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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee required)
For the fiscal year ended December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No fee required)
for the transition period from to
Commission file number 1-10993
SPS TRANSACTION SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3798295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 Lake Cook Road, Riverwoods, IL 60015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847/405-3700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of January 31, 1997, the Registrant had 27,196,837 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant as of January 31, 1997 was approximately $120,786,000.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Stockholders to be mailed to
stockholders on or about March 31, 1997 for the year ended December 31, 1996
are incorporated by reference in Parts II and IV. Portions of the Registrant's
Definitive Proxy Statement to be mailed to stockholders on or about March 31,
1997 for the Annual Meeting to be held on April 29, 1997, are incorporated by
reference in Part III.
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PART I
Item 1. BUSINESS
General
SPS Transaction Services, Inc. (the "Company") is a third party provider of
technology-based outsourcing services concentrated in four primary businesses:
the electronic processing of non-cash point-of-sale transactions (predominantly
credit card transactions), consumer private label credit card program
administration, commercial accounts receivable processing and call center based
customer service applications. As used herein, "Company" shall mean SPS
Transaction Services, Inc. and its subsidiaries, unless the context otherwise
indicates.
In its payment transaction processing business, referred to as Network
Transaction Services, the Company provides a wide variety of clients with
point-of-sale processing. This includes authorization, data capture, reporting
and routing for settlement of check, credit card and debit card transactions.
The Company also manages private label credit card programs for merchants and
other service providers through its Consumer Credit Card Services business.
For these programs, the Company either administers the program for its merchant
client or acts as an issuer and owns the credit card loans outstanding. In
addition, the Company offers billing and accounts receivable management systems
for clients with businesses as their customers through its Commercial Account
Processing Services business. The Company's call center TeleServices business
includes on-line technical helpdesk support, catalog order entry and handling
of customer service inquiries.
The Company originated from an enterprise established by Sears, Roebuck and
Co. ("Sears") in 1985. The Company was organized as a Delaware corporation in
October 1991 to carry on the businesses of its then two wholly owned
subsidiaries, SPS Payment Systems, Inc. ("SPS"), a Delaware corporation, and
Hurley State Bank ("HSB"), a South Dakota state chartered bank. Prior to the
Company's initial public offering in March 1992, the Company was a direct,
wholly owned subsidiary of NOVUS Credit Services Inc. ("NCSI") and an indirect,
wholly owned subsidiary of NCSI's parent, Dean Witter, Discover & Co. ("DWD").
After the Company's initial public offering, NCSI owned 74.3% of the Company's
common stock. On March 1, 1993, DWD completed its initial public offering of
19.9% of its common stock, reducing Sears' ownership in DWD to 80.1%. On June
30, 1993, Sears divested its remaining ownership of DWD's common stock by means
of a special dividend to Sears shareholders. At December 31, 1996, the Company
was a 73.6% majority owned subsidiary of NCSI, which in turn is a wholly owned,
direct subsidiary of DWD.
On February 5, 1997, DWD and Morgan Stanley Group Inc. announced a
definitive agreement to merge. The new company will be named Morgan Stanley,
Dean Witter, Discover & Co. The transaction, which is expected to be completed
by mid-1997, is subject to certain regulatory approvals and the approval of
shareholders of both companies.
Network Transaction Services
The Company provides electronic network transaction processing services
primarily to national and regional merchants. The Company captures transaction
information electronically at the point-of-sale; transmits the information
utilizing the facilities of unaffiliated communication services providers to
the credit card issuer, debit card issuer, or other appropriate on-line
processor for authorization or verification; communicates the response to the
merchant electronically; stores the information for reporting purposes; and
submits processed data to the appropriate settlement entity. The authorization
process is typically completed within seven seconds after the transaction data
leaves the merchant's premises.
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The Company typically markets these services directly to large regional and
national merchants and competes with other large networks and merchant
acquirers for this business.
The major components of the Company's Network Transaction Services business
are described below:
- - Electronic Authorization/Data Capture - Transaction approval requests are
processed through point-of-sale equipment using primarily "950" system dial-up
telephone access, ISDN line access, leased line access, or satellite access
into the communications network. The cardholder account number is checked
against a computer file maintained by the issuer of the card and the purchase
is approved or declined within seconds. A similar procedure is used for debit
card processing and electronic check verification. At the time of
authorization, pertinent transaction data is recorded and stored for use in
settlement and client reporting. The Company's system provides for the
redundant capture of transaction data at both the merchant's point-of-sale
terminal and at the communications network data center. This data capture
redundancy protects the merchant and the Company's system against potential
loss of data. In addition, the Company's system provides multiple transaction
routing capability from the merchant's point-of-sale location to ensure the
user a high level of access to electronic authorizations. These features
provide what the Company believes to be superior reliability and uptime for its
clients.
- - Reporting and Settlement - Captured data is automatically processed within
the Company's system for complete client reporting. This data is then
transmitted for settlement to the appropriate financial institution or the
designated processor. In the settlement process for a credit transaction, the
merchant's account is credited and the card issuer is notified to post the
transaction to the cardholder's account. For debit card transactions, the
merchant's account is credited and the cardholder's checking account is
debited. MasterCard(r) and Visa(r) card transaction data is transmitted to a
settlement institution selected by the Company's merchant client. The
settlement institution then enters transactions into the bankcard interchange
settlement process. For NOVUS(sm) Card transactions (which include Discover
Card, Private Issue(r) Card, BRAVO(sm) Card and affinity program cards) and
American Express(r) Card transactions, data is transmitted directly to the card
issuers of such cards. For other card types, transaction data is transmitted
to the appropriate processor for settlement of the transactions.
The Company maintains a 24-hour network services "help" desk which responds
to inquiries from merchant locations and assists them in resolving terminal,
network, communication and system training problems. The help desk provides
terminal application consultation and, if necessary, downloads new applications
to the merchant's point-of-sale terminals. The Company maintains a terminal
preparation facility (the "TPF") which loads, tests and ships point-of-sale
terminals to merchant locations. The TPF also provides repair services for
point-of-sale terminals. The Company also markets point-of-sale terminal sales
and maintenance, customer terminal application software development and
customized reporting solutions as part of its Network Transaction Services
business.
The Company's Network Transaction Services are provided pursuant to written
contracts with merchant clients. Such contracts are generally individually
negotiated with each merchant, have terms varying from one to five years and
frequently contain provisions that automatically extend the term of the
contract unless either party takes affirmative action to terminate the
contract.
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The Company utilizes the computer and communications network (the "Network")
of Advantis to process the majority of the Company's electronic transactions.
The Company has access to the Network pursuant to an agreement between the
Company and Advantis. Although Advantis is responsible for maintaining the
Network and data centers, the Company develops and maintains most of the
transaction processing systems and proprietary software that it runs on the
Network. Processing performed by other communication providers is done through
similar agreements. The Company develops merchant and industry specific
software tailored to the needs of its clients. Most data capture programs used
in the Company's transaction processing services were developed and are
maintained by Company employees and are not accessible, except as permitted by
the Company, to other businesses that use the Network.
Through the Network, the Company maintains direct data links for NOVUS,
Visa, MasterCard and American Express card authorizations and various other
direct data links to proprietary card issuers and financial institutions for
the purposes of authorizing and completing the Company's electronic transaction
processing services. A wide variety of stand-alone point-of-sale terminals,
electronic cash register systems and personal computers can be used by the
Company's merchant clients at their individual locations to access the
Company's system.
Consumer Credit Card Services
The Company offers to national and regional merchants customized private
label consumer credit card programs. The Company's wholly owned subsidiary,
HSB, issues the credit card on behalf of the client and owns the receivables
that are generated through the use of the credit card (the "HSB Programs"). In
programs that are managed but not owned (the "Managed Programs"), the Company
administers the programs but does not act as the card issuer or own the
receivables.
Whether the portfolio is owned or managed, the Company offers a full range
of credit card services including: new account processing featuring custom
scoring models; card design, embossing and issuance; sales authorizations;
statement processing and mailing; remittance processing; handling cardholder
inquiries; collections; and full marketing support.
Services provided by the Company in a private label consumer credit card
program typically include the following:
- - Implementation Support - The Company assists the merchant with card and
statement design, software implementation and training before the processing of
new accounts begins.
- - New Account Processing - The Company's New Account Processing System ("NAPS")
enables new customer accounts to be opened in an average of four to six
minutes. Applicant information taken at the point-of-sale is entered into NAPS,
which maintains an on-line link to the major national credit bureaus and uses
proprietary automated point-scoring models selected by the issuer of the
credit card to approve or decline credit applications. Applications received by
mail are also handled through NAPS and are generally processed on the date of
receipt. The Company's risk management department oversees the development and
validation of new account approval models that are customized for an individual
client and monitors and adjusts such models on an ongoing basis as applicants
and economic conditions change.
- - Credit Card Embossing - The Company's software automatically generates a file
of approved new account names and numbers for use in card embossing, and
embossed cards are mailed to approved applicants.
- - Sales Authorizations - The Company currently authorizes all transactions
under its private label credit card programs through the Network. Merchants can
utilize the same point-of-sale terminals they use for bank cards for private
label credit card authorizations.
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- - Mechanized Statement Processing - The Company sends monthly account
statements directly to the cardholders. Large volumes and state-of-the-art
equipment enable the Company to process statements efficiently. Statements can
be customized to meet each merchant client's needs.
- - Remittance Processing - The Company processes and deposits private label
credit card payments typically within 24 hours of their receipt.
- - Cardholder Services - The Company has customer service representatives
available to answer cardholder questions and handle billing inquiries during
regular business hours. An automated call distribution system allows customer
service representatives to answer telephone calls using the merchant client's
name. The Company's cardholder service system enables the customer service
representative to view the cardholder's file and billing statement information
on a computer screen allowing for effective responses to cardholder inquiries.
- - Collections - The Company uses a sophisticated on-line collection system to
identify and prioritize delinquent accounts. The Company contacts and attempts
to work with delinquent cardholders to reach mutually agreeable payment plans.
- - Marketing Support - The Company assists its clients in developing a complete
marketing plan that targets the merchant's private label credit cardholders.
The Company also creates promotional materials to support such marketing plans.
- - Customized Reporting - The Company uses customized software to analyze a
merchant client's cardholder base and to develop marketing information.
The Company provides these services through two product offerings:
- - Consumer Credit Card Outsourcing Services - For certain of the Managed
Programs, the Company enters into a card services agreement with the merchant
setting forth the credit card program services to be provided by the Company.
The Company has traditionally charged flat processing fees under such
agreements on a per service provided basis (for example, per collection call
made, per card embossed, per statement issued). In some instances, the Company
charges an aggregate flat processing fee under such agreements on a per
cardholder account basis. Card services agreements typically have terms varying
from one to five years and frequently contain provisions that automatically
extend the term unless either party takes affirmative action to terminate the
agreement.
- - Owned Consumer Credit Card Programs - For each of the HSB Programs, a
merchant services agreement between HSB and the merchant is negotiated that
sets forth the obligation of HSB to open credit card accounts for qualified
customers of the merchant, the services to be provided by HSB and the merchant
discount revenues to be paid by the merchant to HSB. In some of the HSB
Programs, the merchant services agreement provides that the merchant discount
revenues can be supplemented or adjusted in certain circumstances, as a result
of prevailing interest rates and to mitigate anticipated increased credit
losses. HSB's merchant services agreements typically have terms of five years
and frequently contain provisions that automatically extend the term unless a
party takes affirmative action to terminate the agreement.
All finance charges (including late fees) paid by private label credit
cardholders under HSB Programs are paid to and retained by HSB except to the
extent that such fees are used to satisfy obligations under loan securitization
agreements (see Hurley State Bank - Loan Securitization). SPS maintains a
services agreement with HSB, pursuant to which SPS acts as the servicer for all
private label accounts owned by HSB, and HSB pays SPS a monthly fee equal to a
specified percentage of the outstanding receivables under such accounts.
Commercial Accounts Processing Services
The Company offers commercial accounts processing for clients whose
customers are businesses rather than consumers. The processing of commercial
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accounts is accomplished through the use of a specialized accounts receivable
management system developed by the Company called PARAGON Commercial
Services(sm). The system allows the Company's clients to offer their commercial
customers a monthly revolving statement or an invoice with custom terms and in
each case the system may include supporting purchase order data. The Company
also provides credit scoring models, cardholder services, collection procedures
and marketing support. Revenues earned from commercial accounts processing are
included in Managed Programs.
MountainWest Financial Corporation ("MountainWest"), a wholly owned
subsidiary of NCSI, is the issuer of the majority of the Company's commercial
private label credit cards as well as certain consumer private label credit
cards with respect to which SPS acts as the servicer pursuant to a Service
Agreement. SPS has also entered into a Marketing Services Agreement with NCSI
pursuant to which SPS provides marketing and sales services for the benefit
of MountainWest.
TeleServices
The Company's TeleServices (formerly referred to as Operational Outsourcing)
business markets call center teleservicing programs that focus on
business-to-consumer applications based on the Company's technological
capabilities and professional customer service. For such services, the Company
develops or utilizes customized software applications primarily to respond to
inbound calls from a client's customers and to facilitate appropriate actions
based on the calls.
The Company services a range of client outsourcing programs including:
- - Help Desk and Technical Support - The Company provides user technical support
programs for proprietary and off-the-shelf software applications, technical
internet user support and problem analyses.
- - Inbound Teleservice - The Company provides customized customer service
applications for clients by responding to inbound inquiries from their
customers. Specific examples of this outsourcing service are the handling of
billing inquiries, product feature inquiries, dealer locator applications,
dispatch services for emergency road service or product repair, enrollment
services, handling member benefit inquiries and many others.
- - Catalog Order Management - The Company provides services to catalog and
direct mail merchants to process inbound orders that are received via
telephone, fax or internet. Service features include order entry, cross-
selling, authorization of credit purchases, real time interfaces with client
warehouses and fulfillment centers, resolution of customer problems and
reporting of customer and product data.
Competition
The Company's services are sold primarily to national and regional
merchants. The Company competes on the basis of service quality, response time,
customer support, customized system applications, reliability and price. The
Company believes that it is among the industry leaders with respect to each of
these factors.
According to the Faulkner & Gray Credit Card Industry Directory (1997
Edition), based on the volume of outstanding receivables administered, GE
Capital Retailer Financial Services has over 50% of the third party private
label credit card marketplace. Also according to Faulkner & Gray, Household
Retail Services, Beneficial National Bank and SPS Transaction Services are the
next largest of the third party private label credit card providers identified,
although the Company believes that no competitors other than GE Capital
Retailer Financial Services are dominant in such marketplace. The principal
competitors of the Company in the electronic network transaction processing
marketplace include First Data Card Services, National City Processing Company,
Alliance Card Services (formerly Business Services, Inc. and Limited Card
Services), and BuyPass Corporation, although the Company believes that no
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competitors other than First Data Card Services are dominant in such
marketplace. The Company's TeleServices business is client specific, and as
such the Company does not compete with a defined set of competitors with
respect to these services. Existing and potential competitors of the Company
may have equal or greater financial, technological and/or marketing resources
than the Company, and there can be no assurance that the Company will continue
to be able to compete successfully with them.
Significant Clients
Tandy is the Company's largest client, accounting for 24.0% of the Company's
net operating revenues in 1996. The Company administers four owned private
label credit card programs and provides electronic transaction processing
services for Tandy. The Goodyear Tire & Rubber Company ("Goodyear") is the
Company's next largest client, accounting for 12.0% of the Company's net
operating revenues in 1996. The Company administers two owned private label
credit card programs and provides electronic transaction processing services
and TeleServices for Goodyear. None of the Company's other clients individually
accounted for more than 10% of the Company's net operating revenues in 1996.
Seasonal Factors
The Company's results of operations are impacted by seasonal patterns of
retail purchasing, but because certain seasonal trends are typically
offsetting, their impact does not significantly affect the Company's overall
results of operations. The number of transactions processed and the level of
credit card loans outstanding typically grows during the fourth quarter
followed by a flattening or decline in the subsequent first quarter. This
seasonality results mainly from higher levels of retail sales in the fourth
quarter than in the first quarter. During the fourth quarter, merchant discount
revenue and revenues derived from transaction processing services typically
increase, but are accompanied by increases in expenses associated with the
growth of credit card receivables. These increased expenses typically include
the provision for loan losses, financing expenses, salaries and employee
benefits expenses, processing and service expenses, and various other expenses.
Correspondingly, in the first quarter, merchant discount revenue, revenues
derived from transaction processing services and provision for loan loss
expense typically decrease, but generally are accompanied by increased finance
charge revenue related to the preceding quarter's credit card loan growth.
Hurley State Bank
HSB is the credit card issuer and the receivables funding facility for the
HSB Programs, all of which are administered by the Company. HSB is not a member
of the Federal Reserve System. HSB is engaged only in consumer credit card
operations and is not permitted to engage in commercial lending (which may
include consumer credit card programs where the merchant is a recourse party).
The terms and conditions of the credit card accounts owned by HSB are set forth
in cardholder agreements entered into with each merchant's customers.
Funding of Receivables
The HSB Programs involve making loans to private label credit cardholders
which create receivables from the cardholders. As such, the business is capital
intensive. The Company's ability to add to or expand the HSB Programs is
limited by the amount of its available capital and by applicable regulatory
ratios of capital to assets. The Company currently funds the capital needs of
its operations by deposit taking activities utilizing certificates of deposit
("CDs") in denominations of $100,000 or more, securitizations of credit card
loans and borrowings from DWD.
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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 December 31, 1996, CDs outstanding were $454.4 million, of which
institutional CDs represented $213.2 million and retail CDs represented $241.2
million.
The Company engages in credit card loan securitization transactions through
the sale by HSB of credit card loans. When the Company securitizes its credit
card loans, it retains the right to service the underlying credit card
accounts, for which it receives fees. Loan securitizations have the effect of
converting net credit income and credit card fees into loan servicing fees
while improving overall liquidity and capital ratios of the Company. See
"Business - Hurley State Bank - Loan Securitization."
Certain borrowings to support the HSB Programs are currently provided
pursuant to an Amended and Restated Borrowing Agreement, as ammended, (the
"Borrowing Agreement") and a facility fee letter agreement, as ammended (the
"Facility Fee Agreement")(collectively, the "Financing Agreements") with DWD,
pursuant to which DWD has agreed to provide financing to the Company. As of
January 31, 1997 the maximum amount available under the Borrowing Agreement,
which expires on April 17, 1997, was increased from $1.0 billion to $1.25
billion. The interest rate to be paid by the Company reflects DWD's
borrowing costs. At January 31, 1997, the Company had $917.1 million
outstanding under the Borrowing Agreement. Under the Facility Fee Agreement,
the Company has agreed to pay certain monthly facility fees in connection
with its financing arrangements with DWD. An Amended and Restated Bridge
Agreement, under which DWD provided loans to the Company of up to $250
million, expired on January 31, 1997. The Company expects to renew or
replace the Financing Agreements prior to the expiration dates of such
Financing 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.
Loan Securitization
Selling loans through securitizations results in net income and fee income
from credit card loans under HSB Programs effectively being converted into loan
servicing fees, while improving overall liquidity and capital ratios of the
Company. A securitization transaction involves the sale by HSB of the credit
card loans generated by a pool of HSB Program credit card accounts to a
separate legal entity created for loan securitizations. The securitizations
result in removal of the credit card loans from the Company's balance sheet for
both financial and regulatory accounting purposes. The private label credit
cardholder is generally not aware that the credit card loans from his or her
account have been included in a pool of securitized loans because the Company
services on-balance-sheet and securitized loans in the same manner. Under the
securitization agreements, the existence of certain conditions could cause
early amortization of the affected pool of securitized loans and thereby
increase the Company's need for alternative forms of financing. Such conditions
include an increase in the amount of charge-offs over a specified rate.
Payments by HSB Program cardholders of finance charges and other amounts
relating to the credit card loans are used to pay a rate of return to the
holders of ownership interests in the receivables pools. Such payments are also
used to pay a fee to the agent and a fee to SPS and to reimburse the purchaser
for cardholder accounts that are charged off. Any remaining amounts are
effectively paid to HSB. In the event that such payments are insufficient to
cover charge-offs, and to pay the rate-of-return and agent fee, SPS, as the
recourse party under the Receivables Capital Corporation ("RCC") program, or
the Company, as the recourse party under the Barton Capital Corporation ("BCC")
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program, have agreed to make up such shortfall up to their respective maximum
recourse obligations. DWD is the guarantor of such recourse obligations. In
addition, HSB is obligated to pay a monthly commitment fee to the purchaser of
the credit card loans if any portion of the facility is unused.
HSB maintains a loan securitization program with RCC, and at December 31,
1996, outstanding loans sold under such program were $280.0 million. HSB also
maintains a loan securitization program with BCC, and at December 31, 1996,
outstanding loans sold under such program were $300.0 million. At December 31,
1996, $580.0 million or 26.2% of the HSB Program loans had been sold through
loan securitizations.
The RCC and BCC loan securitization programs are scheduled to expire in
April 1997. The Company expects to renew or replace these facilities on or
prior to the expiration dates. If these programs are not extended on or prior
to their expiration dates, collections allocable to RCC and BCC following the
expiration dates of the programs will be paid to RCC or to BCC, as applicable,
and the interests of RCC and 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.
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 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. Cost 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
$46.6 million and $752.8 million at December 31, 1996 and 1995, respectively.
During 1995, the Company converted several of its fixed interest rate credit
card programs to variable interest rate programs. At December 31, 1996 and
1995, approximately 69% and 58% of the Company's credit card loans including
securitized loans were variable interest rate loans.
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Executive Officers of the Registrant
The following sets forth certain information concerning executive officers
of the Company during the past five years:
Name Age Present Position
- --------------------- ------ ----------------------------------------
Robert L. Wieseneck 59 President, Chief Executive Officer and
Director
Thomas C. Schneider 59 Chief Financial Officer and Director
Robert W. Archer 58 Senior Vice President -- Sales
Richard F. Atkinson 60 Senior Vice President -- Operations
Russell J. Bonaguidi 45 Vice President -- Controller
Thomas W. Clarke 43 Vice President -- Network Services
Operations
Robert J. Ferkenhoff 54 Vice President and Chief Information
Officer
Thomas M. Goldstein 38 Vice President -- Finance
Larry H. Myatt 53 Vice President -- Marketing and
Administration
Ruth M. O'Brien 43 Vice President -- TeleServices
David J. Peterson 39 Vice President -- Network Services and
Corporate Development
Serge J. Uccetta 51 Vice President -- Card Services
Mary Ann Warniment 47 Vice President -- Electronic Information
Services
Mr. Wieseneck has served as President, Chief Executive Officer and a
director of the Company since its formation. He has served as President of SPS
since 1987 and as a director of SPS since 1988. Mr. Wieseneck has also served
as President and Chairman of the Board of HSB since 1989. He has served as a
director of NCSI since 1991 and as an Executive Vice President of NCSI from
December 1986 to April 1987 and since April 1988.
Mr. Schneider has served as Chief Financial Officer and a director of the
Company since its formation. Mr. Schneider has served as an Executive Vice
President of DWD since 1980 and as its Chief Financial Officer from 1981 until
1982 and since 1987. He has also served as Executive Vice President and Chief
Financial Officer of NCSI since 1987 and as a director of NCSI since 1986. Mr.
Schneider has been Chief Financial Officer of Dean Witter Reynolds, Inc.
("DWR") since 1987, an Executive Vice President of DWR since 1984 and a
director of DWR since 1981.
Mr. Archer has served as Senior Vice President -- Sales of the Company and
as a Senior Vice President of SPS since 1994. Mr. Archer served as Vice
President -- Sales of the Company from 1992 until 1994 and as a Vice President
of SPS from 1988 until 1994.
Mr. Atkinson has served as Senior Vice President -- Operations of the
Company and as a Senior Vice President of SPS since 1994. Prior thereto he
served as Vice President -- Operations of the Company from 1992 until 1994 and
as a Vice President of SPS from 1986 until 1994. Mr. Atkinson has served as a
Senior Vice President of HSB since 1991.
Mr. Bonaguidi has served as Vice President -- Controller of the Company, HSB
and SPS since 1994. Prior thereto he was National Manager of Credit Card
Banking for Sears, Roebuck and Co. from 1992 until 1994 and Vice President --
Controller of Prime Option Services, Inc. (an affiliate of the Company) from
1990 until 1992.
Mr. Clarke has served as Vice President -- Network Services Operations of
the Company since 1996 and as Vice President Network Services Operations of SPS
since 1994. Prior thereto he was Vice President -- Network Services
Operations/Development from 1994 until 1996, Controller of the Company from
1992 until 1994, Controller of SPS from 1986 until 1994 and Vice President and
Controller of HSB from 1992 until 1994.
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Mr. Ferkenhoff has served as Vice President and Chief Information Officer of
the Company since 1994 and of SPS since 1993. Prior thereto he was Vice
President -- Information Technology of the Company from 1993 until 1994 and
Vice President -- Information Services for Sears Merchandise Group from 1989
until 1993.
Mr. Goldstein has served as Vice President -- Finance of the Company and as
a Vice President of HSB since 1995. Prior thereto he was First Vice President
- -- Group Director of Funding and Capital Markets/Investor Relations of DWD from
1989 until 1994.
Mr. Myatt has served as Vice President -- Marketing and Administration of
the Company since 1996. Prior thereto he was Vice President -- Marketing and
Product Development of the Company from 1992 until 1996 and as a Vice President
of SPS since 1986.
Ms. O'Brien has served as Vice President -- TeleServices of the Company
since 1996. Prior thereto she was Director of Operational Outsourcing for SPS
and Director of Client Services for SPS from 1994 until 1996 and from 1990
until 1994, respectively.
Mr. Peterson has served as Vice President -- Network Services and Corporate
Development of the Company since 1995. Prior thereto he was Vice President
- -- Corporate Development of the Company from 1994. Mr. Peterson was an
investment banker for DWR from 1987 until 1993
Mr. Uccetta has served as Vice President -- Card Services of the Company
since 1995 and Vice President -- Card Services of SPS since 1993. Prior
thereto he was Director of Commercial Accounts for the Company from 1993 until
1995. Prior to joining SPS, Mr. Uccetta was Director -- Strategic Programs of
Citibank from 1991 until 1993.
Ms. Warniment has served as Vice President -- Electronic Information
Services of the Company since 1993 and as a Vice President of SPS since 1990.
She was Vice President -- Information Technology of the Company from 1992 until
1993.
There are no family relationships between any of the foregoing persons.
Employees
As of December 31, 1996, the Company had 3,881 full-time equivalent
employees, of which 612 were salaried and 3,269 were hourly. Of the hourly
employees, approximately 28% were part-time. Approximately 3,390 of the
Company's full-time equivalent employees were located in field operations
centers providing customer service and support. Of the approximately 385 full-
time equivalent employees located at the Company's headquarters, 70 were
engaged in sales and marketing, 155 were engaged in systems development and
maintenance, and 160 were engaged in supporting the Company's various
businesses and administration. None of the employees of the Company is covered
by a collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
Regulatory Matters
Restrictions on Activities of HSB
HSB, a federally insured, South Dakota state chartered bank, operates as a
limited purpose credit card bank under federal law. The federal Competitive
Equality Banking Act of 1987 ("CEBA") established several categories of
financial institutions that do not fall within the meaning of "bank" for
purposes of the Bank Holding Company Act ("BHCA"). Among those exempted are
credit card banks. As a credit card bank, HSB may engage only in credit card
operations and may not engage in the business of making commercial loans.
Additionally, HSB may not accept savings or time deposits of less than $100,000
and may not accept demand deposits or other transaction accounts of any amount.
Finally, HSB may maintain only one office at which it can accept deposits. HSB
is subject to deposit insurance assessments payable to the Bank Insurance Fund
of the Federal Deposit Insurance Corporation ("FDIC"). The rates for these
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assessments may vary based upon HSB's capital levels, risk categories, and a
rate structure established by the FDIC. The bank is subject to comprehensive
regulations and periodic examinations by the South Dakota Division of Banking
and by the FDIC.
CEBA Limitations
CEBA provides that if HSB fails to comply with the statutory restrictions
affecting its status as a credit card bank, any entity controlling HSB may,
among other things, be required to divest control of HSB. HSB believes,
however, that in light of the programs it has in place, the limitations of CEBA
will not have a material impact on HSB's ability to service, or to maintain the
level of, the cardholder programs. Future federal or state legislation,
regulation or interpretation of federal or state legislation or regulation
could, however, adversely affect the business of HSB or the relationship of any
such controlling entity with HSB.
Exportation of Interest Rates
The terms and conditions of the credit card accounts owned by HSB are
governed by the laws of South Dakota, where HSB is chartered, and by applicable
federal law. Under federal law, HSB may charge interest at the rate allowed by
the laws of South Dakota, which do not limit the amount of interest that may be
charged on credit card loans offered by HSB. As a result, HSB is permitted to
export interest rates pursuant to federal law.
Dividends and Transfers of Funds
There are various legal limitations on the extent to which HSB can finance
or otherwise supply funds, through dividends, loans or otherwise, to the
Company and its affiliates. The FDIC is authorized to prohibit HSB from
engaging in any unsafe and unsound practice in conducting its business, and it
is possible that under some circumstances the FDIC could claim that payment of
a dividend was an unsafe and unsound practice. In addition, under federal law,
a bank cannot pay a dividend that will cause such bank to be
"undercapitalized". HSB's state regulator also has the authority to prohibit
unsafe and unsound practices. The payment of dividends by HSB may also be
affected by other factors, such as the need to maintain adequate capital or to
meet loan demands.
HSB is also subject to certain restrictions which limit the transfer of
funds to the Company, and certain other affiliates in the form of loans,
extensions of credit, investments or purchases of assets or services and which
require that HSB's transactions with its affiliates be on terms no less
favorable to HSB than comparable transactions with unrelated third parties.
Consumer Protection Laws and Debtor Relief Laws
The relationships among cardholders, credit card issuers and sellers of
merchandise in transactions financed by the extension of credit under credit
accounts are extensively regulated by federal and state consumer protection
laws and regulations. Such laws and regulations include the federal
Truth-in-Lending Act (and the Federal Reserve Board's Regulation Z issued
thereunder), Equal Credit Opportunity Act (and the Federal Reserve Board's
Regulation B issued thereunder), Soldiers' and Sailors' Civil Relief Act, Fair
Credit Billing Act, Fair Credit Reporting Act and Fair Debt Collection
Practices Act. These statutes and regulations require credit disclosures on
credit card applications and solicitations, on an initial disclosure statement
required to be provided when a credit card account is first opened, and with
each monthly billing statement. They also prohibit certain discriminatory
practices in extending credit, impose certain limitations on the charges and
fees that may be imposed and regulate practices utilized in collections. In
addition, cardholders are entitled, under such laws and regulations, to have
payments and credits promptly applied on credit accounts and to require billing
errors to be promptly resolved. A cardholder may be entitled to assert
violations of certain of such consumer protection laws by way of set-off
against the cardholder's obligation to pay amounts owing on the cardholder's
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account or, in certain cases, by claims against the lender or seller. For
example, under the federal Truth-in-Lending Act, a credit card issuer is
subject to all claims (other than tort claims) and defenses arising out of
transactions in which a credit card is used to purchase merchandise, if certain
conditions are met. These conditions include requirements that the cardholder
make a good faith attempt to obtain satisfactory resolution of the dispute from
the person honoring the credit card and meet certain jurisdictional
requirements. Where the seller of the goods or services is the same party as
the card issuer, or controls or is controlled by the card issuer directly or
indirectly, these jurisdictional requirements are not applicable. These
statutes further provide that in certain cases a cardholder's liability may not
exceed $50 with respect to charges to the credit card account which resulted
from unauthorized use of the credit card. The application of federal and state
bankruptcy and debtor relief laws affect HSB to the extent such laws result in
any credit card accounts being charged off as uncollectible.
FDICIA
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal bank regulatory agencies are required to take "prompt
corrective action" with respect to banks that do not meet minimum capital
requirements, and FDICIA imposes certain restrictions upon banks which meet
certain capital requirements but are not "well capitalized" for purposes of
FDICIA. FDICIA establishes five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. A bank may be downgraded to, or be deemed to be in, a
capitalization category that is lower than is indicated by its actual capital
position if it is determined to be in an unsafe or unsound condition, or
receives an unsatisfactory examination rating. The FDIC has issued regulations
to implement the prompt corrective action provisions of FDICIA. Under FDICIA
and implementing regulations adopted by the FDIC, a bank that is not well
capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on any deposits significantly higher than the
prevailing rate in its normal market area or nationally (depending upon where
the deposits are solicited). HSB currently solicits deposits through brokers.
If HSB were unable to use brokered deposits as a funding source, the funding
costs for HSB would be likely to increase.
FIRREA Cross-Guarantee Provisions
Pursuant to certain provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), an insured depository
institution which is commonly controlled with another insured depository
institution is liable to the FDIC for any loss incurred, or reasonably
anticipated to be incurred, by the FDIC in connection with the default of such
commonly controlled institution, or any assistance provided by the FDIC to such
commonly controlled institution which is in danger of default. The term
"default" is defined to mean the appointment of a conservator or receiver for
such institution. Under this provision, HSB could be required to reimburse the
FDIC for such losses resulting from the default of any other insured depository
institution which is under common control with HSB (for example, Greenwood
Trust Company, a Delaware state bank, and MountainWest, both of which are owned
by DWD, the ultimate majority stockholder of HSB) and such reimbursement could
be required even if it would cause the bank providing the reimbursement also to
go into default. Such liability is subordinated in right of payment to deposit
liabilities, secured creditors, other than obligations owned to any affiliate
of the depository institution (with certain exceptions) and any obligations and
any other general or senior liability, and any obligation subordinated to
depositors or other general obligations to stockholders in such capacity.
Item 2. PROPERTIES
The Company's headquarters are located in Riverwoods, Illinois, where it
leases approximately 97,400 square feet of office space from NCSI for a term
expiring on January 31, 2000. The Company also conducts significantly all of
its operations out of owned facilities located in Gray, Tennessee and Sioux
Falls, South Dakota, and a leased facility in Layton, Utah. The Gray,
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Tennessee facility contains approximately 131,000 square feet that, as of
December 31, 1996, housed approximately 1,750 full-time equivalent Company
employees involved in processing accounts for certain Managed and HSB Programs,
administering TeleServices and providing certain data communications functions
related to the Company's Network Transaction Services. The Sioux Falls, South
Dakota facility contains approximately 65,000 square feet that, as of December
31, 1996, housed approximately 760 full-time equivalent Company employees
involved in processing accounts for HSB Programs and providing TeleServices.
HSB operates out of the Sioux Falls facility. The Layton, Utah facility
contains approximately 81,000 square feet that, as of December 31, 1996,
housed approximately 880 full-time equivalent Company employees involved in
processing accounts for certain Managed and HSB Programs and providing
TeleServices. The Layton, Utah facility is leased for a term expiring in June
2001.
The Company believes that its properties are adequate and suitable for its
business as presently conducted.
Item 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in routine
litigation incidental to the business. The consequences of these matters are
not presently determinable but, in the opinion of management after consultation
with counsel, the ultimate liability, if any, will not have a material adverse
effect on the consolidated results of operations or financial position of the
Company.
Some of these lawsuits and proceedings arise in jurisdictions such as Alabama
that permit punitive damages disproportionate to the actual damages alleged.
In light of the uncertainties inherent in any litigation, no assurances can be
given as to the ultimate outcome of these lawsuits and proceedings. However,
the Company and its subsidiaries believe that there are meritorious defenses
for all of these claims and are defending them vigorously.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section entitled "Quarterly Information" appearing on page 39 of the
Company's Annual Report to Stockholders to be mailed to stockholders on or
about March 31, 1997 for the year ended December 31, 1996 (the "Annual Report")
is incorporated herein by reference in response to information required by Item
5.
The fair market value of a share of Common Stock at the close of business on
January 31, 1997, as reported in the Wall Street Journal, was $18.250.
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, the 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.
Item 6. SELECTED FINANCIAL DATA
The section entitled "5-Year Selected Financial Data" appearing on page 39
of the Annual Report is incorporated herein by reference in response to
information required by Item 6.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 16 through 23 of the
Annual Report is incorporated herein by reference in response to information
required by Item 7.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The sections entitled "Consolidated Balance Sheets" appearing on page 24 of
the Annual Report, "Consolidated Statements of Income" appearing on page 25 of
the Annual Report, "Consolidated Statements of Cash Flows" appearing on page 26
of the Annual Report, "Consolidated Statements of Changes in Stockholders'
Equity" appearing on page 27 of the Annual Report, "Notes to Consolidated
Financial Statements" appearing on pages 28 through 35 of the Annual Report,
"Independent Auditors' Report" appearing on page 38 of the Annual Report and
"Quarterly Information" appearing on page 39 of the Annual Report are
incorporated herein by reference in response to information required by Item 8.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Nominees for Election as Directors" appearing on pages
2 and 3 of the Company's proxy statement to be mailed to stockholders on or
about March 31, 1997 for the April 29, 1997 Annual Meeting of Stockholders (the
"Proxy Statement") is incorporated herein by reference in response to
information concerning directors required by Item 10.
The information concerning executive officers required by Item 10 is set
forth in Part I, Item I of this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing on pages 7 through
12, and the section entitled "Performance Graph" appearing on page 13, of the
Proxy Statement is incorporated herein by reference in response to information
required by Item 11.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Directors and Officers"
appearing on pages 5 and 6 of the Proxy Statement is incorporated herein by
reference in response to information required by Item 12.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships" appearing on pages 14 through
16 of the Proxy Statement is incorporated herein by reference in response to
information required by Item 13.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. The following Consolidated Financial Statements of
SPS Transaction Services, Inc. are incorporated herein by reference from
the Annual Report:
Annual Report
Page
-------------
Consolidated Balance Sheets 24
Consolidated Statements of Income 25
Consolidated Statements of Cash Flows 26
Consolidated Statements of Changes in Stockholders' Equity 27
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 38
2. Financial Statement Schedules. The following Financial Statement
Schedules are incorporated herein by reference from the Annual Report:
Quarterly Financial Information 39*
Schedule III - Condensed Financial Statements of SPS Transaction
Services, Inc. (Parent Company Only) S-1**
Independent Auditors' Report S-5**
- ------------------------
* Refers to page number in Annual Report.
** Refers to page number in this Form 10-K.
All other Financial Statement Schedules have been omitted since the
information is not applicable, is not required or is included in the
Consolidated Financial Statement or Notes to Consolidated Financial
Statement listed under section (a)1 above.
3. Listing of Exhibits. The following exhibits are incorporated by reference
or filed herewith:
3.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 3.1 of the Company's Registration Statement No. 33-44937 (the
"1992 Registration Statement")).
3.2 By-laws of the Company (incorporated by reference from Exhibit 3.2 of the
1992 Registration Statement).
4.1 Form of certificate representing shares of Common Stock of the Company
(incorporated by reference from Exhibit 4.1 of the 1992 Registration
Statement).
10.1 Services Agreement for Systems Operations Services dated September 17,
1993, between SPS and Advantis (portions of which have been granted
confidential treatment pursuant to an order of the Securities and Exchange
Commission, which will remain in effect until December 31, 1998)
(incorporated by reference from Exhibit 10.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993
Form 10-K")).
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10.2 Service Agreement dated as of February 1, 1994, and Amendment to the
Service Agreement dated as of January 31, 1995, each between SPS and
MountainWest (incorporated by reference from Exhibit 10.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(the "1994 Form 10-K")).
10.3 POS Debit Card Program Letter Agreement dated as of August 30, 1994,
between SPS and Discover Card Services, Inc. ("Discover Card")
(incorporated by reference from Exhibit 10.3 of the 1994 Form 10-K).
10.4 Management Services Agreement dated as of January 1, 1992, between the
Company and NCSI (incorporated by reference from Exhibit 10.2 of the 1992
Registration Statement).
10.5* Amendment to the Advantis/SPS Payment Systems, Inc. Master Agreement for
Systems Operations Services effective March 13, 1997, between Advantis
and SPS.
10.6 Third Amendment to Service Agreement made effective as of January 1,
1996, between SPS and MountainWest (incorporated by reference from
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 (the "1996 Third Quarter Form
10-Q")).
10.7 Third-Party Processing and Cooperative Network Service Agreement made as
of September 28, 1992, between SPS and Discover Card (incorporated by
reference from Exhibit 10.7 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (the "1992 Form 10-K")).
10.8 Terminal Service Agreement made as of January 1, 1992, between SPS and
Discover Card (incorporated by reference from Exhibit 10.6 of the 1992
Registration Statement).
10.9 Letter Agreement dated November 5, 1992, between SPS and Discover Card,
amending the Terminal Service Agreement made as of January 1, 1992
(incorporated by reference from Exhibit 10.9 of the 1992 Form 10-K).
10.10 Amended and Restated Marketing Services Agreement dated as of January 1,
1996, between SPS and NCSI (incorporated by reference from Exhibit 10.2
of the 1996 Third Quarter Form 10-Q).
10.11 System Access Agreement entered into August 1, 1992, between SPS and
Discover Card (incorporated by reference from Exhibit 10.11 of the 1992
Form 10-K).
10.12 Lease Agreement made February 1, 1993, between SPS and NCSI (incorporated
by reference from Exhibit 10.12 of the 1993 Form 10-K).
10.13 Assignment and Assumption of Lease dated as of December 31, 1993, between
SPS and NCSI, and Office Lease Agreement made and entered into October 1,
1990, between NCSI and Price Development Company (incorporated by
reference from Exhibit 10.13 of the 1993 Form 10-K).
10.14 Service Agreement dated as of January 1, 1988, between SPS and HSB
(incorporated by reference from Exhibit 10.12 of the 1992 Registration
Statement).
10.15 Service Agreement dated as of November 1, 1990, between SPS and
MountainWest (incorporated by reference from Exhibit 10.13 of the 1992
Registration Statement).
10.16 Registration Agreement made as of February 25, 1992, between the Company
and NCSI (incorporated by reference from Exhibit 10.16 of the 1993 Form
10-K).
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10.17 Letter Agreement dated as of September 1, 1995, between SPS and NOVUS
Services, Inc. (successor in interest to Discover Card), amending the
System Access Agreement entered into August 1, 1992, the Terminal Service
Agreement made as of January 1, 1992, as amended, and the Third Party
Processing and Cooperative Network Service Agreement made as of September
28, 1992 (incorporated by reference from Exhibit 10.17 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995
(the "1995 Form 10-K")).
10.18 Third Amended and Restated Master Receivables Purchase Agreement dated as
of July 19, 1995, and First Amendment to the Third Amended and Restated
Master Receivables Purchase Agreement dated as of December 15, 1995, each
among HSB, SPS, DWD, RCC and Bank of America National Trust and Savings
Association (incorporated by reference from Exhibit 10.18 of the 1995
Form 10-K).
10.19 Assignment and Assumption Agreement dated as of July 19, 1995, among HSB,
SPS, DWD, RPC, RCC and Bank of America National Trust and Savings
Association (incorporated by reference from Exhibit 10.19 of the 1995
Form 10-K).
10.20 Credit Card Receivables Purchase Agreement dated as of December 30, 1992,
among HSB, the Company, SPS, DWD, BCC and Westpac Banking Corporation
(incorporated by reference from Exhibit 10.21 of the 1992 Form 10-K).
10.21 First Amendment to the Credit Card Receivables Purchase Agreement dated
as of December 29, 1995, among HSB, the Company, SPS, DWD, BCC and
Societe Generale (successor in interest to Westpac Banking Corporation)
(incorporated by reference from Exhibit 10.21 of the 1995 Form 10-K).
10.22 Merchant Services Agreement made as of February 19, 1987, between HSB and
Goodyear (incorporated by reference from Exhibit 10.17 of the 1992
Registration Statement).
10.23 Amendment to the Terminal Service Agreement dated as of July 1, 1993,
between SPS and Discover Card (incorporated by reference from Exhibit
10.25 of the 1993 Form 10-K).
10.24 Form of Interest Rate and Currency Exchange Agreement between the Company
and DWD or NCSI (incorporated by reference from Exhibit 10.26 of the 1993
Form 10-K).
10.25*Second Amendment to Credit Card Receivables Purchase Agreement dated as
of December 18, 1996, among BCC, Societe Generale, HSB, the Company, DWD
and SPS.
10.26 First Amendment to Service Agreement made as of January 1, 1993, between
SPS and MountainWest (incorporated by reference from Exhibit 10.28 of the
1992 Form 10-K).
10.27 Form of Cardholder Agreement (incorporated by reference from Exhibit 10.29
of the 1993 Form 10-K).
10.28 Amendment to the Merchant Services Agreement dated as of April 27, 1993,
between HSB and Goodyear (portions of which have been granted confidential
treatment pursuant to an order of the Securities and Exchange Commission
which will remain in effect until June 14, 1999) (incorporated by
reference from Exhibit 10.31 of the 1993 Form 10-K).
10.29# Dean Witter, Discover & Co. Omnibus Equity Incentive Plan (incorporated
by reference from Exhibit 4.1 of the DWD Registration Statement No.
33-63024 on Form S-8).
10.30# Dean Witter, Discover & Co. 1994 Omnibus Equity Plan (incorporated by
reference from Exhibit 10.52 of the DWD Annual Report on Form 10-K for the
fiscal year ended December 31, 1993).
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10.31# Dean Witter, Discover & Co. Employees Replacement Stock Plan (incorpora-
ted by reference from Exhibit 4.2 of the DWD Registration Statement No.
33-63024 on Form S-8).
10.32# First Amendment to the Dean Witter, Discover & Co. Employees Replacement
Stock Plan (adopted June 18, 1993)(incorporated by reference from Exhibit
10.1 of the DWD Current Report on Form 8-K dated November 18, 1993).
10.33 Form of Amended and Restated Borrowing Agreement between the Company and
DWD (incorporated by reference from Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1995 (the "1995 Third Quarter Form 10-Q")).
10.34 Amendment to the Facility Fee Letter Agreement dated as of May 3, 1996,
between the Company and DWD (incorporated by reference from Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1996 (the "1996 First Quarter Form 10-Q")).
10.35 Facility Fee Letter Agreement between the Company and DWD (incorporated by
reference from Exhibit 10.3 of the 1995 Third Quarter Form 10-Q).
10.36#SPS Transaction Services, Inc. Employee Stock Purchase Plan (amended and
restated as of January 1, 1996) (incorporated by reference from Exhibit
10.36 of the 1995 Form 10-K).
10.37# SPS Transaction Services, Inc. Amended and Restated Formula Plan for Non-
Affiliate Directors (incorporated by reference from Exhibit 10.38 of the
1992 Form 10-K).
10.38# SPS Transaction Services, Inc. Amended and Restated 1992 Employees Stock
Plan (incorporated by reference from Exhibit 10.39 of the 1992 Form 10-K).
10.39# SPS Transaction Services, Inc. 1995 Omnibus Equity Plan (incorporated by
reference from Exhibit 10.40 of the 1994 Form 10-K).
10.40# SPS Transaction Services, Inc. Amended and Restated Tax Deferred Equity
Participation Plan (incorporated by reference from Exhibit 4.3 of the
Company's Registration Statement No. 333-412 on Form S-8).
10.41# NOVUS Credit Services Inc. Supplemental Retirement Income Plan, formerly
known as the Sears Consumer Financial Corporation Supplemental Retirement
Income Plan, effective as of January 1, 1989 (incorporated by reference
from Exhibit 10.36 of the DWD Registration Statement No. 33-56104 on Form
S-1).
10.42# Dean Witter, Discover & Co. Tax Deferred Equity Participation Plan
(amended and restated October 21, 1994) (incorporated by reference from
Exhibit 4.1 of the Post-Effective Amendment No. 1 to the DWD Registration
Statement No. 33-82240 on Form S-8).
10.43 Sales Lead Letter Agreement dated January 26, 1995, between SPS and
Discover Card (incorporated by reference from Exhibit 10.47 of the 1994
Form 10-K).
10.44 Amended and Restated Merchant Services Agreement made as of December 29,
1994, between HSB and Tandy (incorporated by reference from Exhibit 10.48
of the 1994 Form 10-K).
10.45 Purchase Agreement made as of December 30, 1994, among Tandy National
Bank, Tandy Credit Corporation and HSB (incorporated by reference from
Exhibit 2.1 of the Company's Current Report on Form 8-K dated December 30,
1994).
10.46 Acquisition Agreement dated as of January 18, 1995, as amended, among HSB,
Tandy National Bank and Tandy Credit Corporation (incorporated by
reference from Exhibit 2.1 of the Company's Current Report on Form 8-K
dated March 30, 1995).
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10.47 Agreement and Plan of Merger dated as of March 30, 1995, among HSB, Hurley
Receivables Corporation, Tandy and Tandy Credit Corporation (incorporated
by reference from Exhibit 2.2 of the Company's Current Report on Form 8-K
dated March 30, 1995).
10.48 Assignment and Assumption Agreement dated as of March 30, 1995, between
SPS Newco, Inc. and Tandy Receivables Corporation (incorporated by
reference from Exhibit 2.3 of the Company's Current Report on Form 8-K
dated March 30, 1995).
10.49*Letter Amendment to Third Amended and Restated Master Receivables
Purchase Agreement dated as of December 6, 1996 among HSB, SPS, DWD, RCC
and Bank of America National Trust and Savings Association.
10.50 Addendum to the Merchant Services Agreement dated as of April 1, 1994,
between HSB and Goodyear (incorporated by reference from Exhibit 10.52 of
the 1994 Form 10-K).
10.51 First Amendment to the Amended and Restated Borrowing Agreement dated as
of May 3, 1996, between the Company and DWD (incorporated by reference
from Exhibit 10.1 of the 1996 First Quarter Form 10-Q).
10.52 Second Amendment to the Amended and Restated Borrowing Agreement dated as
of September 30, 1996, between the Company and DWD (incorporated by
reference from Exhibit 10.6 of the 1996 Third Quarter Form 10-Q).
10.53 Service Agreement dated as of September 1, 1996, between SPS and NOVUS
Services, Inc. (incorporated by reference from Exhibit 10.3 of the 1996
Third Quarter Form 10-Q).
10.54*First Amendment to the Lease Agreement made on March 20, 1997, between
NCSI and SPS.
10.55*Lease Agreement made as of January 1, 1997, between NCSI and SPS.
10.56#First Amendment to the NOVUS Credit Services Inc. Supplemental Retirement
Income Plan (adopted December 8, 1992) (incorporated by reference from
Exhibit 10.41 of the DWD Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.57#Second Amendment to the NOVUS Credit Services Inc. Supplemental Retirement
Income Plan (adopted June 15, 1993) (incorporated by reference from
Exhibit 10.42 of the DWD Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.58#Third Amendment to the NOVUS Credit Services Inc. Supplemental Retirement
Income Plan (adopted February 13, 1995) (incorporated by reference from
Exhibit 10.27 of the DWD Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
13.1* Annual Report to Stockholders. Except for those portions expressly
incorporated by reference herein, the 1996 Annual Report is furnished for
the information of the Commission and is not deemed "filed" as part of
this Annual Report on Form 10-K.
21.1 Subsidiaries of the Company (incorporated by reference from Exhibit 22.1
of the 1992 Form 10-K).
23.1* Independent Auditors' Consent.
24.1* Powers of Attorney.
27.0* Financial Data Schedule.
* Filed herewith.
# Management contract or compensatory plan or arrangement.
-20-
<PAGE>
(b) Current Reports on Form 8-K
A Current Report on Form 8-K dated January 12, 1997 was filed with the
Securities and Exchange Commission reporting Item 7 relating to the Company's
fourth quarter earnings release.
A Current Report on Form 8-K dated December 30, 1996 was filed with the
Securities and Exchange Commission reporting Item 7 relating to Tandy
Corporation.
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.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 26, 1997.
SPS TRANSACTION SERVICES, INC.
------------------------------
(Registrant)
By: ROBERT L. WIESENECK
------------------------------
Robert L. Wieseneck, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 26, 1997, by the following persons on behalf of
the Registrant and in the capacities indicated:
Signature Capacity
- ---------------------------------- --------------------------------------
PHILIP J. PURCELL*
- ---------------------------------
Philip J. Purcell Chairman of the Board and Director
ROBERT L. WIESENECK
- ---------------------------------
Robert L. Wieseneck President, Chief Executive Officer and
Director(Principal Executive Officer)
RUSSELL J. BONAGUIDI*
- ---------------------------------
Russell J. Bonaguidi Vice President and Controller
(Principal Accounting Officer)
THOMAS R. BUTLER*
- ---------------------------------
Thomas R. Butler Director
FRANK T. CARY*
- ---------------------------------
Frank T. Cary Director
MITCHELL M. MERIN*
- ---------------------------------
Mitchell M. Merin Director
CHARLES F. MORAN*
- ---------------------------------
Charles F. Moran Director
THOMAS C. SCHNEIDER*
- ---------------------------------
Thomas C. Schneider Chief Financial Officer and Director
(Principal Financial Officer)
DENNIE M. WELSH*
- ---------------------------------
Dennie M. Welsh Director
*ROBERT L. WIESENECK
- ---------------------------------
By Robert L. Wieseneck,
Attorney-in-fact
-22-
<PAGE>
SCHEDULE III
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
- -----------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Assets:
Investments in consolidated subsidiaries $ 191,597 $ 143,831
Advances to subsidiaries 40,553 62,854
Due from an affiliated company 2,148 573
Other assets 282 243
----------- -----------
Total Assets $ 234,580 $ 207,501
=========== ===========
Liabilities and Stockholders' Equity:
Payables to subsidiaries $ 6,130 $ 4,418
Due to affiliated companies 3,520 3,176
Other liabilities 538 697
----------- -----------
Total liabilities 10,188 8,291
Total stockholders' equity 224,392 199,210
----------- -----------
Total Liabilities and Stockholders' Equity $ 234,580 $ 207,501
=========== ===========
<FN>
See notes to condensed financial statements.
</TABLE>
S-1
<PAGE>
SCHEDULE III
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Dividends received from subsidiaries $ -- $ 15,000 $ 14,800
Interest revenue from subsidiaries 44,375 23,526 4,965
Other revenues 2,258 573 --
-------- -------- --------
Total revenues 46,633 39,099 19,765
-------- -------- --------
Interest expense 42,661 18,169 480
Other expenses 180 192 232
-------- -------- --------
Total expenses 42,841 18,361 712
-------- -------- --------
Income before income taxes and equity
in undistributed net earnings of
subsidiaries 3,792 20,738 19,053
Income tax expense 1,416 2,258 1,693
-------- -------- --------
Income before equity in undistributed
net earnings of subsidiaries 2,376 18,480 17,360
Equity in undistributed net earnings
of subsidiaries 20,870 24,993 20,375
-------- -------- --------
Net income $ 23,246 $ 43,473 $ 37,735
======== ======== ========
<FN>
See notes to condensed financial statements.
</TABLE>
S-2
SCHEDULE III
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 23,246 $ 43,473 $ 37,735
Adjustments to reconcile net income to
net cash flows from operating activities:
Equity in undistributed net earnings
of subsidiaries (20,870) (24,993) (20,375)
(Increase) decrease in operating assets:
Due from an affiliated company (1,575) (573) --
Other assets (39) (243) --
Increase (decrease) in operating
liabilities:
Due to an affiliated company 1,013 4,473 984
Other liabilities (159) 50 86
--------- --------- ---------
Net cash from operating activities 1,616 22,187 18,430
--------- --------- ---------
Cash Flows From Investing Activities:
Investments in and advances to
subsidiaries, net (2,883) (17,822) (21,883)
Cash Flows From Financing Activities:
Due to an affiliated company -- (3,073) 3,073
Proceeds from exercise of stock options 622 665 380
Changes in treasury stock, net 645 (1,957) --
--------- --------- ---------
Net cash from financing activities 1,267 4,365 3,453
--------- --------- ---------
Cash 0 0 0
Cash, Beginning of Year -- -- --
--------- --------- ---------
Cash, End of Year $ 0 $ 0 $ 0
========= ========= =========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest $ 42,316 $ 15,021 $ 505
========= ========= =========
Cash paid for income taxes $ 1,641 $ 2,406 $ 1,423
========= ========= =========
Supplemental Schedule of Noncash Investing
and Financing Activities:
Employee compensation and benefit plan
transactions $ 669 $ 1,325 $ 1,008
========= ========= =========
<FN>
See notes to condensed financial statements.
</TABLE>
S-3
<PAGE>
SCHEDULE III
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. Introduction and Basis of Presentation
The condensed financial statements of SPS Transaction Services, Inc. (the
"Parent Company") should be read in conjunction with the consolidated financial
statements of SPS Transaction Services, Inc. and subsidiaries (the "Company")
and notes thereto found in pages 24-35 of the Company's 1996 Annual Report to
Stockholders (the "Annual Report") and incorporated by reference.
The Company is a 73.6% majority owned subsidiary of NOVUS Credit Services,
Inc. ("NCSI"), which in turn is a wholly owned, direct subsidiary of Dean
Witter, Discover & Co. ("DWD"). On March 1, 1993, DWD completed an initial
public offering of 19.9% of its common stock reducing Sears, Roebuck and Co.
("Sears") ownership in DWD to 80.1%. On June 30, 1993, Sears divested its
remaining ownership of DWD's common stock by means of a special dividend to
Sears shareholders.
2. Dividends Received from Subsidiaries
No dividends were received by the Company from its consolidated subsidiaries
for the year ended December 31, 1996, however, the Company did receive
dividends from its consolidated subsidiaries totaling $15.0 million and $14.8
million for the years ended December 31, 1995 and 1994, respectively.
3. Payment of Dividends
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.
S-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
SPS Transaction Services, Inc.
We have audited the consolidated financial statements of SPS Transaction
Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and for each
of the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 18, 1997; such financial statements and report
are included in your 1996 Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included Schedule III listed in Item 14.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 18, 1997
S-5
<PAGE>
Sequential
Page
Exhibit Description Number
- ------- ----------------------------------------------- ----------
<PAGE>
3. Listing of Exhibits. The following exhibits
are incorporated by reference or filed herewith:
3.1 Certificate of Incorporation of the Company
(incorporated by reference from Exhibit 3.1 of
the Company's Registration Statement No. 33-44937
(the "1992 Registration Statement")).
3.2 By-laws of the Company (incorporated by reference
from Exhibit 3.2 of the 1992 Registration Statement).
4.1 Form of certificate representing shares of Common
Stock of the Company (incorporated by reference from
Exhibit 4.1 of the 1992 Registration Statement).
10.1 Services Agreement for Systems Operations Services
dated September 17, 1993, between SPS and Advantis
(portions of which have been granted confidential
treatment pursuant to an order of the Securities and
Exchange Commission, which will remain in effect until
December 31, 1998) (incorporated by reference from
Exhibit 10.1 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993
(the "1993 Form 10-K")).
10.2 Service Agreement dated as of February 1, 1994, and
Amendment to the Service Agreement dated as of
January 31, 1995, each between SPS and MountainWest
(incorporated by reference from Exhibit 10.2 of the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (the "1994 Form 10-K")).
10.3 POS Debit Card Program Letter Agreement dated as of
August 30, 1994, between SPS and Discover Card Services,
Inc. ("Discover Card") (incorporated by reference from
Exhibit 10.3 of the 1994 Form 10-K).
10.4 Management Services Agreement dated as of January 1, 1992,
between the Company and NCSI (incorporated by reference
from Exhibit 10.2 of the 1992 Registration Statement).
10.5* Amendment to the Advantis/SPS Payment Systems, Inc.
Master Agreement for Systems Operations Services
effective March 13, 1997, between Advantis and SPS.
10.6 Third Amendment to Service Agreement made effective
as of January 1, 1996, between SPS and MountainWest
(incorporated by reference from Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 (the
"1996 Third Quarter Form 10-Q")).
10.7 Third-Party Processing and Cooperative Network
Service Agreement made as of September 28, 1992,
between SPS and Discover Card (incorporated by
reference from Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (the "1992 Form 10-K")).
10.8 Terminal Service Agreement made as of January 1, 1992,
between SPS and Discover Card (incorporated by reference
from Exhibit 10.6 of the 1992 Registration Statement).
<PAGE>
10.9 Letter Agreement dated November 5, 1992, between
SPS and Discover Card, amending the Terminal Service
Agreement made as of January 1, 1992 (incorporated
by reference from Exhibit 10.9 of the 1992 Form 10-K).
10.10 Amended and Restated Marketing Services Agreement
dated as of January 1, 1996, between SPS and NCSI
(incorporated by reference from Exhibit 10.2 of the
1996 Third Quarter Form 10-Q).
10.11 System Access Agreement entered into August 1, 1992,
between SPS and Discover Card (incorporated by reference
from Exhibit 10.11 of the 1992 Form 10-K).
10.12 Lease Agreement made February 1, 1993, between SPS
and NCSI (incorporated by reference from Exhibit
10.12 of the 1993 Form 10-K).
10.13 Assignment and Assumption of Lease dated as of
December 31, 1993, between SPS and NCSI, and Office
Lease Agreement made and entered into October 1, 1990,
between NCSI and Price Development Company (incorporated
by reference from Exhibit 10.13 of the 1993 Form 10-K).
10.14 Service Agreement dated as of January 1, 1988, between
SPS and HSB (incorporated by reference from Exhibit
10.12 of the 1992 Registration Statement).
10.15 Service Agreement dated as of November 1, 1990, between
SPS and MountainWest (incorporated by reference from
Exhibit 10.13 of the 1992 Registration Statement).
10.16 Registration Agreement made as of February 25, 1992,
between the Company and NCSI (incorporated by reference
from Exhibit 10.16 of the 1993 Form 10-K).
10.17 Letter Agreement dated as of September 1, 1995, between
SPS and NOVUS Services, Inc. (successor in interest to
Discover Card), amending the System Access Agreement
entered into August 1, 1992, the Terminal Service
Agreement made as of January 1, 1992, as amended, and the
Third Party Processing and Cooperative Network Service
Agreement made as of September 28, 1992 (incorporated
by reference from Exhibit 10.17 of the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1995 (the "1995 Form 10-K")).
10.18 Third Amended and Restated Master Receivables
Purchase Agreement dated as of July 19, 1995, and
First Amendment to the Third Amended and Restated Master
Receivables Purchase Agreement dated as of December
15, 1995, each among HSB, SPS, DWD, RCC and Bank
of America National Trust and Savings Association
(incorporated by reference from Exhibit 10.18 of the
1995 Form 10-K).
10.19 Assignment and Assumption Agreement dated as of
July 19, 1995, among HSB, SPS, DWD, RPC, RCC and
Bank of America National Trust and Savings Association
(incorporated by reference from Exhibit 10.19 of
the 1995 Form 10-K).
10.20 Credit Card Receivables Purchase Agreement dated
as of December 30, 1992, among HSB, the Company,
SPS, DWD, BCC and Westpac Banking Corporation
(incorporated by reference from Exhibit 10.21 of
the 1992 Form 10-K).
<PAGE>
10.21 First Amendment to the Credit Card Receivables
Purchase Agreement dated as of December 29, 1995,
among HSB, the Company, SPS, DWD, BCC and Societe
Generale (successor in interest to Westpac
Banking Corporation) (incorporated by reference
from Exhibit 10.21 of the 1995 Form 10-K).
10.22 Merchant Services Agreement made as of February 19, 1987,
between HSB and Goodyear (incorporated by reference
from Exhibit 10.17 of the 1992 Registration Statement).
10.23 Amendment to the Terminal Service Agreement dated
as of July 1, 1993, between SPS and Discover Card
(incorporated by reference from Exhibit 10.25 of the
1993 Form 10-K).
10.24 Form of Interest Rate and Currency Exchange Agreement
between the Company and DWD or NCSI (incorporated by
reference from Exhibit 10.26 of the 1993 Form 10-K).
10.25* Second Amendment to Credit Card Receivables
Purchase Agreement dated as of December 18, 1996,
among BCC, Societe Generale, HSB, the Company, DWD
and SPS.
10.26 First Amendment to Service Agreement made as of
January 1, 1993, between SPS and MountainWest
(incorporated by reference from Exhibit 10.28 of
the 1992 Form 10-K).
10.27 Form of Cardholder Agreement (incorporated by
reference from Exhibit 10.29 of the 1993 Form 10-K).
10.28 Amendment to the Merchant Services Agreement
dated as of April 27, 1993, between HSB and
Goodyear (portions of which have been granted
confidential treatment pursuant to an order
of the Securities and Exchange Commission which
will remain in effect until June 14, 1999)
(incorporated by reference from Exhibit 10.31
of the 1993 Form 10-K).
10.29# Dean Witter, Discover & Co. Omnibus Equity
Incentive Plan (incorporated by reference from
Exhibit 4.1 of the DWD Registration Statement
No. 33-63024 on Form S-8).
10.30# Dean Witter, Discover & Co. 1994 Omnibus Equity
Plan (incorporated by reference from Exhibit 10.52
of the DWD Annual Report on Form 10-K for the fiscal
year ended December 31, 1993).
10.31# Dean Witter, Discover & Co. Employees Replacement
Stock Plan (incorporated by reference from Exhibit
4.2 of the DWD Registration Statement No. 33-63024
on Form S-8).
10.32# First Amendment to the Dean Witter, Discover & Co.
Employees Replacement Stock Plan (adopted June 18,
1993)(incorporated by reference from Exhibit
10.1 of the DWD Current Report on Form 8-K dated
November 18, 1993).
10.33 Form of Amended and Restated Borrowing Agreement
between the Company and DWD (incorporated by
reference from Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1995 (the "1995 Third Quarter Form 10-Q")).
<PAGE>
10.34 Amendment to the Facility Fee Letter Agreement
dated as of May 3, 1996, between the Company
and DWD (incorporated by reference from Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1996
(the "1996 First Quarter Form 10-Q")).
10.35 Facility Fee Letter Agreement between the Company
and DWD (incorporated by reference from Exhibit
10.3 of the 1995 Third Quarter Form 10-Q).
10.36# SPS Transaction Services, Inc. Employee Stock
Purchase Plan (amended and restated as of
January 1, 1996) (incorporated by reference
from Exhibit 10.36 of the 1995 Form 10-K).
10.37# SPS Transaction Services, Inc. Amended and
Restated Formula Plan for Non-Affiliate Directors
(incorporated by reference from Exhibit 10.38
of the 1992 Form 10-K).
10.38# SPS Transaction Services, Inc. Amended and
Restated 1992 Employees Stock Plan (incorporated
by reference from Exhibit 10.39 of the 1992 Form 10-K).
10.39# SPS Transaction Services, Inc. 1995 Omnibus Equity
Plan (incorporated by reference from Exhibit 10.40
of the 1994 Form 10-K).
10.40# SPS Transaction Services, Inc. Amended and
Restated Tax Deferred Equity Participation Plan
(incorporated by reference from Exhibit 4.3 of the
Company's Registration Statement No. 333-412 on
Form S-8).
10.41# NOVUS Credit Services Inc. Supplemental Retirement
Income Plan, formerly known as the Sears Consumer
Financial Corporation Supplemental Retirement Income
Plan, effective as of January 1, 1989 (incorporated
by reference from Exhibit 10.36 of the DWD
Registration Statement No. 33-56104 on Form S-1).
10.42# Dean Witter, Discover & Co. Tax Deferred Equity
Participation Plan (amended and restated
October 21, 1994) (incorporated by reference from
Exhibit 4.1 of the Post-Effective Amendment No. 1
to the DWD Registration Statement No. 33-82240 on
Form S-8).
10.43 Sales Lead Letter Agreement dated January 26, 1995,
between SPS and Discover Card (incorporated by
reference from Exhibit 10.47 of the 1994 Form 10-K).
10.44 Amended and Restated Merchant Services Agreement
made as of December 29, 1994, between HSB and Tandy
(incorporated by reference from Exhibit 10.48 of
the 1994 Form 10-K).
10.45 Purchase Agreement made as of December 30, 1994,
among Tandy National Bank, Tandy Credit Corporation
and HSB (incorporated by reference from Exhibit 2.1
of the Company's Current Report on Form 8-K dated
December 30, 1994).
<PAGE>
10.46 Acquisition Agreement dated as of January 18, 1995,
as amended, among HSB, Tandy National Bank and
Tandy Credit Corporation (incorporated by reference
from Exhibit 2.1 of the Company's Current Report
on Form 8-K dated March 30, 1995).
10.47 Agreement and Plan of Merger dated as of
March 30, 1995, among HSB, Hurley Receivables
Corporation, Tandy and Tandy Credit Corporation
(incorporated by reference from Exhibit 2.2 of
the Company's Current Report on Form 8-K dated
March 30, 1995).
10.48 Assignment and Assumption Agreement dated as of
March 30, 1995, between SPS Newco, Inc. and
Tandy Receivables Corporation (incorporated by
reference from Exhibit 2.3 of the Company's
Current Report on Form 8-K dated March 30, 1995).
10.49* Letter Amendment to Third Amended and Restated
Master Receivables Purchase Agreement dated as
of December 6, 1996 among HSB, SPS, DWD, RCC
and Bank of America National Trust and Savings
Association.
10.50 Addendum to the Merchant Services Agreement dated
as of April 1, 1994, between HSB and Goodyear
(incorporated by reference from Exhibit 10.52 of
the 1994 Form 10-K).
10.51 First Amendment to the Amended and Restated
Borrowing Agreement dated as of May 3, 1996,
between the Company and DWD (incorporated by
reference from Exhibit 10.1 of the 1996 First
Quarter Form 10-Q).
10.52 Second Amendment to the Amended and Restated
Borrowing Agreement dated as of September 30, 1996,
between the Company and DWD (incorporated by
reference from Exhibit 10.6 of the 1996 Third
Quarter Form 10-Q).
10.53 Service Agreement dated as of September 1, 1996,
between SPS and NOVUS Services, Inc.
(incorporated by reference from Exhibit 10.3
of the 1996 Third Quarter Form 10-Q).
10.54* First Amendment to the Lease Agreement made
on March 20, 1997, between NCSI and SPS.
10.55* Lease Agreement made as of January 1, 1997,
between NCSI and SPS.
10.56# First Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (adopted
December 8, 1992)(incorporated by reference from
Exhibit 10.41 of the DWD Annual Report on Form 10-K
for the fiscal year ended December 31, 1993).
10.57# Second Amendment to the NOVUS Credit Services
Inc. Supplemental Retirement Income Plan
(adopted June 15, 1993) (incorporated by reference
from Exhibit 10.42 of the DWD Annual Report on
Form 10-K for the fiscal year ended
December 31, 1993).
<PAGE>
10.58# Third Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (adopted
February 13, 1995) (incorporated by reference
from Exhibit 10.27 of the DWD Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
13.1* Annual Report to Stockholders. Except for those
portions expressly incorporated by reference herein,
the 1996 Annual Report is furnished for the
information of the Commission and is not deemed
"filed" as part of this Annual Report on Form 10-K.
21.1 Subsidiaries of the Company (incorporated by
reference from Exhibit 22.1 of the 1992 Form 10-K).
23.1* Independent Auditors' Consent.
24.1* Powers of Attorney.
27.0* Financial Data Schedule.
* Filed herewith.
# Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 10.5
AMENDMENT TO THE ADVANTIS/SPS PAYMENT SYSTEMS, INC.
MASTER AGREEMENT FOR SYSTEMS OPERATIONS SERVICES
This document amends the Advantis/SPS Payment Systems, Inc. Master Agreement
for Systems Operations Services, executed by Advantis and SPS Payment Systems,
Inc. ("SPS") on September 17, 1993 ("Master Agreement").
Any defined terms set forth below shall be interpreted consistent with the
meanings set forth in the Master Agreement, unless otherwise specifically
stated.
WHEREAS, SPS is an affiliate of Dean Witter, Discover & Co. ("DWD"); and
WHEREAS, since September 17, 1993, SPS has procured Services from Advantis
under the Master Agreement, and pursuant to the terms of such agreement, has
been eligible to and has obtained a number of such Services at the prices
charged to DWD and its DWD Affiliates under the Advantis/Dean Witter Financial
Services Group, Inc. Master Agreement for Systems Operations Services, executed
by Advantis and Dean Witter Financial Services Group, Inc. on November 19, 1992
("1992 DWD Agreement"); and
WHEREAS, Advantis and DWD have recently renegotiated the 1992 DWD Agreement
and executed a new Advantis/Dean Witter, Discover & Co. Amended Master
Agreement for Systems Operations Services, dated March 13, 1997 ("1997 DWD
Amended Agreement"), which incorporates different charges, charging structures
and methodologies from the 1992 DWD Agreement; and
WHEREAS, SPS and Advantis desire that SPS be eligible to obtain certain
Advantis Services under the same charges, charging structure and methodologies
contained in the 1997 DWD Amended Agreement;
NOW, WHEREFORE, SPS and Advantis agree that the following terms and
conditions amend the Master Agreement, and SPS and Advantis (to the extent
applicable), agree to the following:
Notwithstanding anything in the Master Agreement to the contrary, SPS,
at its option, shall be entitled to either 1) the pricing for all Services
(pursuant to the charging structure and methodologies contained in the 1997
DWD Amended Agreement) that is afforded DWD under the 1997 DWD Amended
Agreement, or 2) negotiate separate, new charges for Services directly with
Advantis under the Master Agreement, provided that in any event, SPS may
choose to obtain any or all of the following specific Services (collectively
referred to as "Transaction Network Services" or "TNS") at the current
pricing, terms, and conditions set forth in the Matrix tables 1-6 under the
Master Agreement:
1.Authorization (BTC);
2.Draft Capture (BTC3);
3.Download (BTC4);
4.New Account Processing (BTC5);
5.950 Metered Time (MT2); and
6.800 Metered Time (MT3).
Section 2.4 of the Master Agreement shall be amended to extend the Term
through December 31, 1999.
Section 2.5(a) shall be replaced in its entirety with the following:
<PAGE>
(a) to notify Customer in writing whether it desires to renew this Master
Agreement and of the proposed prices and terms to govern such renewal not
less than 18 months prior to the expiration of the Term. If Advantis so
notifies Customer that it desires to renew this Master Agreement, Customer
agrees to inform Advantis in writing whether it desires to renew not less
than 12 months prior to the expiration of the Term. Failure by either
Advantis or Customer to provide notice at the time specified above shall be
deemed notice of intent not to renew this Master Agreement. If either
Customer or Advantis does not wish to renew this Master Agreement, it shall
expire at the end of the Term. If both Advantis and Customer desire to
renew this Master Agreement but are unable to agree upon renewal prices,
terms and conditions no later than six months prior to the expiration of
the Term, then Customer may elect to extend this Master Agreement for up to
one year, but not less than six months at the then-current prices
(including charging structure and methodologies available to DWD Affiliates
under the 1997 DWD Amended Agreement), and the applicable terms and
conditions in effect under the Master Agreement during the last year of the
Term by notifying Advantis of its election six months prior to the
expiration of the Term. If Advantis and Customer are unable to reach
agreement on renewal during such extension period, if any, this Master
Agreement will expire at the end of such extension period.
Schedule C of the Master Agreement shall be deleted in its entirety and
replaced with Amended Schedule C, attached hereto.
Except for the TNS Matrix tables 1-6, SPS acknowledges and agrees that there
are no other pricing tables (either Matrix or non-Matrix) which are currently
available for SPS to utilize under the 1992 DWD Agreement.
For those Services which SPS decides to obtain pursuant to the DWD prices
under the 1997 DWD Amended Agreement as described above, Advantis shall be
responsible for providing the same type and level of detail of information
related to billing, volume utilization, estimated charges and other similar
information to SPS as Advantis is obligated to provided to DWD's other DWD
Affiliates pursuant to Advantis' obligations under the 1997 DWD Amended
Agreement. Notwithstanding the foregoing, DWD shall be solely responsible to
Advantis for payment to Advantis for all Services which SPS uses or consumes as
a DWD Affiliate under the 1997 DWD Amended Agreement prices.
Unless otherwise specifically modified or amended by the foregoing, all
other terms and conditions of the Master Agreement shall remain in full force
and effect.
This amendment may be executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become effective when
one or more such counterparts have been signed by each of the parties and
delivered to each of the parties.
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT AND AMENDMENT,
UNDERSTAND IT, AND, TO THE EXTENT APPLICABLE TO A PARTY HERETO, AGREE TO BE
BOUND BY ITS TERMS AND CONDITIONS AND THAT THIS AGREEMENT AND AMENDMENT
SUPERSEDES ALL PROPOSALS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN
THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AGREEMENT AND
AMENDMENT.
ADVANTIS SPS PAYMENT SYSTEMS, INC.
Signature: Patrick M. Kerin Signature: Robert L. Wieseneck
Title: Executive Vice President & CFO Title: President
Date: March 13, 1997 Date: March 13, 1997
S:\SPS_LAW\SYSTEMAG\AMEND\ADVMST.AM
<PAGE>
EXHIBIT 10.25
SECOND AMENDMENT
TO CREDIT CARD RECEIVABLES
PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO CREDIT CARD RECEIVABLES PURCHASE AGREEMENT, dated
as of December 18, 1996, is entered into among BARTON CAPITAL CORPORATION, a
Delaware corporation (the "Company"), SOCIETE GENERALE, a French banking
corporation, as agent for the Company (in such capacity, the "Agent"), HURLEY
STATE BANK, a South Dakota bank ("HSB"), SPS TRANSACTION SERVICES, INC., a
Delaware corporation ("SPST"), DEAN WITTER, DISCOVER & CO., a Delaware
corporation (the "Guarantor"), and SPS PAYMENT SYSTEMS, INC., a Delaware
corporation, as servicer (the "Servicer").
RECITALS
A. The Company, the Agent, HSB, SPST, the Guarantor and the Servicer are
parties to that certain Credit Card Receivables Purchase Agreement, dated as
of December 30, 1992 (as heretofore amended, the "Agreement"); and
B. The Company, the Agent, HSB, SPST, the Guarantor and the Servicer desire
to amend the Agreement in certain respects to modify the meaning of certain
provisions as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Certain Defined Terms. Capitalized terms which are used herein without
definition and that are defined in the Agreement shall have the same meaning
herein as in the Agreement.
2. Amendment to the Agreement. The Agreement is hereby amended as follows:
2.1 Appendix A of the Agreement is amended by deleting ".22%" in clause
(ii) of the definition of "Program Fee" and substituting therefor ".175%."
2.2 Appendix A of the Agreement is further amended by deleting the date
"December 26, 1996" in clause (i) of the definition of "Expiration Date" and
substituting therefor the date "April 15, 1997. "
2.3 Appendix A of the Agreement is further amended by deleting .25% in
clause (ii) of the definition of "Commitment Fee" and substituting therefor
.175%.
3. Representations and Warranties. Each of HSB, SPST, the Guarantor and
the Servicer hereby represents and warrants to the Company and the Agent, but
in each case solely as to itself, as follows:
a. Representations and Warranties. Its representations and warranties
contained in Section 3.1 of the Agreement are true and correct as of the
date hereof (unless stated to relate solely to an earlier date).
<PAGE>
b. Enforceability. The execution and delivery by it of this Amendment,
and the performance of its obligations under this Amendment and the
Agreement, as amended hereby, are within its corporate powers and have been
duly authorized by all necessary corporate action on its part. This
Amendment and the Agreement, as amended hereby, are its valid and legally
binding obligations, enforceable in accordance with their terms.
c. No Termination Event. No Termination Event (matured or unmatured)
has occurred and is continuing.
4. Effect of Amendment. Except as expressly amended and modified by this
Amendment, all provisions of the Agreement shall remain in full force and
effect. After the Amendment becomes effective, all references in the
Agreement to "this Agreement, " "hereof, " "herein" or words of similar effect
referring to the Agreement shall be deemed to be references to the Agreement
as amended by this Amendment. This Amendment shall not be deemed to expressly
or implied waive, amend or supplement any provision of the Agreement other
than as set forth herein.
5. Effectiveness. This Amendment shall become effective as of the date
hereof upon receipt by the Agent of counterparts of this Amendment (whether by
facsimile or otherwise) executed by each of the parties hereto.
6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, and each
counterpart shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument.
7. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the internal laws of the State of Illinois without regard to
any otherwise applicable principles of conflicts of law.
8. Section Headings. The various headings of this Amendment are inserted
for convenience only and shall not affect the meaning or interpretation of
this amendment or the Agreement or any provision hereof or thereof.
<PAGE>
IN WITNESS WHEREOF, the Company, the Agent, HSB, SPST, the Guarantor and
the Servicer have caused this Amendment to be executed by their respective
officers thereunto duly authorized as of the day and year first above written.
BARTON CAPITAL CORPORATION
By: Elizabeth S. Eldridge
Title: Vice President
SOCIETE GENERALE, as the Agent:
By: Martin J. Finan
Title: Vice President
HURLEY STATE BANK
By: Russell J. Bonaguidi
Title: Vice President and
Controller
SPS TRANSACTION SERVICES, INC.
By: Michael J. Hartigan, Jr.
Title: Vice President, Assistant
General Counsel and
Assistant Secretary
DEAN WITTER, DISCOVER & CO.
By: Birendra Kumar
Title: Treasurer
SPS PAYMENT SYSTEMS, INC.
By: Michael J. Hartigan, Jr.
Title: Vice President, Assistant
General Counsel and
Assistant Secretary
S:\SPS_LAW\PURCHASE\AMEND\RECEIVAB.2AM
<PAGE>
EXHIBIT 10.49
Dated as of December 6, 1996
Receivables Capital Corporation
Bank of America National Trust
and Savings Association, as Agent
231 South LaSalle Street
Chicago, Illinois 60697
Re: Extension and Amendment
Ladies and Gentlemen:
Reference is hereby made to that certain Third Amended and Restated Master
Receivables Purchase Agreement dated as of July 19, 1995, as amended as of
December 15, 1995 (as amended or modified from time to time in accordance with
the terms thereof, the "RCC Purchase Agreement"), among Hurley State Bank, as
Seller (the "Seller"), SPS Payment Systems, Inc., as Servicer ("Servicer") and
Recourse Party, Dean Witter, Discover & Co., as Guarantor, Receivables Capital
Corporation, as Purchaser ("Purchaser"), and Bank of America National Trust and
Savings Association, as Agent (the "Agent"). Capitalized terms not otherwise
defined herein are used herein as defined in the RCC Purchase Agreement.
This is to confirm the agreement of the parties hereto as follows:
(a) The date contained in clause (x) of the definition of "Facility
Termination Date" in the RCC Purchase Agreement is amended by replacing
"December 14, 1996" with "April 15, 1997."
(b) The Designated Long-Term Default Rate and the Designated Short-Term
Default Rate set forth in each Supplement is hereby increased by adding to each
of the existing rates 3%.
Except as specifically modified hereby, the RCC Purchase Agreement is hereby
confirmed and reaffirmed in all respects. This letter amendment shall be
governed by, and construed in accordance with, the internal laws of the State
of Illinois without regard to conflict of laws principles.
The terms of this letter amendment shall be binding upon the parties hereto
and their respective successors and assigns and may be modified only by a
subsequent writing signed by the Seller, the Servicer, the Purchaser and the
Agent
<PAGE>
This letter amendment may be executed in any number of counterparts
separately by the different parties hereto.
Very truly yours,
HURLEY STATE BANK,
as Seller
By: Russell J. Bonaguidi
Title: Vice President
SPS PAYMENT SYSTEMS, INC.,
as Servicer and Recourse Party
By: Michael J. Hartigan, Jr.
Title: Vice President
DEAN WITTER, DISCOVER & CO.,
as the Guarantor
By: Birendra Kumar
Title: Treasurer, Senior Vice President
Accepted:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as the Agent
By: Marvin Spencer
Title: Attorney-In-Fact
RECEIVABLES CAPITAL CORPORATION
By: Stewart Cutler
Title: Vice President
Agreed and Accepted:
S:\SPS_LAW\LETTERAG\AMEND\RECCAP.AM
<PAGE>
EXHIBIT 10.54
FIRST AMENDMENT
THIS FIRST AMENDMENT made on March 20, 1997, between NOVUS Credit Services
Inc.("Landlord") and SPS Payment Systems, Inc. ("Tenant").
RECITALS:
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated February 1,
1993 (the "Lease"); and
WHEREAS, Landlord and Tenant desire to extend the term of the Lease and
increase the rentable square feet thereunder:
AGREEMENT:
NOW THEREFORE, intending to be legally bound, and for and in consideration of
the Recitals (which are incorporated herein and made a part hereof) the mutual
promises and covenants herein contained as well as in the Lease, and for other
good and valuable consideration, Landlord and Tenant hereby mutually agree as
follows:
1. In the event of any conflict between the terms hereof and the terms of the
Lease, the terms of this First Amendment shall control.
2. Landlord and Tenant agree that effective February 1, 1997 the leased
premises that Tenant hereby rents from Landlord shall be approximately
94,956 rentable square feet (RSF) (the "Leased Premises"), consisting of
86,403 RSF, the full fourth floor, and 8,553 RSF on the third floor, south
wing. The Leased Premises are shown crosshatched in red on Exhibit A,
which is attached hereto and which replaces Exhibit A of the original
lease.
3. Landlord and Tenant agree to extend the Term of the Lease in accordance
with Section XIV, Option 1, of the Lease for a period of three (3) years,
beginning February 1, 1997 and ending January 31, 2000 subject to the
following Base Rent schedule:
2/01/97-1/31/1998 Rent Per Sq. Ft. - the lower of $30.41 or the
lowest amount that shall be charged or allocated per rentable square
foot to any other NCSI company for the same period.
2/01/98-1/31/1999 Rent Per Sq. Ft. - the lower of $36.71 or the
lowest amount that shall be charged or allocated per rentable square
foot to any other NCSI Company for the same period.
2/01/99-1/31/2000 Rent Per Sq. Ft. - the lower of $38.17 or the lowest
amount that shall be charged or allocated per rentable square foot to
any other NCSI Company for the same period.
Base Rent shall be paid in monthly installments, payable in advance on the
first business day of the month as follows:
<PAGE>
Monthly installments of the lesser of Two Hundred Forty Thousand Six
Hundred Thirty Four and 33/100 Dollars ($240,634.33) or the lowest
amount that shall be charged or allocated per rentable square foot to
any other NCSI company times the Leased Premises (as stated above)
divided by 12, for the period from February 1, 1997 through January 31,
1998; and
Monthly installments of the lesser of Two Hundred Ninety Thousand Four
Hundred Eighty Six and 23/100 Dollars ($290,486.23) or the lowest
amount that shall be charged or allocated per rentable square foot to
any other NCSI Company, times the Leased Premises (as stated above)
divided by 12, for the period from February 1, 1998 through January 31,
1999; and
Monthly installments of the lesser of Three Hundred Two Thousand Thirty
Nine and 21/100 Dollars ($302,039.21) or the lowest amount that shall
be charged or allocated per rentable square foot to any other NCSI
Company, times the Leased Premises (as stated above) divided by 12, for
the period from February 1, 1999 through January 31, 2000.
Notwithstanding the above, Landlord shall determine, at its sole
discretion annually, its prior year's actual Base Rent expense for the
Leased Premises. Landlord shall invoice Tenant for the difference between
the actual Base Rent expense, as determined above, and the amount of Base
Rent paid to Landlord if the actual Base Rent is greater. Likewise,
Landlord shall credit Tenant for the difference between the Base Rent paid
to Landlord and the actual Base Rent expense, as determined above, if the
Base Rent paid is greater. If Tenant is invoiced for Base Rent, Tenant
agrees to pay said invoice within thirty (30) days from the date thereof.
However, in no case shall any adjustment for a prior year's actual Base
Rent expense cause Tenant's Base Rent for such prior year to exceed the
applicable amount in the Base Rent schedule set forth above. Landlord
shall exercise good business judgment to contain operating costs within
the proposed Base Rent structure.
In the event there is mutual agreement between the Landlord and Tenant
that the Term be modified, the parties will amend the Term of this Lease
Agreement.
4. Landlord and Tenant agree that Tenant shall pay Landlord as rental for the
existing furniture ("Furniture Rent") in the Leased Premises at the same
place as the Base Rent according to the following schedule:
The lesser of $4.10 Per Square Foot in monthly installments of Thirty
Two Thousand Four Hundred Forty Three and 30/100 Dollars ($32,443.30)
or the lowest amount that shall be charged or allocated per rentable
square foot to any other NCSI company for the period from February 1,
1997 through January 31, 1998;
The lowest amount that shall be charged or allocated per rentable
square foot to any other NCSI Company, times the Leased Premises square
footage divided by 12, for the period from February 1, 1998 through
January 31, 1999;
The lowest amount that shall be charged or allocated per rentable
square foot to any other NCSI Company, times the Leased Premises square
footage divided by 12, for the period from February 1, 1999 through
January 31, 2000.
5. Delete Section V, RELOCATION, in its entirety.
6. Delete the last paragraph of Section XIV, TERMS OF RENEWAL, in its
entirety.
7. All other terms and conditions of the Lease shall remain in full force and
effect and are hereby fully ratified and confirmed.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment to be
executed.
<PAGE>
LANDLORD:
NOVUS CREDIT SERVICES INC.
By: Bruce L. Osborne
Title: Vice President
Date: March 20, 1997
TENANT:
SPS PAYMENT SYSTEMS, INC.
By: Robert L. Wieseneck
Title: President
Date: March 20, 1997
leasedoc\amendmen\spsamend.1st - March 27, 1997
<PAGE>
EXHIBIT 13
[SPS TRANSACTION SERVICES, INC. LOGO]
SPS Transaction Services, Inc.
1996 Annual Report
<PAGE>
SPS Transaction Services, Inc. (NYSE:PAY) is a leading provider of
technology-based outsourcing services. Principal businesses include electronic
processing of non-cash transactions, consumer private label credit card program
administration, commercial accounts receivable processing and call center
teleservices such as technical help-desk support. The company operates its
businesses primarily through two wholly owned subsidiaries, SPS Payment
Systems, Inc. and Hurley State Bank. SPS is an indirect, 73.6 percent-owned
subsidiary of Dean Witter, Discover & Co.
NETWORK TRANSACTION SERVICES SPS provides a wide variety of clients with
electronic point-of-sale processing, which includes authorization routing, data
capture and file delivery for settlement of credit and debit card transactions.
CONSUMER CREDIT CARD SERVICES SPS manages private label credit card
programs for merchants and service providers. SPS may also act as an issuer and
own the credit card loans outstanding.
COMMERCIAL ACCOUNTS PROCESSING SPS offers billing and accounts receivable
management systems for clients with business customers. Flexible systems allow
for customization according to client needs - monthly revolving accounts,
statements or invoice-based billing.
TELESERVICES SPS applies customer service skills and advanced call center
technology to provide customized inbound and outbound support solutions.
Services include on-line technical help-desk support, catalog order-entry,
customer service inquiries and emergency road service dispatch.
CONTENTS
Letter to Stockholders 2 Notes to Financial Statements 28
Team Approach 5 Responsibility for Financial
Business Segments 6 Statements and Independent
Management's Discussion Auditors' Report 38
and Analysis 16 5-Year Selected Financial Data 39
Financial Statements 24
<PAGE>
SPS TRANSACTION SERVICES, INC.
FINANCIAL HIGHLIGHTS
In thousands, except per share data
<TABLE>
<CAPTION>
1996 1995 % Change
--------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Net operating revenues $320,920 $311,992 2.9
--------------------------------------------------------------------------
Net income 23,246 43,473 (46.5)
--------------------------------------------------------------------------
Net income per common share 0.86 1.60 (46.3)
--------------------------------------------------------------------------
BALANCE SHEET DATA
Total credit card loans $1,637,507 $1,620,833 1.0
--------------------------------------------------------------------------
Total assets 1,760,785 1,777,607 (0.9)
--------------------------------------------------------------------------
Deposits 463,435 382,343 21.2
--------------------------------------------------------------------------
Due to affiliates 982,547 1,110,811 (11.5)
--------------------------------------------------------------------------
Stockholders' equity 224,392 199,210 12.6
--------------------------------------------------------------------------
Return on average stockholders' equity 11.0% 24.5%
--------------------------------------------------------------------------
OPERATING DATA
Electronic point-of-sale
transactions processed 424,069 378,548 12.0
--------------------------------------------------------------------------
TeleServices customer contacts processed 9,745 8,507 14.6
--------------------------------------------------------------------------
Active consumer private label
accounts at year-end 3,466 3,675 (5.7)
--------------------------------------------------------------------------
Active commercial accounts at year-end 898 676 32.8
==========================================================================
SUPPLEMENTAL DATA
Total loans* $2,217,507 $2,229,992 (0.6)
--------------------------------------------------------------------------
</TABLE>
*Total loans represents both owned and securitized credit card loans.
Net Operating
Revenues Net Income
dollars in millions dollars in millions
- ------------------- -------------------
1992 165.6 1992 19.7
1993 205.5 1993 30.6
1994 245.8 1994 37.7
1995 312.0 1995 43.5
1996 320.9 1996 23.2
1
<PAGE>
SPS TRANSACTION SERVICES, INC.
LETTER TO STOCKHOLDERS
1996 was a difficult year for SPS. Our net income was affected by high
charge-offs on our owned consumer credit card accounts. This reflected an
industry-wide deterioration in consumer credit quality that produced record
rates of delinquencies and bankruptcies. Our earnings were also reduced by
expenses related to promotional credit plans offered to our owned private label
credit cardholders. We took aggressive steps to address these problems and are
beginning to see positive results.
Our other three major businesses all experienced healthy increases in the
drivers we use to measure their performance. Their progress reaffirms our
business strategy and our conviction that we are well-positioned for long-term
growth.
ROBERT L. WIESENECK
President and
Chief Executive Officer
[photo]
PHILIP J. PURCELL
Chairman of the Board
[photo]
2
<PAGE>
SPS TRANSACTION SERVICES, INC.
1996 REVIEW. In 1996 we took aggressive measures to increase revenues
and to reduce the credit risks and expenses related to our Consumer Credit Card
Services business. These actions included changes in cardholder terms and an
increase in collection efforts by adding collectors and expanding call hours.
We also implemented a major portfolio improvement program that made adjustments
to cardholder accounts based on analyses of current financial condition, credit
risk and credit behavior scores. While the steps we took resulted in the
reduction of credit lines for some accounts and the closing of others, gross
revenues per account increased in 1996. Additionally, we moved up the
development schedule for new credit scoring models and implemented certain
client pricing revisions, including those for promotional programs.
Given the changes in some clients' marketing strategies, we also
reevaluated and changed our position on the recognition of merchant discount
revenues for promotional payment plans. This change in accounting estimate
resulted in the deferral of $9.3 million of fourth quarter merchant discount
revenues into 1997 and will provide us with a better matching of the revenues
and expenses associated with promotional payment plans going forward. In
addition, in response to the current credit environment, we increased our loan
loss reserve rate for owned receivables. This resulted in an $11.0 million
addition to reserves during the fourth quarter.
We are satisfied that these actions, and other operational changes, are
proceeding according to plan. We believe that they will have an increasingly
positive impact and will moderate the effects of a difficult credit environment
over time. We also believe that our Consumer Credit Card Services business is
now stronger than it was a year ago and are optimistic about its long-term
prospects.
We were very pleased with the performance of our fee-based businesses.
Network Transaction Services processed more than 424 million electronic
transactions, a 12 percent increase over 1995. Expansion of existing client
relationships in the petroleum and specialty retail industries was a major
driver of this growth. We also signed and implemented a number of new clients,
including Budget Rent A Car. We continued making inroads into new markets such
as transportation and supported the operation of the first "credit card
in/credit card out" solution for the parking industry in the United States.
Our Commercial Accounts Processing business delivered a strong
performance in 1996. Total active commercial accounts grew 33 percent, year
over year. Our core office supply superstore clients were responsible for the
majority of the growth. However, we did sign several new clients in the
printing and building supplies markets.
Our TeleServices business, referred to as Operational Outsourcing in
past reports, was recognized as the fifth-largest provider of inbound
teleservices in the April 1996 issue of Telemarketing & Call Center Solutions.
This business was also honored with the Software Technical Assistance
Recognition (STAR) Award for exceptional software support services. Total
TeleServices client contacts grew by 15 percent in 1996 reflecting the
continued addition of new clients, including support of Eddie Bauer's Christmas
catalog order business.
We are committed to providing our clients and their customers with
superior service based on advanced information technology. We continue to
upgrade and enhance many of the systems that support our services, assuring our
clients of efficient, dynamic applications. During 1996, we standardized and
upgraded all three of our call centers with the installation of new automated
call distribution (ACD) telephone switching systems. New intelligent call
routing capabilities allow us to better analyze and direct calls, thereby
improving service and decreasing telecom- munications expense. We were honored
by Call Center magazine's recognition of SPS as one of the "Best Call Centers
of 1996."
3
<PAGE>
SPS TRANSACTION SERVICES, INC.
MARKET AND INDUSTRY TRENDS. A number of current and emerging trends are
affecting our businesses. They include: consumers' increased use of credit and
debit cards as alternatives to cash; the use of targeted credit marketing and
data warehousing analysis tools to supplement less efficient forms of broadcast
and print advertising; and the expansion of businesses' use of outsourcing to
help reduce the fixed expenses of their operating activities.
Consumers are taking advantage of the wider availability of credit, and
bankruptcy has become a more acceptable method for consumers to deal with debt.
We believe these fundamental changes in the credit landscape have created new
challenges in predicting the extent and timing of the credit cycle. While we
also believe the collective efforts of the consumer credit card industry to
address consumer credit quality problems will have a positive effect in 1997,
we will continue to closely monitor and analyze cardholder behavior and make
adjustments as appropriate.
LOOKING FORWARD. Our 1997 business plan addresses the dynamics of each of our
businesses. While we view Network Transaction Services as a mature business, we
believe there is still profitable potential in specialized niche markets where
our customized, value-added services are most competitive. In addition to the
pursuit of new private label clients, Consumer Credit Card Services has
expanded to include bankcard processing for our affiliate, NOVUS Services, Inc.
We will also continue to aggressively market our Commercial Accounts Processing
Services and expect to implement several new clients this year. And our Tele-
Services business will more finely target its sales efforts to market its
strong technical support services to software and hardware providers. We
completed development of our newest service, Electronic Relationship
MarketingSM, last year. In 1997 we plan to implement our first card-based
preferred customer program for a specialty retail chain.
MANAGEMENT UPDATE. In October 1996, Ruth O'Brien was appointed to the new
position of vice president, TeleServices, a business that represents
significant growth potential.
A SPECIAL RECOGNITION. This annual report recognizes the positive response of
all of our employees to the challenges in 1996. These talented individuals,
often working in teams across diverse functional areas, were responsible for
the development of many innovative business solutions during the year. A number
of our dedicated employees are featured on the following pages. The attitude,
energy and commitment displayed by the people throughout the organization give
us tremendous confidence in our ability to return to previous levels of growth.
Thank you for your continued support.
Sincerely,
[signature]
Robert L. Wieseneck
President and
Chief Executive Officer
[signature]
Philip J. Purcell
Chairman of the Board
4
<PAGE>
SPS TRANSACTION SERVICES, INC.
SPS uses a team approach to devise innovative solutions to solve our clients'
business systems problems and improve our internal work processes.
We are a unique company of interrelated businesses, designed and
operated to leverage our assets-people, facilities, systems and software-to
achieve results. The company's team approach to problem solving is an important
part of our culture that exemplifies our strategic approach to growth. Our
teams are often cross functional in make-up, leveraging the background and
skills of each member to develop solutions. These teams may share
responsibility for a product or service we provide to customers, or they may be
focused on improving an internal SPS process. Our teams get results: client
solutions, new applications, continual process improvement and growth.
5
<PAGE>
SPS TRANSACTION SERVICES, INC.
NETWORK TRANSACTION SERVICES
Network Transaction Services is a cornerstone of SPS. In this business,
fee-based long-term contracts result in predictable cash flow and recurring
revenues. SPS teams create innovative client solutions and improve systems. The
result is a track record of consistent growth and a reputation for unique
applications.
WHAT WE DO. SPS provides point-of-sale processing for non-cash
transactions including credit, debit and checks.
Transactions are processed electronically. In seconds, a cardholder's
purchase is approved or denied and vital sales data is captured for merchant
reports. Files are then prepared to facilitate settlement of payment
transactions. SPS processes transactions for over 70,000 merchant terminal
locations. Clients are concentrated in the specialty retail, petroleum,
transportation and hospitality industries.
TEAMWORK. SPS works to provide our clients with the flexible, often
unique solutions that set us apart from our competition. In developing the
software and systems that provide accurate and cost-effective services, we
employ the telecommunications technologies that best suit our clients' needs.
These include traditional phone lines, satellite, ISDN and the Internet. For
example, we developed a comprehensive transaction processing solution utilizing
TCP/IP Internet Protocol for DeCA, an agency of the Department of Defense that
operates over 300 commissaries worldwide. We are also implementing a unique
software solution that is designed to allow our clients to safely and reliably
accept non-cash payments for sales from their World Wide Web storefronts on the
Internet.
OUTLOOK. Use of electronic forms of payment continues to increase, but
the marketplace is very competitive. Our strategy is to pursue industry
specialization and custom applications to maintain growth and enhance
profitability. We will also look for opportunities to partner with other
software and service providers to broaden our offerings.
6
Electronic
Point-of-Sale
Transactions
Processed
in millions
- ---------------
1992 246.7
1993 303.0
1994 329.0
1995 378.5
1996 424.1
<PAGE>
[SATELLITE SOLUTION]
TEAM
[flow chart]
CLIENT SUPPORT
CLIENT
INPUT
PRODUCT DEVELOPMENT
INFORMATION TECHNOLOGY
NETWORK
OPERATIONS
CLIENT IMPLEMENTATION
SATELLITE VERSUS TERRESTRIAL
Speed is one of the most important elements of an electronic payment
transaction. Many companies with remote locations can be better served with
telecommunications options other than traditional high-speed telephone lines.
SPS associates from diverse functional disciplines including Product
Development, Client Support, Information Technology and Operations came
together to develop an alternative solution utilizing state-of-the-art
satellite technology.
7
<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSUMER CREDIT CARD SERVICES
Private label credit cards are more than a payment option. Retailers use
proprietary credit as a marketing tool. Together with our clients, we create
targeted offers and promotional credit plans to stimulate sales and promote
loyalty.
WHAT WE DO. SPS can manage some or all of a client's consumer credit
operations.
We offer fee-based custom services such as new account
processing, credit approval, printing and mailing monthly statements,
processing remittance checks, responding to billing inquiries and collecting
past due accounts. We also process card authorization transactions for most of
these clients. SPS provides these services from three state-of-the-art
operations centers. Based on a client's business requirements, we can also
issue the cards and own the receivables
Credit Card
Loans
dollars in millions
- --------------------------------------------------------------------
Securitized loans Total loans (both owned and securitized)
----------------- -----------
1992 420.0 623.1
1993 430.0 676.7
1994 430.0 1109.9
1995 609.2 2230.0
1996 580.0 2217.5
[STATEMENT REDESIGN]
TEAM
[Flow Chart]
CARDHOLDER RESEARCH
CLIENT
INPUT
REDESIGN
CONCISE, DYNAMIC STATEMENT
8
<PAGE>
SPS TRANSACTION SERVICES, INC.
through our subsidiary, Hurley State Bank. The revenue stream from owned
portfolios includes merchant discount fees, late fees and finance charge
income.
TEAMWORK. Credit marketing and product development specialists work
with each client to develop targeted credit programs to promote sales. Clients
can take advantage of the FACET(SM) System, our proprietary relational data
warehouse program. FACET compiles and analyzes data from multiple sources to
create a comprehensive portrait of each customer and can measure the
effectiveness of either specific promotional offerings or the performance of
the entire portfolio. The modeling and analytical capabilities of our
subsidiary, Ruf Corporation, also add to the team resources we utilize to
improve portfolio performance.
OUTLOOK. Retailers are relying more on targeted marketing, and they
recognize the value of private label credit card programs to strengthen
relationships with their customers. We expect future growth to come from
retailers who are looking to third-party providers to supply the operating and
marketing sophistication that will improve their competitive position in the
marketplace.
MAKING CUSTOMER STATEMENTS MORE USER FRIENDLY
Our clients expressed an interest in expanding the number of promotional credit
plans and in delivering targeted marketing messages to their customers, driving
the need for a more dynamic, comprehensive monthly statement. A team of SPS
professionals from a wide spectrum of areas - Product Development, Credit
Marketing, Information Technology, Operations, Forms Management and Law -
conducted focus group research and developed a new statement format that
combines simplicity with enhanced account information. The new design has been
implemented for more than 40 client companies.
Active Consumer
Credit Card Accounts
at Year-End*
in millions
- --------------------
1992 2.6
1993 2.8
1994 3.3
1995 3.7
1996 3.5
*Includes both managed and
owned accounts
9
<PAGE>
SPS TRANSACTION SERVICES, INC.
[FLOW CHART]
[SYSTEM COST REDUCTION]
TEAM
PRODUCT DEVELOPMENT
INFORMATION TECHNOLOGY
SUPPORT SERVICES
EVALUATE SYSTEMS
IDENTIFY EFFICIENCIES
IMPLEMENT CHANGES
ENHANCED PERFORMANCE, REDUCED
COSTS
MAKING THE SYSTEM RUN SMARTER
Last year, SPS formed a task force to reduce data processing costs
for commercial accounts. Associates from Product Development, Information
Technology and Support Services began the process with an in-depth systems
review, analysis and evaluation. What data did we need? How did we access data?
What reports could be combined? How could we access data more efficiently?
Recommendations were presented, refined and implemented. The result was a
significant decrease in data processing costs and an increase in the level of
customer service, even as volume increased.
10
<PAGE>
SPS TRANSACTION SERVICES, INC.
COMMERCIAL ACCOUNTS PROCESSING
Continued efforts by businesses to reduce fixed costs have fueled the trend to
outsource many operational functions. SPS leveraged its software, systems and
credit management expertise, creating services that help businesses better
manage their commercial accounts receivable.
WHAT WE DO. For clients whose customers are businesses rather than
consumers, SPS can manage all or a part of their accounts receivable
activities.
Our flexible, fee-based services include new account processing with
electronic access to business credit information sources. We offer a choice of
monthly revolving accounts, statements or invoice-based open accounts with
custom payment terms. SPS operations center associates function as an extension
of a client's operating staff and are trained to handle complex customer
service issues and delicate collection problems. Our expertise in risk manage-
ment and collections frequently decreases write-offs. In addition, we can
facilitate funding arrangements to fit our clients' needs.
TEAMWORK. SPS can provide marketing consultation, working with clients
to implement their business strategies. Targeted promotions and special offers
can be used to increase commercial sales and foster stronger ties between the
buyer and seller. Our database management system, SMART, is available for
sophisticated ad hoc analyses of an entire portfolio or specific segments of a
program.
OUTLOOK. Outsourcing is gaining acceptance with many credit
professionals and is seen as a viable management option to improve performance,
especially for accounts receivable departments that must function with limited
resources due to downsizing or capital constraints. We expect continued growth
in the printing, office supply and building supply industries where strong
client relationships already exist. These businesses have high transaction
volumes and are ideally suited for the electronic processing of accounts.
Active Commercial
Accounts at Year-End
in thousands
- ------------------
1992 298
1993 395
1994 546
1995 676
1996 898
11
<PAGE>
SPS TRANSACTION SERVICES, INC.
TELESERVICES
SPS leverages its customer service skills, facilities and sophisticated
telecommunications network to provide call center services for other
businesses. Teams of SPS associates are trained to provide a seamless link
between our clients and their customers.
WHAT WE DO. In our TeleServices business, formerly referred to as
Operational Outsourcing, we are a resource for a wide range of call
center-based services.
The 1-800 numbers listed in our clients' literature are often answered
by SPS associates. They are highly trained to assist sellers of software,
hardware and Internet access services with technical help-desk support. Answers
to our callers' questions often require a high level of knowledge, and contacts
can be quite lengthy. Customer contact can be via the telephone or
Internet/E-mail. Other associates perform catalog data-entry. They are trained
in clients' products and the techniques of up-selling and cross-selling. Other
inbound services include emergency road dispatch and the handling of a variety
of product or service inquiries.
TEAMWORK. Customer service associates can support long-term, ongoing
client programs or respond to short-term holiday, seasonal or weather-related
peaks in call volume. Our state-of-the-art call management systems, including
sophisticated automatic call distribution switches, are capable of processing
millions of calls each month. This infrastructure allows each of our three call
centers to back up the others as necessary.
OUTLOOK. Many companies are choosing outsourcing to minimize the costs
related to staffing and capital investments. Significant opportunities exist
for advanced call center operations that utilize technology to handle customer
service contacts via phone, automatic voice response, Internet/E-mail and
faxback support. Providing the superior service that customers demand is a
competitive advantage for SPS. The TeleServices business unit is focusing sales
and marketing resources on technical support and other select areas that we
believe represent tremendous opportunities.
TeleServices
Customer Contacts
in millions
- -----------------
1992 2.1
1993 4.4
1994 7.5
1995 8.5
1996 9.7
12
<PAGE>
SPS TRANSACTION SERVICES, INC.
[FLOW CHART]
[CLIENT IMPLEMENTATION]
TEAM
"WINNING
WITH CUSTOMERS PROGRAM"
NEW CLIENT
CLIENT-SPECIFIC TRAINING
QUALITY
SERVICE
ONGOING TRAINING
TRAINING IS THE KEY
New client implementations begin with a national accounts manager
working with the client, operations call center management and the training
department to determine needs and timeframes necessary to train support
associates. Then, associates receive general customer service and telephone
etiquette skills through our "Winning With Customers" program. SPS training
specialists then provide extensive training in a new client's culture, products
and/or services. Associates learn through role-playing and on-the-job
instruction.
13
<PAGE>
SPS TRANSACTION SERVICES, INC.
STRATEGIC OPPORTUNITIES
Our strategic planning process identifies growing markets where we can best
leverage new applications of our existing assets: people, facilities, systems
and software. We are constantly refining these assets to improve our position
in our current businesses and to develop new directions for the future.
[FLOW CHART]
[ELECTRONIC MARKETING]
TEAM
DATABASE MARKETING
TRANSACTION PROCESSING SERVICES
TARGETED OFFERS
LOYAL CUSTOMERS
INCREASED SALES
DATABASE MANAGEMENT. Targeted marketing is replacing many forms of traditional
advertising.
Our new Electronic Relationship Marketing(SM) services utilize data
warehousing to help retailers capitalize on customer-linked sales data to
increase sales and profits. These flexible card-based services include access
to a marketing system designed to capture and track customer information as
well as distribute targeted promotional offers or messages at the
point-of-purchase decision.
14
<PAGE>
SPS TRANSACTION SERVICES, INC.
SPS-owned Ruf Corporation is an innovator in marketing research and strategic
decision support database programs. Ruf develops and markets a full range of
intelligent, integrated statistical modeling tools designed to convert data
into critical information for targeted selling. Ruf's skills are used to
maximize the potential of the private label portfolios that we own and manage.
HEALTH CARE SERVICES. The health care industry is using technology as a
method to reduce expenses and improve services. Med-Link Technologies, Inc., a
wholly owned subsidiary of SPS, offers health care providers and payers an
electronic alternative to paper processing. MedCash Health Systems, L.P., a
joint venture with United Surgical Funding & Systems, Inc., provides patient
funding and billing services to health care providers. These two companies form
the foundation of our health care services strategy.
GOING FORWARD. Our philosophy of looking for opportunities to leverage
our assets to pursue new strategic directions will continue to fuel long-term
growth. This approach is an efficient and agile one, allowing us to enter new
markets and respond to new opportunities quickly and cost effectively.
"IT'S WHAT'S BEHIND THE CARD THAT COUNTS!(SM)"
That's the slogan for the SPS team that has developed a new suite of Electronic
Relationship Marketing(SM) services. These individuals were first brought
together to survey the market and develop a new business plan. The group grew
as more skills were needed to create the processes and software that support
this innovative set of marketing services. Their accomplishments have set the
stage for our entry into a new business.
15
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's net operating revenues consist of processing
and service revenues, merchant discount revenue and net credit income, which
are derived as a result of its four principal business services: Network
Transaction Services, TeleServices (formerly referred to as Operational
Outsourcing Services), Commercial Accounts Processing and Consumer Credit Card
Services.
Processing and service revenues consist of four components (as
described below): Transaction processing services, Managed programs, HSB
programs and Servicing fees on securitized loans.
Transaction processing services includes revenues received as a result
of Network Transaction 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 TeleServices. Revenues
from Network Transaction Services typically are based on the number of
electronic point-of-sale transactions processed rather than the dollar
transaction amount. Revenues from TeleServices typically are based upon the
number 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
Accounts Processing and those Consumer Credit Card Services which the Company
administers, but for which it does not act as the card issuer or own the credit
card loans. Managed program revenues are derived from fees based on the volume
of the services provided and on services provided in the administration of
credit life insurance programs.
HSB programs refers to those Consumer Credit Card Services for which
the Company issues the credit card on behalf of the client and owns the credit
card loans that are generated through the use of the card. The revenues derived
from the administration of HSB programs that are included as part of processing
and service revenues primarily consist of late fees.
Servicing fees on securitized loans are revenues derived from credit
card loans that have been sold to investors through asset securitizations. Such
revenues are the result of the fees earned for servicing the underlying credit
card accounts. Loan securitizations have the effect of converting portions of
net credit income, merchant discount revenue and credit card fees to a
component of processing and service revenues for the credit card accounts that
are securitized.
Merchant discount revenue is derived from the Company's owned Consumer
Credit Card Services. Generally, credit card sales are subject to a discount
charged to the merchant based upon contractual percentages. This percentage
varies by portfolio and by the type of credit plan offered. The recognition
of merchant discount revenue on longer term promotional payment plans is
further discussed in Note 2 ("Summary of Significant Accounting Policies") to
the consolidated financial statements.
Interest revenue represents finance charges derived from owned Consumer
Credit Card Services and investment interest. Net credit income is calculated
by subtracting interest expense and the provision for loan losses from interest
revenue.
RESULTS OF OPERATIONS
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>
Period-to-Period Change
------------------------
Year ended December 31, 1996 1995 1994 1995-1996 1994-1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET OPERATING REVENUES
Processing and service revenues 86.2% 74.4% 82.6% 19.2% 14.3%
Merchant discount revenue 10.7 15.9 7.1 (31.1) 184.2
Net credit income 3.1 9.7 10.3 (66.9) 19.7
- -------------------------------------------------------
100.0 100.0 100.0 2.9 26.9
OPERATING EXPENSES
Salaries and employee benefits 30.3 28.1 29.7 10.7 20.3
Processing and service expenses 33.8 29.0 26.6 19.9 38.2
Other expenses 24.2 20.4 18.3 22.2 41.4
- -------------------------------------------------------
88.3 77.5 74.6 17.2 31.9
Income before income taxes 11.7 22.5 25.4 (46.5) 12.4
Income tax expense 4.5 8.6 10.0 (46.5) 8.2
- -------------------------------------------------------
Net income 7.2% 13.9% 15.4% (46.5)% 15.2%
=======================================================
</TABLE>
16
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1996 COMPARED TO 1995
The Company's net income for 1996 was $23.2 million, a 46.5% decrease from
$43.5 million in 1995. Net income per common share was $0.86 for 1996, compared
to $1.60 for 1995.
The decline in earnings is primarily attributable to an increase in
charge-offs and the loan loss allowance rate in the Company's consumer private
label credit card portfolios related to an industry-wide deterioration in
consumer credit quality, and merchant discount issues related to promotional
payment plans.
Net Operating Revenues For 1996, net operating revenues were $320.9 million,
an increase of 2.9% over 1995. The increase in net operating revenues resulted
primarily from increases in net interest income and processing and service
revenues, offset by a decrease in merchant discount revenue and an increase in
provision for loan losses expense. The increase in provision for loan losses
expense was the result of increased net charge-offs and an increase in the loan
allowance rate. The Company had 3.5 million active consumer private label
accounts, both owned and managed, at December 31, 1996, as compared with 3.7
million accounts at December 31, 1995. Active commercial accounts grew 32.8% to
898,000 at December 31, 1996, as compared to 676,000 at December 31, 1995. The
number of point-of-sale transactions processed totaled 424.1 million, up 12.0%
from 378.5 million in 1995. Revenue per point-of-sale transaction decreased to
8.6 cents in 1996 from 8.8 cents in 1995. The number of TeleServices customer
contacts processed totaled 9.7 million, up 14.6% from 8.5 million in 1995.
Processing and service revenues increased 19.2% to $276.7 million for
1996, as compared to $232.1 million for 1995. Processing and service revenues,
representing 86.2% and 74.4% of net operating revenues for 1996 and 1995,
respectively, consisted of the following:
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Transaction processing services $ 87,758 $ 79,192
Managed programs 88,598 75,526
HSB programs 51,744 25,566
Servicing fees on securitized loans 48,645 51,836
- ---------------------------------------------------------
Processing and service revenues $276,745 $232,120
=========================================================
</TABLE>
The increase in revenues from transaction processing services resulted
from a higher volume of Network Transaction Services point-of-sale transactions
processed and increased revenues from TeleServices.
The increase in revenues from Managed programs resulted primarily from
an increase in credit life insurance program revenues, and an increase in the
volume of commercial accounts processed and consumer credit card services
provided.
The increase in revenues from HSB programs resulted from an increase in
late fee revenue resulting from a higher level of credit card loan
delinquencies, coupled with changes in late fee terms initiated during the year.
The conversion of the Radio Shack and Tandy Name Brand credit card portfolios
from managed to owned programs in March 1995 had additional impact on the
comparison.
The decrease in servicing fees on securitized loans was due primarily to
a higher rate of credit losses on securitized loans.
Merchant discount revenue decreased 31.1% to $34.2 million in 1996. The
decrease in merchant discount revenue resulted from the deferral of merchant
discount revenues related to promotional payment plans and from 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. Merchant discount revenue was 10.7% and 15.9% of net operating
revenues for 1996 and 1995, respectively.
Due to changes in clients' marketing strategies, the Company has
reevaluated and changed its estimate of the recognition of merchant discount
revenues for promotional payment plans. This change in accounting estimate
resulted in the deferral of $9.3 million of fourth quarter merchant discount
revenues into 1997 and will provide the Company with a better matching of the
revenues and expenses associated with promotional payment plans.
Net credit income decreased 66.9% to $10.0 million in 1996 resulting
from a $70.6 million increase in provision for loan losses expense partially
offset by a $50.3 million increase in net interest income. The increase in
interest revenue resulted from an increase in average credit card loans
outstanding and from changes in terms initiated during the year. The increase in
interest expense was due to an increase in average borrowings to finance the
growth in average credit card loans, partially offset by lower interest rates
17
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
on borrowings. The increase in the provision for loan losses is attributable to
an increase in the net charge-off rate, coupled with increased charge-offs
associated with growth in average credit card loans outstanding and an increase
in the loan loss allowance rate to provide for continued high rates of
delinquencies and bankruptcies. The industry-wide trend of increasing credit
loss rates, which the Company believes is related to increased consumer debt
levels and bankruptcy rates, contributed to the increase in the Company's net
charge-off rate. The Company believes that this industry-wide trend may
continue and that the Company may experience a higher net charge-off rate in
1997 as compared to 1996. Throughout 1996, the Company took corrective measures
to reduce future charge-offs by implementing a portfolio improvement program
that analyzes credit risk and credit behavior scores for existing accounts,
taking into consideration their current financial condition; re-scoring
existing accounts and reducing credit lines or closing accounts as appropriate;
accelerating the development schedule for new credit scoring models; and
increasing collection efforts by adding collectors, expanding call hours, and
identifying high-risk accounts to accelerate contacts. To help mitigate the
impact of higher charge-offs, the Company has also instituted changes in
cardholder terms and has instituted the implementation of certain client
pricing revisions, including those for promotional programs. In addition, the
Company has reassessed its estimate of the allowance for losses related to
loans intended to be securitized as described in Note 2 ("Summary of
Significant Accounting Policies") to the consolidated financial statements. The
Company believes these actions, along with other operational changes, will have
an increasingly positive impact over time and will serve to moderate the
effects of a difficult credit environment.
The Company's expectations about future charge-off rates and portfolio
improvements are subject to uncertainties that could cause actual results to
differ materially from the Company's expectations as described above. Factors
that influence the level and direction of credit card loan delinquencies and
charge-offs include changes in consumer loan payment patterns, bankruptcy
trends, the seasoning of the Company's loan portfolio, interest rate movements
and their impact on consumer behavior, and the rate and magnitude of changes in
the Company's credit card loan portfolio, including the overall mix of
accounts, products and loan balances within the portfolio.
Operating Expenses For 1996, total operating expenses of $283.4 million
increased 17.2% over 1995. Total operating expenses as a percentage of net
operating revenues rose to 88.3% in 1996, as compared to 77.5% in 1995.
Salaries and Employee Benefits - In 1996, salaries and employee benefits
totaled $97.1 million, an increase of 10.7% from $87.7 million in 1995. During
1996, the Company added approximately 670 additional full-time equivalent
employees. Approximately 94% of these new employees were assigned to field
processing facilities to provide increased TeleServices, to handle an increased
volume of private label accounts processed by the Company and to address
increased collection efforts.
Processing and Service Expenses - Processing and service expenses include data
processing, communications and account processing expenses, which are
influenced, in part, by changes in transaction volume. Such expenses rose 19.9%
for 1996 to $108.5 million. The increase in processing and service expenses
resulted from the increased volume of transactions processed and private label
services provided. In addition, 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 increased to 33.8%
for 1996, as compared to 29.0% for 1995.
Other Expenses - 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. Other expenses totaled $77.8 million and $63.6 million
for 1996 and 1995, respectively. The increase in other expenses of 22.2%
resulted from increased merchant marketing incentives expense, administrative
expenses, fraud losses (resulting from an increase in the incidence of
fraudulent transactions), collection agency expenses and occupancy expenses.
Other expenses were 24.2% and 20.4% of net operating revenues for 1996 and
1995, respectively.
18
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1995 COMPARED TO 1994
The Company's record net income in 1995 of $43.5 million
represented a 15.2% increase over $37.7 million in 1994. Net income per common
share was $1.60 for 1995, up from $1.40 for 1994.
Net Operating Revenues For 1995, net operating revenues grew to $312.0
million, an increase of 26.9% over 1994. The increase in net operating revenues
was comprised of increases in processing and service revenues, net credit income
and merchant discount revenue, 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. The Company had 3.7 million active consumer private label accounts,
both owned and managed, at December 31, 1995, as compared to 3.3 million active
accounts at December 31, 1994. Active commercial accounts grew 23.9% to 676,000
at December 31, 1995 as compared to 546,000 at December 31, 1994. The number of
point-of-sale transactions processed totaled 378.5 million, up 15.0% from 329.0
million in 1994. Revenue per point-of-sale transaction decreased from 9.4c. in
1994 to 8.8c. in 1995. The number of TeleServices contacts processed totaled
8.5 million, up 13.8% from 7.5 million in 1994.
Processing and service revenues increased 14.3% to $232.1 million for
1995, as compared to $203.0 million for 1994. Processing and service revenues,
representing 74.4% and 82.6% of net operating revenues for 1995 and 1994,
respectively, consisted of the following:
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1995 1994
- ---------------------------------------------------------
<S> <C> <C>
Transaction processing services $ 79,192 $ 73,892
Managed programs 75,526 75,282
HSB programs 25,566 9,281
Servicing fees on securitized loans 51,836 44,589
- ---------------------------------------------------------
Processing and service revenues $232,120 $203,044
- ---------------------------------------------------------
</TABLE>
The increase in revenues from transaction processing services resulted
from increased transaction volumes and revenues from the sale of point-of-sale
terminals. Increased transaction volumes over 1994 have more than offset the
effects of reduced pricing that was implemented during 1994 and 1995 as a result
of obtaining longer-term contracts from certain clients and overall competitive
pricing pressures. Revenues from acquisitions during 1995 of Ruf Corporation and
Med-Link Technologies, Inc. further contributed to the increase in transaction
processing services revenues.
The increase in revenues from Managed programs was due to an increase in
revenues from credit life insurance programs and growth in revenues from the
Company's commercial clients. However, as a result of the purchase of the Radio
Shack and Tandy Name Brand credit card portfolios in March 1995 and the purchase
of the Incredible Universe and Computer City credit card portfolios in December
1994 from Tandy Corporation ("Tandy Portfolios"), the increase in revenues from
Managed programs essentially was offset by the loss of managed revenues from the
conversion of the Tandy Portfolios from managed to owned credit card programs.
The increase in revenues from HSB programs resulted from an increase in
late fee revenue resulting from growth in credit card loan portfolios, which
includes the purchase of the Tandy Portfolios, and a higher incidence of
delinquencies in the owned credit card portfolios.
The increase in servicing fees on securitized loans primarily reflects
the revenues received from the assumption of securitized credit card loans from
Tandy in 1995.
Merchant discount revenue increased 184.2% to $49.6 million in 1995 due
to increases in sales activity and pricing of promotional payment programs on
the private label cards in the HSB programs. Merchant discount revenue was 15.9%
and 7.1% of net operating revenues for 1995 and 1994, respectively.
Net credit income increased 19.7% to $30.3 million in 1995 due to higher
net interest income partially offset by an increase in the provision for loan
losses. The increase in interest revenue resulted from an $869.5 million
increase in average credit card loans outstanding associated with the addition
of new credit card portfolios during 1995 and growth in existing credit card
portfolios. The increase in interest expense was due to an increase in average
borrowings to finance the growth in credit card loans. The increase in the
provision for loan losses is attributable to a higher balance of credit card
loans outstanding, coupled with an increase in the net charge-off rate. The
increase in the net charge-off rate resulted from higher charge-off rates in
certain of the Tandy and other portfolios. The industry-wide trend of increasing
credit loss rates contributed to the increase in the Company's net charge-off
rate.
19
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Operating Expenses For 1995, total operating expenses of $241.9 million
increased 31.9% over 1994. Total operating expenses as a percentage of net
operating revenues increased to 77.5% in 1995, as compared to 74.6% in 1994.
Salaries and Employee Benefits - In 1995, salaries and employee benefits
totaled $87.7 million, an increase of 20.3% from $72.9 million in 1994. During
1995, the Company added approximately 195 additional full-time equivalent
employees. Approximately 50% of these new employees were assigned to field
processing facilities to provide increased TeleServices and to handle an
increased volume of private label accounts processed by the Company. The
remaining increase in personnel was attributable to business acquisitions
during 1995 and an increase in systems development personnel.
Processing and Service Expenses - Processing and service expenses include data
processing, communications and account processing expenses, which are
influenced, in part, by changes in transaction processing volume. Such expenses
rose 38.2% for 1995 to $90.5 million. The increase in processing and service
expenses resulted from the increased volume of transactions processed and
private label services provided and from expenses incurred during 1995
associated with the integration of the Tandy Portfolios. Processing and service
expenses as a percentage of net operating revenues increased to 29.0% for 1995,
as compared to 26.6% for 1994.
Other Expenses - Other expenses include expenses related to business
development, merchant marketing, occupancy, advertising and promotion, cost of
terminals sold, credit card fraud and other miscellaneous employee and
administrative expenses. Other expenses totaled $63.6 million and $45.0 million
for 1995 and 1994, respectively. The increase in other expenses of 41.4%
resulted from additional costs incurred as a result of integrating the Tandy
Portfolios, increased costs associated with higher terminal sales, increased
administrative expenses and higher fraud losses that are commensurate with the
growth of credit card loan portfolios, coupled with an increase in the
incidence of fraudulent transactions. Other expenses were 20.4% and 18.3% of
net operating revenues for 1995 and 1994, respectively.
SUPPLEMENTAL INFORMATION
Components of Servicing Fees on Securitized Loans
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Processing and service revenues $ 14,053 $ 12,610 $ 9,365
Merchant discount revenue 4,779 - -
Interest revenue 104,587 107,584 83,932
Interest expense (33,121) (35,726) (25,581)
Provision for loan losses (41,653) (32,632) (23,127)
- -------------------------------------------------------------------------------
Servicing fees on securitized loans $ 48,645 $ 51,836 $ 44,589
- -------------------------------------------------------------------------------
</TABLE>
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. Cost 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 $465.6 million and $752.8 million at December 31, 1996 and 1995,
respectively.
20
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
At December 31, 1996 and 1995, the Company had $40.0 million of
interest rate cap agreements. At December 31, 1996, the current variable rates
on all interest rate cap agreements exceeded the specified cap rates.
At December 31, 1996 and 1995, the Company's interest rate swap
agreements had maturities ranging from October 1997 to December 2000 and from
December 1996 to December 2000, respectively. At December 31, 1996 and 1995,
the Company's interest rate cap agreements had maturities ranging from February
1997 to September 1997.
ASSET QUALITY
The table below sets forth owned credit card loan delinquency information with
supplemental total loan information regarding the Company's credit card loan
portfolio. The amount of non-accruing or restructured loans for the periods
presented are insignificant. The Company has no foreign loans. Owned credit
card loans increased slightly by $16.7 million for 1996 from $1.6 billion at
December 31, 1995. The Company's loan delinquencies tend to fluctuate based
upon the maturity of the credit card portfolio, changes in economic conditions
that vary throughout the year due to seasonal consumer spending and payment
patterns, and due to levels of accounts securitized. The Company believes the
increase in loan delinquency rates experienced throughout the industry is
reflected in the increase in the Company's loan delinquency rates in 1996.
SUMMARY OF LOAN LOSS EXPERIENCE
The Company's policy is to establish an allowance for loan losses that reflects
its estimate of losses on existing credit card loans that may become
uncollectible. The allowance for loan losses is regularly evaluated by
management for adequacy on a portfolio by portfolio basis. For a description of
the factors considered when determining the allowance for loan losses and the
accrued recourse obligation, see Note 2 ("Summary of Significant Accounting
Policies") to the consolidated financial statements.
The table below presents certain information regarding the Company's
allowance for loan losses with supplemental total loan information. For a table
that summarizes the activities affecting the allowance for loan losses and the
accrued recourse obligation, see Note 3 ("Credit Card Loans, Allowance for Loan
Losses and Accrued Recourse Obligation") to the consolidated financial
statements.
The provision for loan losses for 1996 increased to $137.1 million due
primarily to an increase in the level of net charge-offs and an increase in the
owned allowance for loan losses rate from 3.9% at December 31, 1995 to 5.4% at
December 31, 1996. Net charge-offs for 1996 increased $65.5 million to $116.4
million primarily as a result of an increase in the rate of net charge-offs,
coupled with increased charge-offs associated with growth in average credit
card loans. The increase in the allowance rate, which contributed to an
increase in the allowance for loan losses balance of $24.7 million from
December 31, 1995 to December 31, 1996, was in response to a continued high
rate of delinquencies and bankruptcies.
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OWNED TOTAL LOANS* Owned Total Loans* Owned Total Loans*
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average credit card loans $1,512,986 $2,095,026 $1,152,309 $1,678,127 $282,846 $ 712,846
Period-end credit card loans $1,637,507 $2,217,507 $1,620,833 $2,229,992 $679,857 $1,109,857
Net charge-offs as a % of
average credit card loans 7.8% 7.7% 4.4% 5.0% 2.1% 4.0%
Allowance for loan losses as a %
of period-end credit card loans 5.4% 5.0% 3.9% 4.1% 3.5% 4.1%
Accruing loans contractually past due
as to principal and interest payments
30-89 days $ 81,354 $ 108,306 $ 68,173 $ 95,681 $16,642 $ 33,447
5.0% 4.9% 4.2% 4.3% 2.4% 3.0%
90-179 days $ 68,035 $ 86,238 $ 43,207 $ 59,679 $ 8,293 $ 17,029
4.2% 3.9% 2.7% 2.7% 1.2% 1.5%
</TABLE>
*Total loans represents both owned and securitized credit card loans.
21
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 December 31, 1996, CDs outstanding were $454.4 million, of which
institutional CDs represented $213.2 million and retail CDs represented $241.2
million.
HSB maintains a loan securitization program with Receivables Capital
Corporation ("RCC"), and at December 31, 1996, outstanding loans sold under
such program were $280.0 million. HSB also maintains a loan securitization
program with Barton Capital Corporation ("BCC"), and at December 31, 1996,
outstanding loans sold under such program were $300.0 million. At December 31,
1996, $580.0 million or 26.2% of the HSB Program loans had been sold through
loan securitizations.
The RCC and BCC loan securitization programs are scheduled to expire in
April 1997. The Company expects to renew or replace these facilities on or
prior to the expiration dates. If these programs are not extended on or prior
to their expiration dates, collections allocable to RCC and BCC following the
expiration dates of the programs will be paid to RCC or to BCC, as applicable,
and the interests of RCC and of BCC in the applicable securitization pool will
gradually decline to zero. Any receivables originated after the applicable
program's expiration date would remain on the Company's consolidated balance
sheet.
The Company has an Amended and Restated Borrowing Agreement (the
"Borrowing 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 financing to the Company. As of January 31,
1997 the maximum amount available under the Borrowing Agreement, which expires
on April 17, 1997, was increased from $1.0 billion to $1.25 billion. At January
31, 1997, the Company had $917.1 million outstanding under the Borrowing
Agreement. Under the Facility Fee Agreement, the Company has agreed to pay
certain monthly facility fees in connection with its financing arrangements
with DWD. An Amended and Restated Bridge Agreement, under which DWD provided
loans to the Company of up to $250 million, expired on January 31, 1997.
The Company expects to renew or replace the Financing Agreements prior
to the expiration dates of such Financing 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.
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.
22
<PAGE>
SPS TRANSACTION SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cash flows from operating activities increased to $195.2 million in
1996 from $88.2 million in 1995 and $57.0 million in 1994.
Cash flows from investing activities consist primarily of the growth in
existing credit card programs, the acquisition of new private label credit card
portfolios, the sale of credit card loans through securitizations and
short-term investments. Such investing activities resulted in net uses of cash
in 1996, 1995 and 1994 of $140.7 million, $976.0 million and $291.6 million,
respectively. The net principal disbursed on credit card loans, representing
the difference between sales made using the cards and payments received from
cardholders, used cash of $273.8 million, $771.1 million and $194.4 million for
1996, 1995 and 1994, respectively. In April 1996, the sale of a consumer credit
card portfolio resulted in net proceeds of cash of $138.9 million. In December
1995, the Company securitized additional credit card loans resulting in net
proceeds of cash of $150.0 million. In March 1995, the Company purchased the
Radio Shack and Tandy Name Brand credit card portfolios from Tandy Corporation,
resulting in net uses of cash of $296.6 million and a noncash short-term note,
net of imputed interest, of $48.3 million. In December 1994, the Company
purchased the Incredible Universe and Computer City credit card portfolios from
Tandy Corporation, resulting in net uses of cash of $85.8 million and a noncash
short-term note, net of imputed interest, of $175.2 million. The expansion of
facilities and purchase of equipment used cash of $11.5 million, $11.1 million
and $6.1 million in 1996, 1995 and 1994, respectively.
Cash flows from financing activities consist primarily of borrowings
and deposits. Such financing activities resulted in net uses of cash of
$48.2 million in 1996 and net proceeds of cash of $893.5 million and $230.7
million in 1995 and 1994, respectively. Amounts due to affiliated companies
resulted in net uses of cash of $128.4 million and net proceeds of cash of
$945.0 million and $97.7 million in 1995 and 1994, respectively.
Interest-bearing deposits resulted in net proceeds of cash of $82.4 million,
$171.8 million and $130.2 million in 1996, 1995 and 1994, respectively. The
repayment of short-term notes payable with Tandy Corporation resulted in net
uses of cash of $2.1 million and $227.0 million in 1996 and 1995, respectively.
At December 31, 1996, 1995 and 1994, the Company had cash equivalents of $15.2
million, $8.9 million and $3.2 million, respectively.
SEASONAL FACTORS
The Company's results of operations are impacted by seasonal patterns
of retail purchasing, but because certain seasonal trends are typically
offsetting, their impact does not significantly affect the Company's overall
results of operations. The number of transactions processed and the level of
credit card loans outstanding typically grows during the fourth quarter
followed by a flattening or decline in the subsequent first quarter. This
seasonality results mainly from higher levels of retail sales in the fourth
quarter than in the first quarter. During the fourth quarter, merchant discount
revenue and revenues derived from transaction processing services increase, but
are accompanied by increases in expenses associated with the growth of credit
card receivables. These increased expenses typically include the provision for
loan losses, financing expenses, salaries and employee benefits expenses,
processing and service expenses and various other expenses. Correspondingly, in
the first quarter, merchant discount revenue, revenues derived from transaction
processing services and provision for loan loss expense typically decrease, but
generally are accompanied by increased finance charge revenue related to the
preceding quarter's credit card loan growth.
23
<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
In thousands, except share data
<TABLE>
<CAPTION>
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,205 $ 8,879
Cash and due from banks - restricted - 29,000
Investments held to maturity - at amortized cost 41,675 47,430
Credit card loans 1,637,507 1,620,833
Allowance for loan losses (88,397) (63,704)
- ------------------------------------------------------------------------------------------------------------
Credit card loans, net 1,549,110 1,557,129
Accrued interest receivable 21,141 23,828
Accounts receivable 42,202 28,683
Due from affiliated companies 9,900 4,776
Premises and equipment, net 25,294 19,800
Deferred income taxes 38,266 26,276
Prepaid expenses and other assets 17,992 31,806
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,760,785 $1,777,607
============================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $ 9,012 $ 10,270
Interest-bearing 454,423 372,073
- ------------------------------------------------------------------------------------------------------------
Total deposits 463,435 382,343
Accounts payable, accrued expenses and other 50,019 44,788
Income taxes payable 17,756 11,232
Due to affiliated companies 982,547 1,110,811
Notes payable - 2,095
Accrued recourse obligation 22,636 27,128
- ------------------------------------------------------------------------------------------------------------
Total liabilities 1,536,393 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; 27,242,207 and 27,146,515 shares issued;
27,187,462 and 27,073,877 shares outstanding at
December 31, 1996 and 1995, respectively 272 271
Capital in excess of par value 81,096 79,396
Retained earnings 144,345 121,099
Common stock held in treasury, at cost, $.01 par value, 54,745 and
72,638 shares at December 31, 1996 and 1995, respectively (1,312) (1,957)
Stock compensation plan 453 501
Employee stock benefit trust (413) -
Unearned stock compensation (49) (100)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 224,392 199,210
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,760,785 1,777,607
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share data
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Processing and service revenues $276,745 $232,120 $203,044
Merchant discount revenue 34,153 49,550 17,432
- -----------------------------------------------------------------------------------------------
310,898 281,670 220,476
Interest revenue 226,266 162,205 48,931
Interest expense 79,129 65,361 10,204
- -----------------------------------------------------------------------------------------------
Net interest income 147,137 96,844 38,727
Provision for loan losses 137,115 66,522 13,401
- -----------------------------------------------------------------------------------------------
Net credit income 10,022 30,322 25,326
- -----------------------------------------------------------------------------------------------
Net operating revenues 320,920 311,992 245,802
Salaries and employee benefits 97,117 87,730 72,937
Processing and service expenses 108,544 90,535 65,522
Occupancy expense 9,438 7,819 8,381
Other expenses 68,328 55,799 36,601
- -----------------------------------------------------------------------------------------------
Total operating expenses 283,427 241,883 183,441
Income before income taxes 37,493 70,109 62,361
Income tax expense 14,247 26,636 24,626
- -----------------------------------------------------------------------------------------------
Net income $ 23,246 $ 43,473 $ 37,735
===============================================================================================
Net income per common share $ 0.86 $ 1.60 $ 1.40
===============================================================================================
Weighted average common shares outstanding 27,171 27,093 27,032
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $23,246 $43,473 $37,735
Adjustments to reconcile net income to net cash flows
from operating activities
Depreciation and amortization 14,468 11,751 2,518
Imputed interest on notes payable 15 5,605 -
Provision for loan losses 137,115 66,522 13,401
Deferred income taxes (11,990) (4,282) (4,967)
(Increase) decrease in operating assets
Cash and due from banks - restricted 29,000 (29,000) -
Amounts due from affiliated companies (5,124) (256) (322)
Accrued interest receivable and accounts receivable (10,832) (16,961) (5,864)
Prepaid expenses and other assets 11,234 (6,753) (1,268)
Increase (decrease) in operating liabilities
Accounts payable, accrued expenses and other 5,369 3,513 6,427
Income taxes payable 7,055 3,748 1,147
Due to affiliated companies 142 4,619 8,095
Accrued recourse obligation (4,492) 6,199 130
- ----------------------------------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 195,206 88,178 57,032
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments held to maturity - purchases (276,445) (123,687) (44,673)
Investments held to maturity - maturities 282,200 86,729 42,080
Net principal disbursed on credit card loans (273,823) (771,057) (194,429)
Purchase of credit card portfolios - (306,903) (85,764)
Proceeds from sale of credit card loans 138,861 150,000 -
Investment in joint venture - - (2,720)
Purchases of premises and equipment, net (11,516) (11,105) (6,062)
- ----------------------------------------------------------------------------------------------------------------
Net cash from investing activities (140,723) (976,023) (291,568)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in noninterest-bearing deposits (1,258) 5,011 2,456
Net increase in interest-bearing deposits 82,350 171,795 130,229
Due to affiliated companies (128,406) 945,011 97,682
Repayment of notes payable (2,110) (227,021) -
Proceeds from exercise of stock options 622 665 380
Change in treasury stock, net 645 (1,957) -
- ----------------------------------------------------------------------------------------------------------------
Net cash from financing activities (48,157) 893,504 230,747
- ----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 6,326 5,659 (3,789)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 8,879 3,220 7,009
- ----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, END OF YEAR $15,205 $8,879 $3,220
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $79,627 $59,353 $9,850
Cash paid for income taxes 19,231 27,192 28,446
================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Short-term notes, net issued to purchase credit card portfolios $ - $48,333 $175,178
================================================================================================================
See notes to consolidated financial statements.
</TABLE>
26
<PAGE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
In thousands
<TABLE>
<CAPTION>
Capital in Total
Preferred Common Excess of Retained Treasury Stockholders'
Stock Stock Par Value Earnings Stock Other Equity
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $ - $270 $77,355 $ 39,891 $ - $ (935) $116,581
Net income 37,735 37,735
Exercise of stock options 1 379 380
Employee Stock Purchase Plan 73 73
Minimum pension liability
adjustment 935 935
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 - 271 77,807 77,626 - - 155,704
- ---------------------------------------------------------------------------------------------------------------------
Net income 43,473 43,473
Exercise of stock options 1,197 1,197
Employee Stock Purchase Plan 392 392
Stock compensation plan 501 501
Unearned stock compensation,
net of amortization (100) (100)
Purchase of treasury stock, at cost (1,957) (1,957)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 - 271 79,396 121,099 (1,957) 401 199,210
- ---------------------------------------------------------------------------------------------------------------------
Net income 23,246 23,246
Exercise of stock options 1 1,152 1,153
Employee Stock Purchase Plan 428 428
Employee benefit plan 120 732 852
Stock compensation plan 413 (48) 365
Employee stock benefit trust (413) (413)
Unearned stock compensation,
net of amortization 51 51
Purchase of treasury stock, at cost (500) (500)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ - $272 $81,096 $144,345 $(1,312) $ (9) $224,392
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SPS Transaction
Services, Inc. (the "Company") and its subsidiaries. The Company is a 73.6%
majority owned subsidiary of NOVUS Credit Services Inc. ("NCSI"), which in turn
is a wholly owned, direct subsidiary of Dean Witter, Discover & Co. ("DWD").
On February 5, 1997, DWD and Morgan Stanley Group Inc. announced a
definitive agreement to merge. The new company will be named Morgan Stanley,
Dean Witter, Discover & Co. The transaction, which is expected to be completed
by mid-1997, is subject to certain regulatory approvals and the approval of
shareholders of both companies.
The Company provides a range of technology outsourcing services
including the processing of credit card transactions, consumer private label
credit card programs, commercial accounts processing programs; 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 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.
All material intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior year amounts to conform to
current presentation.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Due From Banks - Cash and due from banks consists of cash and highly
liquid investments not held for resale with maturities, when purchased, of
three months or less.
Cash and Due From Banks - Restricted - Cash and due from banks - restricted
represents cash and invested cash derived from collections of certain
securitized receivables. Such amounts, which include the investors' and a
portion of the Company's share of cash collections, are deposited with a third
party and are paid out in the month subsequent to collection.
Investments - Investments held to maturity includes those investments that the
Company has the intent and ability to hold to maturity. These investments
consisted of U.S. Treasury securities that are reported at amortized cost,
which approximates fair market value. The fair market value of investments held
to maturity was $41.7 million and $47.4 million at December 31, 1996 and 1995,
respectively. All such investments at December 31, 1996 had maturities within
one year.
Credit Card Loans - Loans to cardholders are reported at their principal
amounts outstanding. Interest on loans is credited to income as earned.
Interest and fees are accrued on loans until the date of charge-off, which
occurs at the end of the month during which an account becomes 180 days past
due, except in the case of cardholder bankruptcies, where loans are charged off
upon receipt and processing of written notification, and in fraudulent
transactions, where loans are charged off when identified. The interest portion
of charged off loans is written off against interest revenue, while the fee
portion of charged off loans (late fee and credit insurance fee) is written off
against processing and services revenues.
Periodically, the Company purchases credit card loans from third parties.
These loans are recorded at their principal amounts outstanding less any
allowance for loan losses. Any difference between this amount and the fair
value of credit card loans acquired is recorded as a discount or premium and
amortized to interest revenue over the estimated life of the acquired loans
using a method that approximates the interest method. Any excess of
consideration given over the fair value of credit card loans acquired is
recorded as purchased credit card rights. Purchased credit card rights
represent an intangible asset that is amortized on a straight-line basis over
the expected life of the cardholder relationship.
Securitization of Credit Card Loans - The Company periodically sells credit
card loans through asset securitizations and continues to service such loans.
The revenues derived from servicing securitized loans are recorded in the
consolidated statements of income as processing and service revenues over the
term of the securitized loans rather than at the time the loans are sold. The
effects of recording these revenues over the term of the securitized loans
rather than at the time the loans were sold have not historically been
material.
Allowances for Loan Losses - The allowance for loan losses is a
significant estimate that is regularly evaluated by management
for adequacy on a portfolio by portfolio basis and is established through a
charge to the provision for loan losses. 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 borrowers' 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.
28
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In 1996, the
Company revised its estimate of the allowance for losses for loans intended to
be securitized. This revision 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 Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," by the Financial Accounting Standards Board
("FASB"), which eliminated the uncertainty surrounding the appropriate
accounting treatment for asset securitization transactions. The change had no
impact on the Company in 1996 as no loans were identified to be securitized.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided principally by the straight-line method over the estimated useful
lives of the related assets.
Income Taxes - Income tax expense is provided for using the asset and liability
method, under which deferred tax assets and liabilities are determined based
upon the temporary differences between the financial statement and income tax
bases of assets and liabilities, using currently enacted tax rates.
Processing and Service Revenues - Processing and service revenues include
revenues from transaction processing services, managed and HSB programs, and
servicing of securitized loans. The Company's revenues from transaction
processing services and managed programs are recognized when the service is
performed. Revenues from HSB programs, consisting primarily of late fees
assessed to cardholders, are recognized when earned. Revenues
for servicing securitized loans are recognized as collected.
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 may charge a higher merchant discount rate than where client marketing
strategies promote shorter-term interest-deferred programs. 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) is
being 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. This change in accounting estimate resulted in the net
deferral of $9.3 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.
Interest Rate Hedges - The Company enters into various interest rate exchange
contracts, which consist of interest rate swaps, caps and cost of funds
agreements, primarily as hedges against specific liabilities in funding the
Company's credit card loan portfolio. For contracts that are designated as
hedges of the Company's liabilities, gains and losses are deferred and
recognized as adjustments to interest expense over the remaining life of the
underlying liabilities. For contracts that are hedges of asset securitizations,
gains and losses are recognized as adjustments to processing and service
revenues.
Employee Stock Plans - Employee stock plans are accounted for under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). In accordance with the provisions of APB
No. 25, no charge to earnings is recorded for those stock-based benefits issued
to employees which are deemed "non-compensatory".
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which became effective January 1, 1996 and requires the
determination of the fair value, as defined, of stock options granted. The
Company has elected, as permitted, to provide pro forma disclosure of the
effect of SFAS No. 123 on earnings in Note 8 to the consolidated financial
statements.
29
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Accounting Pronouncements - Effective January 1, 1996, the Company
adopted 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 FASB has issued SFAS No. 125, effective for transfers of financial
assets made after December 31, 1996, except for transfers of certain financial
assets for which the effective date has been delayed by one year. SFAS No. 125
provides financial reporting standards for the derecognition and recognition of
financial assets, including the distinction between transfers of financial
assets which should be recorded as sales and those which should be recorded as
secured borrowings. SFAS No. 125 supersedes and incorporates the essential
provisions of SFAS No. 122, "Accounting for Mortgage Servicing Rights, an
amendment of SFAS No. 65." The Company believes that the effect of the adoption
of SFAS No. 125 will not be material to the Company's financial position or
results of operations.
NOTE 3 CREDIT CARD LOANS, ALLOWANCE FOR
LOAN LOSSES AND ACCRUED RECOURSE OBLIGATION
The changes in the allowance for loan losses were as follows:
<TABLE>
<S> <C> <C> <C>
--------------------------------------------------
In thousands, Year ended December 31, 1996 1995 1994
------------------------------------------------------------------------
Balance, beginning of year $63,704 $24,090 $12,183
Provision for loan losses 137,115 66,522 13,401
Purchase of credit card portfolios - 30,594 4,326
Charge-offs (138,181) (67,754) (10,757)
Recoveries 21,759 16,801 4,937
------------------------------------------------------------------------
Net charge-offs (116,422) (50,953) (5,820)
------------------------------------------------------------------------
Transfers from (to) accrued
recourse obligation 4,000 (6,549) -
------------------------------------------------------------------------
Balance, end of year $88,397 $63,704 $24,090
------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, $527.9 million and $612.4 million,
respectively, of the Company's credit card loans had minimum contractual
maturities of less than one year. Because of the uncertainty regarding credit
card loan repayment patterns, which historically have been higher than
contractually required minimum payments, and variable rate loan pricing
utilized by the Company, this amount may not necessarily be indicative of the
Company's credit card loan repricing schedule.
At December 31, 1996 and 1995, the Company had commitments to extend
credit in the amount of $16,926.0 million and $16,995.1 million, respectively.
Commitments to extend credit arise from agreements to extend to customers
unused lines of credit on certain credit cards issued by the Company. These
commitments, substantially all of which the Company can terminate at any time
and which do not necessarily represent future cash requirements, are
periodically reviewed based on account usage and customer creditworthiness.
Credit card loans were reduced by $580.0 million and $609.2 million at
December 31, 1996 and 1995, respectively, due to the sale with limited recourse
of such loans through securitization transactions. The accrued recourse
obligation related to securitized loans was $22.6 million and $27.1 million at
December 31, 1996 and 1995, respectively.
NOTE 4 TRANSACTIONS WITH AFFILIATED COMPANIES
The Company is affiliated with several entities through common direct or
indirect ownership by NCSI and DWD. Various transactions are entered into with
these affiliated companies, primarily resulting from intercompany loans,
deposits, advances and the provisions of required services on behalf of, to and
by the affiliates. Such services include, but are not limited to, transaction,
collection and disbursement processing. In addition, affiliated companies
allocate certain premises and other operating expenses based on defined
formulas. In the opinion of management, these expense allocations are
reasonable and no less favorable to the Company than the cost that would have
been incurred if the Company had operated as an unaffiliated entity.
Transactions with affiliated companies included in the consolidated
statements of income were as follows:
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------
In thousands, Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Processing and service revenues $17,297 $14,286 $12,293
Interest expense 66,771 51,411 7,395
Occupancy expense 3,224 3,127 2,999
Other expenses 11,029 11,215 10,601
- ----------------------------------------------------------------------------------------------
Due from affiliated companies was comprised of the
following:
- -----------------------------------------------------------------------------------
In thousands, December 31, 1996 1995
- ----------------------------------------------------------------------------------------------
Trade receivables
NOVUS Services, Inc. $2,156 $1,710
MountainWest Financial 7,744 2,359
NOVUS Credit Services Inc. - 707
- ----------------------------------------------------------------------------------------------
Due from affiliated companies $9,900 $4,776
==============================================================================================
30
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to affiliated companies was comprised of the following:
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
In thousands, December 31, 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C>
Amounts due for services
DWD $ 1,363 $ 465
NOVUS Credit Services Inc. 9,145 8,861
Prime Option Services 43 244
---------------------------------------------------------------------------------
$ 10,551 $ 9,570
=================================================================================
Borrowings due to DWD
Borrowings under facility,
due on demand $967,584 $1,095,841
Accrued interest payable
on DWD borrowings 4,412 5,400
---------------------------------------------------------------------------------
$971,996 $1,101,241
=================================================================================
</TABLE>
The weighted average annual interest rate on borrowings due to DWD,
excluding the effects of interest rate exchange contracts, was 5.6% and 6.3%
for 1996 and 1995, respectively.
At December 31, 1996 and 1995, borrowings due to DWD were subject to
interest rate exchange contracts with notional amounts of $151.7 million and
$351.1 million, respectively. Such interest rate exchange contracts consisted
of interest rate swaps and cost of funds agreements, which primarily converted
DWD borrowings to fixed rates. At December 31, 1996 and 1995, interest rate cap
agreements with notional amounts of $30 million for both years set weighted
average rate limits of 3.5% for both years on DWD borrowings. The weighted
average interest rates on borrowings due to DWD, excluding the effects of
interest rate exchange contracts, at December 31, 1996 and 1995 were 5.6% and
5.4%, respectively. The weighted average interest rates on borrowings due to
DWD, including the effects of interest rate exchange contracts, at
December 31, 1996 and 1995 were 5.6% and 5.5%, respectively.
NOTE 5 DEPOSITS
A summary of deposits by type is as follows:
<TABLE>
<S> <C> <C>
------------------------------------------------
In thousands, December 31, 1996 1995
------------------------------------------------
Noninterest-bearing deposits $ 9,012 $ 10,270
Certificates of deposit 454,423 372,073
------------------------------------------------
Total deposits $463,435 $382,343
================================================
</TABLE>
Certificates of deposit include deposits sold through Dean Witter Reynolds
Inc., an affiliate, of $241.2 million and $191.6 million at December 31, 1996
and 1995, respectively.
The weighted average annual interest rates on interest-bearing deposits,
excluding the effects of interest rate exchange contracts, for 1996 and 1995
were 6.3% and 6.5%, respectively. The weighted average interest rates on
interest- bearing deposits, excluding the effects of interest rate exchange
contracts, at December 31, 1996 and 1995 were 6.1% and 6.2%, respectively.
The weighted average interest rates on interest-bearing deposits,
including the effects of interest rate exchange contracts, at December 31, 1996
and 1995 were 6.1% and 6.2%, respectively.
Certificates of deposit maturing over the next five years were as follows:
<TABLE>
<S> <C>
In thousands
----------------------------------------------
Certificates of deposit maturing in:
1997 $238,623
1998 52,700
1999 47,100
2000 38,200
2001 23,200
----------------------------------------------
</TABLE>
NOTE 6 NOTES PAYABLE
In February 1996, the Company made the final monthly installment on a note
payable to Tandy Corporation ("Tandy"). This note related to the Company's
purchase during the first quarter of 1995 of the Radio Shack and Tandy Name
Brand credit card portfolios. The note payable had an imputed annual interest
rate of 6.5%.
NOTE 7 RETIREMENT BENEFITS PENSION PLAN
Substantially all employees of the Company are eligible to par-
ticipate, after meeting certain age and service requirements, in a
non-contributory defined benefit pension plan established for employees of NCSI
(the "Plan"). Pension benefits are based on length of service and average
annual compensation. The Company's policy is to contribute annually to the Plan
an amount at or above that which is required under the Employee Retirement
Income Security Act. In 1996, 1995 and 1994, Company contributions to the Plan
were $3.3 million, $2.7 million and $2.0 million, respectively.
Pension expense consisted of the following:
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------------
In thousands, Year ended December 31, 1996 1995 1994
---------------------------------------------------------------
Service cost $ 2,253 $ 1,355 $1,505
Interest on projected
benefit obligation 1,322 887 724
Actual return on plan assets (1,754) (1,383) (153)
Net amortization and deferral 1,143 868 (32)
---------------------------------------------------------------
Total pension cost $ 2,964 $ 1,727 $2,044
===============================================================
</TABLE>
The expected long-term rate of return on Plan assets was 9.0% in 1996,
1995 and 1994.
31
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The funded status of the Plan was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
In thousands, December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $10,900 $ 9,266
Accumulated benefit obligation $12,419 $10,963
======================================================================================================
Projected benefit obligation $20,214 $18,241
Plan assets at fair value 14,527 10,308
- ------------------------------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation 5,687 7,933
Unrecognized transitional obligation (57) (62)
Unrecognized net loss (4,766) (6,742)
Unrecognized prior service cost (1,162) (1,241)
Adjustment required to recognize
minimum liability - 767
- ------------------------------------------------------------------------------------------------------
Accrued pension (asset) liability $ (298) $ 655
======================================================================================================
</TABLE>
Assumptions used in calculating the projected benefit obligation were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.50% 7.25% 8.50%
Rate of increase in
compensation levels 5.00% 5.00% 5.00%
- ------------------------------------------------------------------------------------------------------
</TABLE>
The Company also has a non-qualified pension plan established for certain
employees of NCSI. The amounts charged to expense under the plan were $103,000,
$265,000 and $424,000 for 1996, 1995 and 1994, respectively.
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS The Company has unfunded
postretirement plans that provide medical and life insurance for eligible
retirees, employees and dependents. At December 31, 1996 and 1995 the Company's
obligation for these benefits was $789,000 and $847,000, respectively.
OTHER PLANS The Company sponsors a qualified 401(k) plan (the "START Plan").
Under this plan, the Company matches a certain percentage of employees' annual
pretax contributions based upon the level of income achieved by the Company.
The Company's matching contribution at various levels of income is set during
the commencement of the plan year. The plan uses the Company's contributions to
purchase the Company's common stock. The Company's contributions to the START
Plan was $0.5 million in 1996 and $1.1 million in both 1995 and 1994.
Employees of the Company are eligible for certain postemployment benefits.
These benefits were not material to the Company's consolidated results of
operations or financial position.
NOTE 8 STOCK PLANS
The Company maintains equity-based incentive plans under which various types of
stock awards are granted to officers, directors and key employees of the
Company.
EQUITY-BASED INCENTIVE AWARDS The Company is authorized to issue up to 3.2
million shares of its common stock in connection with awards under three stock
incentive plans. Stock option activity under these plans was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE Average Average
NUMBER OPTION Number Option Number Option
OF SHARES PRICE of Shares Price of Shares Price
- -------------------------------------------------------------------------------------------------------------
Options outstanding,
beginning of year 773,904 $19.45 849,484 $18.44 534,080 $ 8.41
Granted 346,188 29.45 17,000 30.33 380,352 31.42
Exercised (72,029) 8.64 (69,004) 9.64 (46,088) 8.24
Forfeited (26,496) 30.72 (23,576) 18.22 (18,860) 21.21
- -------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,021,567 23.31 773,904 19.45 849,484 18.44
=============================================================================================================
Options exercisable 559,684 17.84 374,525 15.90 169,156 8.93
=============================================================================================================
Options available for future grant 1,878,466 2,198,158 191,582
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31, 1996 OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------
AVERAGE
NUMBER REMAINING AVERAGE NUMBER AVERAGE
Range of Exercise Prices OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.00 to $26.00 339,462 5YEARS $ 8.88 332,990 $ 8.55
$26.50 to $30.00 354,144 9YEARS 29.49 6,944 28.59
$31.50 to $32.00 327,961 7YEARS 31.57 219,750 31.58
- ------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These plans are "non-compensatory" under APB No. 25, and, accordingly, no
charge to earnings has been recorded. On a pro forma basis, under SFAS No. 123,
if the fair value of options granted in 1996 and 1995 had been charged to
earnings, net income as reported would have been reduced by $1.0 million and
$81,000, respectively. Net income per common share as reported for 1996 would
have been reduced by $0.04 with no effect for 1995.
The fair value of each option grant is estimated on the date of grant
using a binomial option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected volatility of 35.51%,
risk-free interest rates of 5.88% and 7.51%; and expected lives of 6.1 and 6.4
years.
EMPLOYEE STOCK PURCHASE PLAN Under the Employee Stock Purchase Plan (the "Stock
Purchase Plan"), employees are authorized to purchase up to 150,000 shares of
the Company's common stock at not less than 85% of the fair market value at the
date of purchase. Shares of common stock to be delivered under the Stock
Purchase Plan are made available from authorized but unissued or treasury
shares of common stock. As of December 31, 1996 and 1995, employees of the
Company had purchased 23,663 and 18,577 shares of common stock under the plan,
respectively. The discount to fair market value was $76,000 for 1996 and
$69,000 for 1995. The plan is "non-compensatory" under APB No. 25, and,
accordingly, no charge to earnings has been recorded for the amount of the
discount to fair market value. On a pro forma basis, if the discount had been
charged to earnings, net income would have been reduced by $47,000 and $43,000
for 1996 and 1995, respectively, and there would have been no effect on net
income per common share for both years.
DEFERRED COMPENSATION AWARDS The Company is authorized to issue up to 75,000
shares of its common stock in connection with a deferred compensation plan
adopted in 1995 that provides for the deferral of a portion of certain
employees' compensation with payment made in the form of shares of the
Company's common stock. In 1996 and 1995, the Company recorded compensation
expense of $32,000 and $401,000 and unearned compensation of $8,000 and
$100,000 in connection with the award of approximately 4,500 and 18,000 shares
of common stock under the plan, respectively. These shares were issued in 1997
and 1996 and are held in custodial or trust accounts pending employee
eligibility to receive the shares. Unearned compensation is recognized over the
related plan vesting periods.
NOTE 9 INCOME TAXES
The following is a summary of the expense (benefit) for income taxes:
<TABLE>
<CAPTION>
------------------------------------------------------------
In thousands, Year ended December 31, 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense
Federal $ 23,567 $28,630 $26,478
State 2,670 2,288 3,115
--------------------------------------------------------------------------------
26,237 30,918 29,593
Deferred tax expense (benefit)
Federal (11,171) (4,875) (5,012)
State (819) 593 45
--------------------------------------------------------------------------------
(11,990) (4,282) (4,967)
--------------------------------------------------------------------------------
Total income tax expense $ 14,247 $26,636 $24,626
================================================================================
</TABLE>
The following deferred income taxes were recorded:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
In thousands, December 31, 1996 1995
------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Loan loss allowances $30,957 $20,636
Unearned income 3,289 61
Other deferred tax assets 5,933 5,856
------------------------------------------------------------------------------
Total deferred income tax assets 40,179 26,553
------------------------------------------------------------------------------
Deferred income tax liabilities (1,913) (277)
------------------------------------------------------------------------------
Total deferred income taxes $38,266 $26,276
==============================================================================
</TABLE>
A reconciliation from the statutory federal income tax rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.2 2.7 3.3
Other (0.2) 0.3 1.2
- ---------------------------------------------------------------
Effective income tax rate 38.0% 38.0% 39.5%
===============================================================
</TABLE>
NOTE 10 COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under noncancellable
operating leases. At December 31, 1996, future minimum rental commitments under
such leases, net of subleases, were as follows:
<TABLE>
<CAPTION>
In thousands
- --------------------------------
<S> <C>
1997 $ 4,201
1998 4,956
1999 5,018
2000 1,277
2001 454
2002 and thereafter 56
- --------------------------------
Total lease commitments $15,962
================================
</TABLE>
33
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total rent expense, net of sublease rental income, for property and
equipment and the portion thereof related to affiliated companies was as
follows:
<TABLE>
<CAPTION>
Portion
Total Rent Related to
In thousands, Year ended December 31, Expenses Affiliates
- -------------------------------------------------------------
<S> <C> <C>
1996 $6,860 $3,961
1995 6,938 3,797
1994 6,583 3,633
- -------------------------------------------------------------
</TABLE>
The Company has an Amended and Restated Borrowing Agreement (the
"Borrowing 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 financing to the Company. As of January 31,
1997 the maximum amount available under the Borrowing Agreement, which expires
on April 17, 1997, was increased from $1.0 billion to $1.25 billion. At January
31, 1997, the Company had $917.1 million outstanding under the Borrowing
Agreement. Under the Facility Fee Agreement, the Company has agreed to pay
certain monthly facility fees in connection with its financing arrangements
with DWD. An Amended and Restated Bridge Agreement, under which DWD provided
loans to the Company of up to $250 million, expired on January 31, 1997.
In the normal course of business, the Company is involved in routine
litigation incidental to the business. The consequences of these matters are
not presently determinable but, in the opinion of management after consultation
with counsel, the ultimate liability, if any, will not have a material adverse
effect on the consolidated results of operations or financial position of the
Company.
NOTE 11 FINANCIAL INSTRUMENTS
The Company uses interest rate exchange contracts, which consist of
interest rate swaps, caps and cost of funds agreements, as part of its interest
rate risk management program. This program is designed to reduce the volatility
of earnings resulting from changes in interest rates, including the interest
rate risk inherent in servicing fees on securitized loans received by the
Company from credit card loans sold through asset securitizations. This is
accomplished by minimizing the volatility of the spread between credit card
loan yields and funding costs. When asset yield and funding costs are not
anticipated to result in stable spreads, the Company utilizes interest rate
exchange contracts. These contracts are entered into as hedges of interest rate
risk, and gains or losses from these contracts generally offset
counterbalancing gains or losses on the hedged risk. The Company attempts to
match the recognition of the gains or losses in the periods in which the
hedged risk is realized. Thus, gains or losses may be recognized as part of
periodic settlements or, upon early termination of an interest rate exchange
contract, deferred and amortized over the remaining period of the hedged risk to
achieve the appropriate matching. Interest rate exchange contracts are subject
to credit risk for receivable or gain positions. The fair value of these
agreements is the estimated amount that the Company would receive (or pay) to
terminate the underlying contract, taking into account current market
conditions.
Interest rate swaps and cost of funds agreements are derivative financial
instruments that are settled by reference to the difference between the base
interest rates being exchanged, multiplied by the notional amount of the
contract. These agreements subject the Company to market risk in excess of
amounts recorded in the consolidated balance sheets in the event of unfavorable
market interest rate movements.
Interest rate exchange agreements outstanding were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------
In thousands, December 31, 1996 1995
- ---------------------------------------------------------------
NOTIONAL FAIR Notional Fair
AMOUNT VALUE Amount Value
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost of funds agreements $ 85,614 $1,434 $342,769 $1,668
Interest rate swaps 380,000 (824) 410,000 (5,366)
- ---------------------------------------------------------------
</TABLE>
Purchased interest rate cap agreements are derivative financial
instruments which, by their nature, have no off-balance sheet risk of loss due
to unfavorable interest rate movements. The Company pays an initial premium,
which is recorded on the consolidated balance sheet and amortized to interest
expense over the term of the cap agreement. Benefits received are recorded as a
reduction of interest expense. The Company had outstanding interest rate cap
agreements with notional amounts of $40.0 million at both December 31, 1996 and
1995. At December 31, 1996 and 1995, the current variable rates on all such
agreements exceeded the specified cap rates. The fair value of these
instruments was $300,000 and $922,000 at December 31, 1996 and 1995,
respectively.
In connection with certain asset securitizations, the Company has a
written interest rate cap agreement with a notional amount of $150.0 million.
Any settlement payments made under this agreement will generally be passed back
to the Company through an adjustment of servicing fees on securitized loans,
although this is subject to the risk of counterparty nonperformance. At
December 31, 1996 and 1995, the fair value of this agreement was zero and
$(2.5) million, respectively. No payments have been made by the Company under
this agreement, which expires in 1997.
34
<PAGE>
SPS TRANSACTION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 FINANCIAL INSTRUMENTS FAIR VALUE INFORMATION
The estimated fair value amounts of the Company's financial instruments have
been determined using available market information and appropriate valuation
methodologies. Considerable judgment is required to develop estimates of fair
value. Accordingly, the estimates are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
At December 31, 1996 and 1995, the carrying amounts of the Company's
financial assets and liabilities are reasonable estimates of fair value.
NOTE 13 CONCENTRATIONS OF CREDIT RISK
The Company's loan portfolio consists of credit card loans throughout the
United States. As a result of private label credit card programs with regional
merchants, the Company had credit card loans, including securitized loans,
aggregating approximately 12% and 10% in Texas and California, respectively, at
December 31, 1996. At December 31, 1995, the Company had credit card loans,
including securitized loans, aggregating approximately 12% in Texas.
At December 31, 1996, the Company's loan portfolio was concentrated among
three major private label credit card programs that comprised approximately
30%, 11% and 11% of the total loan portfolio, including securitized loans. At
December 31, 1995, the Company's loan portfolio was concentrated among three
major private label credit card programs that comprised approximately 26%, 11%
and 10% of the total loan portfolio, including securitized loans.
NOTE 14 CAPITAL REQUIREMENTS
HSB is subject to various regulatory capital requirements administered by the
Federal Deposit Insurance Corporation ("FDIC"). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by the FDIC that, if undertaken, could have a direct
material effect on HSB's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, HSB must
meet specific quantitative capital guidelines as calculated under regulatory
accounting practices. HSB's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require HSB to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996, that
HSB meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized HSB as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized HSB must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed HSB's category.
HSB's capital amounts and ratios as filed in the Consolidated Report of
Condition and Income as required by 12 U.S. Code section 324 are presented in
the table at the bottom of the page.
NOTE 15 MAJOR CUSTOMERS
A significant portion of the Company's revenues was derived from two major
customers. These major customers accounted for the following percentage of net
operating revenues for the years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------
1996 1995 1994
- --------------------------------------
<S> <C> <C> <C>
Tandy Corporation 24.0% 25.6% 15.4%
Goodyear Tire &
Rubber Company 12.0 12.3 16.7
- --------------------------------------
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------------------------
In thousands Amount Ratio Amount* Ratio* Amount* Ratio*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Total capital (to risk weighted assets) $166,723 10.63% $125,504 8.0% $156,880 10.0%
Tier I capital (to risk weighted assets) 146,241 9.32 62,752 4.0 94,128 6.0
Tier I capital (to average assets) 146,241 10.23 57,184 4.0 71,480 5.0
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1995
Total capital (to risk weighted assets) $155,011 10.17% $121,977 8.0% $152,471 10.0%
Tier I capital (to risk weighted assets) 135,374 8.88 60,988 4.0 91,483 6.0
Tier I capital (to average assets) 135,374 9.73 55,640 4.0 69,550 5.0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Amounts equal to or greater than amounts shown.
35
<PAGE>
SPS TRANSACTION SERVICES, INC.
AVERAGE BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
In thousands
- ---------------------------------------------------------------------------------------------
Year ended December 31, 1996
- ---------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE
AMOUNTS EARNED/PAID YIELD/RATE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning Assets
Due from banks $ 4,911 $ 255 5.2%
U.S. government securities 48,788 2,523 5.2%
State and political securities - - -
Credit card loans 1,512,986 223,488 14.8%
- ------------------------------------------------------------------------------
Total interest-earning assets 1,566,685 226,266 14.4%
- ------------------------------------------------------------------------------
Noninterest-earning assets
Cash and due from banks 13,989
Allowance for loan losses (63,630)
Due from affiliates 3,067
Other assets 98,792
- ----------------------------------------------------------------
TOTAL ASSETS $1,618,903
================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 420,973 $ 26,651 6.3%
Notes payable to affiliates and other borrowings 908,256 50,992 5.6%
Interest rate exchange contracts - 1,486 -
- ------------------------------------------------------------------------------
Total interest-bearing liabilities 1,329,229 79,129 6.0%
- ------------------------------------------------------------------------------
Noninterest-bearing liabilities 77,872
- ----------------------------------------------------------------
TOTAL LIABILITIES 1,407,101
- ----------------------------------------------------------------
STOCKHOLDERS' EQUITY 211,802
- ----------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,618,903
================================================================
NET INTEREST INCOME $147,137
==============================================================================
NET YIELD ON INTEREST-EARNING ASSETS 9.4%
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL TOTAL LOANS INFORMATION*
Credit card loans $2,095,026 $328,075 15.7%
Total interest-earning assets $2,148,725 $330,853 15.4%
Total interest-bearing liabilities $1,911,269 $112,250 5.9%
Net yield on interest-earning assets 10.2%
-------------------------------------------------------------------------------------------
</TABLE>
*Total loans represents both owned and securitized credit card loans.
36
<PAGE>
SPS TRANSACTION SERVICES, INC.
AVERAGE BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
In thousands
Year ended December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Amounts Earned/paid Yield/rate mounts Earned/Paid Yield/Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning Assets
Due from banks $27,853 $ 1,501 5.4% $ - $ - -
U.S. government securities 25,616 1,418 5.5% 6,971 289 4.1%
State and political securities - - - 3 - -
Credit card loans 1,152,309 159,286 13.8% 282,846 48,642 17.2%
- ---------------------------------------------------------------------------- ----------------------
Total interest-earning assets 1,205,778 162,205 13.5% 289,820 48,931 16.9%
- ---------------------------------------------------------------------------- ----------------------
Noninterest-earning assets
Cash and due from banks 10,922 8,846
Allowance for loan losses (48,145) (12,358)
Due from affiliates 2,221 2,186
Other assets 86,991 57,044
- --------------------------------------------------------------- --------
TOTAL ASSETS $1,257,767 $345,538
=============================================================== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 296,919 $19,322 6.5% $121,407 $6,231 5.1%
Notes payable to affiliates and other borrowings 710,442 45,334 6.4% 19,716 1,220 6.2%
Interest rate exchange contracts - 705 - - 2,753 -
- ---------------------------------------------------------------------------- ---------------------
Total interest-bearing liabilities 1,007,361 65,361 6.5% 141,123 10,204 7.2%
- ---------------------------------------------------------------------------- ---------------------
Noninterest-bearing liabilities 73,149 68,272
- --------------------------------------------------------------- --------
TOTAL LIABILITIES 1,080,510 209,395
- --------------------------------------------------------------- --------
STOCKHOLDERS' EQUITY 177,257 136,143
- --------------------------------------------------------------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,257,767 $345,538
=============================================================== ========
NET INTEREST INCOME $96,844 $38,727
============================================================================ =====================
NET YIELD ON INTEREST-EARNING ASSETS 8.0% 13.4%
- ---------------------------------------------------------------------------------------- ---------------------------------
SUPPLEMENTAL TOTAL LOANS INFORMATION*
Credit card loans $1,678,128 $266,870 15.9% $712,846 $132,574 18.6%
Total interest-earning assets $1,731,597 $269,789 15.6% $719,820 $132,863 18.5%
Total interest-bearing liabilities $1,533,180 $101,087 6.6% $571,123 $35,785 6.3%
Net yield on interest-earning assets 9.7% 13.5%
--------------------------------------------------------------------------- ---------------------------------
</TABLE>
<PAGE>
SPS TRANSACTION SERVICES, INC.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements and related footnotes in this annual
report were prepared by management, which is responsible for their integrity
and objectivity. The consolidated financial statements, which include amounts
that are based on management's estimates and judgments, were prepared in
accordance with generally accepted accounting principles. Management also
prepared the other information in this annual report and is responsible for its
accuracy and consistency with the consolidated financial statements.
Management maintains a system of internal controls that it believes
provides reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with management's
authorizations. Judgments are required to assess and balance the relative cost
and expected benefits of these internal controls. To assure the effectiveness
of internal controls, the organizational structure provides for defined lines of
responsibility and delegation of authority. The Company's formally stated and
communicated policies demand of employees high ethical standards in their
conduct of its business. These policies address, among other things, potential
conflicts of interest; compliance with all domestic and foreign laws, including
those related to financial disclosure; and the confidentiality of proprietary
information. Furthermore, the Company's comprehensive internal audit program
is designed for continual evaluation of the adequacy and effectiveness of its
internal controls and measures adherence to established policies and procedures.
The Company's consolidated financial statements have been audited by
Deloitte & Touche LLP, independent auditors, and their report follows. They
have advised the Company that their audits were conducted in accordance with
generally accepted auditing standards and considered the Company's internal
accounting controls in determining the auditing procedures they deem necessary
to express an opinion on the consolidated financial statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, reviews audit plans, internal controls, financial reports and
related matters with the Company's management, internal auditors and
independent auditors. The independent auditors and the internal auditors have
free access to the Committee, without the presence of management, to advise
the committee of any significant matters resulting from their audits of the
Company's financial statements and internal controls.
/s/ Robert L. Wieseneck
Robert L. Wieseneck
President, Chief Executive Officer and Director
Thomas C. Schneider
Chief Financial Officer and Director
INDEPENDENT AUDITORS' REPORT
STOCKHOLDERS AND BOARD OF DIRECTORS
SPS TRANSACTION SERVICES, INC.
We have audited the accompanying consolidated balance sheets of SPS Transaction
Services, Inc. (an indirect, majority-owned subsidiary of Dean Witter, Discover
& Co.) and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows, and changes in stockholders'
equity for each of the three years in the period ended December 31, 1996. These
financial statements, appearing on pages 24 through 35, are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SPS Transaction Services, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
February 18, 1997
Chicago, Illinois
38
<PAGE>
SPS TRANSACTION SERVICES, INC.
QUARTERLY INFORMATION (UNAUDITED)
In thousands, except per share data
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net operating revenues $89,011 $83,296 $79,572 $69,041 $69,571 $76,161 $80,691 $85,569
Total operating expenses 71,212 72,660 70,546 69,009 52,603 59,977 61,998 67,305
Net income 11,035 6,593 5,598 20 10,277 9,785 11,777 11,634
PER SHARE DATA
Net income per common share $ 0.41 $ 0.24 $ 0.21 $ 0.00 $ 0.38 $ 0.36 $ 0.43 $ 0.43
Average common shares
outstanding 27,117 27,183 27,194 27,190 27,078 27,114 27,105 27,077
STOCK PRICE DATA (1)
High $ 32.50 $ 30.75 $ 18.13 $ 18.75 $ 35.00 $ 35.50 $ 34.38 $ 30.13
Low 28.75 17.00 13.50 14.00 27.88 28.00 24.75 25.75
Close 30.88 18.00 15.88 15.25 35.00 34.63 28.88 29.63
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Stock price ranges are for transactions reported in The Wall Street
Journal for SPS Transaction Services, Inc. listed on the New York Stock
Exchange under the trading symbol PAY.
The number of registered common stockholders on February 5, 1997 was 3,790.
5-YEAR SELECTED FINANCIAL DATA
In thousands, except per share data
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net operating revenues $ 320,920 $ 311,992 $ 245,802 $205,494 $165,630
Total operating expenses 283,427 241,883 183,441 156,563 131,516
Pretax income 37,493 70,109 62,361 48,931 34,114
Income taxes 14,247 26,636 24,626 18,283 13,460
Net income 23,246 43,473 37,735 30,648 19,663
Net income per common share 0.86 1.60 1.40 1.14 0.76
BALANCE SHEET DATA
Credit card loans $1,637,507 $1,620,833 $ 679,857 $246,710 $203,073
Total assets 1,760,785 1,777,607 768,493 309,537 264,574
Deposits 463,435 382,343 205,537 72,852 4,156
Due to affiliates 982,547 1,110,811 161,573 55,869 120,515
Stockholders' equity 224,392 199,210 155,704 116,581 85,964
Return on average stockholders' equity 11.0% 24.5% 27.7% 30.2% 30.6%
SUPPLEMENTAL DATA
Total loans* $2,217,507 $2,229,992 $1,109,857 $676,710 $623,073
- ----------------------------------------------------------------------------------------------
</TABLE>
*Total loans represents both owned and securitized credit card loans.
39
<PAGE>
SPS TRANSACTION SERVICES, INC.
BOARD OF DIRECTORS
PHILIP J. PURCELL
Chairman of the Board
Chairman and Chief Executive Officer
Dean Witter, Discover & Co.
(financial services)
ROBERT L. WIESENECK
President and Chief Executive Officer
THOMAS R. BUTLER
President, NOVUS Services, Inc.
and Executive Vice President
Dean Witter, Discover & Co.
(financial services)
FRANK T. CARY
Chairman (retired)
International Business Machines Corporation
(computer systems and services)
MITCHELL M. MERIN
Executive Vice President and
Chief Administrative Officer
Dean Witter, Discover & Co.
(financial services)
CHARLES F. MORAN
Senior Vice President,
Administration (retired)
Sears, Roebuck and Co. (retailing)
THOMAS C. SCHNEIDER
Chief Financial Officer
Executive Vice President and
Chief Financial Officer
Dean Witter, Discover & Co.
(financial services)
DENNIE M. WELSH
General Manager,
IBM Global Services
International Business Machines Corporation
(computer systems and services)
OFFICERS
ROBERT W. ARCHER
Senior Vice President-Sales
RICHARD F. ATKINSON
Senior Vice President-Operations
RUSSELL J. BONAGUIDI
Vice President-Controller
THOMAS W. CLARKE
Vice President-Network
Services Operations
CHRISTINE A. EDWARDS
General Counsel and Secretary
ROBERT J. FERKENHOFF
Vice President and
Chief Information Officer
THOMAS M. GOLDSTEIN
Vice President-Finance
BIRENDRA KUMAR
Treasurer
LARRY H. MYATT
Vice President-Marketing
and Administration
RUTH M. O'BRIEN
Vice President-TeleServices
DAVID J. PETERSON
Vice President-Network Services
and Corporate Development
THOMAS C. SCHNEIDER
Chief Financial Officer
SERGE J. UCCETTA
Vice President-Card Services
MARY ANN WARNIMENT
Vice President-Electronic
Information Services
ROBERT L. WIESENECK
President and Chief Executive Officer
40
<PAGE>
CORPORATE INFORMATION
SPS TRANSACTION SERVICES, INC.
2500 Lake Cook Road
Riverwoods, Illinois 60015
OPERATIONS CENTERS
Gray, Tennessee
Sioux Falls, South Dakota
Layton, Utah
WORLD WIDE WEB ADDRESS
http://www.spspay.com
EMPLOYEES
3,881 full-time equivalent employees;
612 salaried and 3,269 hourly
FORM 10-K AND INVESTOR INFORMATION
Copies of the Annual Report on Form 10-K filed with the Securities and Exchange
Commission and other investor information may be obtained from the Company's
Investor Relations Department, (847) 405-3400.
ANNUAL MEETING
The 1997 annual meeting of stockholders will be held at 10:00 a.m. on Tuesday,
April 29 at the Chicago Botanic Garden, Education Center, 1000 Lake Cook Road,
Glencoe, Illinois.
COMMON STOCK
The Company's common stock is listed on the New York Stock Exchange under the
trading symbol "PAY."
STOCKHOLDER SERVICES
For stockholder address changes and inquiries regarding stockholder accounts
and stock transfers, contact the Stockholder Records/Transfer Agent:
First Chicago Trust Company
of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
(800) 446-2617
Those forwarding stock certificates are advised to use registered mail.
CAUTIONARY STATEMENT
Except for historical information, the statements made and information provided
in this report are forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. Risks and
uncertainties that could cause results to differ materially from those
forward-looking statements are contained in the company's SEC filings.
<PAGE>
SPS TRANSACTION SERVICES, INC.
2500 Lake Cook Road
Riverwoods, Illinois 60015
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 333-00626 (SPS Transaction Services, Inc. START Plan); No. 33-84112
(SPS Transaction Services, Inc. Employee Stock Purchase Plan); No. 33-
58924 (SPS Transaction Services, Inc. 1992 Employees Stock Plan and SPS
Transaction Services, Inc. Formula Plan for Non-Affiliate Directors);
No. 333-412 (SPS Transaction Services, Inc. Amended and Restated Tax
Deferred Equity Participation Plan); and No. 333-410 (SPS Transaction
Services, Inc. 1995 Omnibus Equity Plan) of SPS Transaction Services,
Inc. filed on Forms S-8 of our reports dated February 18, 1997,
included in and incorporated by reference in this Annual Report on Form
10-K of SPS Transaction Services, Inc. for the year ended December 31,
1996.
Deloitte & Touche LLP
Chicago, Illinois
March 25, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
Each of the undersigned being a director or officer, or both, of SPS
Transaction Services, Inc. (the "Company"), does hereby constitute and appoint
Robert L. Wieseneck, Christine A. Edwards, Larry H. Myatt, Michael J.
Hartigan, Jr. and Russell J. Bonaguidi, and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of the
Company), to sign the Company's Annual Report on Form 10-K for the Company's
fiscal year ended December 31, 1996 and to file same, together with all
exhibits thereto and other attachments and documents in connection therewith,
with the Securities and Exchange Commission, the New York Stock Exchange and
any other regulatory authority, and to sign, file or deliver such further
documents and to take such further actions in connection therewith as each of
the undersigned might or could do in person and as each such attorney and
agent deems necessary or desirable; and each of the undersigned does hereby
fully ratify and confirm all that said attorneys and agents, or any of them,
or the substitute of any of them, shall do or cause to be done by virtue
hereof.
Signature Capacity
Philip J. Purcell
-------------------------
Philip J. Purcell Chairman of the Board and Director
Robert L. Wieseneck
-------------------------
Robert L. Wieseneck President, Chief Executive Officer and
Director (Principal Executive Officer)
Russell J. Bonaguidi
-------------------------
Russell J. Bonaguidi Vice President and Controller
(Principal Accounting Officer)
Thomas R. Butler
-------------------------
Thomas R. Butler Director
Frank T. Cary
-------------------------
Frank T. Cary Director
Mitchell M. Merin
-------------------------
Mitchell M. Merin Director
Charles F. Moran
-------------------------
Charles F. Moran Director
Thomas C. Schneider
-------------------------
Thomas C. Schneider Chief Financial Officer and Director
(Principal Financial Officer)
Dennie M. Welsh
-------------------------
Dennie M. Welsh Director
S:\SPS_LAW\EMDUFFY\FORMS\POA.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,205
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 41,675
<INVESTMENTS-MARKET> 0
<LOANS> 1,637,507
<ALLOWANCE> (88,397)
<TOTAL-ASSETS> 1,760,785
<DEPOSITS> 463,435
<SHORT-TERM> 982,547
<LIABILITIES-OTHER> 90,411
<LONG-TERM> 0
0
0
<COMMON> 272
<OTHER-SE> 224,120
<TOTAL-LIABILITIES-AND-EQUITY> 1,760,785
<INTEREST-LOAN> 223,488
<INTEREST-INVEST> 2,523
<INTEREST-OTHER> 255
<INTEREST-TOTAL> 226,266
<INTEREST-DEPOSIT> 26,651
<INTEREST-EXPENSE> 79,129
<INTEREST-INCOME-NET> 147,137
<LOAN-LOSSES> 137,115
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 283,427
<INCOME-PRETAX> 37,493
<INCOME-PRE-EXTRAORDINARY> 37,493
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,246
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 68,035
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 63,704
<CHARGE-OFFS> 138,181
<RECOVERIES> 21,759
<ALLOWANCE-CLOSE> 88,397
<ALLOWANCE-DOMESTIC> 88,397
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 10.55
LEASE AGREEMENT
Lease Agreement, made as of January 1, 1997, between NOVUS Credit Services Inc.
("NCSI", formerly known as Sears Consumer Financial Corporation), a Delaware
Corporation having its principal office at 2500 Lake Cook Road, Riverwoods, IL
60015 (hereinafter referred to as "Landlord"), and SPS Payment Systems, Inc.
("SPS", formerly known as Sears Payment Systems, Inc.), a Delaware Corporation,
having its principal office at 2500 Lake Cook Road, Riverwoods, IL 60015
(hereinafter referred to as "Tenant") .
In consideration of the rents and covenants herein set forth, Landlord hereby
leases to Tenant, and Tenant hereby rents from Landlord premises containing
approximately 2,405 rentable square feet (RSF), (hereinafter called "Leased
Premises"), as shown crosshatched in red on Exhibit A, a copy of which is
attached hereto, located in the office building known as 2500 Lake Cook Road,
Riverwoods, IL 60015 (hereinafter called "Riverwoods Building"), which is
situated on that certain parcel of land (hereinafter called "Riverwoods
Building Area"). The Leased Premises contain the fixtures, improvements, and
certain other property now installed. This lease shall be for the term, upon
the rentals and subject to the terms and conditions set forth in this Lease
Agreement and Exhibits hereto.
Tenant and its agents, employees, and invitees have the nonexclusive right with
others designated by Landlord to the free use of the common areas in the
Riverwoods Building and of the land (hereinafter called "Land") on which the
Riverwoods Building is located for the common areas' intended and normal
purposes. Common areas include elevators, sidewalks, parking areas, cafeteria,
conference rooms (including without limitation conference rooms on the
conference level), driveways, hallways, stairways, public bathrooms, common
entrances, lobby, and other similar public areas and access ways. Landlord may
change common areas if the changes do not materially and unreasonably interfere
with Tenant's access to the premises or use of them.
Subject to Section VII, Tenant and its employees may have the nonexclusive
right with others designated by Landlord, at whatever fee Landlord deems
reasonable and charges any other NCSI subsidiary or affiliate that is
headquartered in the Riverwoods Building (hereinafter called "NCSI Company")
for the use of specially designated areas, not common areas, such as a fitness
center.
Section I
TERM
-----
The term of this Lease Agreement shall commence on January 1, 1997 (hereinafter
called the "Commencement Date") and shall expire thirty-seven (37) months
thereafter on January 31, 2000 (hereinafter called the "Term").
In the event there is mutual agreement between the Landlord and Tenant that the
Term be modified, the parties will amend the Term of this Lease Agreement.
<PAGE>
Section II
USE
---
The Leased Premises shall be used by Tenant solely for general office purposes
in keeping with the class and character of the Riverwoods Building and for no
other purposes. Landlord warrants that applicable laws, ordinances, and
regulations permit the Leased Premises to be used for general offices.
Section III
RENT
----
A. Base Rent.
---------
Tenant covenants and agrees to pay Landlord, as rental for the Leased
Premises, base rent (hereinafter called "Base Rent") in monthly
installments, payable in advance on the first business day of each month
for the Term as follows:
Monthly installments of Five Thousand Seven Hundred Thirty Nine and
93/100 Dollars ($5,739.93) or the lowest amount that shall be charged
or allocated per rentable square foot to any other NCSI company, times
the Leased Premises (as stated above) divided by 12, for the period
from January 1, 1997 through January 31, 1997; and
Monthly installments of the lesser of Six Thousand Ninety Four and
67/100 Dollars ($6,094.67) or the lowest amount that shall be charged
or allocated per rentable square foot to any other NCSI Company, times
the Leased Premises (as stated above) divided by 12, for the period
from February 1, 1997 through January 31, 1998; and
Monthly installments of the lesser of Seven Thousand Three Hundred
Fifty Seven and 30/100 Dollars ($7,357.30) or the lowest amount that
shall be charged or allocated per rentable square foot to any other
NCSI Company, times the Leased Premises (as stated above) divided by
12, for the period from February 1, 1998 through January 31, 1999; and
Monthly installments of the lesser of Seven Thousand Six Hundred Forty
Nine and 90/100 Dollars ($7,649.90) or the lowest amount that shall be
charged or allocated per rentable square foot to any other NCSI
Company, times the Leased Premises (as stated above) divided by 12, for
the period from February 1, 1999 through January 31, 2000.
Notwithstanding the above, Landlord shall determine, at its sole discretion
annually, its prior year's actual Base Rent expense for the Leased Premises.
Landlord shall invoice Tenant for the difference between the actual Base
Rent expense, as determined above, and the amount of Base Rent paid to
Landlord if the actual Base Rent is greater. Likewise, Landlord shall
credit Tenant for the difference between the Base Rent paid to Landlord and
the actual Base Rent expense, as determined above, if the Base Rent paid is
greater. However, in no case shall any adjustment for a prior year's actual
Base Rent expense cause Tenant's Base Rent for such prior year to exceed the
applicable amount in the Base Rent schedule set forth above. If Tenant is
invoiced for Base Rent, Tenant agrees to pay said invoice within thirty (30)
days from the date thereof. Landlord shall exercise good business judgment
to contain operating costs within the proposed Base Rent structure.
Additionally, Landlord shall, prior to January of each year of the Term,
advise Tenant of the projected monthly Base Rent for the next period; and
effective on February 1 and the first day of each month for the twelve (12)
months thereafter, Tenant shall pay Landlord said projected monthly Base
Rent.
<PAGE>
Included in Base Rent are Real Estate Taxes and Operating Expenses as
defined below:
1. "Real Estate Taxes" shall be deemed to be those real estate taxes
assessed against the land and/or the Riverwoods Building and the
Riverwoods Building Area. Real Estate Taxes shall exclude federal,
state or local income taxes; franchise, gift, transfer, excise, capital
stock, estate, succession, or inheritance taxes; penalties or interest
for late payment of such taxes.
2. "Operating Expenses" shall be the total expenses incurred by the
Landlord in connection with the operation, maintenance and repair of the
Riverwoods Building and the Riverwoods Building Area in accordance with
sound management and accounting principles generally accepted with
respect to the size and quality in the Chicago metropolitan area. These
Operating Expenses shall include but not be limited to: (i) all utility
charges; (ii) materials and supplies used in the operation and
maintenance of the building; (iii) wages and salaries paid to all
building service employees; (iv) all fees and contract costs paid to
independent contractors engaged in such operation, maintenance and the
cleaning of the Building; (v) "fringe benefits" for such employees in
(iii) above including all Social Security taxes, unemployment insurance
as well as all other types of applicable employee insurance, taxes, cost
for providing compensation for disability taxes, cost for any life
insurance, hospital and/or welfare plan or any federal and/or life
expenses included under the provisions of any collective bargaining
agreement covering employees of the Riverwoods Building; and (vi)
replacement of common area equipment furniture and fixtures rendered
unserviceable by normal wear and tear.
All Riverwoods Building and Riverwoods Building Area Real Estate Taxes and
Operating Expenses incurred by the Landlord in the operation of the
Riverwoods Building and the Riverwoods Building Area during the term of this
Lease Agreement shall be included in the Base Rent as set forth in this
Lease Agreement. An example of an expense not included in the Base Rent is
an expense incurred as a result of Tenant's business or operations. Such
expense includes but is not limited to Federal and/or State Clean Air Act
assessments. Any such assessment will be made based on Lessee's actual
performance under the terms of any such Federal or State Clean Air Act.
Insurance is not included in Operating Expenses and is charged directly to
Tenant by Risk Management.
B. Furniture Rent
--------------
Tenant covenants and agrees to pay Landlord as rental for the furniture in
the Leased Premises, (hereinafter called "Furniture Rent") in monthly
installments payable in advance on the first day of the month, to the same
payee and at the same place as the Base Rent according to the following
schedule:
The lesser of $4.10 Per Square Foot in monthly installments of Eight
Hundred Twenty One and 71/100 Dollars ($821.71) or the lowest amount that
shall be charged or allocated per rentable square foot to any other NCSI
Company, times the Leased Premises square footage divided by 12, for the
period from January 1, 1997 through January 31, 1998; and
The lowest amount that shall be charged or allocated per rentable square
foot to any other NCSI Company, times the Leased Premises square footage
divided by 12, for the period from February 1, 1998 through January 31,
1999; and
The lowest amount that shall be charged or allocated per rentable square
foot to any other NCSI Company, times the Leased Premises square footage
divided by 12, for the period from February 1, 1999 through January 31,
2000.
C. Base Rent and Furniture Rent are hereinafter referred to collectively
and/or alternatively as "Rent." Any items or services covered under the
Rent due under this Lease will not be included in the Management Services
Agreement dated as of January 1, 1992, and any successor agreements thereto,
between the parties. Additionally, rent on space available for expansion to
any other NCSI Company (hereinafter called "Riverwoods Expansion Space")
will not be charged to the Tenant during the Term.
D. Rent shall be paid without advance notice, demand, offset, or deduction
unless the offset or deduction is made by Tenant as permitted under this
Lease Agreement or to recover any unpaid (nonappealable) court judgment
Tenant has against Landlord.
All Rent payable by Tenant to Landlord under this Lease Agreement shall be
paid to Landlord at 2500 Lake Cook Road, Riverwoods, IL 60015, Attention:
Mary S. Dempsey, 1-West, or at such other place as Landlord may from time to
time reasonably designate in writing.
Section IV
IMPROVEMENTS AND ALTERATIONS
----------------------------
A. Landlord's Improvements
-----------------------
Tenant will take the Leased Premises "as is" and Landlord will make no
landlord Improvements to the Leased Premises under this Lease.
B. Tenant Improvements
-------------------
Any alterations to the Leased Premises shall be requested in writing by
Tenant to Landlord in a format reasonably acceptable to Landlord. Then,
upon Landlord's written consent to said alterations, which shall not be
unreasonably withheld, Landlord will coordinate and construct all said
improvements at Tenant's sole expense. Prior to the construction of said
improvements, Landlord shall provide Tenant with an estimate of the cost of
said improvements. The cost of such improvements, alterations or
renovations shall be based on the same then current rates as those offered
to any other tenant or occupant of the Riverwoods Building. Commencement of
construction shall be subject to Tenant's prior approval of the proposed
costs. Tenant shall pay for the cost of said alterations within thirty (30)
days of submission of bills therefor.
<PAGE>
Section V
RELOCATION
----------
Intentionally omitted.
Section VI
MAINTENANCE AND REPAIR
----------------------
Subject to Tenant's liability to pay for repair for damage caused by the
negligence or willful misconduct of its agents, employees, visitors, or
occupants, Landlord shall maintain and keep and repair the Riverwoods Building
Area, the Riverwoods Building, and the Leased Premises including both exterior,
interior, parking lots, driveways and all structural parts, fixtures, wiring,
plumbing, heating, air conditioning, water pipes, plastering and flooring
therein, except only those installations, if any, provided by Tenant. Without
limiting the foregoing, Landlord agrees to keep, to the best of its ability,
heating plant, electrical and water connections and facilities and air
conditioning in operating condition and available for use. Landlord shall
perform such repairs or replacements within a reasonable time after receiving
notice or having actual knowledge of the need for a repair or replacement.
Reasonable time shall mean that amount of time in which like repairs or
replacements are generally performed for any other NCSI Company.
Section VII
HEAT, AIR CONDITIONING, UTILITIES AND OTHER SERVICES
----------------------------------------------------
Landlord shall furnish during "normal operating hours" (which shall include at
least the hours from 8:00 a.m. to 6:00 p.m. on weekdays and 8:00 a.m. to 1:00
p.m. on Saturdays) heat and air conditioning for the Leased Premises necessary
for the comfortable conduct of business; toilet facilities for the use of
employees, customers and other invitees of tenants; janitor service for the
Leased Premises of a quality consistent with such services provided in other
first rate office buildings in the area; electricity for lighting purposes and
a reasonable number of light office machines customarily used for normal office
purposes; adequate elevator services for the use of the employees, customers
and other invitees of tenants. In the event Tenant makes use of these services
at hours other than normal operating hours, Landlord may make reasonable
additional charges for such services.
Landlord shall allow Tenant the use of the following facilities provided Tenant
complies with all rules and regulations established by Landlord from time to
time with regard to the use of said facilities:
1. Full access to the cafeteria and vending areas.
2. Use of conference level facilities as they are available.
3.Use of on-grade employee and visitor parking as available in common.
<PAGE>
Landlord shall provide to Tenant the following services at additional cost:
1. Overtime air conditioning.
2. Overtime use of the service elevator.
3. The actual/allocated cost of any special services performed at Tenant's
request.
Section VIII
INDEMNIFICATION
---------------
A. Tenant indemnifies, defends, and holds Landlord harmless from claims caused
by the negligence or willful misconduct of Tenant, its agents, employees, or
invitees.
When the claim is caused by the joint negligence or willful misconduct of
Tenant and Landlord or Tenant and a third party unrelated to Tenant, except
Tenant's agents, employees, or invitees, Tenant's duty to defend, indemnify,
and hold Landlord harmless shall be in proportion to Tenant's allocable
share of the joint negligence or willful misconduct.
B. Landlord indemnifies, defends, and holds Tenant harmless from claims
resulting from the negligence or willful misconduct of Landlord, its agents,
employees, or invitees.
When the claim is caused by the joint negligence or willful misconduct of
Landlord and Tenant or Landlord and a third party unrelated to Landlord,
except Landlord's agents, employees, or invitees, Landlord's duty to defend,
indemnify, and hold Tenant harmless shall be in proportion to Landlord's
allocable share of the joint negligence or willful misconduct.
C. Notwithstanding Paragraphs A and B, the parties release each other from any
claims either party ("Injured Party") has against the other solely to the
extent the claim is covered by the Injured Party's insurance.
Section IX
ASSIGNMENT OF LEASE AND SUBLETTING
----------------------------------
Tenant will not assign or sublease the Leased Premises.
Section X
PANEL FURNITURE SYSTEMS
-----------------------
Tenant shall have the use of all building standard office furniture and Haworth
Panel Furniture Systems in the Leased Premises, hereinafter referred to as the
Furniture, for the term of this Lease. Tenant shall be responsible for
maintaining said Furniture, and for keeping it in a good state of repair.
Landlord will perform any repair and/or maintenance work on the Furniture, and
Tenant will pay Landlord, or Landlord's vendor, within thirty (30) days after
rendition of a bill therefore by Landlord.
Section XI
SUBORDINATION
-------------
This Lease Agreement shall be subject and subordinate to the lien of any
mortgage now against said premises or which may hereafter be placed against the
Leased Premises, provided:
<PAGE>
A. that the holder thereof shall not be entitled to terminate this Lease
Agreement, by foreclosure or other means, so long as the Tenant or its
successors or assigns shall not be in default hereunder beyond any period
herein given Tenant to cure such default;
B. and that the lien of such mortgage shall not cover any of Tenant's fixtures,
alterations, or improvements, installed at Tenant's expense or which may be
installed or made hereafter, at Tenant's expense, which, by law or the terms
of this Lease Agreement, Tenant is permitted to remove from the Leased
Premises.
In confirmation of such subordination, Tenant shall execute promptly any
reasonable agreement which Landlord or mortgagee may request in writing with
respect thereto.
Section XII
DEFAULT AND REMEDIES
--------------------
<PAGE>
A. Event of Default Defined
------------------------
It shall be an "Event of Default" if a party shall default in the
performance or observance of any covenant or condition of this Lease
Agreement to be performed or observed by such party, and such default shall
continue for thirty (30) days after written notice of such default has been
given to such party by the other non-defaulting party.
B. Landlord's Remedies
1. Termination of Lease. Upon occurrence of any Event of Default by Tenant,
Landlord may, at its option, in addition to any other remedy or right
given hereunder or by law, give written notice to Tenant that this Lease
Agreement shall terminate upon the date specified in the notice, which
date shall not be earlier than twenty (20) days after the giving of such
notice, and upon the date specified in such notice or in any other notice
pursuant to law, this Lease Agreement and the term thereof shall
terminate.
2. Repossession. Upon termination of this Lease Agreement as hereinabove
provided, or pursuant to statute, or by summary proceedings, the Landlord
may enter forthwith without further demand or notice upon any part of the
Leased Premises, in the name of the whole, if it has not heretofore done
so, and resume possession either by summary proceedings, or by action at
law or equity, as the Landlord may determine. In no event shall such
reentry or resumption of possession or reletting as hereafter provided be
deemed an acceptance or surrender of this Lease Agreement or a waiver of
the rights or remedies of Landlord hereunder.
C. Tenant's Remedies
-----------------
If Landlord commits a default, resulting in an Event of Default as defined
in A above, Tenant may pursue any remedy under the law.
<PAGE>
Section XIII
SURRENDER OF PREMISES
---------------------
Tenant covenants to quit and surrender up the Leased Premises and Furniture to
the Landlord at the end of the term of this Lease Agreement in the same
condition as at the date of the commencement of this Lease Agreement, ordinary
use and wear thereof excepted; provided however, that the Tenant shall not be
liable for any damage caused by fire, windstorm, hail, or any other casualty,
or explosion, riot, riot attending a strike, civil commotion, aircraft, motor
vehicles, smoke, vandalism, and malicious mischief, or any other damage not
caused by the negligence or willful act of the Tenant. In the event the Tenant
shall for any reason remain in possession after the expiration of either the
term hereby granted or after the date specified in any written notice of
termination given by either the Landlord or Tenant, such possession shall be as
a month-to-month tenant during which time Tenant shall pay monthly Rent equal
to 150 percent of that accruing during the last month of the preceding term.
Section XIV
TERMS OF RENEWAL
----------------
Tenant shall have the option of one (1) renewal period of three (3) years and
shall notify Landlord 180 days prior to the expiration of this Lease Agreement
of its intent to renew the Lease Agreement as provided herein. All terms of
this Lease Agreement, including Furniture Rent, shall remain in effect during
the option renewal period, except the Base Rent for the three (3) years of the
option shall be as follows:
The terms during the Option will be consistent with those in place during the
lease term, except for Base Rent. Base Rent shall be increased each year at
the then-current CPI, All Urban Consumers, All Items, index for the Chicago-
Gary-Lake County area (or any subsequent index which may replace or supersede
it) for the preceding 12-month period ending December 31 of the year preceding
the then-current rent year. For example, the Base Rent rate increase for the
first 12-month period (February 1, 2000 - January 31, 2001) shall be the CPI
rate as of December 31, 1999 for the previous 12-month period.
Notwithstanding the foregoing terms of renewal, the Base Rent shall be the
lesser of the amounts described above or the lowest amount that shall be
charged or allocated per rentable square foot to any other NCSI Company for the
same period, provided that this provision shall not apply if at any time during
the Option Tenant is no longer under the control of NCSI or any of its
affiliates.
Section XV
EXPANSION SPACE
---------------
Landlord will make available additional space to Tenant on an "as available"
basis, to be reasonably determined by Landlord, under the same lease terms and
conditions as those in this Lease and any amendments, if any, thereto.
Additionally, Landlord shall use its best efforts to ensure that Tenant is
accorded the same right and ability to expand its Leased Premises as any other
NCSI Company.
<PAGE>
Notwithstanding the above, any relocation costs and expenses pertaining to
expansion space will be subject to a separate agreement to be negotiated
between Landlord and Tenant.
Tenant will not be charged for non-Tenant Riverwoods expansion space during any
term of this Lease Agreement.
Section XVI
APPRECIATION RECAPTURE
----------------------
Intentionally Omitted
Section XVII
MISCELLANEOUS PROVISIONS
------------------------
A. Persons Bound. The agreements herein contained shall be binding upon and
shall inure to the benefit of the parties hereto, their respective
successors, assigns, heirs, devisees and personal representatives.
B. Captions Contained in Lease. The captions contained herein are for
reference purposes only and shall not be deemed to be a part hereof nor to
modify or qualify any of the terms, covenants or conditions hereof.
C. Partial Invalidity of Lease. The invalidity or unenforceability of any
provision of this Lease Agreement shall in no way affect the validity or
enforceability of any other provision hereof.
D. Notices. All notices at any time to be served by Landlord upon Tenant shall
be in writing and sent by registered or certified mail with postage prepaid
or be hand delivered and signed for, addressed to Tenant at the Riverwoods
Building to the attention of Tenant's President, or to such other persons
and addresses as may hereafter be designated by Tenant in writing. All
notices at any time to be served by Tenant upon Landlord shall be in writing
and sent by registered or certified mail with postage prepaid or be hand
delivered and signed for, addressed to Mary S. Dempsey, NOVUS Credit
Services Inc., 2500 Lake Cook Road, Riverwoods, IL 60015, or to such other
trustee or agent as may be so designated by it in writing from time to time
and addressed as directed by it.
E. Signs. Landlord will not unreasonably withhold consent to Tenant's
installation of interior signs as are reasonably necessary to Tenant's
business and are in keeping with the reasonable standards maintained in the
Riverwoods Building.
F. Relocation. Subject to Tenant's prior written approval, Landlord may, at
the Landlord's expense, relocate the Tenant within the Riverwoods Building
to a location of similar size space and quality.
G. Rules and Regulations. Tenant and Tenant's servants, employees and agents
shall observe and comply with the rules and regulations set forth in
Exhibit B attached hereto and made a part hereof, entitled "Rules and
Regulations" and such other and further reasonable rules and regulations as
Landlord or Landlord's agents may from time to time adopt for the Riverwoods
Building or the Riverwoods Building Area. In the event of any conflict
between these Rules and Regulations and the Lease, the terms of the Lease
shall prevail.
H. Asbestos. Landlord warrants that, to the best of its knowledge, asbestos is
not contained in the Riverwoods Building.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this Lease
Agreement as of the date and year first above written by their duly authorized
officers.
TENANT: LANDLORD:
By: Robert L. Wieseneck By: Bruce L. Osborne
Its: President Its: Vice President
leasedoc\spsrwd3.lse - created 11-18-96
