United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
250 N. Shadeland Avenue, Indianapolis, IN 46219
(Address of principal executive office) (Zip Code)
(317) 231-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at November 12, 1999
Class A Common Stock, without par value 5,108,016 Shares
- --------------------------------------- ----------------
Class B Common Stock, without par value 8,150,266 Shares
- --------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (unaudited):
Consolidated Condensed Balance Sheets as of
September 30, 1999 and June 30, 1999 3
Consolidated Condensed Statements of Earnings
for the Three Months Ended September 30, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended September 30, 1999 and 1998 5
Consolidated Condensed Statement of Shareholders' Equity for the
Three Months Ended September 30, 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. OTHER INFORMATION 21
Signatures 22
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
Assets 1999 1999
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 7,638 $ 8,088
Restricted cash 12,104 12,379
Receivables held for sale, net 230,189 267,316
Retained interest in securitized assets 194,463 190,865
Accrued interest receivable 1,892 2,035
Property, equipment, and leasehold improvements, net 8,593 8,375
Other assets 22,959 25,868
-------- --------
Total Assets $477,838 $514,926
======== ========
Liabilities and Shareholders' Equity
Liabilities
Amounts due under warehouse facilities $169,815 $185,500
Long-term debt 177,000 199,000
Accrued interest payable 1,914 5,287
Amounts due to trusts 12,707 13,152
Dealer premiums payable 864 2,564
Current and deferred income taxes payable 14,085 16,022
Other payables and accrued expenses 3,648 3,922
-------- --------
Total Liabilities 380,033 425,447
-------- --------
Commitment and Contingencies
Shareholders' Equity
Preferred Stock, without par value, authorized
10,000,000 shares; none issued and outstanding -- --
Class A Common Stock, without par value,
authorized 30,000,000 shares;
5,101,616 and 5,099,344 shares issued and
outstanding at September 30, 1999 and
June 30, 1999, respectively 58,464 58,452
Class B Common Stock, without par value,
authorized 20,000,000 shares;
8,150,266 shares issued and outstanding
at September 30, 1999 and June 30, 1999, respectively -- --
Accumulated other comprehensive earnings, net of income taxes 3,094 199
Retained earnings 36,247 30,828
-------- --------
Total Shareholders' Equity 97,805 89,479
-------- --------
Total Liabilities and Shareholders' Equity $477,838 $514,926
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Interest on receivables held for sale $ 8,145 $ 8,251
Retained interest and other 5,728 5,632
----------- -----------
Total interest income 13,873 13,883
Interest expense 6,564 7,105
----------- -----------
Net interest margin 7,309 6,778
Provision for estimated credit losses 750 2,325
----------- -----------
Net interest margin after provision
for estimated credit losses 6,559 4,453
----------- -----------
Gain on sales of receivables, net 6,530 2,706
Servicing fees 6,068 4,953
Late charges and other fees 1,505 1,206
----------- -----------
Other revenues 14,103 8,865
----------- -----------
Salaries and benefits 6,927 5,670
Other general and administrative expenses 4,914 4,321
----------- -----------
Total operating expenses 11,841 9,991
----------- -----------
Earnings before provision for income taxes 8,821 3,327
Provision for income taxes 3,402 1,270
----------- -----------
Net earnings $ 5,419 $ 2,057
=========== ===========
Net earnings per common share (basic & diluted) $ 0.41 $ 0.16
=========== ===========
Basic weighted average number of common
shares outstanding 13,250,660 13,231,482
=========== ===========
Diluted weighted average number of common
shares outstanding 13,295,546 13,231,482
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,419 $ 2,057
Adjustments to reconcile net earnings to net cash
from operating activities:
Increase in receivables held for sale, net of liquidations (330,869) (398,641)
Dealer premiums paid, net on receivables held for sale (9,812) (13,342)
Proceeds from securitization of receivables held for sale 364,792 351,379
Gain on sales of receivables (4,601) (12,713)
Impairment of retained interest in securitized assets 240 3,542
Accretion of discount on retained interest in securitized assets (5,371) (5,026)
Provision for estimated credit losses 750 2,325
Amortization and depreciation 904 1,279
Restricted cash 275 6,620
Other assets and accrued interest receivable 1,520 (3,007)
Amounts due to trusts (445) (3,543)
Other payables and accrued expenses (5,584) (394)
--------- ---------
Net cash from operating activities 17,218 (69,464)
--------- ---------
Cash flows from investing activities:
Collections on retained interest in securitized assets
and change in spread accounts 21,011 10,934
Capital expenditures (560) (677)
--------- ---------
Net cash from investing activities 20,451 10,257
Cash flows from financing activities:
Principal payment on long-term debt (22,000) (22,000)
Stock options exercised 12 --
Net change in warehouse credit facilities (15,685) 11,685
Payment of borrowing fees (446) --
--------- ---------
Net cash from financing activities (38,119) (10,315)
--------- ---------
Change in cash and cash equivalents (450) (69,522)
Cash and cash equivalents, beginning of period 8,088 75,612
--------- ---------
Cash and cash equivalents, end of period $ 7,638 $ 6,090
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid $ 7,439 $ 1
Interest paid $ 9,782 $ 11,718
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Shareholders' Equity
For the Three Months Ended September 30, 1999
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Number of Common Stock Accumulated
Shares Outstanding Other Total
------------------------------------- Common Comprehensive Retained Shareholders'
Class A Class B Stock Income Earnings Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 5,099,344 8,150,266 $ 58,452 $ 199 $ 30,828 $ 89,479
Comprehensive earnings:
Net earnings - - - - 5,419 5,419
Net unrealized gain on retained
interest in securitized assets - - - 4,656 - 4,656
Income taxes related to unrealized
gain in securitized assets - - - (1,761) - (1,761)
------------------
Total comprehensive earnings 8,314
Stock options exercised 2,272 - 12 - - 12
-----------------------------------------------------------------------------------------------
Balance at September 30, 1999 5,101,616 8,150,266 $ 58,464 $ 3,094 $ 36,247 $ 97,805
===============================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
Note 1 - Basis of Presentation
The forgoing consolidated condensed financial statements are unaudited.
However, in the opinion of management, all adjustments necessary for a fair
presentation of the results of the interim period presented have been included.
All adjustments are of a normal and recurring nature. Results for any interim
period are not necessarily indicative of results to be expected for the year.
The consolidated condensed financial statements include the accounts of Union
Acceptance Corporation ("UAC") and its subsidiaries.
During fiscal 1995, Union Acceptance Funding Corporation, UAC
Securitization Corporation, Performance Funding Corporation and Performance
Securitization Corporation were formed as wholly-owned subsidiaries of UAC.
During fiscal 1996, UAC Boat Funding Corp. was formed as a wholly- owned
subsidiary of UAC. In fiscal 1997, UAC Finance Corporation was formed as a
wholly-owned subsidiary of UAC. Circle City Car Company and Union Acceptance
Receivables Corporation were formed as wholly-owned subsidiaries of UAC during
the first and second quarters, respectively, of fiscal 1998.
The consolidated condensed interim financial statements have been
prepared in accordance with Form 10-Q specifications, and, therefore, do not
include all information and footnotes normally shown in annual financial
statements. A summary of the Company's significant accounting policies is set
forth in "Note 1" of the "Notes to Consolidated Financial Statements" in the
Company's Annual Report on Form 10-K for the year ended June 30, 1999.
In determining the fair value of the Retained Interest in Securitized
Assets ("Retained Interest"), the Company must estimate the future rates of net
credit losses and credit loss severity, delinquencies and prepayments, as they
impact the amount and timing of the estimated cash flows. The Company estimates
prepayments by evaluating historical prepayment performance of comparable
receivables and the impact of trends in the economy. The Company has used annual
prepayment estimates ranging from 22.85% to 28.00% and 16.07% to 20.53% on Tier
I and Tier II receivables, respectively at September 30, 1999. The Company
estimates net credit losses and credit loss severity using available historical
loss data for comparable receivables and the specific characteristics of the
receivables purchased by the Company. The Company used net credit losses of
4.00% to 6.47% and 12.00% to 15.29% on Tier I and Tier II receivables,
respectively, as a percentage of the original principal balance over the life of
the receivables to value Retained Interest at September 30, 1999. The Company
determines the estimated fair value of its Retained Interest by discounting the
expected cash flows released from the Trust (the cash out method) using a
discount rate which the Company believes is commensurate with the risks
involved. The Company used tiered discount rates based on a pool's specific risk
factors up to 900 basis points over the applicable U.S. Treasury Rate of 8.18%
to 14.60% and 11.68% to 15.46% on Tier I and Tier II receivables, respectively
at September 30, 1999. The weighted average discount rate used to value Retained
Interest at September 30, 1999 was 12.98%.
Note 2 - Reclassification
Certain amounts for the prior period have been reclassified to conform
to the current period presentation.
Note 3 - Retained Interest and Other Interest Income
Retained interest and other interest income primarily includes the
discount accretion recognized on Retained Interest, the discount accretion
related to the servicing asset, interest earned on cash collection accounts on
all securitization transactions before January 1, 1997, and interest earned on
cash and cash equivalents.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
Note 4 - Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information ("SFAS
131") effective June 30, 1999. SFAS 131 provides new guidance on segment
reporting. The Company determined it has a single reportable segment which is
acquiring, securitizing and servicing retail automobile installment sales
contracts originated by dealerships affiliated with major domestic and foreign
automobile manufacturers. The single segment was determined based on
management's approach to operating decisions, assessing performance and
reporting financial information.
Note 5 - Earnings Per Share
Earnings per Share have been computed on the basis of the weighted
average number of common shares outstanding in accordance with Statement of
Financial Standards No. 128 "Earnings per Share" (EPS). The following is a
reconciliation of the weighted average common shares for the basic and diluted
earnings per share computations:
Three Months Ended
September 30,
----------------------------
1999 1998
---------- ----------
Basic EPS:
Weighted average common shares 13,250,660 13,231,482
========== ==========
Diluted EPS:
Weighted average common shares 13,250,660 13,231,482
Dilutive effect of stock options 44,886 --
---------- ----------
Weighted average common and
incremental shares 13,295,546 13,231,482
========== ==========
The effect of stock options not exercised during the three months ended
September 30, 1999 are dilutive although the effect on earnings per share is
less than $.01. The effect of stock options not exercised during the three
months ended September 30, 1998 are anti-dilutive and therefore not included in
weighted average common shares.
Note 6 - Current Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement, as amended, is effective for
fiscal years beginning after June 15, 2000, with earlier application allowed.
Management is currently assessing the impact, if any, of this Statement on the
financial condition and operations of the Company upon adoption.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
Note 7 - Retained Interest in Securitized Assets
Retained Interest in Securitized Assets is recorded as an "available
for sale" security and is recorded at fair value with unrealized gains and
losses attributable to change in fair value, net of income taxes, recorded as a
separate component of shareholders' equity ("accumulated other comprehensive
earnings"). Other than temporary impairment charges are recorded through
earnings as a component of gain on sale of receivables, net.
Retained Interest in Securitized Assets is as follows (in thousands) at:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
----------- -----------
<S> <C> <C>
Estimated gross interest spread from receivables,
net of estimated prepayments and fees $ 268,900 $ 248,687
Estimated dealer premium rebates refundable 21,389 22,923
Estimated credit losses on securitized receivables (107,422) (104,448)
Spread accounts 62,238 69,757
Discount to present value (50,642) (46,054)
----------- -----------
$ 194,463 $ 190,865
=========== ===========
Outstanding balance of securitized receivables $ 2,351,269 $ 2,256,415
=========== ===========
Estimated credit losses as a percentage of
securitized receivables serviced 4.57% 4.63%
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company derives substantially all of its earnings from the
acquisition, securitization and servicing of retail installment sales contracts
and installment loan agreements. The retail installment sales contracts are
originated by dealerships affiliated with major domestic and foreign
manufacturers and the loan agreements are originated by the Company as a result
of referrals by the dealerships. To fund the acquisition of these receivables
prior to securitization, the Company utilizes a revolving warehouse credit
facility, discussed in "Liquidity and Capital Resources." Through
securitizations, the Company periodically pools and sells receivables to a trust
which issues Securities to investors representing pro-rata interests in the
receivables sold or notes representing the indebtedness of the trust secured by
the receivables sold. When the Company sells receivables in a securitization, it
records a gain (or loss) on sale of receivables and establishes Retained
Interest in Securitized Assets ("Retained Interest") as an asset. Excess cash
flows are recorded against Retained Interest as received over the life of the
related securitization.
Acquisition Volume. The Company currently acquires receivables in 35
states from over 4,200 manufacturer-franchised auto dealerships. The Company
focuses its efforts on acquiring receivables on late model used and, to a lesser
extent, new automobiles made to purchasers who exhibit a favorable credit
profile ("Tier I"). Total receivable acquisitions were $330.3 million for the
quarter ended September 30, 1999, compared to $368.7 million for the quarter
ended June 30, 1999, and $404.5 million for the same quarter of last fiscal
year. Receivable acquisitions for the quarter ended September 30, 1998, were the
highest they have been in the history of the Company. The Company's primary
focus is on acquiring high quality, profitable receivables. The Company operated
in a relatively favorable interest rate environment during the prior fiscal year
which contributed to higher acquisition volume. During the first quarter of
fiscal 2000, the Company experienced pricing pressures due to increasing
treasury rates and as a result experienced lower receivable acquisitions. See -
"Discussion of Forward-Looking Statements".
Gross and Net Spreads. The gross and net spreads on the first quarter
securitization of fiscal 2000 were 7.09% and 6.20% compared to 7.26% and 5.15%,
respectively, over the same quarter of last year. Gross spread is defined as the
difference between the weighted average receivable rate and the rate born by the
related asset-backed securities. Net spread is defined as gross spread less
servicing fees, upfront costs, ongoing credit enhancement and trustee fees, and
hedging gains or losses.
Net spreads are currently targeted at 5.50% to 6.00% on securitizations
(assuming a pricing spread for asset-backed securities over the two-year
treasury note of 100 basis points) for the remaining three quarters of fiscal
2000. Management believes that by targeting a spread of 7.00% to 7.50% between
receivable rates and the two-year treasury rate that these net spreads can be
achieved. Although management believes these spreads can be achieved, material
factors affecting the net spreads are difficult to predict and could cause
management's projections to be materially inaccurate. These include current
market conditions with respect to interest rates and demand for asset-backed
securities generally and for securities issued in securitizations sponsored by
the Company. See - "Discussion of Forward-Looking Statements".
Gain on Sales of Receivables, Net and Interest Rate Risk. Gain on sales
of receivables continues to be a significant element of the Company's net
earnings. The gain on sales of receivables is affected by several factors but is
primarily affected by the amount of receivables securitized, the net spread, and
the level of estimation for net credit losses.
The Company's sources for funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs a hedging strategy to mitigate this risk. The Company
uses a hedging strategy that primarily consists of the execution of forward
interest rate swaps having a maturity approximating the average maturity of the
receivable production during the relevant period. There is no assurance that
this strategy will completely offset changes in interest rates. In particular,
such strategy depends on management's estimates of receivable acquisition volume
and timing of its securitizations. The Company realizes a gain on its hedging
transactions during periods of increasing interest rates and realizes a loss on
such transactions during periods of decreasing interest rates. The hedging gain
or loss will in part offset changes in interest rates as reflected by a lower or
higher reported gain on sales of receivables, respectively. Recognition of
unrealized gains or losses is deferred until the sale of receivables during the
securitization. On the date of the sale, deferred hedging gains and losses are
recognized as a component of the gain on sales of receivables, net.
Portfolio Performance. The Company has seen stabilization of net credit
losses during the last three quarters. Tier I net credit losses totaled 1.97%
for the quarter ended September 30, 1999, compared to 1.96% and 2.78% for the
quarters ended June 30, 1999 and September 30, 1998, respectively. The Company
attributes the improvement to the implementation of tighter credit standards in
March 1997 and strategic changes made in its origination and collection
departments. Delinquency on the Tier I automobile portfolio was 3.18% at
September 30, 1999, compared to 2.63% and 3.05% at June 30, 1999 and September
30, 1998, respectively. Management believes that the increase in delinquency is
a result of several factors, including inefficiencies in the collection process
and general seasonality experienced in the portfolio. Recoveries as a percentage
of gross charge-offs on the Tier I portfolio decreased slightly to 41.12% for
the quarter ended September 30, 1999, compared to 41.50% for the quarter ended
June 30, 1999, and increased from 38.67% for the same quarter of last year. This
increase over the prior year is primarily due to an increase in the retail sale
of repossessed vehicles at the Company's new car franchised dealership in
Indianapolis for the quarter ended September 30, 1999, compared to the quarter
ended September 30, 1998. This method of disposing of repossessions along with
stricter monitoring of the repossession and resale process should increase the
recovery rate over time. Recovery rates for repossessed automobiles sold by the
Company's retail operation are significantly higher than recovery rates on
vehicles sold at auction. Approximately 15% of repossessed automobiles were sold
at the Company's retail operation during the three months ended September 30,
1999, compared to approximately 9% for the three months ended September 30,
1998. For those automobiles sold at retail during the quarter ended September
30, 1999, the net proceeds received were approximately 58% of the percentage of
the gross charge-off amount. See "Discussion of Forward-Looking Statements".
Provisions are made for estimated net credit losses in conjunction with
each receivable sale. The current assumption utilized in the gain on sale of
receivables calculation for estimated net credit losses on the fiscal 2000 first
quarter securitization was 4.50% over the life of the pool based on a combined
sale of Tier I, Tier II and modified receivables. Estimated net credit losses as
a percentage of securitized receivables serviced (inherent in Retained Interest)
was 4.57% at September 30, 1999, compared to 4.63% and 4.64% at June 30, 1999,
and September 30, 1998, respectively.
<PAGE>
Tier I Portfolio. Set forth below is certain information concerning the
Company's experience pertaining to delinquencies and net credit losses on the
Tier I fixed rate retail automobile, light truck and van receivables serviced by
the Company. There can be no assurance that future delinquency and net credit
loss experience on receivables will be comparable to that set forth below.
See "Discussion of Forward-Looking Statements".
<TABLE>
<CAPTION>
Tier I Delinquency Experience
------------------------------------------------------------------------------------
At September 30, 1999 At June 30, 1999 At September 30, 1998
----------------------- --------------------------- ----------------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 217,296 $2,530,654 213,746 $2,464,371 194,882 $2,151,695
Delinquencies:
30-59 days 4,714 50,734 3,962 41,475 3,741 $ 38,040
60-89 days 1,955 20,439 1,614 16,654 1,873 19,652
90 days or more 875 9,291 670 6,754 793 7,966
--------- ------------ ----------- ------------ --------- -----------
Total delinquencies 7,544 80,464 6,246 64,883 6,407 $ 65,658
========= ============ =========== ============ ========= ===========
Delinquency as a percentage
of servicing portfolio 3.47% 3.18% 2.92% 2.63% 3.29% 3.05%
</TABLE>
As indicated by the above table, delinquency rates based upon
outstanding receivable balances of accounts 30 days past due and over were 3.18%
at September 30, 1999, compared to 2.63% at June 30, 1999, and 3.05% at
September 30, 1998, for the Company's Tier I servicing portfolio.
<TABLE>
<CAPTION>
Tier I Credit Loss Experience
For the Three Months Ended
-----------------------------------------------------------------------------------------
September 30, 1999 June 30, 1999 September 30, 1998
------------------------- ---------------------------- ---------------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 216,508 $2,515,461 211,533 $2,424,663 190,877 $2,088,163
Gross charge-offs 2,003 $ 21,088 1,829 $ 20,308 2,196 $ 23,651
Recoveries 8,671 8,428 9,146
------------ ------------ -----------
Net charge-offs $ 12,417 $ 11,880 $ 14,505
============ ============ ===========
Gross charge-offs as a percentage
of average servicing portfolio (1) 3.70% 3.35% 3.46% 3.35% 4.60% 4.53%
Recoveries as a percentage of
gross charge-offs 41.12% 41.50% 38.67%
Net charge-offs as a percentage
of average servicing portfolio (1) 1.97% 1.96% 2.78%
</TABLE>
(1) Annualized
As indicated in the above table, net credit losses on the Tier I auto
portfolio totaled $12.4 million for the quarter ended September 30, 1999, or
1.97% (annualized) as a percentage of the average servicing portfolio compared
to 1.96% and 2.78% for the quarters ended June 30, 1999, and September 30, 1998,
respectively.
Results of Operations
Net earnings increased 163.4% to $5.4 million, or $0.41 per diluted
share, for the quarter ended September 30, 1999, compared to $2.1 million, or
$0.16 per diluted share, for the quarter ended September 30, 1998. The increase
in net earnings for the quarter ended September 30, 1999 was primarily related
to a higher gain on sale of receivables, net and a lower amount of provision for
estimated credit losses.
Net interest margin after provision for estimated credit losses
increased 47.3% to $6.6 million for the quarter ended September 30, 1999,
compared to $4.5 million for the quarter ended September 30, 1998. The increase
was primarily related to a lower provision for estimated credit losses in the
first quarter of fiscal 2000 compared to the same quarter of the previous fiscal
year.
Interest on receivables held for sale decreased 1.3% to $8.1 million
for the quarter ended September 30, 1999, compared to $8.3 million for the same
period of fiscal 1999. The decrease in interest on receivables held for sale was
primarily a result of a decrease in the average outstanding balance of
receivables held for sale for the quarter to $239.0 million, compared to $256.1
million for the quarter ended September 30, 1998.
Retained interest and other interest income increased 1.7% to $5.7
million for the quarter ended September 30, 1999, respectively, compared to $5.6
million for the quarter ended September 30, 1998. Other interest income related
to discount accretion was $5.4 million for the quarter ended September 30, 1999,
compared to $5.1 million for the quarter ended September 30, 1998. The discount
component of Retained Interest increased at June 30, 1998 by implementing the
"cash out" method and again at June 30, 1999 by increasing the discount rate
used to record the gain on sale of receivables. (Discussed in detail in the
Company's Annual Report on Form 10-K for fiscal 1999). The resulting effect of
this increase was an increase in the amount of the discount. However, due to a
Retained Interest valuation policy change in the second quarter of fiscal 1999,
the accretion of the discount was reduced on some pools that were determined to
be at risk for an other than temporary impairment. Other interest income related
to the restricted cash accounts (collection and spread accounts) for the
quarters ended September 30, 1999, and 1998 were $357,000 and $522,000,
respectively.
Interest expense decreased 7.6% to $6.6 million for the quarter ended
September 30, 1999, compared to $7.1 million for the quarter ended September 30,
1998. The decrease was a result of lower long-term debt interest expense related
to the required second principal payment of $22.0 million on Senior Debt during
August 1999 as well as lower average warehouse borrowing needs due to lower
receivable acquisitions.
Provision for estimated credit losses decreased 67.7% to $750,000 for
the quarter ended September 30, 1999, compared to $2.3 million for the quarter
ended September 30, 1998. The decrease is primarily due to a smaller portfolio
of Tier II and modified receivables as well as improved credit quality on the
new receivables acquired.
Gain on sales of receivables, net increased 141.3% to $6.5 million for
the quarter ended September 30, 1999, compared to $2.7 million for the quarter
ended September 30, 1998. The gain for the quarters ended September 30, 1999 and
1998, consisted of gains on securitization transactions of $6.8 million and $6.2
million offset by charges for other than temporary impairments of Retained
Interest of $240,000 and $3.5 million, respectively. Unrealized gains on
Retained Interest are not charged to income. (See - Financial Condition -
"Retained interest in securitized assets," below). The increase in the
securitization transaction gain relates to a higher volume of receivables
securitized offset by a higher discount rate assumption used in the fiscal 2000
first quarter securitization compared to the fiscal 1999 first quarter
securitization. The receivables sold in the securitization for the quarters
ended September 30, 1999 and 1998, of $364.8 million and $351.4 million,
respectively, primarily included receivable acquisitions for the months of June,
July and August of 1999 and 1998, respectively.
<PAGE>
Information relating to the first quarter fiscal 2000 and 1999
securitizations is in the following table.
<TABLE>
<CAPTION>
First Quarter Securitizations Fiscal
------------------------------------------
2000 1999
---- ----
1999 - C 1998 - C
<S> <C> <C>
Volume (in millions) $364.8 $351.4
Weighted average receivable rate 13.31% 12.81%
Certificate rate 6.22% 5.55%
Gross spread 7.09% 7.26%
Net spread 6.20% 5.15%
Weighted average life (in years) 1.95 2.06
Credit loss assumption 4.50% 4.40%
Annual prepayment speed assumption 28.00% 25.00%
Discount rate assumption 14.66% 9.58%
Weighted average remaining maturity (in months) 71.1 68.8
</TABLE>
Servicing fees increased 22.5% to $6.1 million for the quarter ended
September 30, 1999, compared to $5.0 million for the quarter ended September 30,
1998. The increase in servicing fees is a result of the increase in average
securitized receivables by 22.5% to $2.3 billion for the first quarter of fiscal
2000, compared to $1.9 billion for the first quarter of fiscal 1999. Servicing
fees consist primarily of contractual servicing fees of 1.0% on Tier I
securitizations.
Late charges and other fees increased 24.7% to $1.5 million for the
quarter ended September 30, 1999, compared to $1.2 million for the quarter ended
September 30, 1998. Other fees consist primarily of late charges and other fee
income and the gross profit from the dealership sales. The increase in the
current quarter resulted primarily from the dealership gross profit on sales of
$324,000 but was offset by a decrease in other fee income related to a decrease
in receivable acquisitions and the use of a higher percentage of generic
contracts.
Salaries and benefits expense increased 22.2% to $6.9 million from $5.7
million for the quarters ended September 30, 1999 and 1998, respectively, and
was primarily related to performance based incentives.
Other general and administrative expense increased 13.7% to $4.9
million for the quarter ended September 30, 1999, compared to $4.3 million for
the quarter ended September 30, 1998. Other operating expense includes occupancy
and equipment costs, outside and professional services, receivable expenses,
promotional expenses, travel, office supplies and other. Total operating
expenses (including salaries and benefits) as a percentage of the average
servicing portfolio was 1.85% for the quarters ended September 30, 1999 and
1998, and continues to be below the industry average.
Financial Condition
Receivables held for sale, net and servicing portfolio. Receivables
held for sale, net includes the principal balance of receivables held for sale,
net of unearned discount and allowance for estimated net credit losses,
receivables in process, and prepaid dealer premiums. The Company's portfolio of
receivables held for sale, net decreased to $230.2 million at September 30,
1999, from $267.3 million at June 30, 1999. The decrease was primarily due to a
higher volume of Tier I receivables securitized compared to Tier I receivables
acquired in the current quarter resulting from lower receivable acquisitions in
the first quarter of fiscal 2000 compared to the fourth quarter of fiscal 1999.
Allowance for net credit losses on receivables held for sale was $2.9 million at
September 30, 1999, compared to $2.8 million at June 30, 1999. The Company
serviced $2.4 billion and $2.3 billion in securitized receivables, and the total
servicing portfolio was $2.6 billion and $2.5 billion as of September 30, 1999,
and June 30, 1999, respectively.
Retained interest in securitized assets ("Retained Interest"). Retained
Interest increased $3.6 million to $194.5 million at September 30, 1999, from
$190.9 million at June 30, 1999. The Retained Interest balance increased or
decreased by the amounts capitalized upon consummation of the first quarter
securitization including estimated dealer premium rebates, collections,
accretion of discount, change in spread accounts, impairment and net change in
unrealized gain. The Company's collections are the receipt of the net interest
spread.
The following table illustrates the components of the increase in Retained
Interest:
Amounts capitalized (including estimated dealer rebates) $ 14,822
Collections (13,492)
Accretion of discount 5,371
Change in spread accounts (7,519)
Impairment (240)
Net change in unrealized gain 4,656
----------
Increase in Retained Interest $ 3,598
==========
Allowance for net credit losses on securitized receivables is included
as a component of Retained Interest. At September 30, 1999, the allowance
related to both Tier I and Tier II securitized receivables totaled $107.4
million or 4.57% of the total securitized receivable portfolio compared to
$104.4 million or 4.63% at June 30, 1999. The Company's assumptions for valuing
Retained Interest on a "cash out" basis at September 30, 1999, include the
Company's latest estimates for net credit losses of 4.00% to 6.47% on Tier I
receivables and 12.00% to 15.29% on Tier II receivables as a percentage of
original principal balance over the life of receivables, annual prepayment
estimates ranging from 22.85% to 28.00% on Tier I receivables and 16.07% to
20.53% on Tier II receivables and discount rates ranging from 8.18% to 14.60% on
Tier I receivables and 11.68% to 15.46% on Tier II receivables. The weighted
average discount rate used to value Retained Interest at September 30, 1999 was
12.98%. Impairment of Retained Interest, an available-for-sale security, is
measured on a disaggregate (pool by pool) basis in accordance with SFAS 115. See
- - "Discussion of Forward-Looking Statements".
Amounts due under revolving warehouse credit facility and long-term
debt. The balance of the revolving warehouse credit facility and the Senior and
Senior Subordinated Notes was $346.8 million at September 30, 1999, compared to
$384.5 million at June 30, 1999. The decrease in borrowings was related to a
required principal payment on the Company's Senior Note in August 1999 of $22.0
million and a decrease in acquisition volume for the period after the first
quarter securitization through September 30, 1999, compared to the same period
ended September 30, 1998.
Current and deferred income taxes payable. Current and deferred income
taxes payable was $14.1 million at September 30, 1999, compared to $16.0 million
at June 30, 1999. The decrease is primarily a result of an extension payment
made during the quarter ended September 30, 1999 for the fiscal 1999 tax
liability offset by the payable associated with current period income.
Liquidity and Capital Resources
Sources and Uses of Cash in Operations. The Company's business requires
significant amounts of cash to support operations. Its primary uses of cash
include (i) acquisition of receivables, (ii) payment of dealer premiums, (iii)
securitization costs including cash held in spread accounts and similar cash
collateral accounts under the revolving warehouse credit facility, (iv) servicer
advances of payments on securitized receivables pursuant to securitization
trusts, (v) losses on hedging transactions realized in connection with the
closing of securitization transactions where interest rates have declined during
the period covered by the hedge, (vi) operating expenses, (vii) payment of
income taxes, and (viii) interest expense. The Company's sources of cash from
operations include (i) standard servicing fees, generally 1.0% per annum of the
Tier I securitized portfolio, (ii) future servicing cash flows, (iii) dealer
premium rebates, (iv) gains on hedging transactions realized in connection with
the closing of securitization transactions where interest rates have increased
during the periods covered by the hedge, (v) interest income and (vi) sales of
receivables in securitization transactions and (vii) proceeds from sale of
interest-only strips in conjunction with securitization transactions. Net cash
from operating activities increased to $17.2 million for the three months ended
September 30, 1999, from net cash from operating activities of ($69.5) million
for the three months ended September 30, 1998. The increase was primarily
attributable to an increase in receivables securitized relative to receivables
acquired. Net cash from investing activities was $20.5 million and $10.3 million
for the three months ended September 30, 1999, and 1998, respectively. The
increase over prior year relates to higher collections on Retained Interest and
change in spread accounts due to lower net credit losses and the release of the
1995B spread account of approximately $7.0 million due to repurchasing the
remaining receivables from this securitization.
Derivative financial instruments. Derivative financial instrument
transactions may represent a source or a use of cash during a given period
depending on the change in interest rates. In the first quarter of fiscal 2000,
derivative financial instrument transactions provided a source of cash of $3.0
million, compared to a use of cash of $5.2 million during the first quarter of
fiscal 1999.
Financing Activities. Net cash from financing activities for the three
months ended September 30, 1999, was ($38.1) million compared to net cash from
financing activities of ($10.3) million for the three months ended September 30,
1998. The decrease was a result of a decrease in warehouse borrowings for the
period after the first quarter securitization through September 30, 1999,
compared to the same period ended September 30, 1998.
The Company has substantial capital requirements to support its ongoing
operations and anticipated growth. The Company's sources of liquidity are
currently funds from operations, securitization transactions and external
financing including long-term debt and the revolving warehouse credit facility.
Historically, the Company has used the securitization of receivable pools as its
primary source of long-term funding. In August 1999, the Company established an
additional source of liquidity through a securitization arrangement with a
commercial paper conduit which will be available for future use as management
deems appropriate. Such facility has a capacity of $250.0 million, all of which
is currently available. Securitization transactions enable the Company to
improve its liquidity, to recognize gains from the sales of the receivable pools
while maintaining the servicing rights to the receivables, and to control
interest rate risk by matching the repayment of amounts due to investors in the
securitizations with the actual cash flows from the securitized assets. Between
securitization transactions, the Company relies primarily on the revolving
warehouse credit facility to fund ongoing receivable acquisitions (not including
dealer premiums). In addition to receivable acquisition funding, the Company
also requires substantial capital on an ongoing basis to fund the advances of
dealer premiums, securitization costs, servicing obligations and other cash
requirements previously described. The Company's ability to borrow under the
revolving warehouse credit facility is dependent upon its compliance with the
terms and conditions thereof. The Company's ability to obtain successor
facilities or similar financing will depend on, among other things, the
willingness of financial institutions to participate in funding automobile
financing business and the Company's financial condition and results of
operations. Moreover, the Company's growth may be inhibited, at least
temporarily, if the Company is not able to obtain additional funding through
these or other facilities, or if it is unable to satisfy the conditions to
borrowing under the revolving warehouse credit facility. The Company
consistently assesses its long-term receivable funding arrangements with a view
to optimizing cash flows and reducing costs. The Company has several options for
funding including, but not limited to, a public asset backed securitization, a
sale into the recently closed commercial paper facility, a private sale, or
temporarily holding the receivables. The Company continues to evaluate market
conditions and available liquidity and could decide to alter the timing of its
securitizations in the future depending on the Company's cash position and
available short-term funding.
Warehouse facility. The Company has borrowing arrangements with an
independent financial institution for a $500.0 million revolving warehouse
credit facility that is insured by a surety bond provider to fund Tier I
receivable acquisitions. At September 30, 1999, $169.8 million of the capacity
was utilized, and an additional $54.1 million was available to borrow based on
the outstanding principal balance of eligible receivables. At June 30, 1999, and
September 30, 1998, $185.5 million and $84.8 million of the capacity was
utilized, and an additional $67.2 million and $62.6 million was available to
borrow based on the outstanding principal balance of eligible receivables,
respectively.
Long-term debt. The Company issued $110.0 million of 8.53% Senior Notes
due August 1, 2002, in connection with the Company's initial public offering.
Interest on the Notes is payable semiannually, and principal payments began
August 1, 1998, and are due on each subsequent August 1, in the amount equal to
approximately 20% of the stated original principal balance. A required principal
payment was made on the Senior Notes in August 1998 and August 1999 of $22.0
million. In April 1996, the Company completed a private placement of $46.0
million of 9.99% Senior Subordinated Notes due March 30, 2003, with interest
payable quarterly and principal due at maturity. In March 1997, the Company
issued $65.0 million of Senior Notes due December 27, 2002. The Notes were
issued as "Series A" in the principal amount of $50.0 million at 7.75% interest
and "Series B" in the principal amount of $15.0 million at 7.97% interest.
Interest on the Notes is payable semiannually and a principal payment is due
March 15, 2002, in the amount equal to approximately 33 1/3% of the stated
original balance, with the remaining principal due at maturity.
The Company's credit agreements, among other things, require compliance
with monthly and quarterly financial maintenance tests and restrict the
Company's ability to create liens, incur additional indebtedness, sell or merge
assets and make investments. The Company is in compliance with all covenants and
restrictions imposed by the terms of indebtedness.
Based on current cash flow projections, management believes that the
Company's existing capital resources, the revolving warehouse credit facility
described above, future earnings, expected growth in receivable acquisitions,
and periodic securitization of receivables should provide the necessary capital
and liquidity for its operations through at least the next twelve months. The
period during which its existing capital resources will continue to be
sufficient will, however, be affected by the factors described above affecting
the Company's cash requirements. A number of these factors are difficult to
predict, particularly including the cash effect of hedging transactions, the
availability of outside credit enhancement in securitizations or other financing
transactions and other factors affecting the net cash provided by
securitizations. Depending on the Company's ongoing cash and liquidity
requirements, market conditions and investor interest, the Company may seek to
issue additional debt or equity securities in the near term. The sale of
additional equity, including Class A Common Stock or preferred stock, would
dilute the interests of current shareholders.
Discussion of Forward-Looking Information
The above discussions and notes to consolidated condensed financial
statements contain forward-looking statements made by the Company regarding its
results of operations, effects of changes in accounting policies, cash flow
needs and liquidity, receivable acquisition volume, target spreads, potential
credit losses, recovery rates, prepayment rates, servicing income, Year 2000
compliance, and other aspects of its business. Similar forward-looking
statements may be made by the Company from time to time. Such forward-looking
statements are subject to a number of important factors that cannot be predicted
with certainty and which could cause such forward-looking statements to be
materially inaccurate. Such factors include, for example, demand for new and
used autos, competition, and consumer credit and delinquency trends. See the
"Discussion of Forward-Looking Information" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for fiscal 1999 which is incorporated herein by this
reference.
Year 2000 Compliance
During the year ended June 30, 1997, the Company began a risk
evaluation of potential Year 2000 issues. The outcome of this evaluation was the
formation of a Year 2000 Committee that consists of officers and employees of
the Company. The purpose of this committee is to assess all risks, analyze
current systems including information technology ("IT") and non-IT systems,
coordinate upgrades and replacements, and report the current and projected
status of all known Year 2000 compliance issues.
During the assessment phase, over thirty service bureaus and system
vendors which include third parties which the Company has a material
relationship were identified that performed or supplied potential Year 2000
compliance issues. The list included eight service bureaus, seven software
vendors, seven hardware vendors, one electric company, six maintenance and
supplies companies and four telecommunications companies. Once the systems were
identified, an immediate correspondence was established for the purpose of
educating the Company on known Year 2000 issues or Year 2000 compliance
certification.
The systems identified were put through one of two possible phases. If
the vendor provided proof that the system in question had proper Year 2000
compliance certification and a testing cycle was possible, an appropriate
testing cycle was performed. If the testing cycle failed or the system had known
Year 2000 issues, a mission critical evaluation and replacement recommendations
were performed.
At this time, all known mission critical systems have been either
replaced or upgraded with Year 2000 compliant solutions. The last of these
upgrades was performed in March 1999, as scheduled. The Company has been
re-testing all systems and plans on completing these tests by November 15, 1999.
Beginning October 1, 1999, the Company entered a "quiet period" on in-house
development and implementations that will last through December 31, 1999. The
purpose of the "quiet period" is to eliminate any new Year 2000 issues by
blocking any new software or hardware installations or upgrades except as may be
necessary to correct a Year 2000 problem.
The replacement or remediation costs for Year 2000 compliance issues
with the Company is estimated to be less than $100,000, which the Company
recognized as incurred. This estimated cost is mostly due to software upgrades
that include new features which are combined with Year 2000 corrections.
The Company estimates that the worst case Year 2000 issue scenario
would be discontinuance of electrical power. Although the Company has numerous
power backup devices, a long-term power outage would have a material adverse
effect on the Company's operations. Although the discontinuance of electrical
power is possible, the Company believes the likelihood of such an outage to be
remote. The Company continuously monitors the status of its Year 2000 plan and,
based on such information, will develop contingency plans as necessary. See -
"Discussion of Forward-Looking Statements".
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company bears the primary risk of loss due to credit losses in its
servicing portfolio. Credit loss rates are impacted by general economic factors
that affect customers' ability to continue to make timely payments on their
indebtedness. Prepayments on receivables in the servicing portfolio reduce the
size of the portfolio and reduce the Company's servicing income. The gain on
sales of receivables in connection with each securitization transaction and the
amount of Retained Interest recognized in each transaction reflect deductions
for estimates of future defaults and prepayments. The carrying value of Retained
Interest may be adjusted periodically to reflect differences between estimated
and actual net credit losses and prepayments on past Securitizations. For
example, if net credit losses increased or decreased by 100 basis points on a
$300.0 million Securitization, the gain on sale would result in a reduction or
an increase of the Gain (Loss) on Sales of Receivables by approximately $3.0
million pre-tax, before consideration of discounting. The same 100 basis points
increase or decrease would result in a reduction or an increase of the Retained
Interest of approximately $24.0 million, before consideration of discounting,
based on a securitized receivable portfolio of $2.4 billion at September 30,
1999. The forgoing examples are developed utilizing the cash flow model employed
by management to calculate the fair value of Retained Interest by changing the
credit loss assumption as described. The Company does not believe fluctuations
in interest rates materially affect the rate of prepayments on receivables.
The Company's sources of funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs derivative financial instruments to mitigate this risk.
The Company uses a hedging strategy that primarily consists of the execution of
forward interest rate swaps having a maturity approximating the average maturity
of the receivable production during the relevant period. There is no assurance
that this strategy will completely offset changes in interest rates. In
particular, such strategy depends on management's estimates of receivable
acquisition volume and timing of its Securitizations. The Company realizes a
gain on its hedging transactions during periods of increasing interest rates and
realizes a loss on such transactions during periods of decreasing interest
rates. The hedging gain or loss should substantially offset changes in interest
rates as seen by a lower or higher reported gain on sales of receivables,
respectively. Recognition of unrealized gains or losses is deferred until the
sale of receivables during the Securitization. On the date of the sale, deferred
hedging gains and losses are recognized as a component of Gain (Loss) on Sales
of Receivables. Increases or decreases in interest rates reduce or increase the
fair value of long-term debt, respectively. At September 30, 1999, the Company
had an unrealized hedging loss on forward interest rate swaps of $289,000 based
on notional amounts outstanding of $371.2 million.
<PAGE>
The following table presents the principal cash repayments and related
weighted average interest rates by maturity date for the current variable rate
and long-term debt at September 30, 1999.
<TABLE>
<CAPTION>
Nine months
ended June
30, 2000 2001 2002 2003 Total Fair Value
-------- ---- ---- ---- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due under warehouse facility $169,800 $ -- $ -- $ -- $169,800 $169,800
Weighted average variable rate 5.12%
Long-term debt $ -- $22,000 $43,667 $ 111,333 $177,000 $155,655
Weighted average fixed rate 0.00% 8.53% 8.14% 8.86% 8.64%
</TABLE>
Sensitivity analysis on Retained Interest
At September 30, 1999, key economic assumptions and the sensitivity of the
current fair value of Retained Interest to immediate 10% and 20% adverse changes
in assumed economics is as follows:
<TABLE>
<CAPTION>
Amounts as of September 30, 1999 Tier I Tier II Total
------ ------- -----
<S> <C> <C> <C>
Fair value of retained interest 192,750,243 7,656,367 200,406,609
Prepayment speed assumption (annual rate) 22.50%-28.00% 16.07% - 20.53%
Impact on fair value of 10% adverse change 186,947,223 7,599,313 194,546,536
Impact on fair value of 20% adverse change 181,451,225 7,543,699 188,994,924
Net loss rate assumption (pool life rate) 4.00% - 6.47% 12.00%-15.29%
Impact on fair value of 10% adverse change 174,407,614 6,473,988 180,881,602
Impact on fair value of 20% adverse change 155,870,532 5,275,948 161,146,480
Discount rate assumption (annual rate) 8.18% - 14.60% 11.68% - 15.46%
Impact on fair value of 10% adverse change 188,467,785 7,506,680 195,974,465
Impact on fair value of 20% adverse change 184,380,313 7,362,158 191,742,471
</TABLE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended September 30, 1999.
<PAGE>
Signatures
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.
Union Acceptance Corporation
November 12, 1999 By: /S/ John M. Stainbrook
----------------------------------------
John M. Stainbrook
President and Chief Executive Officer
November 12, 1999 By: /S/ Rick A. Brown
----------------------------------------
Rick A. Brown
Treasurer, Secretary and
Chief Financial Officer
REMOTE OUTSOURCING AGREEMENT
by and between
ALLTEL INFORMATION SERVICES, INC.
and
UNION ACCEPTANCE CORPORATION
July 1998
<PAGE>
TABLE OF CONTENTS
Page
1. Scope of Services, Description of Exhibits ........... 1
1.1 Services 1
1.2 Exhibits 1
2. Term ................................................. 1
3. Responsibilities of the Parties ...................... 1
3.1 Input Forms and Output Forms ......................... 1
3.2 Delivery 1
3.3 Equipment and Communication Costs .................... 2
3.4 Client's Input Data .................................. 2
3.5 Maintaining Copies of Input .......................... 2
3.6 Compatibility of Non-ALLTEL Systems3
3.7 Audit ................................................ 3
3.8 Days of Operation 3
4. Time of Performance .................................. 4
4.1 Submission of Input .................................. 4
4.2 Acts of God and Equipment Malfunction ................ 4
4.3 Special Requests ..................................... 4
4.4 Correction of Processing Errors ...................... 4
4.5 Client Review of Reports ............................. 4
4.6 Limitation of Liability .............................. 4
5. Planning and Communication ........................... 5
6. Education ............................................ 5
7. Mergers and Acquisitions ............................... 5
8. Enchancements, Replacement Systems, New Subsystems,
New Systems, and Modifications to ALLTEL Batch and
On-Line Systems .......................................... 5
8.1 Announcement ............................................. 5
8.2 Installation of Enhancements and Replacement Systems 6
8.3 Installation of New Subsystems and New Systems ........... 6
8.4 Modifications Requested by Client ........................ 6
8.5 Client Knowledge of System Status ........................ 7
8.6 User Manuals ............................................. 7
9. Regulatory Compliance .................................... 7
10. Confidentiality .......................................... 7
10.1 Confidentiality of Client Data ........................... 7
10.2 ALLTEL Data .............................................. 7
10.3 Inspection of Records .................................... 8
10.4 Legal Process ............................................ 8
10.5 Confidential Agreement ................................... 8
11. Return of Data ........................................... 8
11.1 Program Ownership 8
11.2 Master and Transaction File Ownership .................... 9
12. Disaster Recovery and File Backup ........................ 9
12.1 Disaster Recovery 9
12.2 File Backup .............................................. 9
13. Miscellaneous Services ................................... 10
13.1 Authorized Additional Services ........................... 10
13.2 Repetitive Services ...................................... 10
14. Price Adjustment ......................................... 10
15. Payment and Billing ...................................... 10
16. Termination .............................................. 11
16.1 Right to Terminate ....................................... 11
16.2 Method of Termination .................................... 11
16.3 Data, Systems and Programs11
17. Year 2000 Compliance ..................................... 11
17.1 Responsibility and Obligation ............................ 11
17.2 Year 2000 Compliant Software ............................. 11
17.3 Year 2000 Compliance Exclusions .......................... 12
17.4 Year 2000 Corrections .................................... 12
18. No Interference with Contractual Relationship ............ 13
19. Assignment or Delegation of Duties........................ 13
20. Client and ALLTEL Employees .............................. 13
21. Qualified Personnel ...................................... 13
22. Facilities for ALLTEL Personnel .......................... 13
23. Notices .................................................. 13
24. Paragraph Titles ......................................... 14
25. Counterparts ............................................. 14
26. Increase for Taxes ....................................... 14
27. Standard Reports and Schedules ........................... 14
28. Financial Statements ..................................... 14
29. Governing Law ............................................ 14
30. Insurance ................................................ 14
31. Entire Agreement, Warranty Disclaimers ................... 15
32. Covenant of Good Faith ................................... 15
33. Informal Dispute Resolution .............................. 15
33.1 Dispute Notice ........................................... 15
33.2 Presidents' Meeting ...................................... 15
33.3 Mediation ................................................ 15
33.4 Litigation ............................................... 16
33.5 Exception ................................................ 16
EXHIBITS
A. Software Listing
B. Reports
C. Charges
D. Input/Output Schedule
E. ALLTEL Holiday Schedule
F. ALLTEL Insurance Coverage
G. Guidelines for Disaster Recovery Responsibilities
H. Branch Automation Software License Agreement
I. U.S. Year 2000 (MVS) Status
<PAGE>
ALLTEL INFORMATION SERVICES, INC.
REMOTE OUTSOURCING AGREEMENT
This is an Agreement between ALLTEL INFORMATION SERVICES, INC., an
Arkansas corporation, whose permanent mailing address is 4001 Rodney Parham.
Road, Little Rock, Arkansas 72212 (hereinafter referred to as "ALLTEL") and
UNION ACCEPTANCE CORPORATION, whose permanent mailing address is 250 N.
Shadeland Avenue, Indianapolis, Indiana. 46219 (hereinafter referred to as
"Client"). In consideration of the payments to be made and services to be
performed hereunder, the parties agree as follows:
1. Scope of Services, Description of Exhibits.
1.1 Services . In consideration for Client's payment of the fees
set forth in Exhibit C hereto, ALLTEL will provide the data
processing services (including the dedication of appropriate
resources) described in this Agreement and the Exhibits
hereto.
1.2 Exhibits . ALLTEL will receive data from Client for processing
and will process such data and produce the reports selected by
Client pursuant to Exhibit B in accordance with the schedules
set forth in Exhibit D. Client will pay ALLTEL for its
services herein in accordance with this Agreement and Exhibit
C hereto.
2. Term.
The effective date of this Agreement is October 1, 1998 ("Effective
Date"). This Agreement will terminate on September 30, 2004 (the
"Expiration Date"). Not less than nine (9) months prior to the
Expiration Date, ALLTEL will submit to Client a renewal agreement for
the continuation of processing services and Client will promptly review
such agreement, and commence negotiations with ALLTEL, if necessary,
and accept or reject the agreement within six (6) months prior to the
Expiration Date.
3. Responsibilities of the Parties.
The parties have certain responsibilities under this Agreement as
follows:
3.1 Input Forms and Output Forms . Client will provide all input
media, output media, balance control forms, other forms and
paper stock necessary for its data processing.
3.2 Delivery . Client is responsible for entry of input data by
means of telecommunication or, where applicable, by delivery
of documents or tape by mail through contract courier or
otherwise to ALLTEL's technology center currently located at
Little Rock, Arkansas (the "ALLTEL Data Center"). Tape or
other applicable media will be delivered to an
ALLTEL-designated location at the ALLTEL Data Center. ALLTEL
will prepare output for receipt by Client and, when it is
"download" output, ALLTEL will transmit such output to Client.
<PAGE>
Where designated by Client, ALLTEL will deliver output to the
U.S. postal service or to contract courier, as requested by
Client. ALLTEL will separate output, by application, for
delivery to Client at the times and in the manner specified in
Exhibit D. Subject to Client's responsibility to maintain
copies of original input data as defined in Section 3.5,
ALLTEL acknowledges its responsibility for safekeeping
Client's documents or data while they are in the ALLTEL Data
Center.
3.3 Equipment and Communication Costs . In connection with the use
of on-line services, Client will pay all costs associated with
the on-line transmission of input data to, and the on-line
transmission of output from, the ALLTEL Data Center, including
but not limited to communication or telephone lines, moderns,
routers, gateways, PC's, servers and all related components
and the installation and continuing costs thereof, as required
by such on-line operations. As of the Effective Date, the
Client-specific communications equipment components located in
Indianapolis consist of a 384K ALLTEL transport circuit (ID=EC
980112-001), a Visual CSU model - Multi-Protocol District ASE
AS-T1-E, a Cisco Router model 2503, five (5) SAA Gateways and
a BARR personal computer. The shared communication, equipment
components located at the Technology Center in Little Rock
consist of the 384K frame relay to ATM connection from the
AENbb Hub, a Patch Panel, a Cisco Router model 7513, a token
ring connection and an MM 3172 Controller. ALLTEL reserves the
right to approve installation dates and selection of such
equipment to assure that this equipment is compatible with
ALLTEL's equipment and programs and that the installation
dates for such equipment are compatible with the ALLTEL Data
Center schedules in effect at the time of such installation.
In connection with the use of on-line services, Client will
install and maintain the required printing and file transfer
system compatible with ALLTEL's processing methods and
systems. Client will enter into hardware maintenance and
operating system software maintenance agreements directly with
the vendors from whom the equipment and software base been
purchased or leased, either directly from the vendor or
through ALLTEL or a third party.
3.4 Client's Input Data . All tapes and other input data furnished
by Client hereunder shall be in good condition, customarily
acceptable for machine reading in a form and format specified
by ALLTEL. All on-line data transmissions must be in proper
formats and input forms and data entry screens used must be in
accordance with ALLTEL's specifications, as provided to Client
in writing. Client will correct all input data not submitted
in the form and manner set forth herein.
3.5 Maintaining Copies of Input . Client will maintain copies of
all input data for processing hereunder, whether submitted to
ALLTEL directly or through third parties, to permit
reconstruction of such input data. Client assumes all risks of
loss and expenses of reconstruction of such input data, except
for loss caused by ALLTEL's negligence.
<PAGE>
3.6 Compatibility of Non-ALLTEL Systems . If Client wishes to
utilize non-ALLTEL systems and have such systems communication
with ALLTEL software, ALLTEL shall determine the feasibility
thereof. If feasible, ALLTEL will submit a cost proposal to
Client for development and repetitive communication with the
non-ALLTEL systems. Client will provide all data input to
ALLTEL in ALLTEL's standard format as provided to the Client
in writing. Client will receive all downloaded data from
ALLTEL in ALLTEL's standard format.
3.7 Audit.
(a) ALLTEL will provide an annual audit of its operations
at the ALLTEL Data Center by an independent
accounting firm. A copy of the related audit report
will be furnished to Client.
(b) In addition, ALLTEL will cooperate fully with Client
or its internal or external auditors for the purpose
of audit and regulatory compliance. Promptly
following any such audit of Client, whether conducted
by either internal or external auditors, Client will
instruct its auditors to conduct an exit conference
with ALLTEL and to provide ALLTEL as soon as
thereafter as is reasonably possible a copy of each
report prepared as a result of such audit examination
whether in draft or final form. In addition, Client
will provide and instruct its external auditors to
provide ALLTEL with a copy of that portion of each
written report containing comments concerning ALLTEL
or the services performed by ALLTEL pursuant to this
Agreement.
3.8 Days of Operation . ALLTEL will "batch process" and update
Client's data five (5) days per week, such days being Monday
through Friday in accordance with Exhibit D. At Client's
election and subject to adequate implementation time and for
additional fees, ALLTEL will process Client's data six (6)
days per week, such days being Monday through Saturday. At the
time of such election, Exhibit D will be revised to reflect
the new on-line availability and processing windows resulting
from six (6)-day processing. On-line service hours are defined
separately in Exhibit D. ALLTEL will observe the holiday
schedule shown in Exhibit E.
At Client's election and subject to adequate implementation
time and for additional fees, ALLTEL will revert to processing
Client's data five (5) days a week, Monday through Friday. At
the time of such election, Exhibit D will be revised once
again to reflect five (5)-day processing on-line availability
and processing windows. Client agrees that it will not request
a change in the number of processing days more than one time
per calendar year.
<PAGE>
4. Time of Performance.
The parties agree that timely and accurate submission of input and
output is essential to satisfactory performance under this Agreement.
4.1 Submission of Input . Client agrees that its failure to submit
input data in the form prescribed in Section 3 or in
accordance with the schedules set forth in Exhibit D shall
enlarge ALLTEL's time of performance hereunder if and to the
extent reasonably necessary.
4.2 Acts of God and Equipment Malfunction . If an act of God,
other disaster, malfunction of equipment or other event beyond
the reasonable control of ALLTEL prevents timely data
processing hereunder, Client agrees that ALLTEL's time of
performance shall be enlarged if and to the extent reasonably
necessary.
4.3 Special Requests . Special requests by Client or any
governmental agency authorized to regulate or supervise Client
which impact ALLTEL's normal processing schedule shall result
in an enlargement of ALLTEL's time of performance hereunder if
and to the extent reasonably necessary.
4.4 Correction of Processing Errors . In the event of an error in
processing Client's data, ALLTEL will correct such error
within a reasonable time, including the rebuilding of any data
files damaged or destroyed by error. Error correction or
rebuilding of data files shall be without charge to Client if
due to the fault of ALLTEL. Client will pay for the cost of
correcting errors and rebuilding data files unless such
correcting and/or rebuilding is caused by the fault of ALLTEL.
If faulty programs generate any such error, ALLTEL will
provide Client with evidence, as Client may reasonably
require, which will verify the complete and proper execution
of corrections to applicable program routines.
4.5 Client Review of Reports . Client will carefully review and
inspect all reports prepared by ALLTEL and balance promptly to
the control totals mutually established by Client and ALLTEL,
and within two (2) business days after any error or
out-of-balance condition could be detectable, Client will
notify ALLTEL of any erroneous processing. If Client fails to
so notify ALLTEL, it shall be deemed to have waived its rights
with respect to such error and to have assumed all risks
related thereto, including any increase in the cost of
connection, to the extent that ALLTEL shall establish that the
same could have been avoided by earlier detection of such
error.
4.6 Limitation of Liability . Except for claims or expenses
arising out of ALLTEL's gross negligence or willful
misconduct. IF ALLTEL SHALL BREACH ANY COVENANT, AGREEMENT OR
UNDERTAKING REQUIRED OF IT BY THIS AGREEMENT, ALLTEL'S
LIABILITY FOR ANY LIABILITIES, LOSSES, COSTS, DAMAGES AND
EXPENSES IN ASSOCIATION WITH ANY CLAIM OR ACTION RELATED TO,
IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT, WHETHER
IN CONTRACT OR TORT OR OTHERWISE, SHALL BE LIMITED TO CLIENT'S
DIRECT DAMAGES, ACTUALLY INCURRED. IN NO EVENT SHALL ALLTEL BE
LIABLE FOR INDIRECT, SPECIAL, PUNITIVE, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER, FOR LOSS OF
REVENUES OR LOSS OF PROFITS OR FOR THE CLAIMS OR DEMANDS MADE
BY ANY THIRD PARTIES.
<PAGE>
5. Planning and Communication.
ALLTEL and Client agree that effective planning and communication are
necessary to provide direction to data processing, and that they will
work to promote a free and open exchange of information between ALLTEL
personnel, Client executive management and Client user departments.
6. Education.
ALLTEL will make available to Client and its personnel, its standard
application software training courses, which are generally held in
Little Rock, Arkansas, in accordance with ALLTEL's education and
training department schedule, a current copy of which will be provided
to Client upon request. Client personnel may attend such courses, which
are generally offered by ALLTEL to its customers, upon payment of
ALLTEL's then current standard published course fee. Client
acknowledges that enrollment of Client personnel in any courses offered
by ALLTEL shall be subject to normal space availability requirements
and compliance with ALLTEL's standard registration and enrollment
deadlines and procedures. Client also will complete any and all class
prerequisites prior to attending class. Travel expenses incurred by
Client personnel attending any such classes shall be borne by Client.
7. Mergers and Acquisitions.
Upon written request by Client, ALLTEL will process additional data
resulting from any merger or acquisition involving either Client or any
of Client's affiliates; subject, however, to agreement on the
processing and conversion charges applicable thereto. Client will
notify ALLTEL of any such proposed merger or acquisition as soon as
reasonably practicable.
8. Enchancements, Replacement Systems, New Subsystems, New Systems, and
Modifications to ALLTEL Batch and On-Line Systems.
8.1 Announcement . A current list of all enhancements, replacement
systems, new subsystems, and new systems developed by ALLTEL
and made generally available to customers of the ALLTEL Data
Center is posted at ALLTEL's Internet website:
banksoft.alltel.com. At Client's request, ALLTEL will furnish
such listings to Client. An enhancement refers to a scheduled
<PAGE>
upgrade of a current system. A replacement system refers to a
system developed to replace an older version of that same
system. New subsystems and new systems refer to subsystems and
systems newly developed and released to the ALLTEL network of
data centers.
8.2 Installation of Enhancements and Replacement Systems . With
respect to systems and subsystems listed in Exhibit A, ALLTEL
will install and Client will accept all such ALLTEL-developed
enhancements and replacement systems. If Client declines to
accept an enhancement or a replacement system, Client may be
required to pay the cost of processing for the stand-alone
system, said cost to be determined at the time. Subsequent to
the installation of an ALLTEL-developed replacement system,
ALLTEL will no longer provide enhancements to the replaced
version of that ALLTEL system. Installation of enhancements
and replacement systems will be provided by ALLTEL without
installation charge except for Client-specific programming
requirements and unless program modifications previously
installed by ALLTEL, at Client's request, have created a
condition which would result in excess installation time over
the normal installation time, in which event the related
excess hours of programmer time, client services time,
computer time and computer operator time will be charged
Client using ALLTEL's Hourly Rates as defined herein.
8.3 Installation of New Subsystems and New Systems . New
subsystems or new systems will be provided by ALLTEL at
Client's option for a license fee, if applicable, and the
installation charge described below. ALLTEL will present the
features of such new subsystems or new systems to Client and
inform Client of any fees related to such installation. Client
will pay the costs of education of Client's employees, new
user documentation, file conversions and a reasonable increase
in repetitive processing charges (if any) associated with new
subsystems or systems. ALLTEL will present the features,
installation and education costs, and additional processing
charges (if any) to Client at least ninety (90) days prior to
the scheduled implementation of the new subsystem or system.
Any programmer, client services, computer operator, or
computer time required by ALLTEL for modification to such new
subsystem or system requested by Client will be charged to
Client using ALLTEL's Hourly Rates as defined herein.
8.4 Modifications Requested by Client . During the term of this
Agreement, Client may request modifications to the programs
installed for Client. If ALLTEL agrees to make such
modifications, computer, computer operator, client services,
and programmer time used by ALLTEL to implement such
Client-authorized modifications will be charged to Client
using ALLTEL's Hourly Rates as defined herein. Requested
modifications may increase the cost to Client of subsequently
installing and/or processing ALLTEL-developed enhancements,
replacements systems, new subsystems, or new system releases.
With respect to modifications of ALLTEL's application bank
control records (BCR's), Client shall have the ability to make
on-line certain BCR modifications as agreed upon by Client and
ALLTEL. ALLTEL shall made other Client requested BCR
modifications, without charge, except for modifications which
require programming time. Client will pay for chargeable BCR
modifications, at ALLTEL's Hourly Rates.
<PAGE>
8.5 Client Knowledge of System Status . Client acknowledges its
responsibility to remain informed of the direction and status
of the software, including attendance at necessary education
classes and workshops. ALLTEL will make product information
available via ALLTEL's Internet website and/or on other media
as appropriate.
8.6 User Manuals . ALLTEL will ensure that Client is provided with
a full set of documentation, via electronic media where
available, applicable to the systems listed in Exhibit A.
Client is responsible for the personalization, the subsequent
maintenance, reproduction and distribution of all user
manuals.
9. Regulatory Compliance.
To comply with the requests of applicable regulatory authorities,
ALLTEL agrees that Client's processing will have priority over
processing for ALLTEL's non-financial customers, if any. ALLTEL will
provide, at the prescribed times, all required letters of assurance to
the appropriate regulatory authorities. During the term of this
Agreement, ALLTEL agrees that ALLTEL's programs will comply with the
mandatory federal data processing output requirements specified by the
federal regulatory authorities applicable to Client. Client will make
ALLTEL aware of any applicable local or state regulatory requirements
that have requirements different than those of federal regulatory
authorities. Any changes required by such state or local requirements
which ALLTEL shall endeavor to obtain consents to share the costs of
such charges required by such state and local requirements among the
ALLTEL clients affected.
10. Confidentiality.
10.1 Confidentiality of Client Data . All information concerning
Client, its business or customers submitted to ALLTEL pursuant
to this Agreement shall be held in confidence by ALLTEL and
shall not be disclosed. No person or entity shall be permitted
to have access to Client's data without the written
authorization of Client. All of Client's data shall be
available for examination by Client, at any time during
regular business hours, without notice.
10.2 ALLTEL Data . All information concerning ALLTEL, its software,
related documentation or its business submitted by ALLTEL to
Client pursuant to this Agreement shall be held in confidence
by Client and Client will safeguard such information with the
same degree of care that it exercises with respect to its own
proprietary and confidential information. Client agrees that
no such information will be disclosed or made available to any
third party for any reason except for employees of Client on a
"need-to-know" basis, for auditing purposes by independent
<PAGE>
certified accountants, and for complying with applicable
governmental laws, regulations or court orders. Client
covenants and agrees that, except as ALLTEL may specifically
approve in writing, in advance, it will not utilize any such
information, except as contemplated by this Agreement.
10.3 Inspection of Records . No person shall be permitted to have
access to Client's data without the written authorization of a
properly designated officer of Client which authorization
shall specify the data to which such persons may have access.
ALLTEL agrees that all of Client's data shall be available for
examination, at any time during regular business hours,
without notice. Except as provided in Section 10.2, no person
shall be permitted access to any information concerning
ALLTEL, its software, related documentation or its business
without the prior written authorization of a properly
designated officer of ALLTEL, which authorization shall
specify the information to which such persons may have access.
10.4 Legal Process . If one party receives any legal process
requiring it to produce the other party's data or that of any
of the other party's customers, such party shall notify the
other party promptly and deliver copies of such orders to the
other party, immediately and prior to compliance with such
process at such party's address first listed in this
Agreement. Any such notice to ALLTEL shall be sent to the
attention of General Counsel.
10.5 Confidential Agreement . This Agreement (and any Exhibits
hereto) is a confidential document. In no event may this
Agreement be reproduced or copied or shown to any third
parties by either Client or ALLTEL without the prior written
consent of the other party, except as may be necessary by
reason of legal, audit or regulatory requirements beyond the
reasonable control of ALLTEL or Client, as the case may be.
11. Return of Data.
At Client's request and upon payment by Client to ALLTEL at ALLTEL's
Hourly Rates, ALLTEL will provide to Client all data and files, in
machine-readble form or otherwise, belonging to Client in ALLTEL's
possession at any time. Client's right to request and receive such data
and files is absolute and shal not be affected by any default of Client
under this Agreement or for any other reason.
11.1 Program Ownership . ALLTEL's proprietary programs and related
documentation will remain its property both during and
subsequent to the term of this Agreement. Any programs and
related documentation owned by Client that are used by ALLTEL
to process Client's data will remain the property of Client
and ALLTEL may not use such programs for any purpose without
Client's prior written permission.
<PAGE>
11.2 Master and Transaction File Ownership . Client's master and
transaction files are the property of Client and will be made
available to Client by ALLTEL, promptly upon the request of
Client. Such data will be made available in its then present
format, copied onto magnetic tapes supplied by Client. Charges
for such services will be at ALLTEL's Hourly Rates then in
effect. Client will pay all charges for the delivery of such
data to the Client.
12. Disaster Recovery and File Backup.
12.1 Disaster Recovery . ALLTEL shall provide disaster recovery
services for its batch and on-line processing obligations to
Client at a dedicated facility which is equipped to handle the
ALLTEL Data Center processing in the event disaster recovery
is needed. Client agrees to provide data communication access
to the disaster recovery facility, including payment of
communication expense to the disaster recovery facility.
ALLTEL is responsible for locating at the disaster recovery
facility the necessary communications devices (including, but
not limited to routers, CSU's/DSU's, modems, etc.) to
facilitate such communication. ALLTEL shall designate and
design such backup network for Client. Throughout the term of
this Agreement, ALLTEL will maintain in effect contracts
and/or arrangements for disaster recovery, which are
substantially equivalent to those that are currently in
effect.
Client acknowledges that disaster recovery arrangements are
designed to deal with circumstances that are expected to cause
a substantial portion of the capabilities at the ALLTEL Data
Center to be unavailable for a period exceeding seventy-two
(72) consecutive hours.
ALLTEL will test its disaster recovery capabilities at least
once per calendar year. Client shall be required to
participate in the disaster recovery test when deemed
appropriate by ALLTEL.
Guidelines to assist the parties in understanding their
respective general responsibilities and areas of cooperation
with respect to disaster recovery are set forth in Exhibit G
attached hereto.
12.2 File Backup . ALLTEL will provide and maintain adequate backup
files of Client's data received by ALLTEL and all programs
utilized to process Client's data.
<PAGE>
13. Miscellaneous Services.
13.1 Authorized Additional Services . Client may authorize and
ALLTEL may agree to perform certain services not included in
this Agreement. Authorized services such as the use of ALLTEL
programmers or non-repetitive computer and operator time or
clerical function will be charged to Client by multiplying the
actual hours used by the appropriate ALLTEL hourly rates (the
"Hourly Rates") set forth in Exhibit C hereto.
13.2 Repetitive Services . Client also may request ALLTEL to
prepare price quotations for services of a repetitive nature.
If ALLTEL agrees to perform such services, ALLTEL will provide
Client with a written fee quotation. Upon written
authorization from Client, ALLTEL promptly will initiate such
services in accordance with the mutually agreed upon schedule.
14. Price Adjustment.
The parties acknowledge that ALLTEL's costs of providing services
pursuant to this Agreement are likely to increase, particularly in the
areas of data processing salaries and operating system maintenance. The
fees and charges reflected in this Agreement will be increased, but not
decreased, to compensate ALLTEL for such inflation based upon changes
in the Consumer Price Index for All Urban Consumers - Other Goods and
Services (the "CPI-U") as published by the U.S. Department of Labor,
Bureau of Labor Statistics. Effective October 1, 1999 (the thirteenth
contract month), such fees and charges shall be increased by the
percentage increase in the CPI-U over the one (1)-year period ended May
31, 1999 (the eighth contract month). Annually thereafter, such fees
and charges shall be further increased by the percentage increase in
the CPI-U for the corresponding twelve (12)-month period ending May
31st of each year.
15. Payment and Billing.
All amounts payable pursuant to this Agreement shall be payable in U.S.
currency. ALLTEL shall bill the Base Processing Fee as set in Section
1.1 of Exhibit C, on the first day of each month for services to be
provided during that month. ALLTEL will bill all additional incremental
fees, reimbursable expenses and other charges on the first day of each
month, for services rendered during the preceding month. All such
billings shall be due upon receipt. If Client fails to pay any invoice
within thirty (30) days from the mail date of invoice, ALLTEL shall
notify Client that such invoice is past due and ALLTEL shall charge a
late penalty equal to one and one-half percent (1.5%) per month on the
outstanding balance owed by Client. If Client is past due in any
payment for more than sixty (60) days from mail date of invoice, ALLTEL
may terminate this Agreement by giving thirty (30) days' written notice
to Client.
<PAGE>
16. Termination.
This Agreement may be terminated prior to the Expiration Date, as
follows:
16.1 Right to Terminate . In addition to any other rights which
either party may have in law or equity, either ALLTEL or
Client may terminate this Agreement if the defaulting party
fails to cure any default hereunder within thirty (30) days of
written notice from the other party, specifying the nature and
extent of any such default.
16.2 Method of Termination . Exercise of the right to terminate
under this Section must be accomplished by specifying in such
written notice to the defaulting party, the nature and extent
of such default and fixing a date, on the last day of a month,
not less than one hundred eighty (180) days following the date
of receipt of such notice, for cessation of services hereunder
(the "Termination Date").
16.3 Data, Systems and Programs . If this Agreement expires, or if
Client terminates by virtue of ALLTEL default, the Branch
Automation Software shall remain subject to Exhibit G. In
addition, upon Client's request, ALLTEL agrees to provide to
Client copies of Client's data files, records and programs on
magnetic media.
17. Year 2000 Compliance.
17.1 Responsibility and Obligation . This Section addresses
ALLTEL's responsibility and obligation for Year 2000
compliance solely of the ALLTEL software identified on the
Schedule titled "U.S. Year 2000 (MVS) Status" (the
"Schedule"). The version which is current as of the Effective
Date is attached to and made a part of this Agreement as
Exhibit 1. The Schedule is updated regularly and updated
versions can be accessed at ALLTEL's Internet website,
banksoft.altel.com. The software identified on the Schedule is
referred to herein as the "Y2K Software". Year 2000 compliance
of any other software or any hardware, equipment or services
provided by or through ALLTEL or any of its affiliates is
beyond the scope of this Section and is outside the
responsibility and obligation of ALLTEL hereunder.
17.2 Year 2000 Compliant Software . ALLTEL will make available, at
no additional charge, updates, modifications, corrections and
enhancements to the Y2K Software which when properly installed
on a Year 2000 compatible operating system and/or hardware
environment will cause the Y2K Software to be "Year 2000
Compliant". The Y2K Software will be considered "Year 2000
Compliant" if the Y2K Software manages and manipulates data
involving dates, including single-century, cross-century and
leap year formulas, and date values without resulting in the
generation of incorrect or invalid values involving such
dates, or causing an abnormal ending.
<PAGE>
17.3 Year 2000 Compliance Exclusions . The representations
contained in this Section shall have no effect and shall not
apply if:
(a) the failure of the Y2K Software to be Year 2000
Compliant is the result, in whole or in part, of the
interaction between the Y2K Software and any other
software which may pass data into or accept data from
Client's system or the Y2K Software (including,
without limitation, all third-party software),
including any failures relating to interfaces between
the Y2K Software any other software; or
(b) the operating system and/or hardware environment is
not owned and operated by ALLTEL and is not Year 2000
compatible; or
(c) there have been modifications of the Y2K Software,
unless the modifications or customization are
re-applied by ALLTEL after each installation of
additional updates, corrections, modifications or
enhancements to make such modifications or
customization Year 2000 Compliant; or
(d) the Year 200 updates to the Y2K Software are either
not installed by ALLTEL or not properly installed by
Client's organization according to ALLTEL
specifications; or
(e) the Y2K Software which is not Year 2000 Complaint is
behind the "Minimum Year 2000 Release Levels"
specified in the Schedule or Client's organization
fails to properly install or have installed any other
necessary updates, modifications, corrections and
enhancements (including, but not limited to,
additional code posted on the ALLTEL Internet website
and additional tapes made available by ALLTEL in
accordance with ALLTEL specifications; or
(f) this Agreement expires or is terminated prior to the
failure of the Y2K Software to Year 2000 Complaint.
17.4 Year 2000 Corrections . In the event that the updated Y2K
Software is not Year 2000 Compliant, subject to the
limitations contained this Section, ALLTEL will correct and
repair the Y2K Software to make it Year 2000 Complaint,
ALLTEL's liability (including, without limitation, all
liability related to Year 2000) is limited as provided in this
Agreement. EXCEPT AS EXPRESSLY PROVIDED HEREIN, ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE YEAR 2000
COMPLIANCE OF THE Y2K SOFTWARE, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE
HEREBY EXPRESSLY DISCLAIMED AND EXCLUDED.
<PAGE>
18. No Interference with Contractual Relationship.
Client warrants that, as of the date hereof, it is not subject to any
contractual obligation that would prevent Client from entering into
this Agreement, and that ALLTEL's offer to provide such service in no
way caused or induced Client to breach any contractual obligation.
19. Assignment or Delegation of Duties.
Neither party hereto shall assign, subcontract, or otherwise convey or
delegate its rights or duties hereunder to any other party without the
prior written consent of the other party to this Agreement.
20. Client and ALLTEL Employees.
During the term of this Agreement and for a period of one (1) year
thereafter, both Client and ALLTEL agree not to solicit nor offer
employment to any employee of the other without the prior written
consent of the other.
21. Qualified Personnel.
ALLTEL personnel providing services to Client will possess at least
that degree of skill and expertise required to perform the services
contemplated by this Agreement and generally held by persons of similar
employment, Client may establish, and ALLTEL will adhere to, the
priority of tasks to be accomplished by ALLTEL personnel. ALLTEL shall
select the members of ALLTEL's staff. Members of the staff are not
employees or agents of Client for any purpose.
22. Facilities for ALLTEL Personnel.
To the extent ALLTEL personnel may require access to Client's premises,
Client will provide office space, office supplies and secretarial
assistance for ALLTEL staff. ALLTEL will comply with Client's security
procedures and rules with respect to access to Client's premises and
use of Client's facilities.
23. Notices.
All notices, requests and demands, other than routine operational
communications under this Agreement, shall be in writing and shall be
deemed to have been duly given when delivered in person or by contract
courier or three (3) business days following deposit in the United
States mail, registered or certified postage prepaid, and addressed to
the other party at the address first herein shown above. Notice of
changes of address, if any, shall be given in like manner.
<PAGE>
24. Paragraph Titles.
Paragraph titles as to the subject matter of particular paragraphs
herein are for convenience only and are in no way to be construed as
part of this Agreement or as a limitation of the scope of the
particular paragraphs to which they refer.
25. Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original, but all of which shall constitute
one and the same instrument.
26. Increase for Taxes.
Client will pay directly, or reimburse ALLTEL for, all taxes however
designated, levied or based on the charges hereunder or on this
Agreement, including state and local sales, use, privilege or excise
taxes based on gross revenues or taxes on services rendered; excluding,
however, any taxes levied on the personal property or net income of
ALLTEL and Indiana gross income tax. The provisions of this Section 26
shall survive the termination of this Agreement.
27. Standard Reports and Schedules.
All processing for Client and each of its subsidiaries or facilities
will be identical in terms of applications processed (Exhibit A),
reports produced (Exhibit B), and input-output schedules (Exhibit D).
28. Financial Statements.
Annually, within one hundred twenty (120) days following the close of
its fiscal year, each of ALLTEL and Client will provide to the other a
copy of its financial statement for the most recent year.
29. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Indiana. The parties that exclusive
jurisdiction and venue for the resolution of disputes under this
Agreement shall be the state or federal courts located in Marion
County, Indiana.
30. Insurance.
A schedule of ALLTEL's current insurance coverage is attached hereto as
Exhibit F. ALLTEL may alter such coverage at ALLTEL's discretion.
However, ALLTEL will not eliminate any such coverage if, in light of
the related risks, costs of insurance and ALLTEL's then-existing
financial condition, it would not be prudent to do so.
<PAGE>
31. Entire Agreement, Warranty Disclaimers.
This Agreement constitutes the entire agreement between Client and
ALLTEL. This Agreement may not be amended in any fashion except by
written instrument, executed by the parties hereto, specifically
providing for amendment thereof. ALLTEL MAKES NO WARRANTIES EXPRESS OR
IMPLIED, OTHER THAN THE EXPRESS WARRANTIES CONTAINED IN THIS AGREEMENT.
NO REPRESENTATION OR STATEMENT NOT EXPRESSLY CONTAINED IN THIS
AGREEMENT OR INCORPORATED HEREIN BY REFERENCE SHALL BE BINDING UPON
ALLTEL AS A WARRANTY OR OTHERWISE.
32. Covenant of Good Faith.
ALLTEL and Client agree that, in their respective dealings arising out
of or related to this Agreement, they shall act fairly and in good
faith.
33. Informal Dispute Resolution.
If any dispute should arise concerning performance under or
interpretation of this Agreement, then, prior to, and as a condition to
a party's right to initiate any litigation in respect thereof, the
parties shall take the following steps in an attempt to informally
resolve any such dispute.
33.1 Dispute Notice . At the request of either party, the senior
managers of the parties assigned to the data processing
matters contemplated by this Agreement shall meet in person
and shall present to each other a written summary, reflecting
in reasonable detail the nature and extent of the dispute in
question (the "Dispute Notice"). Such a meeting shall take
place within five (5) days after the receipt of the request.
33.2 Presidents' Meeting . If within three (3) days following the
meeting held pursuant to paragraph 33.1 above, said dispute is
not resolved, or if for any reason the meeting contemplated by
paragraph 33.1 has not been held as contemplated thereby, then
the matter in dispute shall be presented to the president of
ALLTEL and to the president of Client for resolution. Said
presidents (or their appointed designees) shall meet in person
within three (3) business days following a written request by
either party. Such meeting shall include a presentation of the
written descriptions of the dispute contemplated by paragraph
33.1.
33.3 Mediation . If any dispute remains unresolved after ten (10)
business days following the initial request for informal
dispute resolution, then either party may refer the matter to
the American Arbitration Association ("AAA") for mediation by
an individual with subject matter expertise in the area of
dispute, and both parties shall cooperate in the mediation
process for thirty (30) days. The costs of the mediation shall
be borne equally by both parties.
<PAGE>
33.4 Litigation . If the dispute remains unresolved after forty
(40) days following the initial request for informal dispute
resolution, then either party may initiate appropriate
litigation in respect thereof.
33.5 Exception . Notwithstanding the foregoing, if the parties are
able to resolve disputes without litigation in a court of law
and without resorting to the procedures described in
paragraphs 33.1 through 33.4 of this Section 33, they shall
not be obligated to follow such procedures.
IN WITNESS WHEREOF, the undersigned representatives of the parties have executed
this Agreement, thereunto duly authorized, as of the Effective Date.
ALLTEL INFORMATION SERVICES, INC. UNION ACCEPTANCE CORPORATION
By: /s/ Danny Elliott By: /s/ Timothy I. Shaw
-------------------------- ---------------------------
Name: Danny Elliott Name: Timothy I. Shaw
Title: Vice President Title: Chief Information Officer
Date: 8-6-98 Date: 7-31-98
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