such Remittance Date is prior to the
Termination Date, such amount being applied in accordance with the provisions
of Section 4.7(a) governing Principal Collections, or (B) if such Remittance
Date is on or after the Termination Date, for credit to the Collection Account
for distribution to the Company for payment in reduction of such Carry-Over
Charge-Off Deficiencies;
(vi) as a credit to the Cash Collateral Account to the extent that the
Cash Collateral Account is not Fully Funded (the amount determined by the
Servicer pursuant to clause (W-iii) of the related Determination Date
Statement);
(vii) to the Servicer for payment to the Cash Collateral Depositor, first,
to the extent of any Scheduled Payment due and payable on such Remittance Date
and any Scheduled Payment due but unpaid on any preceding Remittance Date and
second, to the extent of any Remaining Amount (as such term is defined in the
Cash Collateral Deposit Agreement) then due and payable; and
(viii) the balance shall be applied to any unpaid amounts due and owing
under Sections 7.2(a) and 7.3 and paid to the Servicer for payment to the
Affected Parties in accordance with such Sections pro rata in an amount equal
to the lesser of the unpaid amount due and owing and such balance and any
thereafter remaining balance shall be retained by the Servicer or, if the
Servicer is a Successor Servicer, paid to HSB.
(b) In the event that, on any Determination Date, the Purchased Percentage
of Finance Charge Collections are insufficient to pay in full Carrying Costs
for the related Remittance Date (the amount determined pursuant to clause (P)
of the related Determination Date Statement is negative), and/or are
insufficient to offset in full the Purchased Percentage of Charge-Offs for the
immediately preceding Collection Period (the amount determined pursuant to
clause (Q) of the related Determination Date Statement is negative), and/or are
insufficient to pay in full the Purchased Percentage of the Servicing Fee for
the immediately preceding Collection Period (the amount determined pursuant to
clause (V-i) of the related Determination Date Statement is negative), the
Agent shall withdraw from the Cash Collateral Account on the Remittance Date,
an amount equal to the lesser of (i) the Available Cash Collateral Account
Balance on such Determination Date and (ii) the amount necessary to (x) pay in
full Carrying Costs for the related Remittance Date, (y) offset in full the
Purchased Percentage of Charge-Offs for the immediately preceding Collection
Period, and (z) pay in full the Purchased Percentage of the Servicing Fee for
the immediately preceding Collection Period (the total amount required to
satisfy this clause (ii) is the amount determined pursuant to clause (V-ii) of
the related Determination Date Statement). On each Remittance Date, the Agent
shall apply the amount withdrawn from the Cash Collateral Account as follows:
first, to the Agent's Account for distribution to the Company to the extent of
the amount necessary to pay in full the Carrying Costs for such Remittance Date
(the negative amount determined pursuant to clause (P) of the related
Determination Date Statement); second, to the Servicer as an offset to the
remaining Purchased Percentage of Charge-Offs (if clause (P) is positive, the
remaining Purchased Percentage of Charge-Offs is the negative amount determined
pursuant to clause (Q) of the related Determination Date Statement; and if
clause (P) is negative, the remaining Purchased Percentage of Charge-Offs is
the full amount of the Purchased Percentage of Charge-Offs which is set forth
in clause (O) of the related Determination Date Statement) for application by
the Servicer in accordance with the provisions of Section 4.7 governing
Principal Collections; and, third, to the Servicer to the extent of the amount
necessary to pay in full the Purchased Percentage of the Servicing Fee for the
immediately preceding Collection Period (if clause (S) is positive, the
remaining Purchased Percentage of the Servicing Fee is the negative amount
determined pursuant to clause (V-i) of the related Determination Date
Statement; and if clause (S) is negative, the remaining Purchased Percentage of
the Servicing Fee is the full Purchased Percentage of the Servicing Fee which
is set forth in clause (U) of the related Determination Date Statement).
Section 4.7 Purchased Percentage of Principal Collections.
(a) The Company agrees that, on each Business Day during each Collection
Period prior to the Termination Date, the Servicer shall, either, at HSB's
option, (i) remit to HSB the Purchased Percentage of Principal Collections
processed on the related Date of Processing or (ii) allocate to the Company the
Purchased Percentage of Principal Collections processed on the related Date of
Processing for application on the Remittance Date for the related Collection
Period as a credit to the Agent's Account for distribution to the Company as a
reduction in the Net Certificate Amount; provided that, if the UAL Ratings
Trigger shall have occurred, the Purchased Percentage of all Principal
Collections on Receivables on which UAL Corporation is the Merchant shall be
allocated to the Company and applied and distributed in accordance with Section
4.7(a)(ii); provided, further, that, if the AMR Ratings Trigger shall have
occurred, the Purchased Percentage of all Principal Collections on Receivables
on which AMR Corp. is the Merchant shall be allocated to the Company and
applied and distributed in accordance with Section 4.7(a)(ii). Allocations to
the Company pursuant to clause (ii) above shall be held for the Company by the
Servicer as provided in Section 4.4(a)(i).
(b) On each Remittance Date for the Collection Period ending on or after the
Termination Date, the Servicer shall remit to the Agent's Account by electronic
funds transfer of immediately available funds the amount (but not more than the
Net Certificate Amount) determined by it pursuant to clause (k) (the Purchased
Percentage of Principal Collections) of the related Determination Date
Statement until the Net Certificate Amount has been reduced to zero.
Section 4.8 Termination.
(a) The obligation under this Agreement to credit or remit amounts to the
Agent's Account or to make payments on the Barton Certificate shall terminate
on the earlier of (i) the day after the Remittance Date upon which, after
giving effect to the remittance of any amount credited pursuant to Section 4.7,
including, without limitation, any amounts remitted pursuant to Section 2.9 or
3.3, the Net Certificate Amount shall be zero, and all other amounts due
hereunder shall have been paid in full, including, without limitation, the
amount of the Company's existing obligations which comprise Carrying Costs on
such Remittance Date but which have not yet accrued been reserved for or paid,
including the Interest Component on all outstanding Commercial Paper used to
fund the Purchased Interest that will not mature on or prior to such Remittance
Date but that will accrue in the future, but excluding the amount of any
Program Fee or Commitment Fee which has not yet accrued (the "Prepayment
Amount"), and (ii) the date which is ten years subsequent to the Expiration
Date. On the final Remittance Date, the Servicer's obligation to make any such
credit shall be limited to such amount as shall, when applied in reduction of
any remaining Net Certificate Amount, make any such remaining Net Certificate
Amount equal to zero and pay any other amount due to the Company hereunder,
including, without limitation, the Prepayment Amount, and the Servicer shall
remit any remaining Principal Collections to HSB. The Servicer shall furnish
to the Company and the Agent not later than the related Determination Date
written notice to the effect that the following Remittance Date will be the
final Remittance Date for the Barton Certificate.
(b) The Agent, on behalf of the Company, shall invest any amounts received
from the Servicer with respect to the Commercial Paper which has not yet
matured and Carrying Costs which have not yet accrued in Permitted Investments.
If the Agent receives any such amounts by 10:00 a.m., New York City time, on
the Remittance Date, the Agent shall invest such amounts in Permitted
Investments described in clause (ii) of the definition thereof maturing, in
each case, no later than the date on which the Commercial Paper matures or such
Carrying Costs are payable by the Company, as the case may be. If the Agent
receives any such amounts after 10:00 a.m., New York City time, on the
Remittance Date, the Agent shall invest such amounts in Permitted Investments
described in clause (iii) thereof until the next Business Day and, thereafter,
shall invest such amounts in Permitted Investments described in clause (ii) of
the definition thereof maturing, in each case, no later than the date on which
such Commercial Paper matures or such Carrying Costs are payable by the
Company, as the case may be. Within two Business Days of the payment by the
Company of any Commercial Paper or Carrying Costs, as the case may be, the
Agent shall remit to HSB the investment income on the amount paid by the
Company.
(c) On the final Remittance Date, the Company shall automatically and
without further action be deemed to transfer, assign, set-over and otherwise
convey to HSB, without recourse, representation or warranty, other than a
representation by the Company that it has not created any liens or similar
encumbrances on the Transferred Property which have not been released, all the
right, title and interest of the Company in and to the Transferred Property and
shall return the Barton Certificate to HSB for cancellation. The Company shall
execute such documents and instruments of transfer or assignment and take such
other actions as shall reasonably be requested by HSB to effect the conveyance
of the Transferred Property pursuant to this subsection.
Section 4.9 Remittances to the Company. On each Remittance Date, the
Servicer shall remit amounts payable to the Agent by transferring funds by
electronic funds transfer to the Agent's Account on or before 11:00 a.m., New
York City time, on such Remittance Date pursuant to Section 4.6(a) and Section
4.7. The foregoing notwithstanding, the final remittance in respect of the
Barton Certificate (including for this purpose any purchase by HSB pursuant to
Section 3.3(a) or 2.9) shall be made in the applicable manner specified above
only upon presentation and surrender of the Barton Certificate at the office of
the Servicer specified by it in the notice of such final remittance or
repurchase.
Section 4.10 Other Rights of the Agent.
(a) The Agent is hereby authorized, at any time after the occurrence of a
Servicer Transfer Event described in clause (vi) of the definition thereof upon
three Business Days' notice to HSB and the Servicer and at HSB's expense, to
direct the Obligors of the Receivables to make all further payments in respect
of the Receivables to a lock-box account under the control of the Servicer and
containing at all times only Collections.
(b) The Agent is hereby authorized at any time after the occurrence of a
Servicer Transfer Event and the designation of a Successor Servicer to take any
and all steps in SPS's name and on behalf of SPS necessary or desirable, in the
determination of the Successor Servicer or the Agent, to collect all amounts
due under any and all Accounts, including, without limitation, endorsing SPS's
name on checks and other instruments representing Collections, and enforcing
the Receivables.
Section 4.11 Adjustments for Reversals. The aggregate balance of Principal
Receivables that are Eligible Receivables used to calculate the Receivables
Balance which is used to calculate the Purchased Percentage and the Seller
Amount shall be reduced by the Servicer as of the Collection Period End Date
for the Collection Period in which any Reversals are made by the amount of such
Reversals.
If, on any Collection Period End Date as calculated on the fifth Business Day
after such Collection Period End Date, the Seller Amount equals less than 5% of
the remaining Receivables Balance on such Collection Period End Date as a
result of Reversals during the related Collection Period, HSB and SPS
Transaction Services, Inc. ("SPST"), jointly and severally, shall either (i)
designate a number of additional accounts to be included as Accounts hereunder
within three Business Days (or such shorter number of days such that the total
number of days elapsed since the Collection Period End Date shall not exceed
10) in accordance with Section 2.5, such that the Seller Amount will be at
least equal to 5% of the Receivables Balance after such inclusion and addition
or (ii) remit within three Business Days (or such shorter number of days such
that the total number of days elapsed since the Collection Period End Date
shall not exceed 10) an amount equal to the amount by which such Reversal
causes the Seller Amount to be less than 5% of the remaining Receivables
Balance to the Servicer. Such remittance or deposit shall be applied, prior to
the Termination Date, in accordance with Section 4.7(a)(ii) and, on or after
the Termination Date, in accordance with Section 4.7(b).
Section 4.12 Annual Accountants Report. On or before May 15 of each year
the Servicer, at its expense, shall cause a firm of nationally recognized
independent accountants (within the meaning of the Securities Act of 1933, as
amended) to furnish a report or reports (which report(s) shall include, whether
or not set forth in Schedule II, without limitation, the Report on Policies and
Procedures Placed in Operation and Tests of Operating Effectiveness - Private
Label Credit Card and Electronic Point-of-Sale Transaction Processing Services)
to the Company and the Agent, substantially to the effect set forth in Schedule
II, covering the prior calendar year, setting forth such exceptions or errors
in records that, in the opinion of such firm, are immaterial to the interests
of the Company and such other exceptions as were found.
Section 4.13 Annual Statement as to Compliance. The Servicer will deliver
to the Company and the Agent on or before May 15 of each year, a certificate of
the Servicer signed on behalf of the Servicer by an officer of the Servicer and
stating that (i) a review of the activities of the Servicer relating to the
servicing of the Receivables during the preceding calendar year and of its
performance under this Agreement has been made under such officer's
supervision, and (ii) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled in all material respects all its obligations
under this Agreement throughout the period covered by such review, or, if there
has been a default in the fulfillment of any such obligations, specifying each
such default known to such officer and the nature and status thereof.
ARTICLE V
MERGER AND CONSOLIDATION
Section 5.1 Merger or Consolidation of HSB, SPS or Limited Guarantor. Any
Person into which HSB, SPS or Limited Guarantor may be merged or converted or
with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which HSB, SPS or the Limited Guarantor shall be
a party, or any Person succeeding to the business of HSB, SPS or the Limited
Guarantor shall be deemed to have assumed and be the successor to all of the
duties and obligations of HSB, SPS or the Limited Guarantor, as the case may
be, hereunder, without the execution or filing of any paper or any further act
on the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided that such Person shall execute such agreements,
documents and instruments as may be requested by the Agent to evidence such
Person's assumption of the obligations of HSB, SPS or the Limited Guarantor, as
the case may be, hereunder, including, without limitation, the execution and
filing of UCC financing statements or amendments thereto.
ARTICLE VI
TERMINATION EVENTS; SERVICING TRANSFER EVENTS
Section 6.1 Termination Events. The occurrence and continuation of any one
of the following events shall be a "Termination Event" under this Agreement:
(a) the failure on the part of SPST or the Limited Guarantor to make any
payments when due hereunder in accordance with Section 4.11 and Section 9.1,
respectively, and the continuation of such failure for a period of five days or
the failure on the part of HSB (other than those relating to withdrawals from
the Cash Collateral Account and other transfers made or to be made by the
Agent) to make any other payments when due hereunder and the continuation of
such failure for a period of fifteen days;
(b) the failure on the part of HSB or the Limited Guarantor to observe or
perform in any material respect any other term, covenant, condition or
agreement provided for herein or in the Barton Certificate and the continuation
of such failure for 30 days from the date HSB or the Limited Guarantor, as the
case may be, had knowledge or notice of such failure;
(c) any representation or warranty made by HSB or the Limited Guarantor
under or in connection with this Agreement or any Determination Date Statement
or other information, report or statement delivered pursuant hereto shall have
been false or incorrect when made or deemed made in any material respect and,
provided, that if such representation or warranty shall be amenable to cure,
HSB and/or the Limited Guarantor shall have thirty days from the date HSB had
knowledge of such falsehood or incorrectness to effect such cure, and,
provided, further, that the preceding proviso shall only apply if cure can be
effected without adverse effect upon the Company or the Agent and HSB or the
Limited Guarantor shall be diligently working to effect such cure;
(d) the occurrence of an Event of Bankruptcy with respect to HSB, the
Limited Guarantor, SPST, SPS or any Affiliate Successor Servicer;
(e) the average of the Portfolio Yield for any three consecutive Collection
Periods is less than the sum of the average Certificateholder's Interest Rate
for the Remittance Dates for such Collection Periods and the sum of the average
Servicing Fee Rate for such Collection Periods;
(f) HSB, SPST, SPS or any Affiliate Successor Servicer is not directly or
indirectly owned or controlled by the Limited Guarantor or, if HSB, SPST, SPS
or any Affiliate Successor Servicer are so owned or controlled, the long-term
unsecured debt of the Limited Guarantor (or successor thereof by merger,
consolidation or otherwise) is not rated at least BBB- by S&P and Baa3 by
Moody's; it being understood that for the purposes of this clause (f),
"control" of a Person means the power, directly or indirectly, to direct or
cause the direction of the management and policies of such Person, whether by
contract or otherwise;
(g) [reserved];
(h) Except as permitted hereunder, SPS or any Affiliate Successor Servicer
resigns as Servicer;
(i) HSB at any time fails to be "adequately capitalized" for a period of 30
consecutive days, as such term is defined by the appropriate federal regulatory
body for the purposes of the Prompt Corrective Action Regulations;
(j) HSB fails to pay any Debt exceeding in the aggregate $10,000,000, or any
interest or premium thereon or any installment thereof, when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) and
such failure continues after the applicable grace period, if any, specified in
the agreement or instrument relating to such Debt; or (ii) any other default
under any agreement or instrument relating to any Debt exceeding in the
aggregate $10,000,000, or any other event, occurs and continues after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such Debt; or (iii) any Debt exceeding in the
aggregate $10,000,000 is declared to be due and payable or required to be
prepaid (other than by a regularly scheduled required prepayment) prior to the
stated maturity thereof;
(k) the Internal Revenue Service files notice of a lien pursuant to Section
6323 of the Internal Revenue Code with regard to any of the assets of HSB in
excess of $1,000,000 and such lien is not released within 30 days, or the
Pension Benefit Guaranty Corporation files, or indicates its intention to file,
notice of a lien in excess of $1,000,000. pursuant to Section 4068 of ERISA
with regard to any of the assets of HSB;
(l) subject to the proviso hereto, the Seller Amount calculated with respect
to any Collection Period End Date is equal to less than (i) 5% of the
Receivables Balance on such Collection Period End Date, plus, (ii) if
applicable, (x) if at such time the long-term unsecured debt rating of United
Airlines Corporation is less than B+ by S&P or B1 by Moody's, an amount equal
to the greater of (A) the amount of Receivables created due to new charges
during the immediately preceding Collection Period from Accounts with respect
to which United Airlines Corporation is the Merchant and (B) the monthly
average of Receivables created due to new charges during the immediately
preceding three Collection Periods on Accounts with respect to which United
Airlines Corporation is the Merchant, and (y) if at such time the long-term
unsecured debt rating of AMR Corp. is less than B+ by S&P or B1 by Moody's, an
amount equal to 66.67% of the greater of (A) the amount of Receivables created
due to new charges during the immediately preceding Collection Period from
Accounts with respect to which American Airlines, Inc. is the Merchant and (B)
the monthly average of Receivables created due to new charges during the
immediately preceding three Collection Periods on Accounts with respect to
which American Airlines, Inc. is the Merchant; provided, that a Termination
Event that occurs by reason of the operation of clause (i) and/or (ii) above,
unless cured prior thereto, shall be deemed to occur on the tenth day following
such Collection Period End Date;
(m) as of any Determination Date, the aggregate balances of the Principal
Receivables in Accounts with respect to any Merchant as of the close of
business on the immediately preceding Collection Period End Date exceeded the
Concentration Limit with respect to such Merchant on such date and, other than
as a result of its failure to satisfy the condition set forth in clause (iii)
of Section 2.6(b), HSB fails to remove a number of Accounts with respect to
such Merchant pursuant to Section 2.6 or, other than as a result of its failure
to satisfy the conditions set forth in clause (iii) of Section 2.5(b), HSB
fails to add a number of Additional Accounts pursuant to Section 2.5, in each
case, such that the aggregate balances of all Principal Receivables in the
Accounts with respect to such Merchant as of the close of business on the
second Collection Period End Date following such Collection Period exceeded the
Concentration Limit with respect to such Merchant on such date.
Section 6.2 Remedies. If (i) a Termination Event described in paragraph
(d) of Section 6.1 above shall have occurred, the Termination Date shall
thereupon automatically occur, (ii) if a Termination Event described in
paragraphs (e) or (l) of Section 6.1 shall have occurred, the Termination Date
shall automatically occur upon the expiration of the cure period set forth in
such Termination Events, if any, and (iii) if any other Termination Event
specified in Section 6.1 shall have occurred, the Agent shall have the right to
declare by written notice to HSB any Remittance Date occurring at least seven
days after such notice as the Termination Date. This Section 6.2 constitutes
written notice by the Agent to HSB that the Termination Date shall
automatically occur in the circumstances and at the times described in clauses
(i) and (ii) above. No additional notice of any kind shall be required as a
condition of the occurrence of the Termination Date in the circumstances
described in said clauses. Upon the occurrence of the Termination Date, the
Company shall have all of the rights and remedies provided to a secured
creditor or a purchaser of accounts under the Uniform Commercial Code and by
applicable law in respect thereto. If (i) a Termination Event described in
paragraph (d) or (i) of Section 6.1 shall have occurred or (ii) a Servicer
Transfer Event shall have occurred, the Agent may, by notice given in writing
to SPS (a "Servicer Termination Notice"), terminate all of the rights and
obligations of SPS as Servicer under this Agreement; provided, however, that no
such termination shall affect the obligations of SPS under Section 7.1 or
Section 7.2, which obligations shall survive any such termination. If SPS
disputes the occurrence of a Servicer Transfer Event described in paragraph
(ii) or (v) of the definition thereof, SPS and the Agent shall, in order to
resolve such dispute in an expedited manner, submit such dispute to the
American Arbitration Association, New York, New York, pursuant to the
Association's expedited arbitration rules; provided that, reasonable
out-of-pocket expenses of the prevailing party (including, without limitation,
fees and expenses of counsel to each party) shall be paid by the non-prevailing
party; provided further that, if such dispute is not resolved within 30 days
after the Agent notifies SPS of the occurrence of a Servicer Transfer Event,
SPS must terminate its activities as the Servicer and allow the newly
designated Servicer to perform such activities on the date provided by the
Agent as described above, notwithstanding the commencement or continuation of
any proceeding to resolve the aforementioned dispute. If SPS disputes the
occurrence of a Servicer Transfer Event described in paragraph (ii) or (v) of
the definition thereof, such Servicer Transfer Event shall not be deemed to
have occurred for the purposes of this Agreement until the determination
through arbitration that such Servicer Termination Event has in fact occurred
or, if earlier, on the thirty-first day after the Agent notifies SPS of such
occurrence. Notwithstanding any termination of the rights and obligations of
SPS as Servicer, SPS shall remain responsible for any acts or omissions to act
by it as Servicer prior to such termination.
Section 6.3 Successor Servicer. (a) After receipt by SPS of a Servicer
Termination Notice, and on the date that a Successor Servicer shall have been
appointed by the Agent pursuant to Section 6.4, all authority and power of SPS
as Servicer under this Agreement shall pass to and be vested in a Successor
Servicer; and, without limitation, the Agent is hereby authorized and empowered
(upon the failure of SPS to cooperate) until termination of this Agreement
pursuant to Section 4.8 to execute and deliver, on behalf of SPS as
attorney-in-fact or otherwise, all documents and other instruments upon the
failure of SPS to execute or deliver such documents or instruments, and to do
and accomplish all other acts or things necessary or appropriate to effect the
purposes of such transfer of servicing rights.
(b) SPS agrees to cooperate with the Agent and such Successor Servicer in
effecting the termination of the responsibilities and rights of SPS to conduct
servicing hereunder, including, without limitation, the transfer to such
Successor Servicer of all authority of SPS to service the Receivables (and the
Purchased Interest therein) provided for under this Agreement, including,
without limitation, all authority over all Collections which shall on the date
of transfer be held by SPS for deposit, or which shall thereafter be received
with respect to the Receivables.
(c) SPS shall promptly transfer its electronic records (i.e. its computer
tapes and disks on which data relating to the Receivables is stored but,
subject to this subsection (c), excluding computer hardware and proprietary or
licensed software) relating to the Receivables (and the Purchased Interest
therein) to the successor Servicer in such electronic form as the Successor
Servicer may reasonably request and shall promptly transfer to the Successor
Servicer all other records, correspondence and documents necessary for the
continued servicing of the Receivables in the manner and at such times as the
Successor Servicer shall reasonably request. To the extent that compliance
with this Section shall require SPS to disclose to the Successor Servicer
information of any kind which SPS reasonably deems to be confidential, the
Successor Servicer shall be required to enter into such customary licensing and
confidentiality agreements as SPS shall deem necessary to protect its interest.
In addition, the Servicer shall use reasonable efforts to arrange, to the
satisfaction of the Agent, such amendments to licenses of computer software as
are necessary or desirable to permit the Agent to effect such transfer of
servicing.
Section 6.4 Agent to Act; Appointment of Successor. (a) On and after the
receipt by SPS of a Servicer Termination Notice pursuant to Section 6.2, SPS
shall continue to perform all servicing functions under this Agreement until
the date specified in the Servicer Termination Notice or otherwise specified by
the Agent in writing or, if no such date is specified in the Servicer
Termination Notice, or otherwise specified by the Agent, until a date mutually
agreed upon by SPS and the Agent. The Agent shall as promptly as possible
after the giving of a Servicer Termination Notice appoint a successor servicer
(the "Successor Servicer"). HSB shall have the right to request the Agent to
appoint an Affiliate of Limited Guarantor as Successor Servicer but the Agent
shall retain the right to appoint the Successor Servicer in its sole
discretion. The Successor Servicer appointed by the Agent shall accept its
appointment by a written assumption in a form acceptable to the Agent. The
Successor Servicer shall agree in any such written assumption that it will not
establish a relationship with any Merchant similar to that maintained by HSB
with such Merchant pursuant to the Merchant Agreement to which such Merchant is
a party. The Agent may obtain bids from any potential successor servicer. In
the event that a Successor Servicer has not been appointed or has not accepted
its appointment at the time when SPS ceases to act as Servicer, the Agent
without further action shall automatically be appointed the Successor Servicer.
Notwithstanding the above, the Agent shall, if it is legally unable so to act,
petition a court of competent jurisdiction to appoint any established financial
institution having a net worth of not less than $100,000,000 and whose regular
business includes the servicing of individual revolving credit accounts the
Successor Servicer hereunder.
(b) Upon its appointment, the Successor Servicer shall be the successor in all
respects to SPS with respect to servicing functions under this Agreement and
shall be subject to all the responsibilities, duties and liabilities relating
thereto placed on SPS by the terms and provisions hereof, and all references in
this Agreement to SPS as servicer shall be deemed to refer to the Successor
Servicer; provided, however, that HSB and SPS shall not indemnify the Agent if
the acts, omissions or alleged acts or omissions upon which a claim for
indemnification arises pursuant to Section 7.1 constitute fraud, gross
negligence, or willful misconduct by a Successor Servicer. With the prior
written consent of the Agent, the Successor Servicer shall expressly be
authorized to delegate any of its duties hereunder to SPS or any of its
Affiliates on and after the date of any transfer of servicing pursuant to this
Article VI.
(c) In connection with such appointment and assumption, the Agent shall be
entitled to such compensation, or may make such arrangements for the
compensation of the Successor Servicer out of Collections, as it and such
Successor Servicer shall agree; provided, however, that no such compensation
for any Collection Period shall be in excess of 2% per annum on the average
amount of the Principal Receivables during such Collection Period.
(d) All authority and power granted to the Successor Servicer under this
Agreement shall automatically cease and terminate upon termination of this
Agreement pursuant to Section 4.8 and shall pass to and be vested in SPS and,
without limitation, SPS is hereby authorized and empowered to execute and
deliver, on behalf of the Successor Servicer, as attorney-in-fact or
otherwise,all documents and other instruments, and to do and accomplish all
other acts or things necessary or appropriate to effect the purposes of such
transfer of servicing rights. The Successor Servicer agrees to cooperate with
SPS in effecting the termination of the responsibilities and rights of the
Successor Servicer to conduct servicing of the Receivables relating to the
Purchased Interest. The Successor Servicer shall transfer its electronic
records relating to the Receivables to SPS in such electronic form as SPS may
reasonably request and shall transfer all other records, correspondence and
documents to SPS in the manner and at such times as SPS shall reasonably
request. To the extent that compliance with this Section 6.4 shall require the
Successor Servicer to disclose to SPS information of any kind which the
Successor Servicer deems to be confidential, SPS shall be required to enter
into such customary licensing and confidentiality agreements as the Successor
Servicer shall deem reasonably necessary to protect its interests.
(e) It shall be understood and agreed that the Agent may enter into a
servicing agreement with such Successor Servicer pursuant to such terms as are
consistent with the servicing terms hereof (and no more burdensome to Seller or
SPS), as the Agent shall deem necessary or desirable; which terms may provide
for the replacement of such Successor Servicer pursuant to such conditions as
the Agent shall deem necessary or desirable.
Section 6.5 Monitoring. If the Agent does not elect to replace SPS or an
Affiliate Successor Servicer with a Successor Servicer following the occurrence
of a Servicer Transfer Event, the Agent shall have the right to appoint a firm
of public accountants to monitor the servicing of the Receivables by SPS or an
Affiliate Successor Servicer and to furnish to the Company and the Agent, at
the expense of SPS, such letters, certificates or reports thereon as the
Company or the Agent shall reasonably request. Any fees of the firm of public
accountants retained by the Agent as above provided for work performed
subsequent to the curing of such Servicer Transfer Event shall be at the
expense of the Agent; provided, however, if the Company or the Agent shall
request, SPS or an Affiliate Successor Servicer shall cooperate with such firm
in the subsequent monitoring of its servicing of the Receivables pursuant to
this Agreement notwithstanding any fees in connection therewith shall not be at
the expense of SPS.
ARTICLE VII
INDEMNIFICATION
Section 7.1 Indemnification. (a) By entering into this Agreement, each of
HSB and SPS, jointly and severally (except in the case of Section 7.1(ix) only,
each of HSB and SPS, severally and not jointly), agrees to be liable, directly
to any Affected Party as a third party beneficiary, for the entire amount of
any and all damages, losses, claims, liabilities and any costs and expenses
relating thereto or otherwise, including reasonable attorneys' fees and
disbursements (all of the foregoing being collectively referred to as "Losses")
awarded against or incurred by it arising out of or as a result of this
Agreement or the ownership of the Purchased Interest or in respect of any
Receivable, any Account or any Credit Card Agreement, excluding, however, (i)
Losses to the extent resulting from gross negligence, willful misconduct or
fraud on the part of any Affected Party, (ii) recourse for uncollectible
Receivables, (iii) any Business Taxes incurred by any Affected Party arising
out of or as a result of this Agreement or the ownership of the Purchased
Interest or in respect of any Receivable, any Account or any Credit Card
Agreement or (iv) any costs and expenses incurred by the Company in the
ordinary course of its business (including overhead and periodic legal and
auditing fees not principally related to this Agreement) and any other costs
and expenses which were not incurred by the Company in connection with this
Agreement or the ownership of the Purchased Interest (clauses (i) through (iv)
collectively, "Excluded Amounts") (all Losses other than Excluded Amounts being
the "Indemnified Amounts"). Without limiting the foregoing (but subject to the
exclusions set forth above), HSB and SPS shall pay on demand to each Affected
Party any and all amounts necessary to indemnify such Affected Party for
Indemnified Amounts relating to or resulting from:
(i) the creation of the Purchased Interest in any Receivable (A) which is
not at the date of the creation of such interest an Eligible Receivable or (B)
which thereafter ceases to be an Eligible Receivable;
(ii) reliance on any representation or warranty made by HSB, the Servicer
or the Limited Guarantor (or any of their respective officers) under or in
connection with this Agreement, any Determination Date Statement or any other
information or report delivered by them pursuant hereto which shall have been
false or incorrect in any material respect when made or deemed made;
(iii) the failure by HSB, the Servicer or the Limited Guarantor to comply
with any term, provision or covenant contained in this Agreement, or with any
Requirement of Law applicable to any Receivable, any Account or any Credit Card
Agreement, or the nonconformity of any Receivable, any Account or any Credit
Card Agreement with any Requirement of Law, including, without limitation,
Regulation Z of the Board of Governors of the Federal Reserve System and the
laws and regulations of the various states of the United States of America;
(iv) the failure to vest in the Company or to transfer to the Company an
undivided percentage ownership interest, to the extent of the Purchased
Interest, in the Receivables or other Transferred Property, free and clear of
any Lien not contemplated by this Agreement;
(v) the failure to file, or any delay in filing, UCC financing statements
with respect to any Transferred Property as provided herein;
(vi) any dispute, claim, offset or defense (other than discharge in
bankruptcy of the Obligor) of the Obligor to the payment of any Receivable
(including, without limitation, a defense based on such Receivable or the
related Credit Card Agreement not being a legal, valid and binding obligation
of such Obligor enforceable against it in accordance with its terms);
(vii) any investigation, litigation or proceeding directly involving HSB's
or SPS's performance of this Agreement or the ownership of the Purchased
Interest or in respect of any Receivable or any other Transferred Property;
(viii) the failure to pay when due any taxes, including without
limitation, sales, excise or personal property taxes, payable in connection
with the Receivables, the Accounts or the Credit Card Agreements; or
(ix) so long as SPS is the Servicer, the commingling of Collections at any
time with other funds.
(b) If any Affected Party shall have notice of any attempt to impose or
collect any tax or governmental fee or charge for which indemnification will be
sought from HSB or SPS under Section 7.1(a), such Affected Party shall give
prompt and timely notice of such attempt to HSB and SPS and HSB and SPS shall
have the right, at their respective expense, to participate in any proceedings
resisting or objecting to the imposition or collection of any such tax,
governmental fee or charge.
Section 7.2 Yield Protection.
(a) If (i) Regulation D or (ii) any Regulatory Change occurring after the
date hereof
(w) shall subject an Affected Party to any tax, duty or other charge with
respect to the Purchased Interest or any part thereof or shall change the basis
of taxation of payments to the Affected Party of any Purchased Interest or
interest thereon owned by, owed to or funded by it or any other amounts due
under this Agreement in respect of any Purchased Interest owned by or funded by
it or its obligations or rights, if any, to provide funding therefor (except
for changes in the rate of tax on the overall net income of such Affected Party
imposed by the United States of America, by the jurisdiction (including the
foreign jurisdiction) in which such Affected Party is incorporated, organized,
managed, controlled or is considered to have its principal executive office and
by the jurisdiction where such Affected Party is acting for the purposes of
this Agreement; or
(x) shall impose, modify or deem applicable any reserve (including, without
limitation, any reserve imposed by the Federal Reserve Board, but excluding any
reserve included in the determination of interest), special deposit or similar
requirement against assets of any Affected Party, deposits or obligations with
or for the account of any Affected Party or with or for the account of any
affiliate (or entity deemed by the Federal Reserve Board to be an affiliate) of
any Affected Party, or credit extended by any Affected Party; or
(y) shall change the amount of capital maintained or required or requested
or directed to be maintained by any Affected Party; or
(z) shall impose any other condition affecting any Purchased Interest owned
or funded by any Affected Party, or its obligations or rights to provide
funding therefor;
and the result of any of the foregoing is or would be
(A) to increase the cost to (or in the case of Regulation D referred to
above, to impose a cost on) (I) an Affected Party funding or making or
maintaining any investment in the Purchased Interest, any purchases,
reinvestment, or loans or other extensions of credit under the Stand-by
Purchase Agreement, or any Credit Advance, or any commitment to such Affected
Party with respect to any of the foregoing, or (II) the Agent for continuing
its or HSB's relationship with the Company,
(B) to reduce the amount of any sum received or receivable by an Affected
Party under this Agreement or the Barton Certificate, or under the Stand-by
Purchase Agreement or the Enhancement Agreement with respect thereto, or
(C) in the sole determination of such Affected Party, to reduce the rate of
return on the capital of an Affected Party as a consequence of its obligations
hereunder or arising in connection herewith to a level below that which such
Affected Party could otherwise have achieved,
then, subject to compliance with subsection (c) below, at the time specified in
the next sentence, after written demand by such Affected Party (which demand
shall be accompanied by a statement setting forth the basis for such demand)
shall have been delivered to SPS and the Agent, the Servicer shall pay, but
solely from the Purchased Percentage of Finance Charge Collections available
therefor pursuant to Section 4.6(a)(viii), to such Affected Party such funds in
accordance with Section 4.6(a)(viii). Amounts payable to any Affected Party
hereunder shall be paid from the Purchased Percentage of Finance Charge
Collections available therefor pursuant to Section 4.6(a)(viii) to such
Affected Party, (x) if such written demand has been made on or before the last
Business Day of the calendar month in which such amount arose, on the first
Remittance Date occurring in the immediately succeeding calendar month and (y)
if such demand is made after the last Business Day in the calendar month in
which such amount arose, on the Remittance Date occurring in the immediately
succeeding calendar month after the month in which the demand was made. It
shall be understood and agreed that no demand may be satisfied from funds other
than from the Purchased Percentage of Finance Charge Collections available
therefor pursuant to Section 4.6(a)(viii) in accordance with the terms of this
Agreement. In no case shall the right to make such demand be, or be deemed to
be, a separate claim against HSB, SPS, the Limited Guarantor or any Affiliate
of any of them or against any of their respective officers, directors,
stockholders, employees or agents and any such right is herewith expressly
waived.
(b) Each Affected Party will promptly notify SPS and the Agent of any event
of which it has knowledge which will entitle such Affected Party to
compensation pursuant to this Section 7.2; provided, however, no failure to
give or delay in giving such notification shall adversely affect the rights of
any Affected Party to such compensation. Before giving any notice to SPS and
the Agent pursuant to this Section 7.2, such Affected Party shall take
reasonable steps with the consent of SPS (which consent shall not unreasonably
be withheld), including without limitation designation of a different
applicable lending office (unless such designation will, in the judgment of the
Affected Party, be otherwise disadvantageous to such Affected Party), if such
reasonable steps would avoid the need for or reduce the amount of any payment
that would otherwise be due under this Section 7.2. Notwithstanding the
foregoing Section 7.2(a), compensation may be paid to any Affected Party only
for any amount arising or accruing both:
(i) during (x) any time or period commencing not earlier than the date on
which such Affected Party notifies SPS and the Agent that it proposes to demand
such compensation and identifies to SPS and the Agent the statute, regulation
or other basis upon which the claimed compensation is or will be based, and
(y) any time or period during which, because of the retroactive application of
such statute, regulation or other basis, such Affected Party did not know that
such amount would arise or accrue; and
(ii) within six months prior to any demand therefor, accompanied by a
certificate of such Affected Party claiming compensation and setting forth in
reasonable detail its computation of the additional amount or amounts to be
paid to it hereunder.
(c) In determining any amount provided for or referred to in this Section
7.2, an Affected Party may use any commercially reasonable averaging and
attribution methods (with the concurrence of SPS, which concurrence shall not
be unreasonably withheld) that it (in its sole discretion) shall deem
applicable. Any Affected Party when making a claim under this Section 7.2
shall submit to SPS a statement containing a reasonably detailed analysis as to
such increased cost or reduced return (including an appropriate and detailed
calculation and legal description of the basis therefor), which statement
shall, in the absence of demonstrable error, be conclusive and binding upon
SPS.
Section 7.3 Withholding Taxes. If (a) HSB, the Servicer or SPS is required
at any time to make any deduction or withholding for or on account of any Tax
from any sum owed, paid or payable by HSB, the Servicer or SPS to or for the
account of any Affected Party hereunder and (b) such requirement results from a
Change in U.S. Tax Law and not from any action or omission by such Affected
Party (including any failure by such Affected Party to provide tax forms as
required by the Stand-by Purchase Agreement or to conduct its business so that
payments to or for the account of such Affected Party hereunder are effectively
connected to the conduct by such Affected Party of a trade or business in the
United States), the Servicer shall pay, upon written notice setting forth such
claim in reasonable specificity, but solely from the Purchased Percentage of
Finance Charge Collections available therefor pursuant to Section 4.6(a)(viii),
to such Affected Party such funds in accordance with Section 4.6(a)(viii) such
additional amount as is necessary to ensure that such Affected Party receives
and retains free from any liability, except as provided for in the last
sentence of this Section 7.3, a net sum equal to that which such Affected Party
would have received and retained had no such deduction or withholding been
required or made. Amounts payable to any Affected Party hereunder shall be
paid from the Purchased Percentage of Finance Charge Collections available
therefor pursuant to Section 4.6(a)(viii) to such Affected Party, (x) if such
written demand has been made on or before the last Business Day of the calendar
month in which such amount arose, on the first Remittance Date occurring in the
immediately succeeding calendar month and (y) if such demand is made after the
last Business Day in the calendar month in which such amount arose, on the
Remittance Date occurring in the immediately succeeding calendar month after
the month in which the demand was made. It shall be understood and agreed that
no demand may be satisfied from funds other than from the Purchased Percentage
of Finance Charge Collections available therefor pursuant to Section
4.6(a)(viii) in accordance with the terms of this Agreement. In no case shall
the right to make such demand be, or be deemed to be, a separate claim against
HSB, SPS, the Limited Guarantor or any Affiliate of any of them or against any
of their respective officers, directors, stockholders, employees or agents and
any such right is herewith expressly waived. If pursuant to this Section 7.3,
any Affected Party receives an increased payment with respect to Tax, and such
Affected Party also recovers any portion of such Tax from the applicable taxing
authority such that the total amount of the payments and the recovered Tax
exceeds the amount stated to be payable with respect to such Affected Party,
such Affected Party shall remit any such excess to the Servicer, or if the
Servicer is a successor Servicer, paid to HSB.
ARTICLE VIII
CONDITIONS OF PURCHASE
Section 8.1 Conditions Precedent. The effectiveness of this Agreement is
subject to the condition precedent that, on or before the date of such
purchase, the Agent shall have received the following, each (unless otherwise
indicated) dated such date and in form and substance satisfactory to the Agent:
(a) A copy of the resolutions of the Board of Directors of HSB approving
this Agreement as amended and restated and the other documents to be delivered
by it hereunder and the transactions contemplated hereby, certified by an
officer of HSB;
(b) certificate of an officer of HSB certifying the names and true
signatures of the officers authorized on its behalf to sign this Agreement and
the other documents to be delivered by it hereunder (on which certificate the
Agent and the Company may conclusively rely until such time as the Agent shall
receive from HSB a revised certificate meeting the requirements of this
subsection (b));
(c) A certificate of the Secretary or Assistant Secretary of SPST certifying
the names and true signatures of the officers authorized on its behalf to sign
this Agreement and the other documents to be delivered by it hereunder (on
which certificate the Agent and the Company may conclusively rely until such
time as the Agent shall receive from SPST a revised certificate meeting the
requirements of this subsection(c));
(d) A copy of the resolutions of the Board of Directors of the Servicer
approving this Agreement and the other documents to be delivered by it
hereunder and the transactions contemplated hereby, certified by its Secretary
or Assistant Secretary;
(e) A certificate of the Secretary or Assistant Secretary of the Servicer
certifying the names and true signatures of the officers authorized on its
behalf to sign this Agreement and the other documents to be delivered by it
hereunder (on which certificate the Agent and the Company may conclusively rely
until such time as the Agent shall receive from the Servicer a revised
certificate meeting the requirements of this subsection (e));
(f) A certificate of the Secretary or Assistant Secretary of the Limited
Guarantor certifying the names and true signatures of the officers authorized
on its behalf to sign this Agreement and the other documents to be delivered by
it hereunder (on which certificate the Agent and the Company may conclusively
rely until such time as the Agent shall receive from the Limited Guarantor a
revised certificate meeting the requirements of this subsection (f));
(g) The Cash Collateral Deposit Agreement, duly executed and delivered;
(h) Confirmation of initial deposit into Cash Collateral Account;
(i) Opinion of Counsel to HSB, SPS, the Limited Guarantor, SPST and the Cash
Collateral Depositor as to corporate authority, etc. in substantially in the
form of Exhibit G;
(j) Opinion of Counsel to HSB, SPS and the Cash Collateral Depositor
regarding perfection in the Cash Collateral Account in substantially the form
of Exhibit H; and
(k) Letter from each Rating Agency confirming its ratings on the Company's
Commercial Paper.
Section 8.2 Conditions Precedent to Effectiveness, Additional Accounts,
Removed Accounts and Maintenance of Net Certificate Amount Each increase of
the Certificate Amount pursuant to Section 2.4, each addition of Accounts
pursuant to Section 2.5 and each removal of Accounts pursuant to Section 2.6
(a) and (b) shall be subject to the conditions precedent that on the date of
such purchase, increase, addition, removal or remittance the following
statements shall be true (and HSB shall be deemed to have certified that):
(a) The representations and warranties contained in Article III are true and
correct on and as of such day as though made on and as of such day and shall be
deemed to have been made on such day; and
(b) No event has occurred and is continuing, or would result from such
purchase, increase, addition, removal or remittance, that constitutes a
Termination Event or would constitute a Termination Event but for the
requirement that notice be given or time elapse or both.
ARTICLE IX
THE LIMITED GUARANTEE
Section 9.1 Limited Guarantee.
(a) The Limited Guarantor hereby unconditionally and irrevocably guarantees
(the "Limited Guarantee") to the Company the prompt performance by HSB, SPS and
any Affiliate Successor Servicer of their respective duties to deposit to the
relevant Account and/or pay over to the Company Collections actually received
and processed by them as and when required by the terms of this Agreement (the
"Guaranteed Obligation"). The Guaranteed Obligation shall include performance
by HSB, SPS or any Affiliate Successor Servicer of their respective duties to
deposit or pay over Collections actually received and processed by them, but
not deposited or paid over in accordance with the terms of this Agreement on
the grounds that a court in connection with insolvency proceedings with respect
to any of them has determined that such funds were commingled with other funds
held or owned by them. Except as set forth in the preceding sentence with
respect to commingled funds, it shall be expressly understood and agreed that
the Guaranteed Obligation shall not include performance by HSB, SPS or any
Affiliate Successor Servicer of their respective duties to deposit or pay over
Collections received and processed by them that were required to be paid over
to any Person by the IRS or the Pension Benefit Guaranty Corporation ("PBGC")
with a claim to such Collections superior to that of the Company. The Limited
Guarantor hereby agrees to make any such payment to the Agent by 11:00 a.m.,
New York City time, on the Remittance Date by wire transfer of immediately
available funds to the Agent's Account. The Limited Guarantor further agrees
to pay any and all reasonable expenses (including, without limitation, all
reasonable fees and expenses of counsel) which may be paid or incurred by the
Company or the Agent in enforcing, or obtaining advice of counsel in respect
of, any of their rights under this Section 9.1. The Limited Guarantee shall
remain in full force and effect until the Net Certificate Amount has been
reduced to zero and all other amounts due to the Company or the Agent have been
paid in full.
(b) The Limited Guarantor waives any and all notice of the creation,
renewal, extension or accrual of the Guaranteed Obligation and notice of or
proof of reliance by the Company or the Agent upon the Limited Guarantee or
acceptance of the Limited Guarantee; the Guaranteed Obligation shall
conclusively be deemed to have been contracted or incurred in reliance upon the
Limited Guarantee; and all dealings between HSB, SPS, any Affiliate Successor
Servicer and the Limited Guarantor, on the one hand, and the Company and the
Agent, on the other hand, shall likewise be conclusively presumed to have been
had or consummated in reliance upon the Limited Guarantee. Except as provided
in subsection (a) above, the Limited Guarantor waives diligence, protest,
demand for payment and notice of default or nonpayment to or upon the Limited
Guarantor with respect to the Guaranteed Obligation. The Limited Guarantee
shall be construed as a continuing, absolute and unconditional guarantee of
payment without regard to (i) the validity or enforceability of any provision
of this Agreement or any collateral security therefor or right of offset with
respect thereto at any time or from time to time held by the Company, the
Agent, Societe Generale or any Bank, (ii) any defense, set off, counterclaim
(other than a defense of payment) which may at any time be available to or be
asserted by HSB, SPS or any Affiliate Successor Servicer against the Company or
the Agent or (iii) any circumstances whatsoever (with or without notice to or
knowledge of HSB, SPS, any Affiliate Successor Servicer or the Limited
Guarantor) which constitutes or might be construed to constitute, an equitable
or legal discharge of HSB, SPS or any Affiliate Successor Servicer for the
Guaranteed Obligation, or of the Limited Guarantee, in bankruptcy or in any
other instance. When the Company or the Agent on behalf of the Company is
pursuing the Company's rights and remedies under the Limited Guarantee against
the Limited Guarantor, the Agent or the Company may, but shall be under no
obligation to, pursue such rights or remedies as it may have against HSB, SPS
or any Affiliate Successor Servicer or any other Person or against any
collateral security therefor or any right of offset with respect thereto and
any failure by the Agent, the Company, Societe Generale or any Bank to pursue
such other rights or remedies or to collect any payments from HSB, SPS or any
Affiliate Successor Servicer or any such other Person or to realize upon any
such collateral security or to exercise any such right of offset, or any
release of HSB, SPS, or any Affiliate Successor Servicer or any such other
Person or any such collateral security or right of offset, shall not relieve
the Limited Guarantor of any liability under the Limited Guarantee, and shall
not impair or affect the rights and remedies, whether express, implied or
available as a matter of law, of the Company and the Agent against the Limited
Guarantor.
(c) The Limited Guarantee shall continue to be effective, or be reinstated,
as the case may be, if at any time payment, or any part thereof, of the
Guaranteed Obligation is rescinded or must otherwise be restored or returned by
the Company or the Agent upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of HSB, SPS or any Affiliate Successor Servicer
or upon or as a result of the appointment of a receiver, intervenor or
conservator or, trustee or similar officer for, HSB, SPS or any Affiliate
Successor Servicer or any substantial part of its property, or otherwise, all
as though such payment had not been made.
(d) No failure on the part of the Agent or the Company to exercise, and no
delay in exercising, any right under the Limited Guarantee shall operate as a
waiver thereof; nor shall any single or partial exercise of any right under the
Limited Guarantee preclude any other or further exercise thereof or the
exercise of any other right. The rights and remedies provided in this Article
IX are cumulative and not exclusive of any rights or remedies provided by law.
ARTICLE X
THE AGENT
Section 10.1 Authorization and Action. The Company hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto.
Section 10.2 Agent's Reliance, Etc. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken
or omitted to be taken by it or the Agent under or in connection with this
Agreement (including, without limitation, the servicing, administering or
collecting the Receivables as Servicer pursuant to Section 6.4), except for its
or their own gross negligence or willful misconduct or fraud. Without limiting
the generality of the foregoing, the Agent: (a) may consult with legal counsel
(including counsel for HSB, SPS, the Servicer or the Limited Guarantor),
independent certified public accountants and other experts selected by it and
shall not be liable for any action taken or omitted to be taken in good faith
by it in accordance with the advice of such counsel, accountants or experts;
(b) makes no warranty or representation to the Company or any other holder of
any interest in the Transferred Property and shall not be responsible to the
Company or any such other holder for any statements, warranties or
representations made in or in connection with this Agreement; (c) shall not
have any duty to ascertain or to inquire as to the performance or observance of
any of the terms, covenants or conditions of this Agreement on the part of HSB,
the Servicer or the Limited Guarantor or to inspect the property (including the
books and records) of HSB, SPS, the Servicer or the Limited Guarantor; (d)
shall not be responsible to the Company or any other holder of any interest in
the Transferred Property for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or the
Barton Certificate; and (e) shall incur no liability under or in respect of
this Agreement by acting upon any notice (including notice by telephone),
consent, certificate or other instrument or writing (which may be by facsimile
or telex) reasonably believed by it to be genuine and signed or sent by the
proper party or parties.
Section 10.3 Agent and Affiliates. Societe Generale and any of its
Affiliates may generally engage in any kind of business with HSB, SPS, the
Servicer, the Limited Guarantor or any Obligor, any of their respective
Affiliates and any Person who may do business with or own securities of HSB,
SPS, the Servicer, the Limited Guarantor or any Obligor or any of their
respective Affiliates, all as if Societe Generale were not the Agent and
without any duty to account therefor to the Company or any other holder of an
interest in the Transferred Property.
ARTICLE XI
ASSIGNMENT OF PURCHASED INTEREST
Section 11.1 Restrictions on Assignments. The Company may not assign the
Purchased Interest to any Person without the prior written consent of HSB;
provided, however, that
(i) The Company may assign, or grant a security interest in, the Purchased
Interest (or any portion thereof) to Societe Generale (or successor thereof by
merger, consolidation or otherwise) or any Affiliate of Societe Generale (which
may then assign the Purchased Interest (or any portion thereof) so assigned or
any interest therein to any other Affiliate of Societe Generale); and
(ii) The Company may assign and grant a security interest in any interest
in, to and under the Purchased Interest, this Agreement and the Barton
Certificate to the Collateral Agent, and any successor in such capacity to
secure the Company's obligations under or in connection with the Commercial
Paper, the Stand-by Purchase Agreement, the Enhancement Agreement and any
letter of credit issued thereunder, and certain other obligations of the
Company incurred in connection with the funding of the Purchased Interest.
Notwithstanding the foregoing, the Company shall be permitted to assign the
Purchased Interest (or any portion thereof) to an assignee pursuant to clause
(i) of Section 11.1 above or to a successor Collateral Agent pursuant to clause
(ii) of Section 11.1 above only if, prior to such assignment, the assignee
executes and delivers to the Company a confidentiality agreement containing the
confidentiality requirements set forth in Section 12.12. The Company shall
notify HSB of any assignment pursuant to clause (i) of Section 11.1 or to a
successor Collateral Agent pursuant to clause (ii) of Section 11.1.
Section 11.2 Rights of Assignee. Upon assignment by the Company of the
Purchased Interest (or portion thereof) in accordance with this Article XI, the
assignee receiving such assignment shall have all of the rights of the Company
hereunder with respect to the Purchased Interest (or portion thereof).
Section 11.3 Evidence of Assignment; Endorsement on Barton Certificate. Any
assignment of the Purchased Interest (or portion thereof) to any Person may be
evidenced by an instrument of assignment in substantially the form of Exhibit J
or by such other instruments or documents as may be satisfactory to the
Company, the Agent and the assignee. The Company authorizes the Agent to, and
the Agent agrees that it shall endorse the Barton Certificate to, reflect any
assignments made pursuant to this Article XI or otherwise.
Section 11.4 Rights of the Banks and Collateral Agent. HSB hereby agrees
that, upon notice to HSB, the Collateral Agent may exercise all the rights of
the Agent hereunder, with respect to the Purchased Interest (or portions
thereof), and Collections with respect thereto, which are owned by the Company,
and all other rights and interests of the Company in, to and under this
Agreement and the Barton Certificate. Without limiting the foregoing, upon
such notice, the Collateral Agent may (i) give HSB and the Servicer notice of
the occurrence of an Intermediate Event, (ii) give a Servicer Termination
Notice pursuant to Section 6.2 and (iii) direct the Servicer to take those
actions provided for in Section 4.10, in each case, to the same extent as the
Agent might have done.
ARTICLE XII
MISCELLANEOUS
Section 12.1 Notices, etc. Except where telephonic instructions or notices
are authorized herein to be given, all notices, demands, instructions and other
communications required or permitted to be given to or made upon any party
hereto shall be in writing and shall be personally delivered or sent by
registered, certified or express mail, postage prepaid, return receipt
requested, or by prepaid Telex, facsimile or telegram (with messenger delivery
specified in the case of a telegram) and shall be deemed to be given for
purposes of this Agreement on the day that such writing is delivered or sent to
the intended recipient thereof in accordance with the provisions of this
Section 12.1. Unless otherwise specified in a notice sent or delivered in
accordance with the foregoing provisions of this Section, notices, demands,
instructions and other communications in writing shall be given to or made upon
the respective parties hereto at their respective addresses (or to their
respective Telex or facsimile numbers) indicated below, and, in the case of
telephonic instructions or notices, by calling the telephone number or numbers
indicated for such party below:
If to the Company:
Barton Capital Corporation
6707-D Fairview Road
Charlotte, North Carolina 28210
Attention: Douglas K. Johnson
Tel. No. 704/365-0569
Facsimile No. 704/365-1362
(with a copy to the Agent)
If to HSB:
Hurley State Bank
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: Robert L. Wieseneck
Tel. No. 847/405-0900
Facsimile No. 847/405-3854
With a copy to:
Dean Witter, Discover & Co.
Office of the Treasurer
Two World Trade Center, 56th Floor
New York, New York 10048
Attention: Birendra Kumar
Dean Witter, Discover & Co.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: Michael J. Hartigan, Jr.
If to SPS:
SPS Payment Systems, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: Robert L. Wieseneck
Tel. No. (847) 405-0900
Facsimile No. (847) 405-3854
With a copy to:
Dean Witter, Discover & Co.
Office of the Treasurer
Two World Trade Center, 56th Floor
New York, New York 10048
Attention: Birendra Kumar
Dean Witter, Discover & Co.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: Michael J. Hartigan, Jr.
If to SPST:
SPS Transaction Services, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: Robert L. Wieseneck
Tel. No. (847) 405-0900
Facsimile No. (847) 405-3854
With a copy to:
Dean Witter, Discover & Co.
Office of the Treasurer
Two World Trade Center, 56th Floor
New York, New York 10048
Attention: Birendra Kumar
Dean Witter, Discover & Co.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: Michael J. Hartigan, Jr.
If to the Limited Guarantor:
Dean Witter, Discover & Co.
Office of the Treasurer
Two World Trade Center, 56th Floor
York, New York 10048
Attention: Birendra Kumar
If to the Agent:
Societe Generale
1221 Avenue of the Americas
New York, New York 10020
Attention: Barry Wood
Tel. No. (212) 278-7237
Facsimile No. (212) 278-7320
Section 12.2 Successors and Assigns. This Agreement shall be binding upon
HSB, SPS, SPST, the Servicer, the Limited Guarantor, the Agent and the Company
and their respective successors and assigns and shall inure to the benefit of
HSB, SPS, SPST, the Servicer, the Limited Guarantor, the Agent and the Company
and their respective successors and assigns; provided that, except as otherwise
expressly provided herein, HSB, SPS, SPST, the Servicer and the Limited
Guarantor shall not assign any of their rights or obligations hereunder without
the prior written consent of the Company and the Agent. This Agreement shall
create and constitute the continuing obligations of the parties hereto in
accordance with its terms, and shall remain in full force and effect until such
time as the Net Certificate Amount has been reduced to zero and all other
amounts due to the Company and the Agent have been paid in full; provided,
however, that rights and remedies with respect to any breach of any
representation and warranty made by the parties hereto pursuant to Article III
and the indemnification provisions of Article VII and Section 12.10 shall be
continuing and shall survive any termination of this Agreement.
Section 12.3 Severability Clause. Any provisions of this Agreement which
are prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
Section 12.4 Amendments; Governing Law. This Agreement and the rights and
obligations of the parties hereunder (i) may not be changed orally but only by
an instrument in writing signed by the party against which enforcement is
sought and (ii) shall be construed in accordance with and governed by the laws
of the State of Illinois.
Section 12.5 HSB's Obligations. It is expressly agreed that, anything
contained in this Agreement to the contrary notwithstanding, HSB shall be
obligated to perform all of its obligations under the Accounts to the same
extent as if the Company had no interest in the Transferred Property and the
Company shall have no obligations or liability under the Accounts to any
Obligor by reason of or arising out of this Agreement nor shall the Company be
required or obligated in any manner to perform or fulfill any of the
obligations of HSB under or pursuant to any of the Accounts.
Section 12.6 No Bankruptcy Petition Against the Company. HSB, the Servicer
and the Limited Guarantor covenant and agree and any Successor Servicer or
Affiliate Successor Servicer shall covenant and agree that prior to the date
which is one year and one day after the payment in full of all short-term
promissory notes issued by the Company it will not institute against, or join
any other Person in instituting against, the Company any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
proceedings under any federal state bankruptcy or similar law.
Section 12.7 Setoff. HSB, SPS, SPST, the Servicer and the Limited Guarantor
hereby irrevocably and unconditionally waive all right of set-off that they may
have under contract (including this Agreement), applicable law or otherwise
with respect to any funds or monies of the Company at any time held by or in
the possession of HSB, SPS, SPST, the Servicer or the Limited Guarantor.
Section 12.8 No Recourse. Except as otherwise expressly provided in this
Agreement, it is understood and agreed that HSB, the Servicer and the Limited
Guarantor shall not be liable for the payment of principal of Liquidity
Purchases, Commercial Paper or the payment of Credit Advances or other losses
suffered by the Company in respect of the Barton Certificate. The preceding
sentence shall not relieve HSB, the Servicer and the Limited Guarantor from any
liability hereunder with respect to its representations, warranties, covenants
and other payment and performance obligations herein described.
Section 12.9 Costs and Expenses.
(a) All costs and expenses incurred by the Company or the Agent in
connection with (i) the preparation, execution, delivery and periodic auditing
of this Agreement, the Barton Certificate and all other documents furnished
pursuant hereto or thereto or in connection herewith or therewith, (ii) any
amendments or modifications (or supplements) to this Agreement, the Barton
Certificate and all other documents furnished pursuant hereto or thereto or in
connection herewith or therewith requested by HSB, the Limited Guarantor or SPS
and (iii) the enforcement of the obligations of HSB, the Limited Guarantor or
SPS hereunder, under the Barton Certificate or any other document furnished
pursuant hereto or in connection herewith or therewith, including reasonable
attorneys' fees and expenses, shall be paid by HSB on demand.
(b) In addition, HSB agrees to pay any and all stamp and other taxes and
fees payable or determined to be payable in connection with the execution,
delivery, filing and recording of this Agreement, the Barton Certificate or the
other documents to be delivered hereunder or thereunder and agrees to indemnify
the Agent and the Company against any liabilities with respect to or resulting
from any delay in paying or omission to pay such taxes and fees.
Section 12.10 No Waiver; Remedies. No failure on the part of the Agent or
the Company to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 12.11 Further Assurances. HSB agrees to do such further acts and
things and to execute and deliver to the Company or the Agent such additional
assignments, agreements, powers and instruments as are reasonably required by
the Agent to carry into effect the purposes of this Agreement or to better
assure and confirm unto the Company or the Agent its rights, powers and
remedies hereunder.
Section 12.12 Confidentiality. The Company and the Agent shall not, without
the prior written consent of HSB or SPS, disclose to any Person not party to
this Agreement any information with respect to the Receivables, the Accounts or
the Merchants contained in any computer records, analyses, compilations, data,
studies or other documents or other information with respect to the
Receivables, the Accounts or the Merchants (the "Information") furnished at any
time to the Company or the Agent hereunder; provided, however, that the Company
and the Agent may disclose to any Person such portion of the Information which
(a) is or has been filed with any Governmental Authority by HSB, SPS or any
Affiliate thereof and is generally available to the public, (b) the Agent, the
Company or any assignee of the Company is required to disclose by law or by any
Governmental Authority, or (c) the Agent, in good faith, believes is necessary
or desirable to disclose to any actual or potential lender to the Company and
to any actual or potential participant or assignee of any such lender
(provided, in each case, such Person agrees to confidentiality provisions
similar to those herein and is not a direct competitor of HSB and SPS in the
private label credit card business) or (d) the Agent, in good faith, believes
is necessary or desirable to disclose to a rating agency then rating the
Company's or the Agent's securities; provided, that, if the Agent or the
Company advises HSB or SPS that, in the good faith judgment of the Company or
the Agent, it is necessary or advisable to disclose certain Information in a
legal or administrative proceeding, HSB or SPS shall use its best efforts to
render such Information to the Agent or the Company in a format acceptable to
HSB or SPS and the Agent or the Company or otherwise to accommodate the
reasonable needs of HSB or the Agent; provided, further, that, without limiting
the foregoing, the Agent may disclose Information relating to the Account
Schedule delivered to the Agent from time to time (1) to a Successor Servicer
or (2) with the consent of HSB, to bona fide creditors or potential creditors
of HSB for the limited purpose of enabling any such creditor to identify
Receivables or Accounts subject to this Agreement. The Agent shall use
reasonable efforts to promptly notify by telephone one of the persons listed on
Schedule III of the Agent's intent to disclose any Information pursuant to
clause (c) above. The Agent shall promptly notify HSB of the disclosure of any
Information to any Person pursuant to clause (b) above. The Agent shall
provide HSB with notice ten Business Days prior to disclosure of any
Information to any Person pursuant to clause (2) above.
Section 12.13 Company's Purchase Decision. The Company, with the assistance
of its financial advisors, is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Barton Certificate.
The Company is able to bear the economic risk of its investment in the Barton
Certificate for an indefinite period of time. The Company has had an
opportunity to ask questions and receive answers concerning the Barton
Certificate and has had full access to such other information concerning HSB
and the transactions contemplated hereby as it has requested. The Company
hereby represents that it is acquiring the Barton Certificate for its own
account with the present intention of holding such security for purposes of
investment, and that it has no intention of selling the Barton Certificate in a
public distribution in violation of the federal securities laws or any
applicable state securities laws; provided that nothing contained shall prevent
the Company from assigning the Barton Certificate in compliance with Article
XI.
Section 12.14 Rating Agency Notices. The Company agrees to deliver to
Moody's and S&P copies of any notices received by the Company pursuant to
Sections 2.3(b), 2.5(b)(i), 2.6(b)(i), and 2.7(b)(i) hereof, and agrees to
deliver to Moody's and S&P copies of any notice given by the Company pursuant
to Section 11.1 hereof, in each case promptly after receipt or delivery by the
Company thereof, as the case may be.
Section 12.15 Counterparts. This Agreement may be executed in any number of
copies, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument.
Section 12.16 Headings. Section headings used in this Agreement are for
convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, HSB, SPS, the Limited Guarantor, the Agent and the
Company have caused this Agreement to be executed by their respective officers
thereunto duly authorized as of the day and year first above written.
HURLEY STATE BANK, as Seller
By: /s/ Robert L. Wieseneck
Name: Robert L. Wieseneck
Title: President
DEAN WITTER, DISCOVER & CO., as
Limited Guarantor
By: /s/ Thomas C. Schneider
Name: Thomas C. Schneider
Title: Executive Vice President
and Chief Financial Officer
SPS PAYMENT SYSTEMS, INC., as Servicer
By: /s/ Robert L. Wieseneck
Name: Robert L. Wieseneck
Title: President and Chairman of
the Board
BARTON CAPITAL CORPORATION, as
Purchaser
By: /s/ Elizabeth S. Eldridge
Name: Elizabeth S. Eldridge
Title: Vice President
SOCIETE GENERALE, as the Agent
By: /s/ Martin J Finan
Name: Martin J. Finan
Title: Director
Agreed solely with respect
to Section 4.11:
SPS TRANSACTION SERVICES, INC.
By: /s/ Robert L. Wieseneck
Name: Robert L. Wieseneck
Title: President and Chief Executive Officer
<TABLE> <S> <C>
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