<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file Number 1-10993
SPS TRANSACTION SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3798295
(State of Incorporation) (I.R.S. Employer
Identification No.)
2500 Lake Cook Road, Riverwoods, IL 60015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 405-3400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1996, the Registrant had 27,200,128 shares of common stock,
$0.01 par value per share, outstanding.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 17,396 $ 8,879
Cash and due from banks - restricted -- 29,000
Investments held to maturity - at amortized cost 44,921 47,430
Credit card loans 1,433,373 1,620,833
Allowance for loan losses (65,648) (63,704)
---------- ----------
Credit card loans, net 1,367,725 1,557,129
Accrued interest receivable 20,904 23,828
Accounts receivable 27,810 28,683
Due from affiliated companies 4,811 4,776
Premises and equipment, net 22,507 19,800
Deferred income taxes 27,874 26,276
Prepaid expenses and other assets 28,248 31,806
---------- ----------
TOTAL ASSETS $1,562,196 $1,777,607
========== ==========
LIABILITIES:
Deposits:
Noninterest-bearing $ 8,042 $ 10,270
Interest-bearing 457,042 372,073
---------- ----------
Total deposits 465,084 382,343
Accounts payable, accrued expenses and other 53,306 44,788
Income taxes payable 7,472 11,232
Due to affiliated companies 785,237 1,110,811
Notes payable -- 2,095
Accrued recourse obligation 26,591 27,128
---------- ----------
Total liabilities 1,337,690 1,578,397
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 100,000
shares authorized; none issued or outstanding
Common stock, $.01 par value, 40,000,000 and
40,000,000 shares authorized; 27,235,284 and
27,146,515 shares issued; 27,197,959 and
27,073,877 shares outstanding at September
30, 1996 and December 31, 1995, respectively 272 271
Capital in excess of par value 80,992 79,396
Retained earnings 144,325 121,099
Common stock held in treasury, at cost, $.01
par value, 37,325 and 72,638 shares at September
30, 1996 and December 31, 1995, respectively (1,032) (1,957)
Stock compensation plan 413 501
Employee stock benefit trust (413) --
Unearned stock compensation (51) (100)
---------- ----------
Total stockholders' equity 224,506 199,210
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,562,196 $1,777,607
========== ==========
See notes to unaudited consolidated financial statements.
</TABLE>
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<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
------- ------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Processing and service revenues $65,712 $58,754 $204,808 $172,951
Merchant discount revenue 10,163 9,760 25,382 26,723
------- ------- -------- --------
75,875 68,514 230,190 199,674
Interest revenue 53,972 48,978 166,118 104,510
Interest expense 18,238 17,809 59,824 43,176
------- ------- -------- --------
Net interest income 35,734 31,169 106,294 61,334
Provision for loan losses 32,037 18,992 84,605 34,585
------- ------- -------- --------
Net credit income 3,697 12,177 21,689 26,749
------- ------- -------- --------
Net operating revenues 79,572 80,691 251,879 226,423
Salaries and employee benefits 23,736 22,213 72,407 64,710
Processing and service expenses 26,589 23,147 80,096 65,064
Other expenses 20,221 16,638 61,915 44,804
------- ------- -------- --------
Total operating expenses 70,546 61,998 214,418 174,578
------- ------- -------- --------
Income before income taxes 9,026 18,693 37,461 51,845
Income tax expense 3,428 6,916 14,235 20,006
------- ------- -------- --------
Net income $ 5,598 $11,777 $ 23,226 $ 31,839
======= ======= ======== ========
Net income per common share $ 0.21 $ 0.43 $ 0.85 $ 1.17
======= ======= ======== ========
Weighted average common shares
outstanding 27,194 27,105 27,165 27,099
See notes to unaudited consolidated financial statements.
</TABLE>
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<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
-------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,226 $ 31,839
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 10,687 8,323
Imputed interest on notes payable 15 5,362
Provision for loan losses 84,605 34,585
Deferred income taxes (1,598) (4,052)
(Increase) decrease in operating assets:
Cash and due from banks - restricted 29,000 (30,237)
Amounts due from affiliated companies (35) (518)
Accrued interest receivable and accounts receivable 3,797 (2,208)
Prepaid expenses and other assets 1,623 (6,070)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other 8,520 5,425
Income taxes payable (3,239) 2,560
Due to affiliated companies 2,903 5,709
Accrued recourse obligation (537) (2,830)
-------- --------
Net cash from operating activities 158,967 47,888
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments held to maturity - purchases (226,841) (82,982)
Investments held to maturity - maturities 229,350 58,029
Net principal disbursed on credit card loans (38,462) (315,912)
Purchase of credit card portfolios -- (296,556)
Proceeds from sale of credit card portfolio 138,861 --
Purchases of premises and equipment, net (7,059) (8,237)
-------- --------
Net cash from investing activities 95,849 (645,658)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in noninterest-bearing deposits (2,228) (697)
Net increase in interest-bearing deposits 84,969 147,619
Due to affiliated companies (328,477) 658,740
Repayment of notes payable (2,110) (205,301)
Proceeds from exercise of stock options 622 581
Change in treasury stock, net 925 (1,642)
-------- --------
Net cash from financing activities (246,299) 599,300
-------- --------
Increase in cash and due from banks 8,517 1,530
Cash and due from banks, beginning of period 8,879 3,220
-------- --------
Cash and due from banks, end of period $ 17,396 $ 4,750
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Short-term note, net issued to purchase credit
card portfolios $ -- $ 48,333
======== ========
See notes to unaudited consolidated financial statements.
</TABLE>
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<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
A. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SPS Transaction
Services, Inc. (the "Company") and subsidiaries. The Company is a 73.5%
majority owned subsidiary of NOVUS Credit Services Inc., which in turn is a
wholly owned, direct subsidiary of Dean Witter, Discover & Co. ("DWD"). The
Company provides a range of technology outsourcing services including the
processing of credit card transactions, consumer private label credit card
programs, commercial accounts receivable, and call center customer service
activities in the United States. SPS Payment Systems, Inc. ("SPS"), a wholly
owned subsidiary of the Company, is incorporated in the State of Delaware.
Hurley State Bank ("HSB"), a wholly owned subsidiary of the Company, is
chartered as a bank by the State of South Dakota and is a member of the Federal
Deposit Insurance Corporation.
The Consolidated Balance Sheet as of September 30, 1996, the Consolidated
Statements of Income for the three and nine months ended September 30, 1996 and
1995, and the Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 are unaudited; however, in the opinion of
management, all adjustments, consisting only of normal recurring accruals
necessary for fair presentation, have been reflected. All material
intercompany balances and transactions have been eliminated. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1995 Annual
Report to Stockholders and Annual Report on Form 10-K. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
B. ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," which generally
requires that long-lived assets be reported at the lower of their carrying cost
or net realizable value. The adoption of this statement was not material to
the Company's consolidated financial position or results of operations.
The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting
for Stock-Based Compensation," effective for fiscal years beginning after
December 15, 1995. The Company has elected, as permitted by SFAS No. 123, to
adopt the disclosure requirements of that standard but continue to account for
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees."
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<PAGE>
The Financial Accounting Standards Board has also issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," effective for transfers of financial assets made after
December 31, 1996. (The Financial Accounting Standards Board has recently
proposed to delay the effective date of this statement for twelve months for
transfers of certain financial assets.) This statement provides financial
reporting standards for the derecognition and recognition of financial assets,
including the distinction between transfers of financial assets which should be
recorded as sales and those which should be recorded as secured borrowings.
SFAS 125 supersedes and incorporates the essential provisions of SFAS 122. The
Company believes that the effect of the adoption of SFAS 125 will not be
material to its consolidated financial position or results of operations.
C. RISKS AND UNCERTAINTIES
1.) Allowance for Loan Losses:
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
Actual results could differ from these estimates.
The allowance for loan losses on credit card loans is a significant estimate
that is regularly evaluated by management for adequacy on a portfolio by
portfolio basis. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic conditions that
may affect the borrower's ability to pay.
The Company uses the results of these evaluations to provide an allowance for
loan losses. The exposure for credit losses for owned loans is influenced by
the performance of the portfolio and other factors discussed above, with the
Company absorbing all related losses. The exposure for credit losses for
securitized loans is represented by the Company retaining a contingent risk
based on the amount of credit enhancement provided.
Management believes that its estimates have been historically prudent in
light of the need to allow the market for asset securitizations, in particular
those backed by credit card receivables, to mature, and in light of the
uncertainty of accounting standards for asset securitizations. The Company has
reassessed and revised its estimate of the allowance for losses required for
loans intended to be securitized. This reassessment was based on the Company's
experience with credit losses related to securitized loans in a mature asset
securitization market and the recent issuance of SFAS 125 which eliminated the
uncertainty surrounding the appropriate accounting treatment for asset
securitization transactions. In the third quarter of 1996, this revision in
estimate had no impact. In the fourth quarter and future periods, the effect
of this revision in estimate will likely be to reduce the provision for loan
losses on credit card loans by an amount equal to the allowance that, absent
such revision, would have been provided for loans intended to be securitized.
However, due to the continuing rise in charge-offs, the Company does anticipate
the need to increase its allowance for loan losses on owned loans in the fourth
quarter, which will more than offset any benefit from the change in the
estimated allowance on loans intended to be securitized. Furthermore, the
Company intends to maintain existing loss allowances for securitizations
outstanding, reflected in the accrued recourse obligation, at the date of
implementation, until the related loans are liquidated.
-6-
<PAGE>
2.) Merchant Discount Revenue:
The Company receives merchant discount revenue from its merchant clients
resulting from cardholder purchases utilizing revolving or promotional payment
plans. The amount of merchant discount revenue the Company receives, however,
is influenced by the mix and pricing of promotional payment plans offered to
private label cardholders. For certain merchant clients, where client
marketing strategies promote longer term interest deferred programs, the
Company charges a higher merchant discount rate, yet where client marketing
strategies promote shorter term interest deferred programs, the Company charges
a lower merchant discount rate. The use of promotional payment plans, such as
deferred interest plans, has grown in popularity with merchants and as a
result, the use of these plans has begun to vary dramatically from past
practices and expected practices. Historically, the Company has recognized
merchant discount revenue in the consolidated statements of income as received
in the month when the sale occurred. Beginning in the fourth quarter of 1996,
a portion of merchant discount revenue received resulting from longer term
promotional payment plans (six months or longer) will be deferred and amortized
to interest income using the interest method over periods equal to the duration
of the plans that originated the merchant discount revenue. Management
estimates that this change in accounting estimate will result in the net
deferral of $6.0 million to $9.0 million of fourth quarter revenues into 1997.
Going forward, Management believes this change will provide for a better
matching of the revenues with the expenses and earning assets associated with
such promotional payment plans.
D. CASH AND DUE FROM BANKS - RESTRICTED
Cash and due from banks - restricted as of December 31, 1995 represented cash
and invested cash derived from collections of certain securitized receivables.
Such collections, which include the investors' and a portion of the Company's
share of cash collections, were deposited with a third party and were paid out
in the month subsequent to collection. No such amounts existed at September 30,
1996.
E. ALLOWANCE FOR LOAN LOSSES AND ACCRUED RECOURSE OBLIGATION
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(In Thousands) (In Thousands)
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $65,304 $55,376 $63,704 $24,090
Additions:
Provision for loan losses 32,037 18,992 84,605 34,585
Purchase of credit card portfolios -- -- -- 29,843
------- ------- ------- -------
32,037 18,992 84,605 64,428
Deductions:
Charge-offs (36,434) (20,027) (99,415) (41,302)
Less: recoveries 4,741 4,850 16,754 11,975
------- ------- ------- -------
Net charge-offs (31,693) (15,177) (82,661) (29,327)
------- ------- ------- -------
Balance, end of period $65,648 $59,191 $65,648 $59,191
======= ======= ======= =======
</TABLE>
At September 30, 1996, on an owned loan basis, there were $82.3 million or
5.7% in loans past due 30 days through 89 days, and $59.4 million or 4.1% in
loans past due 90 days through 179 days. At September 30, 1995, on an owned
loan basis, there were $61.3 million or 4.6% in loans past due 30 days through
89 days, and $35.8 million or 2.7% in loans past due 90 days through 179 days.
-7-
<PAGE>
The changes in the accrued recourse obligation were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(In Thousands) (In Thousands)
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $26,623 $20,991 27,128 20,929
Additions:
Provision charged to processing
and service revenues 10,724 6,543 29,579 22,344
Deductions:
Net charge-offs (10,756) (9,435) (30,116) (25,174)
------- ------- ------- -------
Balance, end of period $26,591 $18,099 $26,591 $18,099
======= ======= ======= =======
</TABLE>
F. NOTES PAYABLE
In February 1996, the Company made the final monthly installment on a note
payable to Tandy. This note related to the purchase, during the first quarter
of 1995, of the Radio Shack and Tandy Name Brand credit card portfolios. The
note had an imputed interest rate of 6.5%.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's net operating revenues consist of processing and service
revenues, merchant discount revenue and net credit income, which are derived as
a result of its four principal business services: Network Services, Operational
Outsourcing Services, Commercial Account Processing and Consumer Private Label
Credit Card Programs.
Processing and service revenues consist of four components (as described
below): Transaction processing services, Managed Programs, HSB Programs and
Servicing fees on securitized loans.
Transaction processing services includes revenues received as a result of
Network Services such as electronic transaction processing, the sale and
servicing of point-of-sale terminals, a System Access Agreement with NOVUS
Services, Inc., an affiliated company, and from Operational Outsourcing
Services. Revenues from electronic transaction processing typically are based
on the number of electronic point-of-sale transactions processed rather than
the dollar transaction amount. Revenues from Operational Outsourcing Services
typically are based upon the number of customer contacts processed through
service activities such as customer billing inquiries, dispatch services,
technical help-desk inquiries and catalog order processing.
Managed Programs includes revenues received as a result of Commercial Account
Processing and those Consumer Private Label Credit Card Programs which the
Company administers, but for which it does not act as the card issuer or own
the credit card loans. Managed Program revenues are derived from fees based on
the volume of the services provided and on services provided in the
administration of credit life insurance programs.
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<PAGE>
HSB Programs refers to those Consumer Private Label Credit Card Programs for
which HSB issues the credit card on behalf of the client and owns the credit
card loans that are generated through the use of the card. The revenues derived
from the administration of HSB Programs that are included as part of processing
and service revenues primarily consist of late fees.
Servicing fees on securitized loans are revenues derived from credit card
loans that have been sold to investors through asset securitizations. Such
revenues are the result of the fees earned for servicing the underlying credit
card accounts. Loan securitizations have the effect of converting portions of
net credit income, merchant discount revenue and credit card fees to a
component of processing and service revenues for the credit card accounts that
are securitized.
Merchant discount revenue is derived from the Company's owned Consumer
Private Label Credit Card Programs. Generally, credit card sales are subject to
a discount charged to the merchant based upon contractually agreed upon
percentages. This percentage varies by portfolio and by the type of credit
plan offered. The recognition of merchant discount revenue on longer term
promotional payment plans is further discussed in Note C to the consolidated
financial statements on Page 7.
Interest revenue represents finance charges derived from owned Consumer
Private Label Credit Card Programs and investment interest. Net credit income
is calculated by subtracting interest expense and the provision for loan losses
from interest revenue.
The following table presents, for the periods indicated, the percentage
relationship that certain statement of income items bear to net operating
revenues and the period-to-period percentage dollar increase or decrease in
each item.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1996 1995 Change 1996 1995 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET OPERATING REVENUES:
Processing and service revenues 82.6% 72.8% 11.8% 81.3% 76.4% 18.4%
Merchant discount revenue 12.8 12.1 4.1 10.1 11.8 (5.0)
Net credit income 4.6 15.1 (69.6) 8.6 11.8 (18.9)
----- ----- ----- -----
100.0 100.0 (1.4) 100.0 100.0 11.2
OPERATING EXPENSES:
Salaries and employee benefits 29.9 27.5 6.9 28.7 28.6 11.9
Processing and service expenses 33.4 28.7 14.9 31.8 28.7 23.1
Other expenses 25.4 20.6 21.5 24.6 19.8 38.2
----- ----- ----- -----
88.7 76.8 13.8 85.1 77.1 22.8
Income before income taxes 11.3 23.2 (51.7) 14.9 22.9 (27.7)
Income tax expense 4.3 8.6 (50.4) 5.7 8.8 (28.8)
----- ----- ----- -----
Net income 7.0% 14.6% (52.5)% 9.2% 14.1% (27.1)%
===== ===== ===== =====
</TABLE>
Net income for the three months ended September 30, 1996 was $5.6 million, a
decrease of $6.2 million, or 52.5%, over the same period a year ago. Net
income per common share for the three month period was $0.21, compared to $0.43
in the prior year's third quarter. Net income for the nine months ended
September 30, 1996 was $23.2 million, a decrease of $8.6 million, or 27.1%,
compared to the same period a year ago. Net income per common share for the
nine month period was $0.85, compared to $1.17 for the same period in 1995.
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<PAGE>
The decline in earnings is primarily attributable to two factors: an increase
in charge-offs in the Company's consumer private label credit card portfolios
related to an industry-wide deterioration in consumer credit quality, and the
mix and pricing of promotional payment plans offered to the Company's consumer
private label credit cardholders.
Net operating revenues for the third quarter of 1996 were $79.6 million, a
decrease of 1.4% from the same period last year. Net operating revenues for the
nine months ended September 30, 1996, were $251.9 million, an increase of 11.2%
over the same period last year. The slight decrease in net operating revenues
for the three months ended September 30, 1996 from the prior year quarter
resulted primarily from increases in processing and service revenues, merchant
discount revenue and net interest income, offset by increased net charge-offs,
which resulted in an increase in provision for loan losses. The increase in net
operating revenues for the nine months ended September 30, 1996 resulted
primarily from increases in net interest income and processing and service
revenues, partially offset by a decrease in merchant discount revenue and
increased net charge-offs, which resulted in an increase in provision for loan
losses expense. The increase in processing and service revenues and net
interest income for both periods was primarily due to increased revenues
resulting from the administration of consumer and commercial private label
credit card programs and an increase in the volume of transaction
processing services provided. Increased revenues from operational outsourcing
services further contributed to the increase in processing and service revenues
for the nine months ended September 30, 1996. The Company's active consumer
private label accounts, both owned and managed, increased to 3.3 million at
September 30, 1996, as compared with 3.2 million active consumer accounts at
September 30, 1995. Active commercial accounts grew 18.1% to 764,000 at
September 30, 1996, as compared to 647,000 at September 30, 1995. For the three
and nine months ended September 30, 1996, the number of point-of-sale
transactions processed totaled 110.1 million and 312.1 million, respectively,
up 15.5% and 15.3%, respectively, from the comparable prior periods. For the
three months ended September 30, 1996, the number of customer contacts
processed totaled 2.0 million, which was comparable to the prior year period.
For the nine months ended September 30, 1996, the number of customer contacts
processed totaled 6.8 million, up 8.2% from the same period last year.
Processing and service revenues increased 11.8% to $65.7 million for the
three months ended September 30, 1996, as compared to $58.8 million for the
same period last year. For the nine months ended September 30, 1996,
processing and service revenues increased 18.4% to $204.8 million as compared
to $173.0 million for the same period last year. Processing and service
revenues represented 82.6% and 72.8% of net operating revenues for the three
months ended September 30, 1996 and 1995, respectively. For the nine months
ended September 30, 1996 and 1995, processing and service revenues represented
81.3% and 76.4% of net operating revenues, respectively. Processing and
service revenues consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
(In Thousands) (In Thousands)
1996 1995 1996 1995
------- ------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Transaction processing services $20,698 $19,719 $62,787 $57,019
Managed Programs 21,074 17,121 66,312 55,987
HSB Programs 13,107 7,631 36,308 16,988
Servicing fees on securitized loans 10,833 14,283 39,401 42,957
------- ------- -------- --------
$65,712 $58,754 $204,808 $172,951
======= ======= ======== ========
</TABLE>
-10-
<PAGE>
The increase in revenues from transaction processing services for the three
months ended September 30, 1996 resulted primarily from a higher volume of
Network Services point-of-sale transactions processed and increased revenues
from the sale of point-of-sale terminals. The increase in revenues from
transaction processing services for the nine months ended September 30, 1996,
resulted from a higher volume of Network Services point-of-sale transactions
processed, increased revenues from Operational Outsourcing Services and the
sale of point-of-sale terminals. The increase in revenues from Managed
Programs for both the three and nine months ended September 30, 1996 resulted
primarily from an increase in credit life insurance program revenues, and an
increase in the volume of Commercial and Consumer Account Processing Services
provided. The increase in revenues from HSB Programs for both the three and
nine months ended September 30, 1996 resulted from an increase in late fee
revenue resulting from the growth in credit card loan portfolios, coupled with
a higher level of credit card loan delinquencies. The conversion of the Radio
Shack and Tandy Name Brand credit card portfolios in March 1995 further
contributed to the increase in HSB Program revenues for the nine months ended
September 30, 1996. The decrease in servicing fees on securitized loans for
the three and nine months ended September 30, 1996 was due primarily to a
higher rate of credit losses on securitized loans.
Merchant discount revenue increased 4.1% to $10.2 million for the three
months ended September 30, 1996, as compared to $9.8 million for the same
period last year. For the nine months ended September 30, 1996, merchant
discount revenue decreased 5.0% to $25.4 million in 1996 compared to the same
period last year. For the nine month period there was a significant shift in
promotional payment plans, for certain merchant clients, from longer term plans
with higher discount rates to shorter term plans with lower discount rates.
This resulted in the decrease in merchant discount revenue for the nine months
ended September 30, 1996 as compared to the same prior year period. However, in
the three months ended September 30, 1996, there has was a reversal from the
previous two quarters in the use of promotional payment plans, for certain
merchant clients, from shorter term plans with lower discount rates to longer
term plans with higher discount rates. Merchant discount revenue was 12.8% and
12.1% of net operating revenues for the three months ended September 30, 1996
and 1995, respectively, and was 10.1% and 11.8% of net operating revenues for
the nine months ended September 30, 1996 and 1995, respectively. Since the
amount of merchant discount revenue recognized is influenced by the mix and
pricing of promotional payment plans, the Company has reassessed its estimate
for merchant discount revenues described in Note C to the consolidated
financial statements on page 7. Any change in this estimate may affect future
recognition of merchant discount revenues. For a discussion of important
factors that might cause actual results to differ materially from those in this
forward-looking statement, please refer to the discussion under the heading
"CAUTIONARY STATEMENT" on page 16.
Net credit income decreased 69.6% to $3.7 million for the three months ended
September 30, 1996, as compared to the same period last year, resulting from a
$13.0 million increase in provision for loan losses expense partially offset by
a $4.6 million increase in net interest income. For the nine months ended
September 30, 1996, net credit income decreased 18.9% to $21.7 million from the
same period last year, resulting from a $50.0 million increase in provision for
loan losses expense partially offset by a $45.0 million increase in net
interest income. For both periods, the increase in interest revenue resulted
from an increase in average credit card loans outstanding associated with
growth in existing credit card portfolios and the addition of new credit card
portfolios since September 30, 1995. The increase in interest expense for both
periods was due to an increase in average borrowings to finance the growth in
credit card loans, partially offset by lower interest rates on borrowings. The
increase in the provision for loan losses is attributable to increased charge-
offs associated with a higher balance of credit card loans outstanding, coupled
with an increase in the net charge-off rate. The increase in the Company's net
charge-off rate was consistent with the industry-wide trend of increasing
credit loss rates. The Company believes that the current industry-wide trend of
increasing credit losses is related, in part, to increased consumer debt levels
and bankruptcy rates. The Company believes this trend will continue and expects
to experience a higher net charge-off rate for the remainder of 1996 and into
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<PAGE>
the first half of 1997 as compared to 1995 and 1996. The Company is taking
corrective measures to reduce future charge-offs by implementing a portfolio
improvement program that analyzes credit risk and credit behavior scores for
existing accounts, taking into consideration their current financial condition;
re-scoring existing accounts and reducing credit lines or closing accounts as
necessary; accelerating the development schedule for new credit scoring models;
and increasing collection efforts by adding collectors, expanding call hours,
and identifying high risk accounts to accelerate contacts. To help mitigate
the impact of these higher charge-offs, the Company has also instituted changes
in cardholder terms and has instituted the implementation of certain client
pricing revisions, including those for promotional programs. In addition, the
Company has reassessed its estimate of the allowance for losses related to
securitized loans as described in Note C to the consolidated financial
statements on page 6. A change in this estimate may affect future provisions
for loan losses on credit card loans. For a discussion of important factors
that might cause actual results to differ materially from those in this
forward-looking statement, please refer to the discussion under the heading
"CAUTIONARY STATEMENT" on page 16.
For the three months ended September 30, 1996, total operating expenses of
$70.5 million represented an increase of 13.8% over the same period last year.
Total operating expenses as a percentage of net operating revenues rose to
88.7% for the three months ended September 30, 1996, as compared to 76.8% for
the same period a year ago. For the nine months ended September 30, 1996, total
operating expenses of $214.4 million represented an increase of 22.8% over the
same period last year. Total operating expenses as a percentage of net
operating revenues rose to 85.1% for the nine months ended September 30, 1996,
as compared to 77.1% for the same period a year ago.
For the three months ended September 30, 1996, salaries and employee benefits
totaled $23.7 million, an increase of 6.9% from $22.2 million in the same
period a year ago. For the nine months ended September 30, 1996, salaries and
employee benefits totaled $72.4 million, an increase of 11.9% from $64.7
million in the same period a year ago. The Company added approximately 383
additional full-time equivalent employees since September 30, 1995.
Approximately 86% of these new employees were assigned to field processing
facilities to handle an increased volume of private label accounts processed by
the Company and to address increased collection efforts. The remaining increase
in personnel was primarily attributable to business acquisitions during 1995
and an increase in Network Services personnel.
Processing and service expenses include data processing, communications and
account processing expenses, which are influenced, in part, by changes in
transaction volume. For the three months ended September 30, 1996, such
expenses rose to $26.6 million, or 14.9% on a period-to-period basis. For the
nine months ended September 30, 1996, processing and service expenses increased
to $80.1 million, or 23.1% from the same period a year ago. The increase in
processing and service expenses for both periods resulted from a higher volume
of transactions processed and private label services provided. In addition,
for the nine month period ended September 30, 1996, ongoing processing and
service expenses associated with the integration of the Radio Shack and Tandy
Name Brand credit card portfolios purchased in March 1995 affected
comparability. Processing and service expenses as a percentage of net
operating revenues were 33.4% and 28.7% for the three months ended September
30, 1996 and 1995, respectively. Processing and service expenses as a
percentage of net operating revenues were 31.8% and 28.7% for the nine months
ended September 30, 1996 and 1995, respectively.
Other expenses include expenses relating to business development, merchant
marketing, occupancy, advertising and promotion, cost of terminals sold, credit
card fraud and other miscellaneous employee and administrative expenses. For
the three months ended September 30, 1996 and 1995, other expenses totaled
$20.2 million and $16.6 million, respectively. For the nine months ended
September 30, 1996 and 1995, other expenses totaled $61.9 million and $44.8
million, respectively. The increase in other expenses for both periods resulted
from increased collection agency expenses, occupancy expenses, administrative
expenses, fraud losses resulting from an increase in the incidence of
fraudulent transactions and increased merchant marketing incentives expense.
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<PAGE>
Other expenses were 25.4% and 20.6% of net operating revenues for the three
months ended September 30, 1996 and 1995, respectively. Other expenses were
24.6% and 19.8% of net operating revenues for the nine months ended September
30, 1996 and 1995, respectively.
Owned credit card loans outstanding decreased $187.4 million from $1,620.8
million at December 31, 1995 to $1,433.4 million at September 30, 1996. At
September 30, 1996, the allowance for loan losses was $65.6 million, equal to
4.6% of total owned credit card loans outstanding, compared with $63.7 million,
or 3.9% of total owned credit card loans outstanding at December 31, 1995.
Accruing loans that were contractually past due 90 days to 179 days represented
4.1% of total owned credit card loans outstanding, at September 30, 1996,
compared to 2.7% of total owned credit card loans outstanding at December 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
Through its liquidity policies, the Company seeks to ensure access to cost
effective funding in all business environments. This objective is accomplished
through diversification of funding sources, extension of funding terms and
staggering of liability maturities.
The Company's capital policies seek to maintain a strong balance sheet
consistent with the Company's business risks as well as regulatory
requirements. The Company's subsidiary bank, HSB, targets the maintenance of
capital levels considered for regulatory purposes to be "well-capitalized" as
defined by the FDIC Improvement Act of 1991.
The Company finances its operations from three principal sources: deposit
taking activities utilizing certificates of deposit ("CDs")in denominations of
$100,000 or more; securitizations of credit card loans; and borrowings from
DWD.
HSB administers a certificate of deposit program through which CDs are issued
to investors in denominations of $100,000 or more. Such CDs are issued to
investors under two programs - an institutional CD program and a retail CD
program. CDs under the institutional CD program are issued directly by HSB to
the investor and generally have a maturity of one to twelve months. CDs under
the retail CD program are issued to investors through Dean Witter Reynolds
Inc., a subsidiary of DWD, and generally have a maturity of two to 10 years.
As of September 30, 1996, CDs outstanding were $457.0 million, of which
institutional CDs represented $231.7 million and retail CDs represented $225.3
million.
HSB maintains loan securitization programs with Receivables Capital
Corporation ("RCC") and at September 30, 1996, outstanding loans under such
programs were $280.0 million. HSB also maintains a loan securitization program
with Barton Capital Corporation ("BCC") and at September 30, 1996, outstanding
loans under such program were $300.0 million. Securitized loans are sold with
limited recourse to the Company. The maximum recourse obligation on such
securitized loans at September 30, 1996, was $120.0 million. At September 30,
1996, $580.0 million or 28.8% of the HSB Program loans had been sold through
loan securitizations.
The RCC and BCC loan securitization programs are scheduled to expire in
December 1996. If these programs are not extended on or prior to their
expiration dates, collections allocable to RCC and BCC following the
expiration dates of the programs will be paid to RCC or to BCC, as applicable,
and the interests of RCC and of BCC in the applicable securitization pool will
gradually decline to zero. Any receivables originated after the applicable
program's expiration date would remain on the Company's consolidated balance
sheet.
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<PAGE>
The Company has an Amended and Restated Borrowing Agreement (the "Borrowing
Agreement"), an Amended and Restated Bridge Agreement (the "Bridge Funding
Agreement") and a facility fee letter agreement (the "Facility Fee Agreement"),
(collectively, the "Financing Agreements") with DWD, pursuant to which DWD has
agreed to provide loans to the Company. Under the Facility Fee Agreement, the
Company has agreed to pay certain monthly facility fees in connection with its
financing arrangements with DWD. The Borrowing Agreement, which expires on
April 17, 1997, was recently amended to increase the maximum amount available
thereunder from $500.0 million to $1.0 billion (the "Commitment"). The Bridge
Funding Agreement was also recently amended to extend its term until January
31, 1997, and, in conjunction with the $500.0 million increase in the
Commitment under the Borrowing Agreement, the Bridge Funding Agreement was
amended to reduce the maximum amount available thereunder from $750.0 million
to $250.0 million. In addition, the maximum amount available under the Bridge
Funding Agreement may be reduced by DWD up to the amount of any additional
funds received by HSB pursuant to any new loan securitization agreement entered
into after the date of the Bridge Funding Agreement. At October 31, 1996, the
Company had $760.8 million outstanding under the Borrowing Agreement and Bridge
Funding Agreement.
The Company expects to renew or replace the Financing Agreements prior to the
expiration dates of such Agreements. The Company is continuing to evaluate
alternative sources of financing to replace all or a portion of its financing
arrangements with DWD. If the Company is unable to reach a satisfactory
agreement with DWD for the renewal or the replacement of the Financing
Agreements, the Company believes it will be able to meet its financial
requirements over the next twelve months from other sources.
Cash flows from operating activities resulted in net proceeds of cash of
$159.0 million and $47.9 million for the nine months ended September 30, 1996
and 1995, respectively.
Investing activities for the nine months ended September 30, 1996 resulted in
net proceeds of cash of $95.8 million, primarily consisting of net proceeds of
cash from the sale of a private label credit card portfolio ($138.9 million),
partially offset by net principal disbursed on credit card loans representing
the difference between sales made using the cards and payments received from
cardholders ($38.5 million). Investing activities for the nine months ended
September 30, 1995 resulted in net uses of cash of $645.7 million, primarily
consisting of the purchase of the Radio Shack and Tandy Name Brand credit card
portfolios from Tandy Corporation on March 30, 1995 ($296.6 million), net
principal disbursed on credit card loans ($315.9 million) and from investments
in U.S. Treasury bills ($25.0 million). The purchase of the two Tandy credit
card portfolios also included a short-term note, net of imputed interest of
$48.3 million issued as part of the purchase consideration.
Financing activities for the nine months ended September 30, 1996 resulted in
net uses of cash of $246.3 million, primarily consisting of a net decrease in
borrowings due to affiliated companies ($328.5 million) and from final payments
made on short-term notes payable with Tandy Corporation ($2.1 million),
partially offset by a net increase in interest-bearing deposits resulting from
the issuance of CDs ($85.0 million). Financing activities for the nine months
ended September 30, 1995 resulted in net proceeds of cash of $599.3 million,
primarily consisting of a net increase in borrowings due to affiliated
companies ($658.7 million) and a net increase in interest-bearing deposits
resulting from the issuance of CDs ($147.6 million), partially offset by
payments made on short-term notes payable with Tandy Corporation ($205.3
million). At September 30, 1996 and 1995, the Company had cash and cash
equivalents of $17.4 million and $4.8 million, respectively.
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<PAGE>
The Company currently has no material commitments requiring capital
expenditures. The Company has not paid any dividends on its Common Stock and
anticipates retaining future operating cash flows for the foreseeable future to
finance growth and business expansion rather than to pay dividends to its
stockholders. Any future determination as to the payment of dividends will
depend upon results of operations, capital requirements, financial condition of
the Company and such other factors as the Board of Directors of the Company in
its discretion shall determine. Periodically, SPS and HSB have paid dividends
to the Company. The amount of dividends that can be paid to the Company by HSB
is restricted by applicable banking regulations.
INTEREST RATE RISK
The Company's interest rate risk policies are designed to reduce the
volatility of earnings resulting from changes in interest rates. This is
accomplished primarily through matched financing, where possible, which entails
matching the repricing schedules of credit card loans and the related
financing. Matched financing includes the funding of variable rate credit card
loans that are primarily indexed to the prime rate with floating rate financing
that is primarily indexed to commercial paper rates and the federal funds rate.
The Company generally retains basis risk between the prime rate and commercial
paper/federal funds rates on variable rate credit card loans. Fixed rate credit
card loans are generally funded with fixed rate financing (financing with an
initial term of one year or greater).
The Company also funds fixed rate credit card loans with floating rate
financing by utilizing interest rate swaps, cost of funds agreements and
interest rate caps to adjust the repricing characteristics of its financing to
fixed rate financing. Under interest rate swaps and cost of funds agreements,
the Company effectively exchanges the interest payments on its financing with
those of a counterparty. Interest rate cap agreements effectively establish a
maximum interest rate on certain of the Company's floating rate borrowings.
Interest rate swap agreements are entered into with an affiliate. Interest rate
cap agreements are entered into with institutions that are established dealers
in these instruments and that maintain certain minimum credit criteria
established by the Company. Costs of funds agreements are entered into as part
of agreements pursuant to which the Company owns the credit card loan portfolio
and provides private label credit card processing services to certain of its
credit card merchant clients.
To reduce the volatility of interest expense from changes in interest rates,
the Company had outstanding interest rate swaps and cost of funds agreements of
$499.1 million and $515.7 million at September 30, 1996 and 1995, respectively.
At September 30, 1996 and 1995, the Company had $40.0 million of interest
rate cap agreements. At September 30, 1996, the current variable rates on all
interest rate cap agreements exceeded the specified cap rates.
At September 30, 1996 and 1995, the Company's interest rate swap agreements
had maturities ranging from December 1996 to December 2000 and from November
1995 to September 2000, respectively. At September 30, 1996 and 1995, the
Company's interest rate cap agreements had maturities ranging from February
1997 to September 1997.
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<PAGE>
CAUTIONARY STATEMENT
Statements about the Company's future economic performance, strategic plans
or objectives, revenue or earnings projections or other financial items and
similar statements are not guarantees of future performance but are forward-
looking statements which by their nature are subject to numerous uncertainties
that could cause actual results to differ materially from those in the forward-
looking statement. Important factors that might cause actual results to differ
materially include, but are not limited to, the following:
Changes in consumer payment patterns, bankruptcy trends and the seasoning of
the Company's loan portfolio that affect the level and direction of credit
card loan delinquencies and write-offs;
Changes in management's estimate of the adequacy of loan loss allowances;
Interest rate movements and their impact on consumer behavior and the
Company's net interest spread and margin;
The rate and magnitude of changes in the Company's credit card loan
portfolio, including the overall mix of accounts, products and loan balances
within the portfolio;
The impact of account repricing and competitors' pricing initiatives on
consumers' usage of the Company's private label credit cards;
The Company's ability to add new accounts and to activate both new and
existing accounts;
The Company's ability to increase usage of its cards and to increase
transaction volume;
The Company's ability to adapt successfully to technological changes to meet
consumers' needs and developments in the marketplace;
The Company's ability to access cost-effective funding (including through
the securitization markets) and the continued legal and commercial
availability of interest rate contracts utilized by the Company to reduce
earnings volatility;
The amount of credit card loans the Company determines to securitize and the
Company's ability to access the securitization markets;
The Company's ability to minimize fraud losses in its credit card
business;
Federal and State legislative and regulatory developments;
National and international economic conditions;
Changes in consumer purchasing patterns utilizing promotional payment plans;
Changes in client marketing strategies promoting shorter term and/or longer
term promotional payment plans; and
Changes in the merchant discount rates assessed on promotional payment
plans.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its subsidiaries are defendants in various lawsuits and
proceedings arising in the normal course of business. Some of these lawsuits
and proceedings arise in jurisdictions such as Alabama that permit punitive
damages disproportionate to the actual damages alleged. In light of the
uncertainties inherent in any litigation, no assurances can be given as to the
ultimate outcome of these lawsuits and proceedings. However, the Company and
its subsidiaries believe that there are meritorious defenses for all of these
claims and are defending them vigorously.
Item 2. Changes in Securities.- None.
Item 3. Defaults Upon Senior Securities.- None.
Item 4. Submission of Matters to a Vote of Security Holders. - None.
Item 5. Other Information.- None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Third Amendment to Service Agreement dated as of January 1, 1996,
between SPS and MountainWest Financial Corporation.
10.2 Amended and Restated Marketing Services Agreement dated as of January
1, 1996, between SPS and NOVUS Credit Services Inc.
10.3 Service Agreement dated as of September 1, 1996, between SPS and
NOVUS Services, Inc.
10.4 First Amendment to the Amended and Restated Bridge Agreement dated as
of September 1, 1996, between the Company and DWD.
10.5 Second Amendment to the Amended and Restated Bridge Agreement dated
as of September 30, 1996, between the Company and DWD.
10.6 Second Amendment to the Amended and Restated Borrowing Agreement
dated as of September 30, 1996, between the Company and DWD.
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K, dated November 11, 1996, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the
Company's 1996 Third Quarter Report to Stockholders.
A Current Report on Form 8-K, dated October 15, 1996, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the
Company's third quarter earnings release.
A Current Report on Form 8-K, dated August 7, 1996, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the
Company's 1996 Second Quarter Report to Stockholders.
A Current Report on Form 8-K, dated July 16, 1996, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the
Company's second quarter earnings release.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPS TRANSACTION SERVICES, INC.
------------------------------
(Registrant)
Date: November 12, 1996 By:/s/ Russell J. Bonaguidi
------------------ -----------------------------------
Russell J. Bonaguidi
Vice President and Controller (Duly
Authorized Officer and Principal
Accounting Officer)
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<PAGE>
EDGAR
Exhibit Description of Exhibits
------- -----------------------
10.1 Third Amendment to Service Agreement dated as of January 1,
1996, between SPS and MountainWest Financial Corporation.
10.2 Amended and Restated Marketing Services Agreement dated as of
January 1, 1996, between SPS and NOVUS Credit Services Inc.
10.3 Service Agreement dated as of September 1, 1996, between SPS
and NOVUS Services, Inc.
10.4 First Amendment to the Amended and Restated Bridge Agreement
dated as of September 1, 1996, between the Company and DWD.
10.5 Second Amendment to the Amended and Restated Bridge Agreement
dated as of September 30, 1996, between the Company and DWD.
10.6 Second Amendment to the Amended and Restated Borrowing
Agreement dated as of September 20, 1996, between the Company
and DWD.
27.0 Financial Data Schedule.
<PAGE>
EXHIBIT 10.1
THIRD AMENDMENT TO SERVICE AGREEMENT
THIS THIRD AMENDMENT TO SERVICE AGREEMENT (the "Third Amendment")
is made effective as of the 1st day of January, 1996 by and between SPS PAYMENT
SYSTEMS, INC. formerly known as Sears Payment Systems, Inc., ("SPS") and
MOUNTAINWEST FINANCIAL CORPORATION, formerly known as SCFC ILC Inc. d/b/a
MountainWest Financial ("MountainWest").
WITNESSETH:
WHEREAS, MountainWest and SPS entered into a Service Agreement
dated as of November 1, 1990 and amended as of January 1, 1993 and May 1, 1993
(collectively, the "Agreement").
WHEREAS, MountainWest and SPS desire to extend the term of the
Agreement.
NOW, THEREFORE, in consideration of the promises and mutual
covenants hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, MountainWest and
SPS hereby agree as follows:
1. Term. Paragraph 1, "Term", of the Agreement is deleted in
its entirety and replaced with the following:
The term of this Agreement ("Term") shall be extended
through December 31, 1998 and shall continue thereafter for
consecutive one (1) year periods unless either party
terminates this Agreement as provided herein. Either party
may terminate this Agreement on January 1, 1997 or on any
subsequent January 1st by giving written notice of
termination to the other party at least one hundred eighty
(180) day prior to the date of termination.
2. Exhibit A-1. Exhibit A-1 as amended is deleted in its
entirety and replaced with Exhibit A-2 attached hereto.
3. Schedule. Schedule 1 listing Merchants who have signed a
Merchant Services Agreement is deleted in its entirety and replaced with
Schedule 2 attached hereto.
4. MountainWest grants to SPS the right of first refusal to
purchase any of the merchant portfolios listed in Schedule 2 to this Third
Amendment in the event MountainWest desires to sell any portfolio to a third
party purchaser subject to the terms and conditions of the existing merchant
services agreements. MountainWest shall provide at least a fifteen (15)
business days notification to SPS prior to entering into an agreement with a
third party purchaser. MountainWest will offer SPS the right to purchase any
portfolio at the same price and terms offered to the third party purchaser
subject to compliance with any applicable regulations.
5. Notice The address of MountainWest contained in paragraph 8
is amended to read as follows:
MountainWest Financial Corporation
280 West 10200 South
Sandy, Utah 84070-4154
Attn: Chairman - CEO
6. Effective Date of Amendment. This Third Amendment shall be
effective as of January 1, 1996.
7. Terms. Capitalized terms, not otherwise defined herein, are
used in this Third Amendment as they are defined in the Agreement.
<PAGE>
8 Continued Effect. Except as specifically amended herein, the
Agreement shall remain in full force and effect.
The undersigned have executed this Third Amendment through their duly
authorized officers.
SPS PAYMENT SYSTEMS, INC. MOUNTAINWEST FINANCIAL CORPORATION
By: /s/ Richard F. Atkinson By: /s/ Bradley O. McBride
Title: SVP - Operations Title: VP/Treasurer
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED MARKETING SERVICES AGREEMENT
THIS AMENDED AND RESTATED MARKETING SERVICES AGREEMENT (the "Agreement")
is made as of this 1st day of January 1996, by and between SPS PAYMENT SYSTEMS,
INC. (formerly known as Sears Payment Systems, Inc.), a Delaware corporation
with its principal place of business at 2500 Lake Cook Road, Riverwoods,
Illinois 60015 ("SPS") and NOVUS CREDIT SERVICES INC. (formerly known as Sears
Consumer Financial Corporation), a Delaware corporation with its principal
place of business at 2500 Lake Cook Road, Riverwoods, Illinois 60015 ("NCSI").
WITNESSETH
WHEREAS, SPS and NCSI entered into a Marketing Services Agreement dated
as of January 1, 1992, as amended (the "Prior Agreement"); and
WHEREAS, SPS and NCSI wish to amend and restate the Prior Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, SPS and NCSI agree as
follows:
1. Services. SPS agrees to provide, in accordance with applicable
federal and state laws, rules and regulations, the services ("Services")
described in Exhibit A attached to and incorporated in this Agreement.
2. Prices and Payment. SPS' fees and charges for the Services are set
forth in Exhibit B. SPS' fees and charges may be changed by agreement of the
parties, as confirmed in writing from time to time. SPS shall bill NCSI for
such Services as set forth in Exhibit B.
3. Term. This Agreement shall be effective as of the date first written
above, and shall remain in effect for as long as (i) the Services Agreement
between NCSI's subsidiary, MountainWest Financial Corporation ("MountainWest"),
and SPS, dated as of November 1, 1990, as amended (the "MountainWest Services
Agreement"), remains in effect or (ii) SPS continues to otherwise provide
MountainWest services substantially similar to those described in the
MountainWest Services Agreement.
4. Representations and Warranties; Covenants.
(a) Both parties represent and warrant that they are free as of the
date hereof of any contractual obligation or legal disability that would
prevent either from entering into this Agreement.
(b) NCSI covenants that it shall use its best efforts to cause
MountainWest to sell to SPS, from time to time and at SPS' election, any of the
Portfolios under such terms and conditions as are mutually acceptable to SPS
and MountainWest, provided that the purchase price of any such Portfolio shall
be equal to its fair market value at the time of purchase.
5. Liability and Indemnification.
(a) SPS shall indemnify and hold NCSI harmless from and against any
and all claims, actions, proceedings, judgments, expenses, damages and
liabilities, including court costs and reasonable attorney's fees, arising in
connection with the Services to be provided hereunder, due to SPS' negligence.
(b) NCSI shall indemnify and hold SPS harmless from and against any
and all claims, actions, proceedings, judgments, expenses, damages and
liabilities, including court costs and reasonable attorney's fees, arising in
<PAGE>
connection with the Services to be provided hereunder, due to NCSI's
negligence.
(c) NCSI and SPS agree that each will comply with all applicable
federal, state, county and local laws, ordinances, codes, rules and regulations
in the performance of their obligations under this Agreement. NCSI and SPS
further agree to hold each other harmless from and against any and all claims,
actions, proceedings, expenses, judgments, damages and liabilities, including
court costs and reasonable attorney's fees that may be sustained by reason of
the respective failure of NCSI or SPS or their employees, agents or
subcontractors to comply with such law, ordinances, codes, rules and
regulations. NCSI and SPS agree that each will fully cooperate with the
other's efforts to comply with applicable federal and state regulations,
including but not limited to the regulations of the Federal Deposit Insurance
Corporation relating to disaster planning.
(d) Notwithstanding anything contained herein to the contrary,
neither party shall be liable to the other for consequential or incidental
damages.
6. Confidentiality.
(a) Confidential Information. In performing its obligations
pursuant to this Agreement, each party may have access to and receive
disclosure of certain confidential information about the other party, including
but not limited to: such party's marketing philosophy and objectives,
competitive advantages and disadvantages, customer names and addresses,
financial results, technological developments, or other information of the
business or affairs of each party, its parent company, its affiliated and
subsidiary companies, or its customers, and a variety of other information and
material which that party considers confidential and/or proprietary
(hereinafter referred to as "Confidential Information").
(b) Nondisclosure. Both parties agree that during the term of this
Agreement and thereafter a party receiving Confidential Information from the
other party may not use or disclose such Confidential Information to any third
party, except (i) as may be necessary to perform obligations pursuant to this
Agreement, (ii) as required by law, and (iii) as may be agreed to in writing by
both parties.
(c) Ownership. All Confidential Information furnished by the
parties to each other in connection with this Agreement is the exclusive
property of the furnishing party, and at the request of that party, the other
party shall return to the furnishing party all such information and copies of
such information.
(d) Protection. Without the prior written consent of the other
party, neither party shall disclose, furnish, or use in any way whatsoever, and
each party shall take measures to prevent its agents, employees and
subcontractors from using, any Confidential Information to which it becomes
privy, except as may be necessary for that party to perform its obligations
pursuant to this Agreement and except as may be agreed upon in writing by both
parties.
(e) Exclusions. Confidential Information shall not include
information: (i) which is known to the receiving party prior to commencing any
discussions with the other party on the subject matter of this Agreement, or
(ii) which is or becomes known to the public generally through no fault or
action of the receiving party; or (iii) is lawfully revealed to the receiving
party; or (iv) is developed by the receiving party as a result of its own
internal efforts and not as a direct or indirect result of the disclosure of
information by the other party.
-2-
<PAGE>
(f) Survival. The provisions of this Section 6 shall survive the
termination of this Agreement.
7. Force Majeure. Each party will be excused from performance hereunder
when and to the extent that it is prevented from performance by forces beyond
its control, including but not limited to acts of war, strike, fire, explosion,
sabotage, accident or casualty.
8. Notices. Any notice required to be given hereunder by either party
to the other shall be given in writing by personal delivery or certified mail,
return receipt requested, and shall be effective when received. Every such
notice shall be addressed, if to SPS, to:
SPS PAYMENT SYSTEMS, INC.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: President
and, if to NCSI, to:
NOVUS CREDIT SERVICES INC.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attention: Senior Vice President, Administration
10. General Conditions.
(a) The validity, construction and performance of this Agreement
shall be governed by the laws of the State of Illinois.
(b) All provisions of this Agreement shall extend to and be binding
upon the parties and their respective successors and assigns. This Agreement
can be modified only in writing and may not be assigned by either party without
the prior written consent of the other party, which consent will not be
unreasonably withheld.
(c) Each paragraph and provision of this Agreement is severable from
the entire Agreement, and if one provision thereof is declared invalid, the
remaining provisions shall nevertheless remain in effect.
(d) This Agreement (including any exhibits) amends and restates the
Prior Agreement and following the date hereof constitutes the entire
understanding of the parties with respect to the Services to be performed
hereunder, and any representation or statement not contained in this Agreement
shall not be binding upon either party as a warranty or otherwise. This
Agreement may not be amended, changed, modified or altered except in writing,
signed by both parties. This Agreement supersedes all previous agreements,
including without limitation the Prior Agreement, and negotiations, whether
written or oral, respecting the subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
SPS PAYMENT SYSTEMS, INC. NOVUS CREDIT SERVICES INC.
By:/s/ Robert L. Wieseneck By:/s/ Thomas Burr
Title: President Title: SVP Planning and Administration
-3-
<PAGE>
EXHIBIT 10.3
SERVICE AGREEMENT
This AGREEMENT is dated as of this 1st day of September, 1996, by and
between SPS PAYMENT SYSTEMS, INC., a Delaware corporation ("SPS"), and NOVUS
SERVICES, INC., a Delaware corporation ("Company").
WITNESSETH:
WHEREAS, SPS provides an accounts receivable system (the "SPS System") and
credit services, including credit review, credit card processing,
authorization, collection and other appropriate services ("Services") to
clients; and
WHEREAS, COMPANY desires to have SPS provide access to the SPS System and
perform certain of such Services for Company.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Term. The term of this Agreement shall commence as of the date first
written above, and shall continue until September 1, 1999, if the minimum
volume of 369,051 Gross Active Accounts ("Minimum Volume") is achieved during
the first year of the Agreement ("Initial Term"), provided that if such Minimum
Volume is not achieved during the first year, the period of the Initial Term
will be extended to a date which is two (2) years after the Minimum Volume is
first achieved. For purposes of this Agreement, a "Gross Active Account"
means any account serviced which at any time during a billing cycle had a
balance or a debit or credit activity. Thereafter, this Agreement shall
continue in effect for additional one (1) year periods ("Subsequent Term(s)")
unless either party shall give written notice of termination to the other party
at least ninety (90) days' prior to the expiration of the Initial Term or any
Subsequent Term(s). SPS' Services will be provided for Company's portfolios of
accounts ("Programs"). Company may remove Accounts or Programs from the SPS
System after the Minimum Volume has been sustained for at least two (2) years.
Both parties shall use their best efforts, and will exercise good faith, to
ensure that the deconversion of Programs from the SPS System occurs in a
gradual and orderly manner so as not to unduly affect the operations of either
party. It is agreed that certain assets which are integral to any Program
which are listed on Exhibit B, shall be assigned to Company without any payment
for such assignment. During the first three (3) years of this Agreement,
without Company's consent, such consent not to be unreasonably withheld, SPS
will not provide Services for Programs for any third party direct competitor of
Company, as long as Company meets the original Annual Projected Volumes of
Ending Gross Active Accounts set forth in Exhibit H.
2. Services. During the Term, SPS, through its employees or any
independent contractor SPS may retain, shall provide Services by performing, in
accordance with applicable federal and state laws, rules and regulations, the
Services described in subparagraphs A through F of this Paragraph 2 and Exhibit
A as the Company may request. Further, SPS shall provide system support and
development services requested by Company to modify the SPS System to
accommodate certain applications and enhancements. The price for development
services and the scope of such work shall be agreed to by the parties prior to
SPS' initiation of any development work. The Company is solely responsible for
the contents of any required cardholder disclosures and the determination of
all credit service charges, including but not limited to, any finance charge
rates and minimum amounts, delinquency charges, collection charges, attorneys'
fees, insurance premiums, or any other charges or fees associated with the
granting of credit by the Company to its customers, except for system
calculation of Company's required credit service charges. SPS agrees that it
shall perform the Services in accordance with the applicable performance
standards described in the Service Level Agreement as Exhibit C which is
attached hereto and incorporated herein.
<PAGE>
A. General Services
(i) Create and maintain in coordination with Company, a
policy and procedures manual relating to Services to be provided ("Policy and
Procedures Manual").
(ii) Provide real time updates to Company's own authorization
system in order to enable Company to utilize its own system to obtain
authorizations.
(iii) Process transactions made by Company's cardholders.
(iv) Receive sales, returns, and payment data from Company in
a mutually agreed upon format for updating the accounts receivable.
(v) Pass an account activity file to Company, in a form
satisfactory to the Company and consistent with SPS' program parameters, which
will enable Company to prepare monthly statements. The file may vary according
to the specifications required for each Program.
(vi) Provide monthly updates of the status of the Company's
customer accounts to up to four (4) credit bureaus which are designated in
writing by the Company.
(vii) Provide SPS' standard daily, weekly and monthly reports
as set forth in Exhibit D. From time to time, Company may request that SPS
develop custom reports for Company. SPS shall provide Company with the price
for development of such custom reports and Company shall provide to SPS written
authorization to develop such reports prior to initiation of SPS development.
B.Credit Approval Services
(i) Provide and implement a procedure by which customer credit
approval or rejection decisions for pending applications would normally be made
by SPS in accordance with Company guidelines within two (2) days of receipt
from Company, incorporating in such procedures a mechanism for review of
rejected accounts in accordance with guidelines developed by the Company.
(ii) Utilize point scoring systems or models developed by SPS
and approved by Company or provided by Company or their agents, on which the
credit approval or rejection decision is based.
(iii) Based on information from applications, SPS will create an
embossing file including the name of the accountholder, the joint accountholder
and any authorized users of the account, and any other mutually agreed upon
information.
(iv) Any credit cards provided by SPS to Company's
accountholders shall be delivered in accordance with Company's fraud prevention
procedures mutually agreed upon between Company and SPS.
C. Collection Services
Provide collection services utilizing SPS' standard collection
procedures as set forth in Exhibit F as may be amended from time to time upon
agreement of the parties. Collection services shall be provided in accordance
with the policies and procedures as set forth in the Service Level Agreement.
Notwithstanding the above, SPS shall be responsible for violations of
applicable federal or state debt collection laws, except to the extent that
such violations resulted from policies or procedures required by or
specifically approved in writing by NOVUS.
D. Customer Services
(i) Provide telephone service for and handle cardholder
inquiries and requests with respect to account activity twenty-four (24) hours
per day, seven (7) days per week, which occurs on or after the date as of which
SPS commences the performance of Services hereunder.
<PAGE>
(ii) Handle customer inquiries in accordance with mutually
agreed upon procedures and standards as set forth in the Service Level
Agreement.
E. Fraud Investigation Services
Provide fraud investigation services utilizing mutually agreed
upon policies and procedures.
F. Information Technology Support Services
Provide Information Technology Support Services as set forth in
Exhibit G.
3. Service Standards and Penalties.
A. Service Standards
The parties acknowledge that the terms of this Agreement shall
be supplemented by the Service Level Agreement.
B. Penalties - Three Consecutive Months
If SPS fails to comply with the requirements contained in the
Service Level Agreement with regard to a Service, the following
shall apply:
(i) beginning the fourth consecutive calendar month of SPS' failure
to comply, the price of the Service for the non-complying Service shall be
reduced by ten percent (10%), retroactive to the first month of the non-
compliance; and
(ii) beginning the fifth consecutive calendar month of SPS' failure
to comply, the price of the Service for the non-complying Service that month
shall be reduced by twenty percent (20%); and
(iii)beginning the sixth consecutive calendar month of SPS' failure
to comply, the price of the Service for the non-complying Service shall be
reduced by thirty percent (30%) for the sixth calendar month and all subsequent
months of non-compliance; and
(iv) beginning the seventh consecutive calendar month of SPS' failure
to comply, Company, in its sole discretion, shall have the right, upon prior
written notice to SPS, to do either or both of the following: (a) continue to
apply the penalty pricing as described in subsection 3(B) above, and/or (b)
remove the Service. The penalty price described above shall continue to apply
until Company removes the Service described in the preceding sentence or until
SPS cures the non-compliance as described in Section 3(C) below. Company and
SPS may mutually agree upon the return of such Service to SPS.
C. Cure
If SPS cures its non-conformance with the Service Level Agreement
during the calendar month following the imposition of a penalty as described in
subsection 3(B) above, then beginning with such calendar month, the price, as
set forth in Exhibit A attached hereto, shall again apply for the Service which
complies with the Service Level Agreement. However, if the Service that was
cured, again becomes non-complying during the calendar month immediately
following the month in which the non-compliance was cured, it shall be deemed
that no cure occurred and the penalty in effect previously shall resume at its
prior level.
<PAGE>
D. Penalties - Six of Twelve Months
If SPS fails to comply with the requirements contained in the Service
Level Agreement with regard to any Service, as set forth in subsection (B)
above, for six (6) months during any rolling twelve (12) month period, Company,
in its sole discretion, shall have the right, upon prior written notice to SPS,
to remove the Service. Company and SPS may mutually agree upon the return of
such Service to SPS.
E. Penalty - Critical Error
(i) SPS acknowledges and agrees that a Critical Error by SPS in
the provision of certain Services may be highly detrimental to Company's
relationship with Company's external client(s). The term "Critical Error" as
used herein shall mean any failure by SPS to comply with the critical function
requirements ("Critical Function Requirements") as described in the Service
Level Agreement.
(ii) SPS and Company agree that if a Critical Error occurs and
if SPS, or its agents, had exclusive control over the factors causing such
Critical Error, then Company, in its sole discretion, shall have the right,
upon written notice to SPS to (a) remove the affected Service or an entire
Program, if Company reasonably determines that such removal is necessary; or
(b) withhold payment from SPS for that portion of the Service that failed to
comply with the Critical Function Requirements.
F. Right of Offset
In the event SPS fails after fifteen (15) days written notice to
reimburse Company for the amount of the applicable penalties, as set forth in
this Section 3, then Company may offset or reduce any future amounts to SPS by
the amount of the applicable penalty.
G. Variances in Projections
The foregoing penalties other than for Critical Errors as described
above shall not apply to the extent that the failure to comply with the Service
Level Agreement is caused by variations in excess of twenty percent (20%) in
projected volumes required to be provided under Section 4 hereunder.
H. Volume Projections
Each month Company shall provide to SPS projections for the next
three (3) months of each item listed in Exhibit I. Any projections requiring
incremental increases of more than 50,000 Gross Active Accounts in a given
month will require at least ninety (90) days advance notice. Further, at least
ninety (90) days prior to each calendar year of this Agreement, or as soon as
Company's annual business plan is finalized, Company shall provide to SPS a
projection of each item listed in Exhibit E. In the event Company has not
achieved the Minimum Volume prior to the end of the third year of this
Agreement, the monthly projected volumes beginning month thirty-seven (37) and
thereafter throughout the Initial Term of this Agreement shall be no less than
the Minimum Volume.
<PAGE>
4. Fees and Payments.
A. Services and Supply Fees
During the contract year which commences September 1, 1996, the fees
for the Services which SPS will provide directly, as well as the fees charged
to SPS for the related services and supplies SPS will procure from other
providers and for which the Company will reimburse SPS shall be the amounts set
forth opposite the description of each service or supply in the attached
Exhibit A designated "Pricing For Services and Supplies," which is hereby made
a part of this Agreement. Each month during the term of the Agreement, SPS
shall charge Company the fee for the actual volume of Services in accordance
with Exhibit A. If the actual number of Gross Active Accounts as of month-end
is at least 80% of the number of Gross Active Accounts projected for such
month-end on Exhibit I, no additional fees relating to Gross Active Accounts
will be charged for such month. If the actual number of Gross Active Accounts
is less than 80% of the projected number of Gross Active Accounts, an
additional fee will be charged under the following formula:
[(The fee for actual volume of services divided by the
number of actual Gross Active Accounts as of month-end)
times 66%] times [(80% of the number of Gross Active
Accounts projected for such month-end) minus the number of
actual Gross Active Accounts as of month-end]
During any subsequent contract year, SPS may increase the fees for
Services which SPS will provide directly as of the beginning of a contract year
(i) to account for differences between actual experience and the assumptions
set forth in Attachments I and II to Exhibit A which are attached hereto and
incorporated herein, and (ii) for Active Account Handling fees, Collection
Account fees and Cardmember Inquiry fees set forth on Exhibit A only to the
extent of sixty-six (66%) of the actual percentage increases in the Employment
Cost Index for the preceding twelve (12) month period as reported by the U.S.
Department of Labor, Bureau of Labor Statistics. SPS will provide Company
sixty (60) days' prior written notice of any such increase in fees.
Subject to ten (10) days' prior written notice to the Company, SPS may
at any time increase the fees for the reimbursable services or supplies SPS
procures on behalf of the Company by the amount of any increase in the charge
for such Services. SPS shall provide notice of such price increases to Company
within ten (10) days after SPS receives notice of a price increase from the
servicer or supplier of such reimbursable services or supplies. Before SPS
procures any of the services or supplies described in Exhibit A for which the
Company must reimburse SPS, SPS shall notify the Company in writing of the
prices at which such services or supplies are to be procured and, if the
Company does not desire to have SPS procure such services or supplies at the
quoted prices, the Company must so advise SPS in writing within thirty (30)
days after the date of the SPS notice. SPS shall provide evidence of its costs
for reimbursable services or supplies.
SPS may, without prior notice, charge the Company additional amounts
incurred by SPS due to increases in U.S. postal rates.
B. Payment
SPS shall bill the Company on a monthly basis for Services rendered in
the previous month. Each invoice shall be accompanied by appropriate
supporting detail as agreed upon by SPS and the Company. The Company shall pay
such invoice within thirty (30) days of the date of such invoice. In the event
Company has a bona fide dispute concerning any item contained on an invoice,
Company shall advise SPS in writing of the basis for the dispute within twenty
(20) days after receipt of the invoice. The parties will then meet in an
attempt to resolve the dispute prior to the payment due date.
C. Most-Favored Nations Pricing
The Fee for each of the Services set forth in Section I of Exhibit A
shall be no greater than those fees charged to other Third Party clients of SPS
for similar services taking in account similar volumes, assumptions and
economics. For purposes of this Agreement, "Third Parties" shall mean a party
that is not controlled by SPS or is not a corporate affiliate or subsidiary of
either Company or SPS.
<PAGE>
5. Internal Control Review Report and Company's Operations and Regulator
Review. At Company's request, but no more frequently than annually, SPS shall
provide Company with a report prepared by its firm of independent certified
public accountants in accordance with applicable audit reporting standards, on
the internal accounting controls of SPS. Such review shall be completed at
SPS' expense and shall be performed in accordance with the AICPA Audit Guide on
Audits of Service-Center-Produced Records. Further, Company employees may,
upon reasonable request as to scope and frequency, visit SPS Operation centers
to review applicable records and observe the Services performed for Company by
SPS. Further, upon reasonable notice, SPS shall permit appropriate federal or
state regulators to review applicable Company records and observe the Services
performed for Company by SPS.
6. Force Majeure. SPS shall not be liable to the Company nor the Company
to SPS for any failure, inability, or delay in performing its obligations
hereunder if such failure, inability, or delay arises for reasons beyond the
control and without the fault of the other party. By way of example, but not
limitation, such causes may include acts of war, strike, fire, explosion,
sabotage, accident, or casualty.
In the event of a delay in performance or non-performance at one or more
of SPS' processing units, SPS shall provide a backup service at another SPS
processing unit, and SPS shall be responsible for any additional telephone
charges incurred.
7. Warranties and Representations.
A. The Company represents and warrants that it is free, as of the
date it signs this Agreement, or will be free, as of the date of commencement
of the Term, of any contractual obligation that would prevent the Company from
entering into this Agreement, and that SPS' offer to provide Services in no way
caused or induced the Company to breach any contractual obligations.
B. SPS represents and warrants that it has the right to provide
Services to the Company under the provisions of this Agreement.
C. SPS makes no representations, warranties or guarantees, express or
implied, including without limitation any warranties of merchantability or
fitness for intended use, other than the express representations, warranties
and guarantees contained in this Agreement.
8. Liability and Indemnification.
A. SPS shall protect, defend, hold harmless and indemnify the Company
from and against any and all claims, actions, liabilities, losses, costs and
expenses arising out of SPS', its employees', agents', and contractors'
negligence performance of the obligations called for by this Agreement,
provided, that SPS' obligation to indemnify the Company for such negligent
performance shall be limited to:
(i) The actual cost of processing or reprocessing to correct
any such negligent performance;
(ii) The actual income lost by the Company resulting directly
from the negligent performance; and
(iii) Third party claims arising from SPS acts or omissions in
providing Services hereunder to the extent such claims do not involve acts or
omissions of Company, or obligations and responsibilities of Company under this
Agreement.
In no event shall SPS' liability to Company exceed the amount of
insurance that would be paid under the general liability insurance or other
policies in effect for actions or omissions of SPS under such policy. For
matters not covered under such policies, SPS' entire liability to Company under
this Agreement will not exceed one million ($1,000,000) dollars.
In addition, SPS shall not be liable to the Company or its customers
for any claims, damages, losses or expenses arising out of the performance of
the Services called for by this Agreement to the extent such claims, damages,
<PAGE>
losses or expenses are due to causes that are in whole or in part beyond the
control of SPS.
B. SPS shall not be liable for and the Company shall protect,
defend, hold harmless and indemnify SPS, its employees, agents and contractors
from and against any and all claims, actions, liabilities, losses, costs and
expenses that may arise out of SPS' performance of the Services called for in
this Agreement, to the extent such loss, damage, action, liability, expense or
claim is caused by the negligence of the Company, its employees, agents or
subcontractors, or the Company's customers except to the extent such loss,
damage or expense is caused by the negligence of SPS or otherwise beyond the
control of Company.
9. Contingency Planning.
Services will be implemented in accordance with the SPS Contingency
Plan, a copy of which will be provided to Company.
10. Notice. Any notice required to be given hereunder by either party to
the other shall be given in writing by personal delivery or certified mail,
return receipt requested, and shall be effective when received. Every such
notice shall be addressed, if to SPS, to:
SPS Payment Systems, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attn: Controller
with a copy to:
SPS Payment Systems, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attn: President
and, if to the Company, to:
NOVUS Services, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60015
Attn: Vice President and Controller
11. Confidential Nature of Data.
A. SPS recognizes the confidentiality of all data and documents
related to Services provided hereunder to the Company and its customers and
agrees to exercise the same standard of care in the protection of said
information as it uses to protect its own confidential information. SPS shall
provide and take all necessary or appropriate security precautions to ensure
that access to such data and documents shall be available only to those persons
required to perform the Services hereunder and only to the extent necessary for
them to perform their work. SPS shall be authorized to release any information
concerning such data and documents to any independent contractor SPS shall
retain in connection with SPS' performance with this Agreement but only to the
extent necessary for such contractors to perform work hereunder and only to
those independent contractors which are under similar obligations of
confidentiality. SPS shall not sell any such data and documents or disclose
the information contained therein, except as expressly provided herein. SPS
shall comply with any and all file safekeeping, recordkeeping, and data back-up
procedures that may be required by applicable law or the Company in connection
with its performance of this Agreement. Neither SPS not its agents or
employees shall divulge or communicate to any unauthorized third party any
information concerning such data and documents unless so required by law or so
directed by an authorized officer of the Company.
<PAGE>
B. The Company recognizes the confidentiality of all confidential
information regarding SPS' business practices designated as confidential by SPS
that it may learn as a result of this Agreement and agrees to exercise the same
standard of care in the protection of said information as it uses to protect
its own confidential information. The Company shall comply with any and all
file safekeeping, recordkeeping, and back-up procedures that may be required by
applicable law in connection with its performance of this Agreement.
C. Upon termination of this Agreement, SPS shall promptly return to
the Company, if requested, the following Company data, which shall be and
remain the property of the Company:
(i) Cardholder master tape files;
(ii) Merchant master tape files;
(iii) Agent master tape files; and
(iv) Computer-produced reports which reflect activity during the
ninety (90) day period immediately prior to termination of the Agreement or the
written request.
SPS shall cooperate with the Company to transfer the Company accounts
receivable processing back to the Company or to a new servicing organization.
Upon the return of any such Company data, and the transfer of processing, SPS
shall submit an invoice to the Company for the cost incurred by SPS in
returning such Company data and coordinating the transfer. Such cost will be
limited to reasonable out of pocket expenses and direct time and materials
cost. The Company shall pay any such invoice within thirty (30) days of the
date of such invoice.
12. Independent Contractor Relationship. SPS shall perform all services
hereunder as an independent contractor, and nothing contained herein shall be
deemed to create any association, partnership, joint venture or relationship of
principal and agent, or employer and employee, between the parties hereto or to
provide any party with the right power or authority, whether express or
implied, to create any such duty or obligation on behalf of the other party.
13. Change in Control. Notwithstanding any other provision of this
Agreement, Company may terminate this Agreement upon ninety (90) days' prior
written notice if SPS is no longer controlled by Dean Witter, Discover & Co.
and controlling interest of SPS is assumed by a competitor of Company. For
purposes of this Agreement, the term "competitor" shall mean an entity which
issues bank cards, charge cards or affinity card which are for universal
acceptance and general use (e.g., not private label cards).
14. General Conditions.
A. The validity, construction and performance of this Agreement
shall be governed by the laws of the State of Illinois.
B. All provisions contained in this Agreement shall extend to and be
binding upon the parties and their respective successors and assigns. This
Agreement can be modified only in writing and may not be assigned by either
party without the prior written consent of the other party, which consent will
not be unreasonably withheld.
C. Each paragraph and provision of this Agreement is severable from
the entire Agreement, and if one provision thereof is declared invalid, the
remaining provisions shall nevertheless remain in effect.
D. This document constitutes the entire Agreement between SPS and
the Company with respect to the Services to be performed by SPS, and no
representation or statement not contained in this Agreement shall be binding
upon SPS as a warranty or otherwise. This Agreement may not be amended,
changed, modified or altered except in writing, signed by both parties. This
Agreement constitutes the entire understanding between the parties and
supersedes all previous Agreements and negotiations, whether written or oral,
respecting the subject matter thereof.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
SPS PAYMENT SYSTEMS, INC. NOVUS SERVICES, INC.
By:/s/ Robert L. Wieseneck By:/s/ William P. O'Hara
Title: President Title: Sr. Vice President
<PAGE>
EXHIBIT 10.4
FIRST AMENDMENT
TO THE
AMENDED AND RESTATED BRIDGE AGREEMENT
THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED BRIDGE AGREEMENT (the
"Amendment") dated as of September 1, 1996, is between SPS TRANSACTION
SERVICES, INC. ("Borrower") and DEAN WITTER, DISCOVER & CO. ("DWDC").
WHEREAS, Borrower and DWDC are parties to an Amended and Restated Bridge
Agreement, dated as of September 1, 1995, pursuant to which DWDC has agreed to
make certain loans to the Borrower; and
WHEREAS, the Borrower and DWDC desire to amend the Amended and Restated
Bridge Agreement.
NOW THEREFORE, the Amended and Restated Bridge Agreement is amended as
follows:
1. Each capitalized term used in this Amendment (and not otherwise
defined herein) shall have the same meaning as set forth in the Amended
and Restated Bridge Agreement.
2. Section 1 of the Amended and Restated Bridge Agreement is
hereby amended in its entirety and henceforth shall read as follows:
1. Amount: The maximum aggregate amount that DWDC shall be
required to lend hereunder at any time shall be $750,000,000;
provided, however, that DWDC may, from time to time and upon
written notice to Borrower, reduce such maximum commitment by an
amount not to exceed the total amount of credit card receivables
that are sold by Hurley State Bank, a wholly owned subsidiary of
Borrower, pursuant to any securitization agreement entered into
after the date of this Amended and Restated Bridge Agreement;
provided, that, except as provided in Section 5(a), any such
reduction shall not affect the status of any loans then outstanding
hereunder.
3. Section 2 of the Amended and Restated Bridge Agreement is
hereby amended in its entirety and henceforth shall read as follows:
2. Term: This Amended and Restated Bridge Agreement shall
expire on January 31, 1997.
4. Except as provided herein, the terms and conditions of the
Amended and Restated Bridge Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as of the date first written above.
SPS TRANSACTION SERVICES, INC. DEAN WITTER, DISCOVER & CO.
By:/s/ Thomas M. Goldstein By:/s/ Birendra Kumar
Title: Vice President - Finance Title: Treasurer
<PAGE>
EXHIBIT 10.5
SECOND AMENDMENT
TO THE
AMENDED AND RESTATED BRIDGE AGREEMENT
THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED BRIDGE AGREEMENT
(the "Amendment") dated as of September 30, 1996, is between SPS TRANSACTION
SERVICES, INC. ("Borrower") and DEAN WITTER, DISCOVER & CO. ("DWDC").
WHEREAS, Borrower and DWDC are parties to an Amended and Restated
Bridge Agreement, dated as of September 1, 1995, and a First Amendment to the
Amended and Restated Bridge Agreement, dated as of September 1, 1996
(collectively, the "Amended and Restated Bridge Agreement"), pursuant to which
DWDC has agreed to make certain loans to the Borrower; and
WHEREAS, the Borrower and DWDC desire to further amend the Amended
and Restated Bridge Agreement.
NOW THEREFORE, the Amended and Restated Bridge Agreement is amended
as follows:
1. Each capitalized term used in this Amendment (and not
otherwise defined herein) shall have the same meaning as set forth
in the Amended and Restated Bridge Agreement.
2. Section 1 of the Amended and Restated Bridge Agreement
is hereby amended in its entirety and henceforth shall read as
follows:
1. Amount: The maximum aggregate amount that DWDC
shall be required to lend hereunder at any time shall be
$250,000,000; provided, however, that DWDC may, from time to
time and upon written notice to Borrower, reduce such maximum
commitment by an amount not to exceed the total amount of
credit card receivables that are sold by Hurley State Bank, a
wholly owned subsidiary of Borrower, pursuant to any
securitization agreement entered into after the date of this
Amended and Restated Bridge Agreement; provided, that, except
as provided in Section 5(a), any such reduction shall not
affect the status of any loans then outstanding hereunder.
3. Except as provided herein, the terms and conditions of
the Amended and Restated Bridge Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
duly executed as of the date first written above.
SPS TRANSACTION SERVICES, INC. DEAN WITTER, DISCOVER & CO.
By:/s/ Thomas M. Goldstein By:/s/ Birendra Kumar
Title: Vice President - Finance Title: Treasurer
<PAGE>
EXHIBIT 10.6
SECOND AMENDMENT
TO THE
AMENDED AND RESTATED BORROWING AGREEMENT
THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED BORROWING AGREEMENT
(the "Amendment") dated as of September 30, 1996, is between SPS TRANSACTION
SERVICES, INC. ("Borrower") and DEAN WITTER, DISCOVER & CO. ("Lender").
WHEREAS, Borrower and Lender are parties to an Amended and Restated
Borrowing Agreement, dated as of September 1, 1995, and a First Amendment to
the Amended and Restated Borrowing Agreement, dated as of May 6, 1996
(collectively, the "Borrowing Agreement"), pursuant to which Lender has made
certain loans to the Borrower; and
WHEREAS, the Borrower and Lender desire to further amend the Borrowing
Agreement.
NOW THEREFORE, the Borrowing Agreement is amended as follows:
1. Each capitalized term used in this Amendment (and not otherwise
defined herein) shall have the same meaning as set forth in the
Borrowing Agreement.
2. Section 2.01(a) of the Borrowing Agreement is hereby amended in its
entirety and henceforth shall read as follows:
(a) Revolving Loan Commitment. Subject to the terms and
conditions of this Borrowing Agreement and relying upon
representations, warranties and covenants of Borrower set forth
herein, Lender shall make loans (all such loans made pursuant to
this Section 2.01(a) being referred to herein collectively as the
"Loans") to Borrower at any time and from time to time prior to the
Commitment Termination Date, in an aggregate principal amount not
exceeding at any one time outstanding $1,000,000,000 (the
"Commitment"). Prior to the Commitment Termination Date, Lender
shall have no obligation to make advances to the extent any
requested advance would cause the principal amount outstanding under
the Revolving Notes to exceed the Commitment, provided, that Lender
may elect (but shall not be obligated) from time to time to make
advances in excess of the Commitment.
3. Except as provided herein, the terms and conditions of the Borrowing
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as of the date first written above.
SPS TRANSACTION SERVICES, INC. DEAN WITTER, DISCOVER & CO.
By:/s/ Thomas M. Goldstein By:/s/ Birendar Kumar
Title: Vice President - Finance Title: Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 17,396
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 44,921
<INVESTMENTS-MARKET> 0
<LOANS> 1,433,373
<ALLOWANCE> (65,648)
<TOTAL-ASSETS> 1,562,196
<DEPOSITS> 465,084
<SHORT-TERM> 785,237
<LIABILITIES-OTHER> 87,369
<LONG-TERM> 0
0
0
<COMMON> 272
<OTHER-SE> 224,234
<TOTAL-LIABILITIES-AND-EQUITY> 1,562,196
<INTEREST-LOAN> 163,924
<INTEREST-INVEST> 1,943
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<INTEREST-TOTAL> 163,924
<INTEREST-DEPOSIT> 19,185
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<INTEREST-INCOME-NET> 106,294
<LOAN-LOSSES> 84,605
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 214,418
<INCOME-PRETAX> 37,461
<INCOME-PRE-EXTRAORDINARY> 37,461
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,226
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 59,421
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<ALLOWANCE-OPEN> 63,704
<CHARGE-OFFS> 99,415
<RECOVERIES> 16,754
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