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
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from to
Commission file number 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
------------------- ------------------------
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, 1998, the Registrant had 27,250,358 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant as of January 31, 1998 was approximately $161,720,000.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Stockholders to be mailed to
stockholders on or about March 31, 1998 for the year ended December 31, 1997
are incorporated by reference in Parts I, II and IV. Portions of the
Registrant's Definitive Proxy Statement to be mailed to stockholders on or
about April 27, 1998 for the Annual Meeting to be held on June 9, 1998, are
incorporated by reference in Part III.
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 and technical help-desk applications. As used herein,
"Company" shall mean SPS Transaction Services, Inc. and its subsidiaries,
unless the context otherwise indicates.
Except for the historical information contained in this Form 10-K, certain
items herein, including (without limitation) certain matters discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"("MD&A") incorporated by reference in Part II, Item 7 of this
Report; and "Quantitative and Qualitative Disclosure about Market Risk"
incorporated by reference in Part II, Item 7A of this Report; are forward-
looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The matters referred to in such
statements could be affected by the risks and uncertainties involved in the
Company's businesses, including (without limitation) the effect of economic and
market conditions, the level and volatility of interest rates, the actions
undertaken by both current and potential new competitors, the impact of
current, pending or future legislation and regulation and other risks and
uncertainties detailed in the MD&A.
The Company conducts the majority of its business through two wholly owned
subsidiaries: SPS Payment Systems, Inc. ("SPS") which is incorporated in the
State of Delaware and Hurley State Bank ("HSB") which is a State of South
Dakota chartered bank and is a member of the Federal Deposit Insurance
Corporation.
The Company is a 73.5% majority owned subsidiary of NOVUS Credit Services
Inc. ("NCSI"), which in turn is a wholly owned, direct subsidiary of Morgan
Stanley, Dean Witter, Discover & Co.
On May 31, 1997, Morgan Stanley Group Inc. was merged with and into Dean
Witter, Discover & Co. ("DWD")(the "Merger"). At that time DWD changed its
corporate name to Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"). On
March 24, 1998 the shareholders of MSDWD approved the change of its corporate
name to Morgan Stanley Dean Witter & Co. ("MSDW").
In the Company's 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, and
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 Accounts Processing business. The Company's call center TeleServices
business includes on-line technical help-desk support, catalog order entry and
handling of customer service inquiries.
-2-
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.
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 to
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. 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 merchants 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
-3
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.
The Company utilizes the computer and communications network (the "Network")
of IBM Global Services 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 IBM Global Services. Although IBM Global Services 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 is taken at the point-of-sale and is entered via
-4
either a 1-800 call to an SPS operations center representative, or through the
Company's Remote Entry Application Processing ("REAP") system where applicant
data is entered directly at the point-of-sale and transmitted to NAPS. NAPS
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.
- - 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. 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.
Using customized software, the Company analyzes a merchant client's cardholder
base and develops customized reporting and analytical marketing information.
The Company provides these services through two product offerings:
- - HSB programs - For each of the HSB programs, a merchant services agreement
between HSB and the merchant is negotiated. The merchant services agreement
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.
-5-
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 intercompany
fee equal to a specified percentage of the outstanding receivables under such
accounts.
- - Managed programs - For 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.
Commercial Accounts Processing
The Company offers commercial accounts processing for clients whose
customers are businesses rather than consumers. The Company provides commercial
clients with two basic offerings, a commercial revolve credit product and an
invoice billing product.
The commercial revolve credit product features monthly statements, invoice
specific detail, master/sub account capability and multiple authorized account
users. The invoice billing product features an invoice for each transaction,
variable payment terms and an ability to match payments to invoices. The
invoice billing product can be provided to clients in a format in which an
invoice is sent for each transaction or in a format in which invoices for a
month are batched and sent with a summary billing that requests payment in a
specified number of days. The latter format is termed prox billing.
SPS generates revenues for its commercial business through marketing and
servicing agreements with MountainWest Financial Corporation ("MountainWest"),
a wholly owned subsidiary of NCSI. MountainWest is the issuer of commercial
private label credit cards and the holder of receivables associated with
transactions on those commercial accounts. The Company provides a full range
of services to commercial clients on behalf of MountainWest including:
- - Implementation Support - The Company assists the commercial client with card
and statement design as applicable, software implementation and training
before the processing of new accounts begins.
- - New Account Processing - The Company's commercial new accounts processing
system has on-line links to commercial credit business and model based
decision tools to assess the creditworthiness of new account applicants.
- - Credit Card Embossing - Where applicable, the Company's software generates a
file of approved new accounts, delivers the file for card embossing, and
provides for distribution of embossed cards according to client specifications.
-6-
- - Sales Authorizations - All card based transactions are electronically
authorized by the Company utilizing the same point-of-sale terminals the
client has in place for other card payment types, such as general purpose
bank cards.
- - Statement and/or invoice processing - The Company prepares and sends
statements and/or invoices as applicable to commercial account holders.
Large volumes and state-of-the-art equipment enable the Company to process
efficiently and provide for customization to meet each commercial client's
needs.
- - Remittance Processing - The Company processes and deposits commercial
account payments typically within 24 hours of their receipt.
- - Account holder services - The Company's commercial customer service
representatives answer account holder questions and handle billing
inquiries. An automated call distribution system allows customer service
representatives to answer telephone calls using the commercial client's
name. The Company's commercial account holder service system enables the
customer service representative to view the account holder's file and billing
information on a computer screen allowing for effective responses to account
holder inquiries.
- - Collections - The Company uses a sophisticated on-line collection system to
identify and prioritize delinquent accounts. The Company has specifically
trained commercial account collection representatives to contact delinquent
account holders in an effort to secure payments on past due accounts.
- - Marketing support - The Company assists commercial clients in developing and
executing marketing plans to advance the client's business. Account holder
reporting and analysis tools are also made available to clients to enhance
marketing effectiveness.
Revenues from commercial accounts processing are included in managed
programs in the Company's financial reports.
TeleServices
The Company's TeleServices business provides call center teleservicing
programs that focus on business-to-consumer applications. These applications
are typically based on the Company's technological capabilities and
professional customer service. For such services, the Company develops or
utilizes customized software applications to respond to inbound calls from a
client's customers and to facilitate appropriate actions based on the calls.
The Company's service offerings focus on value-added inbound services, such
as:
- - 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,
enrollment services, handling member benefit inquiries and many others.
-7-
- - Catalog Order Management - The Company provides services to catalog and
direct mail merchants to process inbound orders that are received via
telephone, facsimile 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.
Revenues generated from TeleServices applications are included in Transaction
processing services in the Company's financial reports.
Prodigy Services Corporation ("Prodigy"), a TeleServices client, has notified
the Company of its intention to terminate the Member Services Agreement between
Prodigy and the Company effective as of May 31, 1998. Prodigy and the Company
have continued to negotiate to replace or renew the agreement, but there is no
assurance that the agreement will be replaced or renewed. The Company believes
that the termination of this agreement will not have a material adverse effect
on the Company's financial condition or its results of operations.
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 (1998
Edition), based on the volume of outstanding receivables administered, GE
Capital Retailer Financial Services has approximately 45% of the third party
private label credit card marketplace. Also according to Faulkner & Gray,
Household Retail Services, Beneficial National Bank, SPS Transaction Services
and Bank One Private Label Credit 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, First
USA Paymentech, and BuyPass Corporation, although the Company believes that no
competitors other than First Data Card Services are dominant in such
marketplace. The primary third party competitor for the Company's commercial
accounts processing business is GE Capital Retailer Financial Services. 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 Corporation is the Company's largest client, accounting for 23.6% of
the Company's net operating revenues in 1997. The Company administers owned
private label credit card programs and provides electronic transaction
processing services for Tandy Corporation. The Goodyear Tire & Rubber Company
("Goodyear") is the Company's next largest client, accounting for 10.1% of the
Company's net operating revenues in 1997. The Company administers 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 1997.
-8-
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 generally 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 MSDW.
HSB administers a CD 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 12 months. CDs under the retail CD program
are issued to investors through Dean Witter Reynolds Inc., a subsidiary of
MSDW, and generally have a maturity of two to 10 years. As of December 31,
1997, CDs outstanding were $504.1 million, of which institutional CDs
represented $227.8 million and retail CDs represented $276.3 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. See
"Business - Hurley State Bank - Loan Securitization."
-9-
Certain borrowings to support the HSB programs are currently provided
pursuant to an Amended and Restated Borrowing Agreement (as amended, the
"Borrowing Agreement") and a facility fee letter agreement (as amended, the
"Facility Fee Agreement") (collectively, the "Financing Agreements") with MSDW,
pursuant to which MSDW has agreed to provide financing to the Company. The
maximum amount available under the Borrowing Agreement, which expires on April
11, 1998, is $1.2 billion. The interest rate to be paid by the Company
reflects MSDW's borrowing costs. At January 31, 1998, the Company had $570.0
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 MSDW. 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 MSDW. If the Company were unable to reach a satisfactory agreement with
MSDW for the renewal or the replacement of the Financing Agreements, the
Company believes it would be able to meet its financial requirements over the
next 12 months from other sources.
Loan Securitization
Selling loans through securitizations results in net credit income and fee
income from credit card loans under HSB programs effectively being converted
into loan servicing fees. 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, to SPS, to a subsidiary of the Company as cash
collateral depositor (net of investment income earned on the cash collateral
deposit) 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 agent fee and cash collateral fee, a cash collateral account has been
established to make up any shortfall, up to the program's maximum cash
collateral 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. MSDW is the limited guarantor of performance.
HSB maintains a loan securitization program with Barton Capital Corporation
("BCC"), and at December 31, 1997, outstanding loans under such program were
$300.0 million. HSB also maintains a loan securitization program with
Receivables Capital Corporation ("RCC"), and at December 31, 1997, outstanding
loans under such program were $280.0 million. At December 31, 1997, $580.0
million or 30.9% of the HSB program loans had been sold through loan
securitizations.
-10-
The BCC and RCC loan securitization programs are scheduled to expire in
April 1998 and October 1998, respectively. 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 BCC and RCC under the programs will be paid to BCC or to RCC, as
applicable, and the interests of BCC and RCC in the applicable securitization
pool will gradually decline to zero. Any receivables originated after a
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
potential volatility of earnings that arises 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. The Company's matched financing strategy targets 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 both 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
with notional amounts of $429.1 million and $465.6 million at December 31, 1997
and 1996, respectively.
At December 31, 1997, the Company had no interest rate cap agreements. At
December 31, 1996, the Company had outstanding interest rate cap agreements
with notional amounts of $40.0 million.
The Company's credit card portfolios consist of both variable interest rate
credit card programs and fixed interest rate credit card programs. At December
31, 1997 and 1996, approximately 67% and 69% of the Company's credit card loans
including securitized loans were variable interest rate loans.
For a further discussion of the Company's interest rate risk and management
policies, see "Risk Management" incorporated by reference in Part II, Item 7A
of this report and see "Notes to Consolidated Financial Statements, Note 10
Financial Instruments" incorporated by reference in Part II, Item 8 of this
report.
-11-
Executive Officers of the Registrant
The following sets forth certain information concerning executive officers
of the Company:
Name Age Present Position
- --------------------- ------ --------------------------------------
Thomas C. Schneider 60 Chairman of the Board, Chief Financial
Officer and Director
Robert L. Wieseneck 60 President, Chief Executive Officer and
Director
Christine A. Edwards 45 General Counsel and Director
Robert W. Archer 59 Senior Vice President -- Sales/
Operations
Richard F. Atkinson 61 Senior Vice President -- Private Label
Consumer
David J. Peterson 40 Senior Vice President -- Commercial
Technology
Services
Russell J. Bonaguidi 46 Vice President and Controller
Robert J. Ferkenhoff 55 Vice President and Chief Information
Officer
Larry H. Myatt 54 Vice President -- Marketing and
Administration
Ruth M. O'Brien 44 Vice President -- TeleServices
Serge J. Uccetta 52 Vice President -- Private Label
Commercial
Mary Ann Warniment 48 Vice President -- Electronic Marketing
Mr. Schneider has served as Chief Financial Officer and a Director of the
Company since its formation and as Chairman of the Board since 1997. He has
served as Executive Vice President, Chief Strategic and Administrative Officer
and Director of MSDW since the Merger. Mr. Schneider served as Executive Vice
President and Chief Financial Officer of DWD from 1987 until the Merger. 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. 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 Director 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.
Mrs. Edwards has served as a Director of the Company since 1997, and as its
General Counsel since 1993. She served as Secretary of the Company from its
formation until 1997. She has also served as Executive Vice President, Chief
Legal Officer and Secretary of MSDW since the Merger. She served as Executive
Vice President, General Counsel and Secretary of DWD from 1991 until the
Merger. She has been General Counsel of NCSI since 1988, a Director of NCSI
since 1990 and Executive Vice President and Secretary of NCSI since 1991.
Mr. Archer has served as Senior Vice President - Sales/Operations of the
Company since 1997. Prior thereto he served as Senior Vice President -- Sales
of the Company and as a Senior Vice President of SPS from 1994 to 1997. 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.
-12-
Mr. Atkinson has served as Senior Vice President -- Private Label Consumer
of the Company since 1997. Prior thereto he served as Senior Vice President --
Operations of the Company and as a Senior Vice President of SPS from 1994 until
1997. Mr. Atkinson 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. Peterson has served as Senior Vice President -- Commercial Technology
Services of the Company since 1997. Prior thereto he was Vice President --
Network Services and Corporate Development of the Company from 1995 to 1997 and
Vice President -- Corporate Development of the Company from 1994 until 1995.
Mr. Peterson was an investment banker for DWR from 1987 until 1993.
Mr. Bonaguidi has served as Vice President and 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. 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. 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 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. Uccetta has served as Vice President -- Private Label Commercial of the
Company since 1997. Prior thereto he was Vice President -- Card Services of
the Company from 1995 to 1996 and Vice President -- Card Services of SPS since
1993. Mr. Uccetta served as 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 Marketing of the
Company since 1997. Prior thereto she served as Vice President -- Electronic
Information Services of the Company from 1993 to 1997 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, 1997, the Company had 3,740 full-time equivalent
employees, of which 609 were salaried and 3,131 were hourly. Of the hourly
employees, approximately 30% were part-time. Approximately 3,280 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, 223 were
-13-
engaged in supporting the Company's various businesses and administration and
162 were engaged in systems development and maintenance. None of the employees
of the Company are 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
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
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. -14
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
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
-15-
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 MSDW, 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 owed 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 in January 2000. The Company also conducts significantly all of its
operations out of owned facilities located in Gray, Tennessee and Sioux Falls,
South Dakota, and out of leased facilities located in Layton, Utah and
Asheville, North Carolina. The Gray, Tennessee facility contains approximately
131,000 square feet that, as of December 31, 1997, housed approximately 1,585
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, 1997, housed
approximately 725 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, 1997, 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 Asheville, North Carolina
facility was opened in 1997 and contains approximately 39,900 square feet that,
as of December 31, 1997, housed approximately 90 full-time equivalent Company
employees involved in providing TeleServices. The Asheville, North Carolina
facility is leased for a term expiring in December 2007.
The Company believes that its properties are adequate and suitable for its
business as presently conducted.
-16-
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; however, in the opinion of management after
consultation with counsel, the ultimate liability, if any, will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
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 year ended December 31, 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section entitled "Quarterly Information" appearing on page 43 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, 1997 (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, 1998, as reported in The Wall Street Journal, was $24.1875.
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 43
of the Annual Report is incorporated herein by reference in response to
information required by Item 6.
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 25 of the
Annual Report is incorporated herein by reference in response to information
required by Item 7.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The section entitled "Risk Management" appearing on pages 23 through 25 of
the Annual Report is incorporated herein by reference in response to
information required by Item 7A.
-17-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The sections entitled "Consolidated Balance Sheets" appearing on page 26 of
the Annual Report, "Consolidated Statements of Income" appearing on page 27 of
the Annual Report, "Consolidated Statements of Cash Flows" appearing on page 28
of the Annual Report, "Consolidated Statements of Changes in Stockholders'
Equity" appearing on page 29 of the Annual Report, "Notes to Consolidated
Financial Statements" appearing on pages 30 through 39 of the Annual Report,
"Independent Auditors' Report" appearing on page 42 of the Annual Report and
"Quarterly Information" appearing on page 43 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" in the Company's
proxy statement to be mailed to stockholders on or about April 27, 1998 for the
June 9, 1998 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 1 of this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" and the section entitled
"Stock Performance Graph" in the Proxy Statement are 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" in 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" in the Proxy Statement is
incorporated herein by reference in response to information required by Item
13.
-18-
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 26
Consolidated Statements of Income 27
Consolidated Statements of Cash Flows 28
Consolidated Statements of Changes in Stockholders' Equity 29
Notes to Consolidated Financial Statements 30
Independent Auditors' Report 42
2. Financial Statement Schedules. The following Financial Statement
Schedules are incorporated herein by reference from the Annual Report:
Quarterly Financial Information 43*
Schedule I - 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).
-19-
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 (incorporated by reference from Exhibit 10.5 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996
(the "1996 Form 10-K")).
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).
-20-
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)("NSI"), 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 Amended and Restated Credit Card Receivables Purchase Agreement dated as
of April 15, 1997 among HSB, the Company, SPS, DWD, BCC and Societe
Generale (incorporated by reference from Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1997 (the "1997 First Quarter Form 10-Q")).
10.21*Fourth Amended and Restated Receivables Purchase Agreement dated
as of October 31, 1997, among HSB, SPS, MSDWD, RCC and Bank of America
National Trust and Savings Association.
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).
-21-
10.25*Agreement of Sublease made as of December 31, 1997 between SPS and
MountainWest.
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#Omnibus Equity Incentive Plan (incorporated by reference from Exhibit 4.1
of the MSDWD Registration Statement No. 33-63024 on Form S-8).
10.30#1994 Omnibus Equity Plan (incorporated by reference from Exhibit
10.52 of the MSDWD Annual Report on Form 10-K for the fiscal year ended
December 31, 1993).
10.31#Employees Replacement Stock Plan (incorporated by reference from Exhibit
4.2 of the MSDWD Registration Statement No. 33-63024 on Form S-8).
10.32#Amendment to the Employees Replacement Stock Plan (adopted June 18,
1993)(incorporated by reference from Exhibit 10.1 of the MSDWD 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 dated September 1, 1995 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).
-22-
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 MSDWD Registration Statement No. 33-56104 on
Form S-1).
10.42#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 MSDWD 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).
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
(incorporated by reference from Exhibit 10.49 of the 1996 Form 10-K).
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).
-23-
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 NSI
(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 (incorporated by reference from Exhibit 10.54 of the 1996
Form 10-K).
10.55 Lease Agreement made as of January 1, 1997, between NCSI and SPS
(incorporated by reference from Exhibit 10.55 of the 1996 Form 10-K).
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 MSDWD 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 MSDWD 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 MSDWD Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
10.59*#Amendment to the SPS Transaction Services, Inc. Amended and Restated Tax
Deferred Equity Participation Plan (adopted April 29, 1997).
10.60 Third Amendment to the Amended and Restated Borrowing Agreement dated as
of January 31, 1997, between the Company and DWD (incorporated by
reference from Exhibit 10.1 of the 1997 First Quarter Form 10-Q).
10.61 Fourth Amendment to the Amended and Restated Borrowing Agreement dated as
of April 13, 1997, between the Company and MSDWD (incorporated by
reference from Exhibit 10.1 of the Company's Quarterly Report on Form 10-
Q for the quarterly period ended June 30, 1997 (the "1997 Second Quarter
Form 10-Q")).
10.62 Amendment to the Facility Fee Letter Agreement dated as of April 13, 1997
between the Company and MSDWD (incorporated by reference from Exhibit
10.2 of the 1997 Second Quarter Form 10-Q).
10.63*First Amendment to Third Party Processing and Cooperative Network
Service Agreement entered into January 1, 1998 between NSI and SPS.
10.64#Amendment to Tax Deferred Equity Participation Plan (adopted October
3,1997) (incorporated by reference from Exhibit 10.17 of the MSDWD Annual
Report on Form 10-K for the fiscal year ended November 30, 1997).
10.65*Second Amendment to the Terminal Service Agreement dated as of January 1,
1997, between SPS and NSI.
10.66*#SPS Senior Management Retention Plan (adopted November 19, 1997).
10.67*#SPS Incentive Plan (adopted November 19, 1997).
-24-
11.0* Statement Re: Computation of Earnings per Common Share.
13.1* Annual Report to Stockholders. Except for those portions
expressly incorporated by reference herein, the 1997 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.
(b) Current Reports on Form 8-K
A Current Report on Form 8-K dated January 27, 1998 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 November 12, 1997 was filed with the
Securities and Exchange Commission reporting Item 7 relating to the Company's
1997 Third Quarter Report to Stockholders.
A Current Report on Form 8-K dated October 21, 1997 was filed with the
Securities and Exchange Commission reporting Item 7 relating to the Company's
third quarter earnings release.
-25-
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 30, 1998.
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 30, 1998, by the following persons on behalf of
the Registrant and in the capacities indicated:
Signature Capacity
- --------------------------------- --------------------------------------
THOMAS C. SCHNEIDER*
- ---------------------------------
Thomas C. Schneider Chairman of the Board
Chief Financial Officer and Director
(Principal Financial Officer)
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)
FRANK T. CARY*
- ---------------------------------
Frank T. Cary Director
CHRISTINE A. EDWARDS*
- ---------------------------------
Christine A. Edwards General Counsel and Director
MITCHELL M. MERIN*
- ---------------------------------
Mitchell M. Merin Director
CHARLES F. MORAN*
- ---------------------------------
Charles F. Moran Director
PHILIP J. PURCELL*
- ---------------------------------
Philip J. Purcell Director
DENNIE M. WELSH*
- ---------------------------------
Dennie M. Welsh Director
*ROBERT L. WIESENECK
- ---------------------------------
By Robert L. Wieseneck,
Attorney-in-fact -26-
<PAGE>
SCHEDULE I
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
- -----------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets:
Investments in consolidated subsidiaries $ 204,424 $ 191,597
Advances to subsidiaries 100,374 40,553
Due from an affiliated company 463 2,148
Other assets 283 282
----------- -----------
Total Assets $ 305,544 $ 234,580
=========== ===========
Liabilities and Stockholders' Equity:
Payables to subsidiaries $ 19,765 $ 6,130
Due to affiliated companies 21,426 3,520
Other liabilities 1,318 538
----------- -----------
Total liabilities 42,509 10,188
Total stockholders' equity 263,035 224,392
----------- -----------
Total Liabilities and Stockholders' Equity $ 305,544 $ 234,580
=========== ===========
See notes to condensed financial statements.
</TABLE>
S-1
<PAGE>
SCHEDULE I
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividends received from subsidiaries $ 25,000 $ -- $ 15,000
Interest on advances to subsidiaries 39,513 44,375 23,526
Other revenues -- 2,258 573
-------- -------- --------
Total revenues 64,513 46,633 39,099
-------- -------- --------
Interest expense 38,158 42,661 18,169
Other expenses 177 180 192
-------- -------- --------
Total expenses 38,335 42,841 18,361
-------- -------- --------
Income before income taxes and equity
in undistributed net earnings of
subsidiaries 26,178 3,792 20,738
Income tax expense 504 1,416 2,258
-------- -------- --------
Income before equity in undistributed
net earnings of subsidiaries 25,674 2,376 18,480
Equity in undistributed net earnings
of subsidiaries 12,826 20,870 24,993
-------- -------- --------
Net income $ 38,500 $ 23,246 $ 43,473
======== ======== ========
See notes to condensed financial statements.
</TABLE>
S-2
<PAGE>
SCHEDULE I
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 38,500 $ 23,246 $ 43,473
Adjustments to reconcile net income to
net cash flows from operating activities:
Compensation payable in common stock 72 855 401
Equity in undistributed net earnings
of subsidiaries (12,826) (20,870) (24,993)
(Increase) decrease in operating assets:
Due from an affiliated company 1,685 (1,575) (573)
Other assets (1) (39) (243)
Increase (decrease) in operating
liabilities:
Due to affiliated companies 18,345 1,303 4,072
Other liabilities 780 (159) 50
--------- --------- ---------
Net cash from operating activities 46,555 2,761 22,187
--------- --------- ---------
Cash Flows From Investing Activities:
Investments in and advances to
subsidiaries, net (46,187) (2,883) (17,822)
Cash Flows From Financing Activities:
Due to an affiliated company -- -- (3,073)
Proceeds from exercise of stock options 52 622 665
Changes in treasury stock, net (420) (500) (1,957)
--------- --------- ---------
Net cash from financing activities (368) 122 (4,365)
--------- --------- ---------
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 $ 38,857 $ 42,316 $ 15,021
Cash (refunded) paid for income taxes (344) 1,641 2,406
========= ========= =========
Supplemental Schedule of Noncash Investing
and Financing Activities:
Employee stock benefit plan
transactions $ 439 $ 959 $ 924
========= ========= =========
See notes to condensed financial statements.
</TABLE>
S-3
<PAGE>
SPS TRANSACTION SERVICES, INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Introduction and Basis of Presentation
The condensed financial statements, including the notes thereto, 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 the notes thereto found in pages 26-39 of
the Company's 1997 Annual Report to Stockholders (the "Annual Report") which is
incorporated by reference in this Form 10-K.
The Company is a 73.5% majority owned subsidiary of NOVUS Credit Services
Inc. ("NCSI"), which in turn is a wholly owned, direct subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. ("MSDWD"). On May 31, 1997, Morgan Stanley
Group Inc. was merged with and into Dean Witter, Discover & Co. At that time
Dean Witter, Discover & Co. changed its corporate name to Morgan Stanley, Dean
Witter, Discover & Co. On March 24, 1998 the shareholders of MSDWD approved
the change of its corporate name to Morgan Stanley Dean Witter & Co. ("MSDW").
2. Dividends Received from Subsidiaries
The Company received dividends from its consolidated subsidiaries totaling
$25.0 million and $15.0 million for the years ended December 31, 1997 and 1995,
respectively. No dividends were received by the Company from its consolidated
subsidiaries for the year ended December 31, 1996
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
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, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 18, 1998; such financial statements and report
are included in your 1997 Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included Schedule I 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.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 18, 1998
S-5
Sequential
Page
Exhibit Description Number
- ------- ----------------------------------------------- ----------
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
(incorporated by reference from Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 (the "1996 Form 10-K")).
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).
10.17 Letter Agreement dated as of September 1, 1995,
between SPS and NOVUS Services, Inc. (successor
in interest to Discover Card)("NSI"), 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 Amended and Restated Credit Card Receivables
Purchase Agreement dated as of April 15, 1997
among HSB, the Company, SPS, DWD, BCC and Societe
Generale (incorporated by reference from Exhibit
10.2 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31,
1997 (the "1997 First Quarter Form 10-Q")).
10.21* Fourth Amended and Restated Receivables Purchase
Agreement dated as of October 31, 1997, among
HSB, SPS, MSDWD, RCC and Bank of America National
Trust and Savings Association.
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* Agreement of Sublease made as of December 31,
1997 between SPS and MountainWest.
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# Omnibus Equity Incentive Plan (incorporated by
reference from Exhibit 4.1 of the MSDWD Registration
Statement No. 33-63024 on Form S-8).
10.30# 1994 Omnibus Equity Plan (incorporated by reference
from Exhibit 10.52 of the MSDWD Annual Report on
Form 10-K for the fiscal year ended December 31,
1993).
10.31# Employees Replacement Stock Plan (incorporated by
reference from Exhibit 4.2 of the MSDWD Registration
Statement No. 33-63024 on Form S-8).
10.32# Amendment to the Employees Replacement Stock Plan
(adopted June 18, 1993)(incorporated by reference
from Exhibit 10.1 of the MSDWD 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 dated September 1,
1995 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 MSDWD Registration
Statement No. 33-56104 on Form S-1).
10.42# 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 MSDWD 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).
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 (incorporated by reference from
Exhibit 10.49 of the 1996 Form 10-K).
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 NSI (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 (incorporated
by reference from Exhibit 10.54 of the 1996
Form 10-K).
10.55 Lease Agreement made as of January 1, 1997,
between NCSI and SPS (incorporated by reference
from Exhibit 10.55 of the 1996 Form 10-K).
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 MSDWD 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 MSDWD 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 MSDWD Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
10.59*# Amendment to the SPS Transaction Services, Inc.
Amended and Restated Tax Deferred Equity
Participation Plan (adopted April 29, 1997).
10.60 Third Amendment to the Amended and Restated
Borrowing Agreement dated as of January 31, 1997,
between the Company and DWD (incorporated by
reference from Exhibit 10.1 of the 1997 First
Quarter Form 10-Q).
10.61 Fourth Amendment to the Amended and Restated
Borrowing Agreement dated as of April 13, 1997,
between the Company and MSDWD (incorporated by
reference from Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997 (the
"1997 Second Quarter Form 10-Q")).
10.62 Amendment to the Facility Fee Letter Agreement
dated as of April 13, 1997 between the Company
and MSDWD (incorporated by reference from Exhibit
10.2 of the 1997 Second Quarter Form 10-Q).
10.63* First Amendment to Third Party Processing and
Cooperative Network Service Agreement entered
into January 1, 1998 between NSI and SPS.
10.64# Amendment to Tax Deferred Equity Participation
Plan (adopted October 3,1997) (incorporated by
reference from Exhibit 10.17 of the MSDWD Annual
Report on Form 10-K for the fiscal year ended
November 30, 1997).
10.65* Second Amendment to the Terminal Service Agreement
dated as of January 1, 1997, between SPS and NSI.
10.66*#SPS Senior Management Retention Plan (adopted November
19, 1997).
10.67*#SPS Incentive Plan (adopted November 19, 1997).
11.0* Statement Re: Computation of Earnings per Common
Share.
13.1* Annual Report to Stockholders. Except for
those portions expressly incorporated by
reference herein, the 1997 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.
Exhibit 10.59
Extract from Resolutions Approved
by the Board of Directors of
SPS Transaction Services, Inc.
on April 29, 1997
RESOLVED, that Appendix A of the SPS Transaction Services, Inc. (the "Company")
Amended and Restated Tax Deferred Equity Participation Plan ("TDEPP") is hereby
amended and restated to read as follows:
APPENDIX A
Amount of Awards
----------------
Effective for annual incentive bonuses awarded for 1997 and
subsequent years, the amount of a Participant's Award shall be an
amount equal to the sum of: (1) 20% of the first $250,000 of the
Participant's bonus awarded under an annual incentive plan
maintained by a Company and selected by the Board; (2) 30% of the
amount of such bonus award which exceeds $250,000, but does not
exceed $500,000; and (3) 40% of the amount of such bonus award
which exceeds $500,000.
Notwithstanding anything herein to the contrary, no Award
shall exceed an amount which would cause a Participant's
Compensation minus the Award to be less than the Minimum Eligible
Compensation and no Award shall be granted in an amount less than
$1,000.
FURTHER RESOLVED, that the Chairman, President and Chief Executive Officer or
any Senior Vice President of the Company be, and each of them hereby is,
authorized to take any and all actions which they deem necessary or appropriate
to carry out the purposes and intents of the foregoing resolution and to make,
execute and deliver or cause to be made executed and delivered, all agreements,
undertakings, documents, instruments or certificates in the name and on behalf
of the Company as they may deem necessary or desirable in connection herewith,
to perform or cause to be performed, the obligations of the Company referred to
herein.
* * * * * * *
Exhibit 10.63
FIRST AMENDMENT TO THIRD PARTY PROCESSING
AND COOPERATIVE NETWORK SERVICE AGREEMENT
This First Amendment ("Amendment") to Third Party Processing and Cooperative
Network Service Agreement is entered into on January 1, 1998 by NOVUS SERVICES,
INC. (hereinafter "NSI") and SPS PAYMENT SYSTEMS, INC., (hereinafter
"Company").
RECITALS
WHEREAS, NSI and Company entered into a Third Party Processing and
Cooperative Network Service Agreement dated as of September 28, 1992, as
modified by a letter agreement between the parties dated as of September 1,
1995 (collectively, the "Agreement");
WHEREAS, NSI, Company and Visa U.S.A. Inc. ("Visa") entered into a link
agreement effective as of February 16, 1989, as amended from time to time
(collectively, the "Visa Link Agreement");
WHEREAS, NSI, Company and MasterCard International Incorporated
("MasterCard") have established an electronic link and intend to enter into a
link agreement ("MasterCard Link Agreement");
WHEREAS, the Visa Link Agreement and the MasterCard Link Agreement each
provide for certain joint obligations of NSI and Company in connection with the
establishment of direct, electronic links between NSI, Company and,
respectively, Visa and MasterCard; and
WHEREAS, NSI and Company have agreed to amend the Agreement to establish the
individual rights and obligations of NSI and Company with respect to the NOVUS
Card transactions accepted at Company's terminals and the fees related thereto.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, NSI and Company
hereby agree as follows:
ARTICLE I - AMENDMENTS
1.1 Electronic Links. Section 3.2 of the Agreement is amended by striking
the section in its entirety and replacing it with the following provision:
"3.2 Visa and MasterCard Links.
(a) Visa Link Agreement.
(i) General. Company shall permit and facilitate the use of
Company's direct data link to the Visa BASE I and BASE II networks (the
"Visa Link") for transactions directed by NSI through the Visa Link.
Company assumes all responsibility and shall take all action necessary
to maintain the Visa Link. NSI shall reimburse Company for the use of
the Visa Link by paying the fees set forth on the Schedule of Fees
attached hereto.
(ii) Termination. Subject to the terms and conditions set
forth in the Visa Link Agreement, NSI and Company may individually
elect to terminate or not to renew the Visa Link Agreement; provided
that: (x) the terminating party shall provide the non-terminating party
with thirty (30) days' advance written notice of the decision to
terminate; (y) if the terminating party is NSI, Company shall promptly
communicate notice of termination to Visa on behalf of NSI, as required
by the terms of the Visa Link Agreement; and (z) subject to the terms
of the Visa Link Agreement, the terminating party shall cooperate with
the non-terminating party, including, without limitation, by continuing
to perform any of the obligations of the terminating party set forth in
the Visa Link Agreement, to the extent necessary to allow the non-
terminating party to perform its obligations pursuant to the Visa Link
Agreement. Subject to the terms of the Visa Link Agreement, the
terminating party shall assign its rights and obligations pursuant to
the Visa Link Agreement to the non-terminating party.
(b) MasterCard Link Agreement.
(i) General. Company shall permit and facilitate the use of
the direct data link to the MasterCard network (the "MasterCard Link")
for transactions directed by NSI through the MasterCard Link. Company
shall assume all responsibility and shall take all action necessary to
maintain the MasterCard Link. NSI shall reimburse Company for the use
of the MasterCard Link by paying the fees set forth on the Schedule of
Fees attached hereto.
(ii) Termination. Subject to the terms and conditions of
the MasterCard Link Agreement, NSI and Company may individually elect
to terminate or not to renew the MasterCard Link Agreement; provided
that: (y) the terminating party shall provide the non-terminating party
with thirty (30) days' advance written notice of such decision, and (z)
subject to the terms of the MasterCard Link Agreement, the terminating
party shall cooperate with the non-terminating party, including,without
limitation, by performing any of the obligations of the terminating
party set forth in the MasterCard Link Agreement, to the extent
necessary to allow the non-terminating party to perform its obligations
pursuant to the MasterCard Link Agreement. Subject to the terms of the
MasterCard Link Agreement, the terminating party shall assign its
rights and obligations pursuant to the MasterCard Link Agreement to the
non-terminating party."
1.2 Schedule of Fees. The Schedule of Fees attached to the Agreement is
deleted in its entirety and replaced with the Schedule of Fees attached hereto.
Each of the parties shall provide the other party with an invoice on a monthly
basis which itemizes the fees payable pursuant to the Schedule of Fees.
1.3 Term of Agreement. Section 6.2(a) of the Agreement is amended by
striking the first sentence of the section in its entirety and replacing it
with the following provision:
"The term of this Agreement shall commence on January 1, 1993 (the
"Effective Date") and, subject to the provisions of Section 6.2(b) below,
the Agreement shall remain in effect for an initial term of five (5) years
and one subsequent term of five (5) years ("Subsequent Term"). Following
the expiration of the Subsequent Term, the Agreement shall continue
thereafter unless terminated by either party upon 180 days' prior written
notice to the other party."
1.4 References to Sears Technology Services Inc. The Agreement is amended
by striking each reference to "Sears Technology Services Inc." or "STS" in
their entirety and replacing each reference with the name, "IBM Global
Services".
1.5 References to Terminal Interface Gateways. The Agreement is amended by
striking each reference to the phrase, "Terminal Interface Gateway" or "TIG"
and replacing each reference with the phrase "Lata Interface Gateway" or "LIG".
ARTICLE II - MISCELLANEOUS
2.1 Effective Date of Amendment. This Amendment is effective as of date
set forth above.
2.2 Terms. Capitalized terms are used in this Amendment as they are
defined in the Agreement.
2.3 Continued Effect. Except as amended hereby, the Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement.
SPS PAYMENT SYSTEMS, INC. NOVUS SERVICES, INC.
By: Steve Maxwell By: Tony Leal
---------------------- -------------------------
Title: Vice President Title: Vice President
---------------------- -------------------------
<PAGE>
Exhibit 13
CLIENTACTIVE
[SPS Transaction Services Logo]
SPS Transaction services, inc.
1997 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, 73.5 percent-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
2 SPS At-a-Glance
4 Letter to Stockholders
7 Being Clientactive
16 Management's Discussion and Analysis
26 Financial Statements
30 Notes to Financial Statements
42 Responsibility for Financial Statements and Independent Auditors' Report
43 5-Year Selected Financial Data
44 Board of Directors and Officers
</TABLE>
<PAGE>
Financial Highlights
In thousands, except per share data
<TABLE>
<CAPTION>
1997 1996 % Change
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Net operating revenues $ 346,885 $ 320,920 8.1
- ---------------------------------------------------------------------------------------------------
Net income 38,500 23,246 65.6
- ---------------------------------------------------------------------------------------------------
Basic earnings per common share 1.41 0.86 64.0
- ---------------------------------------------------------------------------------------------------
Diluted earnings per common share 1.41 0.85 65.9
- ---------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total credit card loans $1,295,787 $1,637,507 (20.9)
- ---------------------------------------------------------------------------------------------------
Total assets 1,512,403 1,760,785 (14.1)
- ---------------------------------------------------------------------------------------------------
Deposits 510,294 463,435 10.1
- ---------------------------------------------------------------------------------------------------
Due to affiliates 639,066 982,547 (35.0)
- ---------------------------------------------------------------------------------------------------
Stockholders' equity 263,035 224,392 17.2
- ---------------------------------------------------------------------------------------------------
Return on average stockholders' equity 15.8% 11.0%
- ---------------------------------------------------------------------------------------------------
OPERATING DATA
Electronic point-of-sale transactions processed 451,444 424,069 6.5
- ---------------------------------------------------------------------------------------------------
TeleServices: service minutes processed 57,039 48,484 17.6
customer contacts processed 9,298 9,745 (4.6)
- ---------------------------------------------------------------------------------------------------
Active consumer private label accounts at year-end 3,080 3,466 (11.1)
- ---------------------------------------------------------------------------------------------------
Active commercial accounts at year-end 979 898 9.0
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Total loans* $1,875,787 $2,217,507 (15.4)
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Total loans represents both owned and securitized credit card loans.
Net Operating Revenues, dollars in millions
<TABLE>
<S> <C>
1993 205.5
1994 245.8
1995 312.0
1996 320.9
1997 346.9
</TABLE>
Net Income, dollars in millions
<TABLE>
<S> <C>
1993 30.6
1994 37.7
1995 43.5
1996 23.2
1997 38.5
</TABLE>
SPS TRANSACTION SERVICES, INC. 1
<PAGE>
LINES OF BUSINESS
NETWORK TRANSACTION SERVICES
SPS provides a wide variety of clients with electronic point-of-sale processing
for non-cash transactions including credit and debit cards, check verification
and check guarantee. Sales data is routed via our proprietary software and
network to the card issuer for authorization. Services include sales data
capture, data transport and file delivery for payment settlement.
CONSUMER CREDIT CARD SERVICES
SPS manages private label credit card programs for merchants and service
providers. Services include new account processing, credit approval, printing
and mailing monthly statements, cardholder customer service, processing
remittance checks and collecting past due accounts. Based on a client's business
requirements, SPS may also act as an issuer and own the credit card loans
outstanding through our subsidiary, Hurley State Bank.
OUTLOOK AND STRATEGY
The use of electronic forms of payment continues to increase, but the market
place is very competitive. While we view Network Transaction Services as a
mature business, we believe there is profitable growth potential in our core
petroleum segment as well as in specialized niche markets where our customized,
value-added services are most competitive. These niche markets include
transportation, parking, commercial fleet fueling and processing for
Internet-based credit payment transactions. We will also look for opportunities
to partner with other software and service providers to broaden our offerings.
Retailers are using consumer private label credit as a marketing and sales
tool, not just a payment option. Together with our clients, SPS will use data
warehousing and analysis to create targeted offerings and promotional credit
plans to stimulate credit sales and promote customer loyalty. This partnership
strategy will also help to increase our active accounts and receivables. We are
planning for growth in this business to come from a mix of current portfolios
and new start-up programs
OPERATING DATA
Electronic Point-of-Sale
Transaction Processed, in millions
<TABLE>
<S> <C>
1993 303.0
1994 329.0
1995 378.5
1996 424.1
1997 451.4
</TABLE>
Credit Card Loans, dollars in millions
<TABLE>
<S> <C> <C>
Securitized Total loans
Loans (both owned and securitized loans)
1993 430.0 676.7
1994 430.0 1109.9
1995 609.2 2230.0
1996 580.0 2217.5
1997 580.0 1875.8
</TABLE>
Atctive Consumer
Credit Card Account
at Year-End*, in millions(includes both managed and owned accounts.)
<TABLE>
<S> <C>
1993 2.8
1994 3.3
1995 3.7
1996 3.5
1997 3.1
</TABLE>
2 SPS TRANSACTION SERVICES, INC.
<PAGE>
COMMERCIAL ACCOUNTS PROCESSING
SPS offers a billing and accounts receivable management system for clients with
business customers. Our flexible, fee-based services include new account
processing with electronic access to business credit information sources, and
our systems allow for customization according to client needs. We offer monthly
revolving accounts or invoice-based billing.
Outsourcing accounts receivable is gaining acceptance with many credit
professionals, especially for downsized departments or those with capital
restraints. We have targeted the printing, office supplies and building supply
industries, where we have broad experience. All of these industries have high
transaction volumes and can benefit greatly by outsourcing and from electronic
processing.
Active Commercial
Account At Year-End, in thousands
<TABLE>
<S> <C>
1993 395
1994 546
1995 676
1996 898
1997 979
</TABLE>
TELESERVICES
SPS applies customer service skills and advanced call center technology to
provide customized inbound customer support solutions. Highly trained SPS
service representatives act as extended staff and help support our clients'
businesses. Services include on-line technical help-desk support where customer
contact can be via the telephone or Internet/e-mail. We also perform catalog
order-entry and handle a variety of product, billing and service inquiries.
Outsourcing call center activities is recognized as an efficient means of
minimizing costs related to staffing and capital investments. Our TeleServices
business is focusing its sales efforts on marketing its strong technical
support services to hardware and software providers. Our extensive training
programs are a proven competitive advantage. We are also investing in
technology upgrades to reduce expenses, improve customer services and maximize
revenues.
TeleServices
Customer Contacts, in millions
<TABLE>
<S> <C>
1993 4.4
1994 7.5
1995 8.5
1996 9.7
1997 9.3
</TABLE>
TeleServices
Service Minutes, in millions
<TABLE>
<S> <C>
1993 N/A
1994 N/A
1995 43.5
1996 48.5
1997 57.0
</TABLE>
SPS TRANSACTION SERVICES, INC. 3
<PAGE>
Letter to Stockholders
1997 was a very good year, with profits up significantly despite a difficult
credit environment. We earned $38.5 million on a record $346.9 million
in net operating revenues. Our strategy was highly focused, implementing
measures to improve the profitability of our asset-based consumer credit card
business while emphasizing revenue growth in our fee-based businesses.
BUSINESS REVIEW The increase in our 1997 net income reflects
the results of initiatives designed to improve the profitability
of our CONSUMER CREDIT CARD SERVICES business. As anticipated,
the changes we made and the programs we put into place contributed
to a decline in our receivables balance as well as the number of
active consumer accounts. However, we believe the result was a
more profitable portfolio.
We have stepped up the level of target marketing to our owned
private label accounts in order to help our clients increase their
sales and thereby increase our receivables balance. We have also
expanded our services to include bankcard processing for our
affiliate, NOVUS Services, Inc. We are confident in the strength
of our Consumer Credit Card Services business and are optimistic
about its long-term prospects.
We were also very pleased with the performance of our fee-based
businesses. NETWORK TRANSACTION SERVICES added a number of mid-size
petroleum clients and completed enhancements to FleetshareSM, our
commercial fleet fueling system, which allow us to offer petroleum
marketers more features and reporting capabilities. After successful
testing, we have begun the migration of clients who were using
leased-line technology for high transaction volume to a more
efficient satellite service. We also began development of an
extensive system upgrade project designed to improve the flexibility
and feature richness of our network service. And recently, our
point-of-sale Terminal Preparation Facility in Gray, Tenn.,
received ISO 9002 quality certification from the International
Organization of Standardization.
We will continue to pursue our core petroleum market as well as
niche markets, such as transportation and parking, where we can
provide our clients with customized, value-added transaction
services.
Our core office supply superstore clients drove the growth in our
COMMERCIAL ACCOUNTS PROCESSING business. The number of active
commercial accounts increased nine percent in 1997. In the third
quarter, we completed development and testing of a new and more
efficient operating system for our commercial revolving accounts
and recently completed conversion of our major clients to the new
system. This year,
4 SPS TRANSACTION SERVICES, INC
<PAGE>
[PHOTO OF ROBERT L. WIESENECK [PHOTO OF THOMAS C. SCHNEIDER
President and Chief Executive Officer] Chairman of the Board]
we plan to implement new credit marketing programs to help our
clients with independent dealer networks increase their sales
and expand their customer base.
In TELESERVICES, we signed an agreement to support IBM Global
Services, a major Internet Service Provider, which contributed
to an increase in the number of technical help-desk calls. During
the year we were honored to receive an Award for Call Center
Excellence (ACCE), and a STAR Award for "High Call Volume" from
the Software Support Professionals Association. In October, we
opened a fourth operations/call center in Asheville, N.C., that
is specifically designed to support our expanding TeleServices
business. Asheville is operating as a satellite of our nearby Gray,
Tenn., center in order to leverage a number of staff and technical
support activities.
We continued to nurture our emerging businesses. Responding to
the changes in the health care environment, both MedCash Health
Systems, our joint venture, and Med-Link Technologies, our
subsidiary, have refined their target markets and product mix.
Our subsidiary, Ruf Corporation, an innovator in marketing
research and decision support database programs, added new
strategic re-seller relationships to enhance coverage in its
target markets. We have also implemented our first card-based
preferred customer loyalty program for a chain of specialty stores
and are enthusiastic about the potential of our new Electronic
Relationship Marketing(SM) services.
MANAGEMENT UPDATE Last April, Thomas C. Schneider was elected
Chairman of the Board of Directors. He succeeds Philip J. Purcell,
Chairman and CEO of our majority owner, Morgan Stanley, Dean
Witter, Discover & Co. Mr. Purcell has remained on our Board.
SPS TRANSACTION SERVICES, INC. 5
<PAGE>
We also made some organizational changes resulting in an
expanded matrix business structure that better defines
accountability and places increased emphasis on marketing and
new business development.
YEAR 2000 PROJECT SPS has established a firm-wide initiative
to address and resolve the system/applications tasks associated
with the approach of the new millennium. We are committed to
providing our clients and their customers with uninterrupted
services. Our goal is to complete code correction and testing of
all critical systems that will be in use on January 1, 2000 by
the end of 1998. These efforts will not result in any significant
increase in total systems expenses in 1998.
INDUSTRY AND MARKET TRENDS The credit industry is still in the
midst of dealing with significant credit quality issues. We will
continue to analyze cardholder behavior and closely monitor
delinquency and bankruptcy rates.
We believe that several market trends will likely have a
favorable impact on our business services in 1998: the use of
credit and debit cards as an alternative to cash continues to
increase; businesses are outsourcing operating activities to
help reduce fixed expenses; and data mining and target marketing
strategies are being used to make more efficient use of marketing
dollars.
LOOKING FORWARD Our key corporate initiative is to strengthen
top-line growth in revenues while maintaining bottom-line growth
in net income. We've coined the word "Clientactive" to describe
our strategy. It's based on the belief that the best way to grow
our business is to help our clients grow theirs. Our 1998 business
plan addresses the dynamics of each of our business services with
this goal in mind. We plan to increase our marketing focus with a
goal of expanding our businesses and enhancing our client
relationships. Plans include providing integrated solutions and
cross-selling products to increase the level of our services to
our current clients. As always, we plan to maintain firm control of
our operating expenses.
We are backed by an exemplary team of professionals and a
growing list of client and vendor "partners," and we are confident
about 1998 and beyond. Thank you for your continued support.
Sincerely,
/s/ Robert L. Wieseneck /s/ Thomas C. Schneider
ROBERT L. WIESENECK THOMAS C. SCHNEIDER
President and Chairman of the Board
Chief Executive Officer
6 SPS TRANSACTION SERVICES, INC
<PAGE>
At SPS, the key to our current and future performance
is in the dedication to our clients' success that every
associate shares. It's an attitude we call
CLIENTACTIVE
Being Clientactive means being Active, Proactive,
Interactive and Intraactive in serving our clients and
their customers every single day. At the heart of the
Clientactive philosophy is our belief that the best way
to grow our business is to help our clients grow theirs.
SPS TRANSACTION SERVICES, INC. 7
<PAGE>
[TERESSA MURPHY PHOTO]
TERESSA MURPHY,
V.P., IBM Global Services
"We've been consistently
pleased with SPS' flexibility
and the high level of support
they provide to meet our
customers' diverse needs."
8 SPS TRANSACTION SERVICES, INC.
<PAGE>
Clientactive
Being Clientactive is being actively focused on our clients and their
customers. Responsiveness is a critical ingredient. At SPS, everyone knows that
the quality of their individual performance affects the quality of every
service we provide
IBM GLOBAL SERVICES, a major Internet Service
Provider, relies on SPS to provide its business
and institutional contract subscribers with
teleservices such as technical help-desk support
and assistance with billing inquiries. We also
provide enrollment and customer service for
consumer subscribers. Our flexibility and
consistent level of service help IBM to take on
new customers and grow its business. IBM can be
confident in the knowledge that we can tailor
our services to support its customers' needs.
ACTIVE
In managing The Goodyear Card program, SPS
must meet the needs of THE GOODYEAR TIRE & RUBBER
COMPANY dealers. In 1997, the SPS Goodyear team
created "Act Now," a very successful cardholder
activation program where customers were given a
rebate on their credit card accounts. The team also
developed "Round Up," an employee incentive program
to open new Goodyear Card accounts. SPS and Goodyear
recently launched "The Open Road," a yearlong campaign
designed to increase dealer sales and profits while
promoting customer loyalty through credit marketing.
SPS TRANSACTION SERVICES, INC. 9
<PAGE>
MARIE BURRIS,
Director of Credit Sales
and Cash Management,
Catherines Stores
Corporation
"SPS came to us with
the idea for a different
kind of marketing
program. Together we
made it happen. The
result both stimulated
sales and made our
associates and credit
customers proud
to contribute to a
worthy cause."
[MARIE BURRIS PHOTO]
<PAGE>
Clientactive
Being Clientactive is being proactive. SPS associates work to understand not
just our clients' needs, but also those of our clients' customers. That way, we
can anticipate their needs and use our expertise and technology to develop more
effective products and services.
PROACTIVE
SPS suggested using a cause-related marketing
strategy to increase customer loyalty within
CATHERINES STORES CORPORATION'S four store
divisions. Other program goals included enhancing
Catherines' corporate image, increasing credit
sales and strengthening cardholder relationships.
Both Catherines and SPS contributed a portion of
credit sales dollars to St. Jude Children's Research
Hospital and the Susan G. Komen Breast Cancer
Foundation. SPS is also enhancing software to
support Catherines' Customer Bonus Points Program.
SPS further developed FACET,SM a relational
database management system, to analyze cardholder
purchasing patterns. We use the information to create
tailored card activation promotions and sales
incentives for our clients. For example, a new
preferred customer event developed for THE BOMBAY
COMPANY resulted in a substantial increase in credit
sales. SPS also tested specially designed offers for
STAPLES in a customer retention program, and a direct
mail campaign for UNITED AIRLINES that received an
unusually high response.
SPS TRANSACTION SERVICES, INC. 11
<PAGE>
[DAVID EDMONDSON PHOTO]
DAVE EDMONDSON,
Sr. V.P. Marketing,
RadioShack
"Working together
toward the combined
goals of improving
sales and portfolio
profitability, we rein-
vented and reinvigor-
ated our private label
credit card
INTER
12 SPS TRANSACTION SERVICES, INC.
<PAGE>
Clientactive
Being Clientactive is being interactive. At SPS that means ongoing client
communication and collaboration. Client participation results in Clientactive
solutions and in stronger "partner" relationships.
The RADIOSHACK AnswersPlus(R) card program is an
important part of RadioShack's competitive sales
strategy. Last year, SPS teamed with RadioShack
to reposition and rename its private label credit
card program in support of its Answers(R) brand.
The launch of the new card was planned to coincide
with the roll-out of the new Sprint Stores at
RadioShack. New card benefits provide additional
value to AnswersPlus cardholders. The card has
become a vital long-term element in building both
brand and customer relationships.
ACTIVE
SPS' interaction with clients is not just project-
based. Last fall, SPS hosted its fifth annual
PETROLEUM INDUSTRY FORUM, creating an opportunity
for petroleum/convenience store marketers and
industry experts to discuss payment trends, data
communications, quick-serve restaurants, fleet fueling
and customer loyalty. A similar CREDIT MARKETING
CONFERENCE helped clients explore strategies for
dealing with the rapidly changing retail and commercial
environments.
SPS TRANSACTION SERVICES, INC. 13
<PAGE>
INTRA
JOHN KEETER,
Director of Information
Services, A.T. Williams
Oil Company (Wilco*)
"SPS incorporated
our needs in the
development of its
new commercial fleet
fueling program,
Fleetshare. Now we
can offer our Wilco
customers much more
than we could with
our own system."
[JOHN KEETER PHOTO]
14 SPS TRANSACTION SERVICES, INC
<PAGE>
Clientactive
Being Clientactive is being intraactive. It's a word we coined at SPS that
means client-focused teamwork. Teamwork is the way we leverage our most
powerful asset - our people.
ACTIVE
Last year, an SPS cross-functional team conducted
a thorough analysis of our commercial fleet fueling
program, Fleetshare. We reviewed its features and
services from the perspective of both our clients and
their customers. We examined how its features compared
to competitive programs. We also reviewed the supporting
systems to maximize efficiencies, allowing us to better
control expenses and offer value-added services at very
competitive prices. Our team approach to the analysis
included input from current clients and incorporated
ideas from A.T. WILLIAMS OIL COMPANY (Wilco), then a
prospective client. This collaboration and subsequent
testing resulted in new systems and reports, including
more comprehensive information about purchases, the
ability to print individualized company logos on reports
and a computerized solution to handle tax-exempt fleets.
Our newly enhanced Fleetshare program allows our clients
greater flexibility in marketing fueling programs and
provides better control of purchases and expenses for
their fleets. In the future, the team plans to add
features that improve security and prevent fraud.
SPS TRANSACTION SERVICES, INC. 15
<PAGE>
OVERVIEW
The Company's net operating revenues consist of processing and services
revenues, merchant discount revenue and net credit income, which are derived
as a result of its four principal business services: TeleServices, Network
Transaction 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 include revenues received as a result of
TeleServices call center processing and Network Transaction Services such as
electronic transaction processing, the sale and servicing of point-of-sale
terminals, and a System Access Agreement with NOVUS Services, Inc., an
affiliated company. Revenues from TeleServices typically are based upon the
length of service minutes and type of customer contacts processed through
activities such as technical help-desk inquiries, customer billing inquiries
and catalog order processing. In recent years there has been a shift in
pricing away from customer contacts toward service minutes as the principal
underlying driver of revenues in TeleServices. Revenues from electronic
transaction processing typically are based on the number of electronic
point-of-sale transactions processed rather than the dollar transaction amount.
Managed programs include 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 primarily consist of late fee revenues assessed on those
Consumer Credit Card Services accounts for which the Company issues the credit
card on behalf of the client and ownes the credit card loans that are generated
through the use of the card.
Servicing fees on securitized loans are revenues derived from credit card
loansthat 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 Services, portions of which are deferred and accreted to interest
revenue. Generally, credit card sales are subject to a discount charged to the
merchant based upon contractual percentages. This percentage varies by
portfolio and by the type of credit plan offered. 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, investment interest and the accretion of certain deferred
merchant discount revenue. 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, 1997 1996 1995 1996-1997 1995-1996
===========================================================================
NET OPERATING REVENUES
<S> <C> <C> <C> <C> <C>
Processing and service revenues 80.6% 86.2% 74.4% 1.0% 19.2%
Merchant discount revenue 4.4 10.7 15.9 (55.2) (31.1)
Net credit income 15.0 3.1 9.7 419.7 (66.9)
- -----------------------------------------------------
100.0 100.0 100.0 8.1 2.9
OPERATING EXPENSES
Salaries and employee benefits 32.2 30.3 28.1 15.1 10.7
Processing and service expenses 28.4 33.8 29.0 (9.1) 19.9
Other expenses 21.4 24.2 20.4 (4.6) 22.2
=====================================================
82.0 88.3 77.5 0.4 17.2
Income before income taxes 18.0 11.7 22.5 66.2 (46.5)
Income tax expense 6.9 4.5 8.6 67.1 (46.5)
=====================================================
Net income 11.1% 7.2% 13.9% 65.6% (46.5)%
=====================================================
</TABLE>
16 SPS TRANSACTION SERVICES, INC.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1997 COMPARED TO 1996
The Company's net income for 1997 was $38.5 million, a 65.6% increase from
$23.2 million in 1996. Basic earnings per common share was $1.41 for 1997,
compared to $0.86 for 1996. Diluted earnings per common share was $1.41 for
1997, compared to $0.85 for 1996.
The growth in earnings is primarily attributable to a higher yield on the
Company's owned consumer private label credit card portfolios and a decrease in
the provision for loan losses expense, partially offset by lower merchant
discount revenue.
NET OPERATING REVENUES For 1997, net operating revenues were $346.9 million, an
increase of 8.1% over 1996. The increase in net operating revenues resulted
primarily from increases in net credit income and transaction processing
services, offset primarily by a decrease in merchant discount revenue and
servicing fees on securitized loans.
Processing and service revenues were $279.5 million for 1997, compared to
$276.7 million for 1996. Processing and service revenues, representing 80.6%
and 86.2% of net operating revenues for 1997 and 1996, respectively, consisted
of the following:
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Transaction processing services $ 97,817 $ 87,758
Managed programs 88,705 88,598
HSB programs 50,674 51,744
Servicing fees on securitized loans 42,317 48,645
- --------------------------------------------------------------------
Processing and service revenues $279,513 $276,745
====================================================================
</TABLE>
The increase in revenues from transaction processing services resulted
from a higher volume of TeleServices service minutes processed and Network
Transaction Services point-of-sale transactions processed. The number of
TeleServices service minutes processed totaled 57.0 million in 1997 compared to
48.5 million in 1996. The number of TeleServices customer contacts processed
totaled 9.3 million in 1997 compared to 9.7 million in 1996. The number of
electronic point-of-sale transactions processed totaled 451.4 million, up 6.5%
from 424.1 million in 1996. Revenue per point-of-sale transaction was 8.7c. for
1997 and 8.6c. for 1996.
The increase in revenues from managed programs resulted primarily from an
increase in the volume of Commercial Accounts Processing services provided,
offset by a decline in credit life insurance program revenues attributable to
the decline in credit card loans outstanding and a lower number of cardholders
enrolled in the program. The decrease in revenues from HSB programs was due to
a decrease in late fee revenue resulting primarily from a lower number of
delinquent accounts. The decrease in delinquent accounts was attributable to
the paydown of certain portfolios and the Company's portfolio improvement
programs, designed to limit the Company's exposure to higher risk accounts. The
Company had 3.1 million active consumer private label accounts, both owned and
managed, at December 31, 1997, compared with 3.5 million accounts at December
31, 1996. Active commercial accounts grew 9.0% to 979,000 at December 31, 1997,
compared to 898,000 at December 31, 1996.
The decrease in servicing fees on securitized loans was due primarily to a
higher rate of credit losses on securitized loans.
Merchant discount revenue decreased 55.2% to $15.3 million in 1997. The
decrease in merchant discount revenue resulted from decreased sales activity
related to the decline in credit card loans. Merchant discount revenue was 4.4%
and 10.7% of net operating revenues for 1997 and 1996, respectively.
Net credit income increased $42.1 million to $52.1 million in 1997
resulting from a $23.3 million increase in net interest income plus an $18.8
million decrease in provision for loan losses expense. The increase in interest
revenue resulted from an increase in the yield on credit card loans (due in
part to performance-based pricing initiatives implemented in 1996) and from the
accretion of $16.7 million of deferred merchant discount revenues into interest
income during 1997 related to interest-deferred promotional payment plans.
These factors were partially offset by higher charge-offs of interest revenue
and lower average credit card loans outstanding. The decrease in interest
expense was due to a decrease in average borrowings reflective of the decline
in average credit card loans, partially offset by a 22 basis point increase in
average interest rates on borrowings. The decrease in provision for loan losses
is attributable to a decrease in credit card loans and a charge to provision
expense in 1996 that increased the allowance for loan losses rate to provide
for continued high rates of delinquencies and bankruptcies (see "Asset Quality"
caption). These factors were partially offset by an increase in the net
charge-off rate, coupled with increased charge-offs.
The decline in credit card loans is related to certain portfolios that are
in paydown, such as the Incredible Universe and McDuff portfolios, affected by
Tandy Corporation's decision to close its Incredible Universe and McDuff stores
beginning in the first quarter of 1997, and to the Company's portfolio
improvement programs designed to limit the Company's exposure to higher risk
accounts. Net charge-offs as a percentage of average credit card loans on an
owned basis increased to 9.4% for 1997 from 7.8% for 1996. The industry-wide
trend of increasing charge-off rates, which the Company believes is related to
increased consumer debt levels and bankruptcy rates, contributed to the
increase in the Company's charge-off rate. The Company believes that this
industry-wide trend may continue in 1998. In addition, the Company's lower
average credit card loans outstanding in 1997 also contributed to the increase
in the charge-off percentage.
SPS TRANSACTION SERVICES, INC. 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In 1996, the Company took corrective measures to reduce future charge-offs
as discussed on Page 19 under the "1996 Compared to 1995" caption. In 1997, the
Company intensified these efforts and continued to implement measures designed
to improve the credit quality of both new and existing credit card accounts.
The Company's expectations about future charge-off rates and portfolio
behaviors 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 spending and 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 1997, total operating expenses were $284.6 million
compared to $283.4 million in 1996. Total operating expenses as a percentage of
net operating revenues declined to 82.0% in 1997, from 88.3% in 1996.
Salaries and Employee Benefits - In 1997, salaries and employee benefits
totaled $111.8 million, an increase of 15.1% from $97.1 million in 1996. The
increase in salaries and employee benefits was attributable to increased
collection efforts, higher TeleServices call volumes and increased benefits
expenses.
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 decreased
9.1% to $98.6 million for 1997. The decrease in processing and service expenses
resulted from a decrease in credit life insurance expenses, an adjustment
resulting from the sale of Morgan Stanley, Dean Witter, Discover & Co.'s
("MSDWD") indirect interest in one of the Company's transaction processing
vendors and a lower volume of private label transactions processed. Processing
and service expenses as a percentage of net operating revenues decreased to
28.4% for 1997, compared to 33.8% for 1996.
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 $74.2 million and $77.8 million
for 1997 and 1996, respectively. The decrease in other expenses of 4.6%
resulted from decreased merchant marketing incentives expense, an adjustment
resulting from the sale of MSDWD's indirect interest in one of the Company's
transaction processing vendors and decreased fraud losses resulting from early
fraud detection initiatives coupled with a lower incidence of fraudulent
transactions. These expense decreases were partially offset by increased
outside collection agency, legal fee, occupancy and administrative expenses.
Other expenses were 21.4% and 24.2% of net operating revenues for 1997 and
1996, respectively.
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. Basic earnings per common share was $0.86 for 1996,
compared to $1.60 for 1995. Diluted earnings per common share was $0.85 for
1996, compared to $1.59 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.
Processing and service revenues increased 19.2% to $276.7 million for
1996, 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>
18 SPS TRANSACTION SERVICES, INC.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 number of electronic
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 8.6c. in
1996 from 8.8c. in 1995. The number of TeleServices service minutes processed
totaled 48.5 million, up 11.4% from 43.5 million in 1995. The number of
TeleServices customer contacts processed totaled 9.7 million, up 14.6% from 8.5
million in 1995.
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 RadioShack and Tandy Name Brand credit card
portfolios from managed to owned programs in March 1995 had additional impact
on the comparison. The Company had 3.5 million active consumer private label
accounts, both owned and managed, at December 31, 1996, compared with 3.7
million accounts at December 31, 1995. Active commercial accounts grew 32.8% to
898,000 at December 31, 1996, compared to 676,000 at December 31, 1995.
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 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
to be accreted as interest income over the life of the promotional payment
plan. 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.
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 of $64.1 million resulted from an increase in average credit card loans
outstanding and changes in terms initiated during the year. The increase in
interest expense of $13.8 million was due to an increase in average borrowings
to finance the growth in average credit card loans, partially offset by lower
interest rates 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
charge-off rates contributed to the increase in the Company's charge-off rate.
Throughout 1996, the Company took corrective measures to reduce future
charge-offs by implementing portfolio improvement programs that analyze credit
risk and credit behavior scores for existing accounts, taking into
consideration cardholders' 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 also instituted changes in cardholder
terms and has implemented certain client pricing revisions, including those for
promotional programs.
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, 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 RadioShack 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, compared to 29.0% for 1995.
SPS TRANSACTION SERVICES, INC. 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
SUPPLEMENTAL INFORMATION
COMPONENTS OF SERVICING FEES ON SECURITIZED LOANS
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Processing and service revenues $ 14,620 $ 14,053 $ 12,610
Merchant discount revenue 4,169 4,779 -
Interest revenue 106,732 104,587 107,584
Interest expense (33,486) (33,121) (35,726)
Provision for loan losses (49,718) (41,653) (32,632)
- ----------------------------------------------------------------------------------
Servicing fees on securitized loans $ 42,317 $ 48,645 $ 51,836
==================================================================================
</TABLE>
ASSET QUALITY
The table below sets forth 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 not material. The Company has no foreign loans. Owned credit card
loans decreased $341.7 million to $1.3 billion at December 31, 1997. 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 contributed to the increase in the
Company's loan delinquency rates in 1997 and 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, 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, see
Note 3 ("Credit Card Loans and Allowance for Loan Losses") to the consolidated
financial statements.
The provision for loan losses for 1997 decreased to $118.4 million
primarily due to the decrease in the amount of credit card loans outstanding and
a charge to provision expense in 1996 that increased the allowance for loan
losses rate to provide for continued high rates of delinquencies and
bankruptcies. The decrease in provision for loan losses was partially offset by
an increase in the net charge-off rate, coupled with increased charge-offs. Net
charge-offs for 1997 increased $14.6 million to $131.0 million.
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
OWNED TOTAL LOANS* Owned Total Loans* Owned Total Loans*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average credit card loans $1,390,998 $1,970,998 $1,512,986 $2,095,026 $1,152,309 $1,678,128
Period-end credit card loans $1,295,787 $1,875,787 $1,637,507 $2,217,507 $1,620,833 $2,229,992
Net charge-offs as a % of
average credit card loans 9.4% 9.2% 7.8% 7.7% 4.4% 5.0%
Allowance for loan losses as a %
of period-end credit card loans 6.2% 5.5% 5.4% 5.0% 3.9% 4.1%
Accruing loans contractually past due
as to principal and interest payments
30-89 days $ 74,085 $ 100,413 $ 81,354 $ 108,306 $ 68,173 $ 95,681
5.7% 5.4% 5.0% 4.9% 4.2% 4.3%
90-179 days $ 60,360 $ 79,433 68,035 $ 86,238 $ 43,207 $ 59,679
4.7% 4.2% 4.2% 3.9% 2.7% 2.7%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total loans represents both owned and securitized credit card loans.
20 SPS TRANSACTION SERVICES, INC.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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
generally 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.
LIQUIDITY AND CAPITAL RESOURCES
FUNDING AND CAPITAL POLICIES 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, Hurley State 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; see Note 13
("Capital Requirements") to the consolidated financial statements.
The Company's interest rate risk policies are designed to reduce the
potential volatility of earnings that arises 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.
PRINCIPAL SOURCES OF FUNDING 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 MSDWD.
HSB administers a CD program through which 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 12 months. CDs under the retail CD
program are issued to investors through Dean Witter Reynolds Inc., a subsidiary
of MSDWD, and generally have a maturity of two to 10 years. As of December 31,
1997, CDs outstanding were $504.1 million, of which institutional CDs
represented $227.8 million and retail CDs represented $276.3 million.
HSB maintains a loan securitization program with Barton Capital
Corporation ("BCC"), and at December 31, 1997, outstanding loans under such
program were $300.0 million. HSB also maintains a loan securitization program
with Receivables Capital Corporation ("RCC"), and at December 31, 1997,
outstanding loans under such program were $280.0 million. At December 31, 1997,
$580.0 million or 30.9% of the HSB Program loans had been sold through loan
securitizations.
The BCC and RCC loan securitization programs are scheduled to expire in
April 1998 and October 1998, respectively. The amended and restated agreements
with BCC and RCC include the elimination of the MSDWD guarantee (which provided
credit support in the transaction) and its replacement with a funded cash
collateral account recorded on the consolidated balance sheets as "amounts due
from asset securitizations." Funding for this cash collateral account is
provided by a special purpose corporation established as a subsidiary of the
Company. The Company expects to renew or replace these facilities on or prior
to their expiration dates. If these programs are not extended on or prior to
their expiration dates, collections allocable to BCC and RCC under the programs
will be paid to BCC or to RCC, as applicable, and the interests of BCC and of
RCC in the applicable securitization pool will gradually decline to zero. Any
receivables originated after a program's expiration date would remain on the
Company's consolidated balance sheet.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has an Amended and Restated Borrowing Agreement (as amended,
the "Borrowing Agreement") and a facility fee letter agreement (as amended, the
"Facility Fee Agreement") (collectively, the "Financing Agreements") with
MSDWD, pursuant to which MSDWD has agreed to provide financing to the Company.
The maximum amount available under the Borrowing Agreement, which expires April
11, 1998, is $1.2 billion. At January 31, 1998, the Company had $570.0 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 MSDWD.
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 MSDWD. If the Company were unable to reach a
satisfactory agreement with MSDWD for the renewal or the replacement of the
Financing Agreements, the Company believes it would 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 at
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.
Cash flows from operating activities resulted in net proceeds of cash of
$96.9 million in 1997, $196.4 million in 1996 and $88.2 million in 1995.
Cash flows from investing activities primarily consist of the
growth/decline in 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 proceeds
of cash of $199.5 million in 1997 and net uses of cash of $140.7 million and
$976.0 million in 1996 and 1995, respectively. The net principal
collected/disbursed on credit card loans, representing the difference between
sales made using the cards and payments received from cardholders, provided
cash of $208.8 million in 1997 and used cash of $273.8 million and $771.1
million in 1996 and 1995, 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 RadioShack 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. The purchase of
equipment used cash of $14.4 million, $11.5 million and $11.1 million in 1997,
1996 and 1995, respectively.
Cash flows from financing activities primarily consist of borrowings
and deposits. Such financing activities resulted in net uses of cash of $296.9
million and $49.3 million in 1997 and 1996, respectively, and net proceeds of
cash of $893.5 million in 1995. Amounts due to affiliated companies resulted in
net uses of cash of $343.3 million and $128.4 million in 1997 and 1996,
respectively, and net proceeds of cash of $945.0 million in 1995.
Interest-bearing deposits resulted in net proceeds of cash of $49.7 million,
$82.4 million and $171.8 million in 1997, 1996 and 1995, respectively. The
repayment of short-term notes payable to Tandy Corporation resulted in net uses
of cash of $2.1 million and $227.0 million in 1996 and 1995, respectively. At
December 31, 1997, 1996 and 1995, the Company had cash equivalents of $14.7
million, $15.2 million and $8.9 million, respectively.
INTEREST RATE RISK The Company's matched financing strategy targets 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
into with an affiliate. Interest rate cap agreements are entered into with
institutions that are established dealers in these instruments and that
maintain certain minimum credit criteria established by the Company. Costs of
funds agreements are entered into as part of agreements pursuant to which the
Company both 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 with notional amounts of $429.1 million and $465.6 million at
December 31, 1997 and 1996, respectively.
At December 31, 1997, the Company had no interest rate cap agreements.
At December 31, 1996, the Company had outstanding interest rate cap agreements
with notional amounts of $40.0 million.
At December 31, 1997 and 1996, the Company's interest rate swap
agreements had maturities ranging from July 1998 to December 2000, and from
October 1997 to December 2000, respectively. The Company's use of matched
financing along with interest rate swaps, caps and cost of funds agreements are
managed in a manner consistent with the Company's overall risk management
policies and procedures (see "Risk Management" caption).
YEAR 2000 COMPLIANCE
Many of the world's computer systems and applications currently record years in
a two-digit format with the century assumed to be 1900. Consequently, they will
be unable to properly interpret dates beyond the year 1999, which could lead to
business disruptions (the "Year 2000" issue). The potential costs and
uncertainties associated with addressing this issue will depend on a number of
factors including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other parties
with which they electronically interact, such as clients, vendors and financial
institutions. In 1994, the Company developed preliminary plans to address Year
2000 compliance. Since that time, the Company has changed point-of-sale
transaction processing applications and systems to ensure "card expiration
date" compliance and has certified its Network Transaction client environments
for the same. The Company also established a Year 2000 Project Team to develop
and manage a comprehensive company-wide compliance process. The team is using a
multi-phase methodology to ensure a comprehensive and consistent approach to
the coordination and management of the compliance effort. The Company has
completed the assessment phase and has begun the correction, testing and
validation phases. It is our goal to complete, by the end of 1998, code
correction and testing of all critical systems that will be in use on January
1, 2000. In addition, the Company is actively working with all of its major
external parties to assess their compliance efforts and the Company's exposure
associated with non-compliance by third parties.
Based upon current information, the Company estimates that company-wide
Year 2000 expenditures for 1997 through 1999 will be approximately $15 million,
with $3 million incurred in 1997. Costs relating to this project are being
expensed by the Company during the period in which they are incurred. The
Company's expectations about future costs associated with the Year 2000 issue
are subject to uncertainties that could cause actual results to differ
materially from what has been discussed above. Factors that could influence the
amount and timing of future costs include the success of the Company in
identifying systems and programs that use two-digit year codes, the nature and
amount of programming required to upgrade or replace each of the affected
systems and programs, the rate and magnitude of related labor and consulting
costs, and the success of the Company's external parties in addressing the Year
2000 issue.
RISK MANAGEMENT
RISK MANAGEMENT POLICY AND CONTROL STRUCTURE Risk is an inherent part of the
Company's businesses and activities. The extent to which the Company properly
and effectively identifies, assesses, monitors and manages each of the various
types of risks involved in its activities is critical to its soundness and
profitability. The Company's broad-based business activities help reduce the
impact that volatility in any particular area or related areas may have on its
net operating revenues as a whole. The Company seeks to identify, assess,
monitor and manage, in accordance with defined policies and procedures, the
following principal risks involved in the Company's business activities: market
risk, credit risk, operational risk, legal risk and funding risk. Funding risk
is discussed under the "Liquidity and Capital Resources" caption.
Risk management at the Company is an integrated process with independent
oversight that requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to
assist in the identification, assessment and control of various risks.
SPS TRANSACTION SERVICES, INC. 23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The risk management policies of the Company are established by its
senior officers who review the Company's performance relative to these
policies. In addition, management has established a Loan Committee to determine
and monitor policies associated with credit risk, loan pricing and reserve
adequacy. The Controllers, Internal Audit, Law, Compliance and Governmental
Affairs Departments, which are all independent of the Company and its business
units, assist senior management in monitoring and controlling the Company's
overall risk profile. The Company continues to be committed to employing
qualified personnel with appropriate expertise in each of its various
administrative and business areas to effectively implement the Company's risk
management and monitoring systems and processes.
The following is a discussion of the Company's risk management policies
and procedures relating to its principal risks other than funding risk.
MARKET RISK Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or other market
factors, such as liquidity, will result in losses for a specified business line
or portfolio.
INTEREST RATE RISK AND MANAGEMENT In the Company's credit card activities, the
Company is exposed to market risk primarily from changes in interest rates,
which impact interest-earning assets, principally credit card loans, net
servicing fees received in connection with credit card loans sold through asset
securitizations and the interest costs related to the financing of these
assets. Financing of the Company's credit card activities includes
certificates of deposit, securitization of credit card loans and borrowings
from MSDWD.
The Company's interest rate risk management policies are designed to
reduce the potential volatility of earnings that arise 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 (see "Interest Rate Risk" discussion under the
"Liquidity and Capital Resources" caption). The Company has little or no
interest rate risk on its Network Transaction Services, TeleServices or
Commercial Accounts Processing businesses.
SENSITIVITY ANALYSIS The Company uses a variety of techniques to assess its
interest rate risk exposure, one of which is interest rate sensitivity
simulation. For purposes of presenting the possi-ble earnings effect of a
hypothetical, adverse change in interest rates over the twelve-month period
from December 31, 1997, the Company has chosen to assume that all interest rate
sensitive assets and liabilities will be impacted by a hypothetical, immediate
100 basis point increase in interest rates as of the beginning of the period.
Interest rate sensitive assets are assumed to be those for which the
stated interest rate is not contractually fixed for the next twelve-month
period. Thus, assets that have a market-based index, such as the prime rate,
which will reset before the end of the twelve-month period, or assets whose
rates are fixed at December 31, 1997 but which will mature, or otherwise
contractually reset to a market-based index rate, prior to the end of the
twelve-month period, are rate-sensitive. The latter category includes special
promotional credit card loan programs with deferred interest incentives that
will contractually reprice in accordance with the Company's normal market-based
pricing structure. For purposes of measuring rate sensitivity for such loans,
only the effect of the hypothetical 100 basis point change in the underlying
market-based index, such as the prime rate, has been considered rather than the
full change in the rate to which the loan would contractually reprice. For
assets that have a fixed rate at December 31, 1997 but which contractually
will, or are assumed to, reset to a market-based index during the next twelve
months, earnings sensitivity is measured from the expected repricing date. In
addition, for all interest rate sensitive assets, earnings sensitivity is
calculated net of expected loan losses.
Interest rate sensitive liabilities are assumed to be those for which the
stated interest rate is not contractually fixed for the next twelve-month
period. Thus, liabilities which have a market-based index, such as commercial
paper or federal funds rate, which will reset before the end of the
twelve-month period, or liabilities whose rates are fixed at December 31, 1997
but which will mature and reset to a market-based indexed rate prior to the end
of the twelve-month period, are rate sensitive. For liabilities that have a
fixed rate at December 31, 1997 but which are assumed to reset to a
market-based index during the next twelve months, earnings sensitivity is
measured from the expected repricing date.
SPS TRANSACTION SERVICES, INC. 24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Assuming a hypothetical, immediate 100 basis point increase in the
interest rates affecting all interest rate sensitive assets and liabilities as
of December 31, 1997, net income over the next twelve-month period would be
reduced by approximately $0.9 million.
The hypothetical model assumes that the balances of interest rate
sensitive assets and liabilities at December 31, 1997 will remain constant over
the next twelve-month period; there is no assumed growth, strategic change in
business focus, change in asset pricing philosophy or change in asset/liability
funding mix. Thus, this model represents a static analysis that cannot
adequately portray how the Company would respond to significant changes in
market conditions. Furthermore, the analysis does not necessarily reflect the
Company's expectations regarding the movement of interest rates in the near
term, including the likelihood of an immediate 100 basis point change in market
interest rates, nor necessarily the actual effect on earnings if such rate
changes were to occur.
CREDIT RISK The Company's exposure to credit risk arises from the possibility
that a party to a transaction might fail to perform under its contractual
commitment, resulting in the Company incurring losses. Potential credit
cardholders undergo credit reviews by the Credit Department to establish that
they meet standards of ability and willingness to pay, and credit card
applications are evaluated using credit scoring systems (statistical evaluation
models that assign point values to information contained in applications). The
Company's credit scoring systems are customized using the Company's policies,
criteria and historical data and are required to be reviewed by the Loan
Committee according to Company policy. Each cardholder's credit line is
reviewed at least annually, and actions resulting from such review may include
lowering a cardholder's credit line or closing the account.
OPERATIONAL RISK Operational risk refers to the risk of human error and
malfeasance of deficiencies in the Company's operating systems. Operating
systems are designed to provide for the efficient servicing of credit card
accounts, and the Company manages operational risk through its system of
internal controls that provides checks and balances to ensure that transactions
and other account-related activity (e.g., new account solicitation, transaction
authorization and processing, billing and collection of delinquent accounts)
are properly approved, processed, recorded and reconciled. Disaster recovery
plans are in place on a Company-wide basis for critical systems and operating
locations, and redundancies are built into the systems as deemed appropriate.
In addition, the Internal Audit Department, which reports to senior
management and the Audit Committee of the Board of Directors, assesses the
Company's operations and control environment through periodic examinations of
business operational areas.
LEGAL RISK Legal risk includes the risk of non-compliance with applicable legal
and regulatory requirements and the risk that a client's or vendor's
performance obligations will be unenforceable. The Company generally is subject
to extensive regulation in the different jurisdictions in which it conducts its
business. The Company has established legal standards and procedures that are
designed to ensure compliance with all applicable statutory and regulatory
requirements. The Company, principally through the Law, Compliance and
Governmental Affairs Department, also has established procedures that are
designed to ensure that senior management's policies relating to conduct,
ethics and business practices are followed. In connection with its business,
the Company has various procedures addressing issues such as regulatory capital
requirements, new products, credit granting, collection activities and
record-keeping. The Company also has established certain procedures to mitigate
the risk that a client's or vendor's performance obligations will be
unenforceable, including consideration of such party's legal authority and
capacity, adequacy of legal documentation, the permissibility of a transaction
under applicable law and whether applicable bankruptcy or insolvency laws limit
or alter contractual remedies.
SPS TRANSACTION SERVICES, INC. 25
<PAGE>
CONSOLIDATED BALANCE SHEETS In thousands, except
share data
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,730 $ 15,205
Investments held to maturity - at amortized cost 36,617 41,675
Credit card loans 1,295,787 1,637,507
Allowance for loan losses (79,726) (88,397)
- --------------------------------------------------------------------------------------------------
Credit card loans, net 1,216,061 1,549,110
Accrued interest receivable 21,847 21,141
Accounts receivable 29,349 42,202
Due from affiliated companies 9,921 9,900
Amounts due from asset securitizations 93,260 -
Premises and equipment, net 32,895 25,294
Deferred income taxes 43,059 38,266
Prepaid expenses and other assets 14,664 17,992
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,512,403 $1,760,785
==================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $ 6,206 $ 9,012
Interest-bearing 504,088 454,423
- --------------------------------------------------------------------------------------------------
Total deposits 510,294 463,435
Accounts payable, accrued expenses and other 80,283 72,655
Income taxes payable 19,725 17,756
Due to affiliated companies 639,066 982,547
- --------------------------------------------------------------------------------------------------
Total liabilities 1,249,368 1,536,393
- --------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 100,000 shares
authorized; none issued or outstanding - -
Common stock, $.01 par value, 40,000,000 and 40,000,000 shares
authorized; 27,276,269 and 27,242,207 shares issued;
27,206,883 and 27,187,462 shares outstanding at
December 31, 1997 and 1996, respectively 273 272
Capital in excess of par value 81,586 81,096
Retained earnings 182,845 144,345
Common stock held in treasury, at cost, $.01 par value, 69,386 and
54,745 shares at December 31, 1997 and 1996, respectively (1,662) (1,312)
Stock compensation related adjustments (7) (9)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 263,035 224,392
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,512,403 $1,760,785
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
SPS TRANSACTION SERVICES, INC. 26
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME In thousands,
except per share data
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Processing and service revenues $279,513 $276,745 $232,120
Merchant discount revenue 15,289 34,153 49,550
- -----------------------------------------------------------------------------------------------------------
294,802 310,898 281,670
Interest revenue 245,194 226,266 162,205
Interest expense 74,748 79,129 65,361
- -----------------------------------------------------------------------------------------------------------
Net interest income 170,446 147,137 96,844
Provision for loan losses 118,363 137,115 66,522
- -----------------------------------------------------------------------------------------------------------
Net credit income 52,083 10,022 30,322
- -----------------------------------------------------------------------------------------------------------
Net operating revenues 346,885 320,920 311,992
Salaries and employee benefits 111,770 97,117 87,730
Processing and service expenses 98,624 108,544 90,535
Occupancy expense 10,987 9,438 7,819
Other expenses 63,204 68,328 55,799
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 284,585 283,427 241,883
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 62,300 37,493 70,109
Income tax expense 23,800 14,247 26,636
- -----------------------------------------------------------------------------------------------------------
Net income $ 38,500 $ 23,246 $ 43,473
===========================================================================================================
Basic earnings per common share $ 1.41 $ 0.86 $ 1.60
Diluted earnings per common share 1.41 0.85 1.59
===========================================================================================================
Basic weighted average common shares outstanding 27,211 27,171 27,093
Diluted weighted average common shares outstanding 27,399 27,375 27,382
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
SPS TRANSACTION SERVICES, INC. 27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 38,500 $ 23,246 $ 43,473
Adjustments to reconcile net income to net cash flows
from operating activities
Depreciation and amortization 12,158 14,468 11,751
Imputed interest on notes payable - 15 5,605
Provision for loan losses 118,363 137,115 66,522
Compensation payable in common stock 72 855 401
Deferred income taxes (4,793) (11,990) (4,282)
(Increase) decrease in operating assets
Amounts due from affiliated companies (21) (5,124) (256)
Accrued interest receivable and accounts receivable 12,147 (10,832) (16,961)
Amounts due from asset securitizations (93,260) - -
Prepaid expenses and other assets 2,061 40,234 (35,853)
Increase (decrease) in operating liabilities
Accounts payable, accrued expenses and other 9,843 1,167 9,411
Income taxes payable 1,969 7,055 3,748
Amounts due to affiliated companies (135) 142 4,619
- ------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 96,904 196,351 88,178
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments held to maturity - purchases (237,292) (276,445) (123,687)
Investments held to maturity - maturities 242,350 282,200 86,729
Net principal collected (disbursed) on credit card loans 208,820 (273,823) (771,057)
Purchase of credit card portfolios - - (306,903)
Proceeds from sale of credit card loans - 138,861 150,000
Purchases of premises and equipment, net (14,402) (11,516) (11,105)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities 199,476 (140,723) (976,023)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in noninterest-bearing deposits (2,806) (1,258) 5,011
Net increase in interest-bearing deposits 49,665 82,350 171,795
Net (decrease) increase in due to affiliated companies (343,346) (128,406) 945,011
Repayment of notes payable - (2,110) (227,021)
Proceeds from exercise of stock options 52 622 665
Purchase of treasury stock, at cost (420) (500) (1,957)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (296,855) (49,302) 893,504
- ------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS (475) 6,326 5,659
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 15,205 8,879 3,220
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, END OF YEAR $ 14,730 $ 15,205 $ 8,879
==============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 75,299 $ 79,627 $ 59,353
Cash paid for income taxes 24,214 19,231 27,192
==============================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Short-term notes, net issued to purchase credit card portfolios $ - $ - $ 48,333
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
SPS TRANSACTION SERVICES, INC. 28
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY In thousands
<TABLE>
<CAPTION>
Common Stock
Capital in Stock Held Compensation Total
Preferred Common Excess of Retained in Treasury, Related Stockholders'
Stock Stock Par Value Earnings at Cost Adjustments Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Compensation payable in
common stock 401 401
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
Compensation payable in
common stock 120 1,145 (410) 855
Purchase of treasury stock, at cost (500) (500)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 - 272 81,096 144,345 (1,312) (9) 224,392
- --------------------------------------------------------------------------------------------------------------------------------
Net income 38,500 38,500
Exercise of stock options 1 51 52
Employee Stock Purchase Plan 439 439
Compensation payable in
common stock 70 2 72
Purchase of treasury stock, at cost (420) (420)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ - $273 $81,586 $182,845 $ (1,662) $ (7) $263,035
================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
SPS TRANSACTION SERVICES, INC. 29
<PAGE>
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 73.5%
majority owned subsidiary of NOVUS Credit Services Inc. ("NCSI"), which in turn
is a wholly owned, direct subsidiary of Morgan Stanley, Dean Witter, Discover &
Co. ("MSDWD").
On May 31, 1997, Morgan Stanley Group Inc. was merged with and into Dean
Witter, Discover & Co. At that time Dean Witter, Discover & Co. changed its
corporate name to Morgan Stanley, Dean Witter, Discover & Co.
The Company provides a range of technology outsourcing services including
the processing of credit and debit card transactions, consumer private label
credit card programs, commercial accounts processing services, and call center
customer service activities in the United States. SPS Payment Systems, Inc.
("SPS"), a wholly owned subsidiary of the Company, is incorporated in the State
of Delaware. Hurley State Bank ("HSB"), a wholly owned subsidiary of the
Company, is chartered as a bank by the State of South Dakota and is a member of
the Federal Deposit Insurance Corporation.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions regarding credit card loan loss levels, the potential
outcome of litigation and other matters that affect the financial statements
and related disclosures. Management believes that the estimates utilized in the
preparation of the consolidated financial statements are prudent and
reasonable. 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 consist of cash and highly
liquid investments not held for resale with maturities, when purchased, of
three months or less.
Investments Held to Maturity - Investments held to maturity include those
investments that the Company has the intent and ability
to hold to maturity. These investments consist of U.S. Treasury securities that
are reported at amortized cost, which approximates fair market value. All such
investments at December 31, 1997 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.
Allowance 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.
30 SPS TRANSACTION SERVICES, INC.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 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 adoption of the enacted provisions of SFAS No. 125 had no
material effect on the Company's financial position or results of operations.
Securitization of Credit Card Loans - The Company periodically sells credit
card loans through asset securitizations and continues to service these loans.
The revenues derived from servicing these 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 are not material. Amounts due from
asset securitizations in the consolidated balance sheets represent
interest-earning credit enhancement reserve funds maintained with third
parties.
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 temporary differences between the financial statement and income tax bases
of assets and liabilities, using currently enacted tax rates.
Earnings per Share - The calculations of basic and diluted earnings per common
share are based on the weighted average number of common shares outstanding for
basic earnings per share and the total weighted average number of common shares
and share equivalents outstanding for diluted earnings per share. The
difference between basic and diluted earnings per share for the years ended
December 31, 1997, 1996 and 1995 is the result of including weighted common
share equivalents totaling 188,514, 203,941 and 289,012, respectively, in the
computation of diluted earnings per share.
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 as compared to instances in
which 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) has been deferred and accreted to interest income using
the interest method over periods equal to the duration of the plans that
originated the merchant discount revenue. The amount of net deferred merchant
discount revenue at December 31, 1997 and 1996 was $4.7 million and $9.3
million, respectively.
SPS TRANSACTION SERVICES, INC. 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 - As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected to continue to account for
its stock-based compensation plans using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Under the provisions of APB No. 25, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of grant over the amount an
employee must pay to acquire the stock.
New Accounting Pronouncements - As of January 1, 1997, the Company adopted SFAS
No. 125, which was effective for transfers of financial assets made after
December 31, 1996. SFAS No. 125 provides financial reporting standards for the
derecognition and recognition of financial assets, including the distinction
between transfers of financial assets which should be recorded as sales and
those which should be recorded as secured borrowings. The adoption of the
enacted provisions of SFAS No. 125 had no material effect on the Company's
consolidated financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("EPS"), effective for periods ending after December 15, 1997, with restatement
required for all prior periods. SFAS No. 128 maintains the previous EPS
category of net income per common share with "basic EPS," which similarly
reflects no dilution from common stock equivalents, and requires "diluted EPS"
which reflects dilution from common stock equivalents based on the average
price per share of the Company's common stock during the period. The adoption
of SFAS No. 128 had no material effect on the Company's EPS calculations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements, which are effective for fiscal years
beginning after December 15, 1997, establish standards for the reporting and
display of comprehensive income and the disclosure requirements related to
segments.
NOTE 3 CREDIT CARD LOANS AND ALLOWANCE FOR LOAN LOSSES
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 88,397 $ 63,704 $ 24,090
Provision for loan losses 118,363 137,115 66,522
Purchase of credit card portfolios - - 30,594
Charge-offs (153,645) (138,181) (67,754)
Recoveries 22,611 21,759 16,801
- -------------------------------------------------------------------------------
Net charge-offs (131,034) (116,422) (50,953)
- -------------------------------------------------------------------------------
Other (1) 4,000 4,000 (6,549)
- -------------------------------------------------------------------------------
Balance, end of year $ 79,726 $ 88,397 $ 63,704
===============================================================================
</TABLE>
(1) Reflects net transfers related to asset securitizations.
At December 31, 1997 and 1996, $428.1 million and $527.9 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, these amounts may not necessarily be indicative of the Company's
credit card loan repricing schedule.
At December 31, 1997 and 1996, the Company had commitments to extend
credit in the amount of $17.9 billion and $16.9 billion, 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 sold through asset securitization transactions and
serviced by the Company totaled $580.0 million at December 31, 1997 and 1996.
32 SPS TRANSACTION SERVICES, INC.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 TRANSACTIONS WITH AFFILIATED COMPANIES
The Company is affiliated with several entities through common direct or
indirect ownership by NCSI and MSDWD. 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 are presented below. Included in processing and service
revenues are amounts derived from a sub-servicing agreement with an affiliate
amounting to $43.6 million, $36.5 million and $27.0 million for 1997, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Processing and service revenues $63,320 $55,294 $42,505
Interest expense 60,773 66,771 51,411
Occupancy expense 3,352 3,224 3,127
Other expenses 10,279 11,029 11,215
- -------------------------------------------------------------------------------
</TABLE>
Due from affiliated companies was comprised of the following:
<TABLE>
<CAPTION>
In thousands, December 31, 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables
NOVUS Services, Inc. $1,747 $2,156
MountainWest Financial 7,912 7,744
NOVUS Credit Services Inc. 262 -
- -------------------------------------------------------------------------------
Due from affiliated companies $9,921 $9,900
===============================================================================
</TABLE>
Due to affiliated companies was comprised of the following:
<TABLE>
<CAPTION>
In thousands, December 31, 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Amounts due for services
MSDWD $ 1,412 $ 1,363
NOVUS Credit Services Inc. 10,217 9,145
Prime Option Services 135 43
- -------------------------------------------------------------------------------
$11,764 $10,551
===============================================================================
Borrowings due to MSDWD
Borrowings under facility,
due on demand $624,088 $967,584
Accrued interest payable
on MSDWD borrowings 3,214 4,412
- -------------------------------------------------------------------------------
$627,302 $971,996
===============================================================================
</TABLE>
The weighted average annual interest rate on borrowings due to MSDWD,
excluding the effects of interest rate exchange contracts, was 5.9% and 5.6%
for 1997 and 1996, respectively. At December 31, 1997 and 1996, borrowings due
to MSDWD were subject to interest rate exchange contracts with notional amounts
of $123.1 million and $151.7 million, respectively. Such interest rate exchange
contracts consisted of interest rate swaps and cost of funds agreements, which
primarily converted MSDWD borrowings to fixed rates. At December 31, 1996,
interest rate cap agreements with notional amounts of $30 million set weighted
average rate limits of 3.5% on MSDWD borrowings. There were no interest rate
cap agreements at December 31, 1997.
As of December 31, 1997 and 1996, the weighted average interest rate on
borrowings due to MSDWD, excluding the effects of interest rate exchange
contracts, was 6.3% and 5.6%, respectively. Interest rate exchange contracts
had no material effect on those weighted average interest rates.
NOTE 5 DEPOSITS
A summary of deposits by type was as follows:
<TABLE>
<CAPTION>
In thousands, December 31, 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing deposits $ 6,206 $ 9,012
Certificates of deposit 504,088 454,423
- -------------------------------------------------------------------------------
Total deposits $510,294 $463,435
===============================================================================
</TABLE>
Certificates of deposit include deposits sold through Dean Witter Reynolds
Inc., an affiliate, of $276.3 million and $241.2 million at December 31, 1997
and 1996, respectively.
The weighted average annual interest rate on interest-bearing deposits,
excluding the effects of interest rate exchange contracts, for 1997 and 1996
was 6.4% and 6.3%, respectively.
As of December 31, 1997 and 1996, the weighted average interest rate on
interest-bearing deposits, excluding the effects of interest rate exchange
contracts, was 6.2% and 6.1%, respectively. Interest rate exchange contracts
had no material effect on those weighted average interest rates.
SPS TRANSACTION SERVICES, INC. 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, certificates of deposit maturing over the next five
years were as follows:
<TABLE>
<CAPTION>
In thousands
- ----------------------------------------------
<S> <C>
Certificates of deposit maturing in:
1998 $276,400
1999 64,886
2000 50,300
2001 33,700
2002 29,800
- ----------------------------------------------
</TABLE>
NOTE 6 RETIREMENT BENEFITS
PENSION PLAN Substantially all employees of the Company are eligible to
participate, 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 1997, 1996 and 1995, Company contributions to the Plan
were $2.7 million, $3.3 million and $2.7 million, respectively.
Pension expense consisted of the following:
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost, benefits earned
during the year $2,214 $2,253 $1,355
Interest cost on projected
benefit obligation 1,415 1,322 887
Return on Plan assets (1,631) (1,754) (1,383)
Expected difference between actual
and expected return on assets 257 733 719
Net amortization 178 410 149
- -------------------------------------------------------------------------------
Total pension expense $2,433 $2,964 $1,727
===============================================================================
</TABLE>
The funded status of the Plan was as follows:
<TABLE>
<CAPTION>
In thousands, December 31, 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of vested
benefit obligation $(13,377) $(10,900)
===================================================================
Accumulated benefit obligation $(15,757) $(12,419)
Effect of future salary increases (7,590) (7,795)
- -------------------------------------------------------------------
Projected benefit obligation (23,347) (20,214)
Plan assets at fair market value 17,382 14,527
- -------------------------------------------------------------------
Projected benefit obligation
in excess of Plan assets (5,965) (5,687)
Unrecognized net obligation 52 57
Unrecognized net loss 3,926 4,766
Unrecognized prior service cost 1,084 1,162
- -------------------------------------------------------------------
(Accrued) prepaid pension cost, end of year $ (903) $ 298
===================================================================
</TABLE>
Assumptions used in calculating the projected benefit obligation were as
follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Weighted average discount rate 7.25% 7.50%
Rate of increase in future
compensation levels 5.00% 5.00%
Expected long-term rate of
return on Plan assets 9.00% 9.00%
- -------------------------------------------------------------------
</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 $129,000,
$103,000 and $265,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
34 SPS TRANSACTION SERVICES, INC.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996 the Company's
accrued post-retirement benefit costs were $2.2 million and $2.1 million,
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 $0.6 million in 1997, $0.5 million in 1996 and $1.1 million in 1995.
Employees of the Company are eligible for certain postemployment benefits.
These benefits were not material to the Company's consolidated financial
position or results of operations in 1997, 1996 and 1995.
NOTE 7 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, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
NUMBER AVERAGE Number Average Number Average
OF SHARES EXERCISE PRICE of Shares Exercise Price of Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 1,021,567 $23.31 773,904 $19.45 849,484 $18.44
Granted 41,906 17.71 346,188 29.45 17,000 30.33
Exercised (6,485) 8.00 (72,029) 8.64 (69,004) 9.64
Forfeited (9,258) 31.14 (26,496) 30.72 (23,576) 18.22
- ----------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,047,730 23.11 1,021,567 23.31 773,904 19.45
======================================================================================================================
Options exercisable 777,238 21.52 559,684 17.84 374,525 15.90
======================================================================================================================
Options available for future grant 1,845,818 1,878,466 2,198,158
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 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 $26.00 374,881 4 YEARS $ 9.88 332,975 $ 8.90
$26.50 TO $30.00 352,244 8 YEARS 29.49 123,658 29.45
$31.50 TO $32.00 320,605 6 YEARS 31.58 320,605 31.58
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SPS TRANSACTION SERVICES, INC. 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996, employees of the
Company had purchased 27,577 and 23,663 shares of common stock under the plan,
respectively. The discount to fair market value was $77,000 for 1997 and
$76,000 for 1996. 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.
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 1997, 1996 and 1995, the Company recorded
compensation expense of $146,000, $32,000 and $401,000 and unearned
compensation of $37,000, $8,000 and $100,000 in connection with the award of
approximately 8,300, 4,500 and 18,000 shares of common stock under the plan,
respectively. These shares are held in custodial or trust accounts pending
employee eligibility to receive the shares. Unearned compensation is recognized
over the related plan vesting periods.
PRO FORMA EFFECT OF SFAS NO. 123 Had the Company elected to recognize
compensation cost pursuant to SFAS No. 123 for its stock option plans and the
Stock Purchase Plan, net income would have been reduced by $898,000, $867,000
and $108,000 for 1997, 1996 and 1995, respectively. Basic earnings per common
share would have been reduced by $0.03 and $0.04 for 1997 and 1996,
respectively, with no effect for 1995. Diluted earnings per common share would
have been reduced by $0.04, $0.03 and $0.01 for 1997, 1996 and 1995,
respectively.
The weighted average fair market value at the date of grant
for stock options granted during 1997, 1996 and 1995 was $7.39, $10.86 and
$12.16 per option, respectively. The fair market value of stock options at the
date of grant was estimated using the Black-Scholes option pricing model
utilizing the following weighted average assumptions:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.6% 5.7% 7.2%
Expected option life in years 5.5 6.1 6.4
Expected stock price volatility 38.1% 30.2% 28.7%
- --------------------------------------------------------
</TABLE>
NOTE 8 INCOME TAXES
The following is a summary of the expense (benefit) for
income taxes:
<TABLE>
<CAPTION>
In thousands, Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense
Federal $ 25,054 $ 23,567 $ 28,630
State 3,539 2,670 2,288
- -----------------------------------------------------------------------------------
28,593 26,237 30,918
Deferred tax expense (benefit)
Federal (4,127) (11,171) (4,875)
State (666) (819) 593
- -----------------------------------------------------------------------------------
(4,793) (11,990) (4,282)
- -----------------------------------------------------------------------------------
Total income tax expense $ 23,800 $ 14,247 $ 26,636
===================================================================================
</TABLE>
The following deferred income taxes were recorded:
<TABLE>
<CAPTION>
In thousands, December 31, 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Loan loss allowances $ 30,258 $ 30,957
Unearned income 6,947 3,289
Other deferred tax assets 8,283 5,933
- -----------------------------------------------------------------------------------
Total deferred income tax assets 45,488 40,179
- -----------------------------------------------------------------------------------
Deferred income tax liabilities (2,429) (1,913)
- -----------------------------------------------------------------------------------
Total deferred income taxes $ 43,059 $ 38,266
===================================================================================
</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, 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.0 3.2 2.7
Other 0.2 (0.2) 0.3
- -----------------------------------------------------------------------------------
Effective income tax rate 38.2% 38.0% 38.0%
===================================================================================
</TABLE>
36 SPS TRANSACTION SERVICES, INC.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under
noncancelable operating leases. At December 31, 1997, future minimum rental
commitments under such leases, net of subleases, were as follows:
<TABLE>
<CAPTION>
In thousands
- ---------------------------------------------
<S> <C>
1998 $ 5,283
1999 5,463
2000 1,588
2001 752
2002 321
2003 and thereafter 1,554
- ---------------------------------------------
Total lease commitments $14,961
=============================================
</TABLE>
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>
In thousands, Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Total rent expense $6,465 $6,860 $6,938
Portion related to affiliates 3,590 3,961 3,797
- ------------------------------------------------------------------
</TABLE>
The Company has an Amended and Restated Borrowing Agreement (as amended,
the "Borrowing Agreement") and a facility fee letter agreement (as amended, the
"Facility Fee Agreement")(collectively, the "Financing Agreements"), with
MSDWD, pursuant to which MSDWD has agreed to provide financing to the Company.
The maximum amount available under the Borrowing Agreement, which expires April
11, 1998, is $1.2 billion. At January 31, 1998, the Company had $570.0 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 MSDWD.
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; however, in the opinion of management after
consultation with counsel, the ultimate liability, if any, will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
NOTE 10 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 potential
volatility of earnings that arises 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, 1997 1996
- -------------------------------------------------------------------
NOTIONAL FAIR Notional Fair
AMOUNT VALUE Amount Value
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost of funds agreements $ 74,055 $600 $ 85,614 $1,434
Interest rate swaps 355,000 126 380,000 (824)
- -------------------------------------------------------------------
</TABLE>
SPS TRANSACTION SERVICES, INC. 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 no interest rate cap agreements
at December 31, 1997; however, at December 31, 1996 the Company had outstanding
interest rate cap agreements with notional amounts of $40.0 million. The
variable rates on the cap agreements exceeded the specified cap rates and had a
fair value of $300,000 at December 31, 1996.
In connection with certain asset securitizations, the Company had
written interest rate cap agreements with notional amounts of $69.0 million and
$150.0 million at December 31, 1997 and 1996, respectively. Both agreements had
strike rates of 11%. Any settlement payments made under these agreements 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, 1997 and 1996, the fair value of these
agreements was not material. No payments have been made by the Company under
this agreement. The $150.0 million written interest rate cap agreement expired
in December 1997. The $69.0 million written interest rate cap agreement expires
in April 2000.
NOTE 11 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, such 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, 1997 and 1996, the carrying amounts of the Company's
financial assets and liabilities are reasonable estimates of fair value.
NOTE 12 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% in Texas and 10% in California at December 31,
1997 and 1996.
At December 31, 1997, the Company's loan portfolio was concentrated among
three major private label credit card programs that comprised approximately
32%, 12% and 10% of the total loan portfolio, including securitized loans. 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.
NOTE 13 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.
38 SPS TRANSACTION SERVICES, INC.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 that, as of December 31, 1997,
HSB meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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 are presented in the table below.
<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>
As of December 31, 1997
Total Capital (to risk weighted assets) $158,873 12.37% >$102,781 >8.0% >$128,477 >10.0%
- - - -
Tier I Capital (to risk weighted assets) 142,004 11.05 > 51,391 >4.0 > 77,086 > 6.0
- - - -
Tier I Capital (to average assets) 142,004 11.31 > 50,206 >4.0 > 62,757 > 5.0
- - - -
- ----------------------------------------------------------------------------------------------------------------------
As of 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
- - - -
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 14 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>
1997 1996 1995
- ----------------------------------------
<S> <C> <C> <C>
Tandy Corporation 23.6% 24.0% 25.6%
The Goodyear Tire &
Rubber Company 10.1 12.0 12.3
- ----------------------------------------
</TABLE>
SPS TRANSACTION SERVICES, INC. 39
<PAGE>
AVERAGE BALANCE SHEETS (UNAUDITED) In thousands
<TABLE>
<CAPTION>
Year ended December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE
AMOUNTS EARNED/PAID YIELD/RATE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Due from banks $ 760 $ 34 4.5%
U.S. government securities 44,450 2,283 5.1%
State and political securities 105 7 6.7%
Credit card loans 1,390,998 240,196 17.3%
Amounts due from asset securitizations 46,875 2,674 5.7%
- ----------------------------------------------------------------------------------------
Total interest-earning assets 1,483,188 245,194 16.5%
- ----------------------------------------------------------------------------------------
Noninterest-earning assets
Cash and due from banks 14,318
Allowance for loan losses (78,496)
Due from affiliates 2,819
Other assets 119,258
- -----------------------------------------------------------------------
TOTAL ASSETS $1,541,087
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 497,870 $ 31,998 6.4%
Notes payable to affiliates and other borrowings 713,414 41,870 5.9%
Interest rate exchange contracts - 880 -
- ----------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,211,284 74,748 6.2%
- ----------------------------------------------------------------------------------------
Noninterest-bearing liabilities 86,089
- -----------------------------------------------------------------------
TOTAL LIABILITIES 1,297,373
- -----------------------------------------------------------------------
STOCKHOLDERS' EQUITY 243,714
- -----------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,541,087
=======================================================================
NET INTEREST INCOME $170,446
========================================================================================
NET YIELD ON INTEREST-EARNING ASSETS 11.5%
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL TOTAL LOANS INFORMATION*
Credit card loans $1,970,998 $346,928 17.6%
Total interest-earning assets 2,063,188 351,926 17.1%
Total interest-bearing liabilities 1,791,284 108,234 6.0%
Net yield on interest-earning assets 11.8%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total loans represents both owned and securitized credit card loans.
40 SPS TRANSACTION SERVICES, INC.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Amounts Earned/Paid Yield/Rate Amounts Earned/Paid Yield/Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Due from banks $ 4,911 $ 255 5.2% $ 27,853 $ 1,501 5.4%
U.S. government securities 48,788 2,523 5.2% 25,616 1,418 5.5%
State and political securities - - - - - -
Credit card loans 1,512,986 223,488 14.8% 1,152,309 159,286 13.8%
Amounts due from asset securitizations - - - - - -
- ------------------------------------------------------------------------------ -----------------------
Total interest-earning assets 1,566,685 226,266 14.4% 1,205,778 162,205 13.5%
- ------------------------------------------------------------------------------ -----------------------
Noninterest-earning assets
Cash and due from banks 13,989 10,922
Allowance for loan losses (63,630) (48,145)
Due from affiliates 3,067 2,221
Other assets 98,792 86,991
- ---------------------------------------------------------------- ----------
TOTAL ASSETS $1,618,903 $1,257,767
================================================================ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 420,973 $ 26,651 6.3% $ 296,919 $ 19,322 6.5%
Notes payable to affiliates and other borrowings 908,256 50,992 5.6% 710,442 45,334 6.4%
Interest rate exchange contracts - 1,486 - - 705 -
- ------------------------------------------------------------------------------ -----------------------
Total interest-bearing liabilities 1,329,229 79,129 6.0% 1,007,361 65,361 6.5%
- ------------------------------------------------------------------------------ -----------------------
Noninterest-bearing liabilities 77,872 73,149
- ---------------------------------------------------------------- ----------
TOTAL LIABILITIES 1,407,101 1,080,510
- ---------------------------------------------------------------- ----------
STOCKHOLDERS' EQUITY 211,802 177,257
- ---------------------------------------------------------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,618,903 $1,257,767
================================================================ ==========
NET INTEREST INCOME $147,137 $ 96,844
============================================================================== =======================
NET YIELD ON INTEREST-EARNING ASSETS 9.4% 8.0%
- ----------------------------------------------------------------------------------------- -----------------------------------
SUPPLEMENTAL TOTAL LOANS INFORMATION*
Credit card loans $2,095,026 $328,075 15.7% $1,678,128 $266,870 15.9%
Total interest-earning assets 2,148,725 330,853 15.4% 1,731,597 269,789 15.6%
Total interest-bearing liabilities 1,911,269 112,250 5.9% 1,533,180 101,087 6.6%
Net yield on interest-earning assets 10.2% 9.7%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SPS TRANSACTION SERVICES, INC. 41
<PAGE>
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 and Chief Executive Officer
/s/ Thomas C. Schneider
Thomas C. Schneider
Chairman of the Board
and Chief Financial Officer
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 Morgan Stanley, Dean
Witter, Discover & Co.) and subsidiaries as of December 31, 1997 and 1996, 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, 1997. These financial statements, appearing on pages 26 through 39, 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 pre-sent fairly, in
all material respects, the financial position of SPS Transaction Services, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
February 18, 1998
Chicago, Illinois
42 SPS TRANSACTION SERVICES, INC.
<PAGE>
QUARTERLY INFORMATION (UNAUDITED) In thousands, except
per share data
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------
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 $90,430 $87,817 $82,351 $86,287 $89,011 $83,296 $79,572 $69,041
Total operating expenses 78,391 73,186 66,327 66,681 71,212 72,660 70,546 69,009
Net income 7,391 8,984 9,839 12,286 11,035 6,593 5,598 20
PER SHARE DATA
Basic earnings per common share $ 0.27 $ 0.33 $ 0.36 $ 0.45 $ 0.41 $ 0.24 $ 0.21 $ 0.00
Diluted earnings per
common share 0.27 0.33 0.36 0.45 0.40 0.24 0.20 0.00
Basic weighted average common
shares outstanding 27,197 27,209 27,217 27,221 27,117 27,183 27,194 27,190
Diluted weighted average
common shares outstanding 27,367 27,386 27,419 27,430 27,387 27,406 27,349 27,349
STOCK PRICE DATA (1)
High $ 19.50 $ 20.88 $ 23.50 $ 23.94 $ 32.50 $ 30.75 $ 18.13 $ 18.75
Low 15.00 15.00 18.13 19.38 28.75 17.00 13.50 14.00
Close 16.00 18.50 22.13 22.56 30.88 18.00 15.88 15.25
- -----------------------------------------------------------------------------------------------------------
</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, 1998 was 3,674.
5-YEAR SELECTED FINANCIAL DATA In thousands, except
per share data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net operating revenues $ 346,885 $ 320,920 $ 311,992 $ 245,802 $205,494
Total operating expenses 284,585 283,427 241,883 183,441 156,563
Pretax income 62,300 37,493 70,109 62,361 48,931
Income taxes 23,800 14,247 26,636 24,626 18,283
Net income 38,500 23,246 43,473 37,735 30,648
Basic earnings per common share 1.41 0.86 1.60 1.40 1.14
Diluted earnings per common share 1.41 0.85 1.59 1.38 1.12
BALANCE SHEET DATA
Credit card loans $1,295,787 $1,637,507 $1,620,833 $ 679,857 $246,710
Total assets 1,512,403 1,760,785 1,777,607 768,493 309,537
Deposits 510,294 463,435 382,343 205,537 72,852
Due to affiliates 639,066 982,547 1,110,811 161,573 55,869
Stockholders' equity 263,035 224,392 199,210 155,704 116,581
Return on average stockholders' equity 15.8% 11.0% 24.5% 27.7% 30.2%
SUPPLEMENTAL DATA
Total loans* $1,875,787 $2,217,507 $2,229,992 $1,109,857 $676,710
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*Total loans represents both owned and securitized credit card loans.
SPS TRANSACTION SERVICES, INC. 43
<PAGE>
BOARD OF DIRECTORS
FRANK T. CARY
Chairman (retired)
International Business
Machines Corporation
(computer systems and services)
CHRISTINE A. EDWARDS
Executive Vice President,
Chief Legal Officer and Secretary
Morgan Stanley, Dean Witter,
Discover & Co. (financial services)
MITCHELL M. MERIN
President and Chief Executive Officer
Dean Witter InterCapital Inc.
(asset management)
CHARLES F. MORAN
Senior Vice President,
Administration (retired)
Sears, Roebuck and Co. (retailing)
PHILIP J. PURCELL
Chairman and Chief Executive Officer
Morgan Stanley, Dean Witter,
Discover & Co. (financial services)
THOMAS C. SCHNEIDER
Executive Vice President and
Chief Strategic and
Administrative Officer
Morgan Stanley, Dean Witter,
Discover & Co. (financial services)
DENNIE M. WELSH
Senior Vice President
International Business
Machines Corporation
(computer systems and services)
ROBERT L. WIESENECK
President and Chief Executive Officer
SPS Transaction Services, Inc.
OFFICERS
THOMAS C. SCHNEIDER
Chairman of the Board
and Chief Financial Officer
ROBERT L. WIESENECK
President and
Chief Executive Officer
CHRISTINE A. EDWARDS
General Counsel
ROBERT W. ARCHER
Senior Vice President-
Sales and Operations
RICHARD F. ATKINSON
Senior Vice President-
Private Label Consumer
DAVID J. PETERSON
Senior Vice President-
Commercial Technology Services
PATRICK A. ALBRIGHT
Vice President-Marketing
and New Product Development*
RUSSELL J. BONAGUIDI
Vice President-Controller
ROBERT J. FERKENHOFF
Vice President and
Chief Information Officer
DOUGLAS M. HARRISON
Vice President-Operations*
MICHAEL J. HARTIGAN, JR.
Vice President, Associate General Counsel and Secretary
STEPHEN W. MAXWELL
Vice President-Network
Transaction Services*
LARRY H. MYATT
Vice President-Administration
RUTH M. O'BRIEN
Vice President-TeleServices
SERGE J. UCCETTA
Vice President-Private Label Commercial
MARY ANN WARNIMENT
Vice President-Electronic
Information Services
* SPS Payment Systems, Inc.
44 SPS TRANSACTION SERVICES, INC.
<PAGE>
Corporate Information
SPS TRANSACTION SERVICES, INC.
2500 Lake Cook Road
Riverwoods, Illinois 60015
OPERATIONS CENTERS
Asheville, North Carolina
Gray, Tennessee
Layton, Utah
Sioux Falls, South Dakota
WORLD WIDE WEB ADDRESS
http://www.spspay.com
EMPLOYEES
3,740 full-time equivalent employees;
609 salaried and 3,131 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 1998 annual meeting of stockholders will be held at 10:00 a.m. on Tuesday,
June 9 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. Designed
and produced by Boller Coates & Neu, Chicago
Designed and produced by Boller Coates & Neu, Chicago.
(C) 1998 SPS Transaction Services, Inc.
Printed in USA
<PAGE>
SPS Transaction Services, Inc. 1997 Annual Report
<PAGE>
SPS Transaction Services, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60015
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, 1998,
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,
1997.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 27, 1998
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,
1997 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
--------- --------
/s/ Thomas C. Schneider
- -------------------------------
Thomas C. Schneider Chairman of the Board
Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Robert L. Wieseneck
- -------------------------------
Robert L. Wieseneck President, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Russell J. Bonaguidi
- -------------------------------
Russell J. Bonaguidi Vice President and Controller
(Principal Accounting Officer)
/s/ Frank T. Cary
- -------------------------------
Frank T. Cary Director
/s/ Christine A. Edwards
- -------------------------------
Christine A. Edwards General Counsel and Director
/s/ Mitchell M. Merin
- -------------------------------
Mitchell M. Merin Director
/s/ Charles F. Moran
- --------------------------------
Charles F. Moran Director
/s/ Philip J. Purcell
- --------------------------------
Philip J. Purcell Director
/s/ Dennie M. Welsh
- --------------------------------
Dennie M. Welsh Director
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,730
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 36,617
<INVESTMENTS-MARKET> 0
<LOANS> 1,295,787
<ALLOWANCE> (79,726)
<TOTAL-ASSETS> 1,512,403
<DEPOSITS> 510,294
<SHORT-TERM> 639,066
<LIABILITIES-OTHER> 100,008
<LONG-TERM> 0
0
0
<COMMON> 273
<OTHER-SE> 262,762
<TOTAL-LIABILITIES-AND-EQUITY> 1,512,403
<INTEREST-LOAN> 240,196
<INTEREST-INVEST> 2,290
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 245,194
<INTEREST-DEPOSIT> 31,998
<INTEREST-EXPENSE> 74,748
<INTEREST-INCOME-NET> 170,446
<LOAN-LOSSES> 118,363
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 284,585
<INCOME-PRETAX> 62,300
<INCOME-PRE-EXTRAORDINARY> 38,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,500
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 74,085
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 88,397
<CHARGE-OFFS> 153,645
<RECOVERIES> 22,611
<ALLOWANCE-CLOSE> 79,726
<ALLOWANCE-DOMESTIC> 79,726
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 10.65
SECOND AMENDMENT TO THE
TERMINAL SERVICE AGREEMENT
THIS SECOND AMENDMENT to the Terminal Service Agreement ("Second
Amendment") is dated as of January 1, 1997 between SPS PAYMENT SYSTEMS, INC.
("Company") and NOVUS SERVICES, INC. formerly known as Discover Card Services,
Inc. ("NOVUS Services").
WHEREAS, Company and NOVUS Services entered into a Terminal Service
Agreement dated January 1, 1992, as amended and supplemented by: a letter
agreement between the parties dated November 5, 1992, an amendment dated July
1, 1993 and a letter agreement dated September 1, 1995 ("Terminal Service
Agreement");
WHEREAS, Company and NOVUS Services desire to amend certain provisions of
the Terminal Service Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Company and
NOVUS Services agree as follows:
1. Fees. Section 2.4 of the Terminal Service Agreement is amended by
deleting the fourth sentence in its entirety and replacing it with the
following sentence:
"The fees set forth in the Schedule of Fees may be increased or decreased
by Company during the term of the Agreement to accommodate demonstrable
increases or decreases in the cost of component parts, provided that (i)
Company shall provide at least one hundred eighty (180) days' written
notice of such changes to NOVUS Services; and (ii) in the event that
Company notifies NOVUS Services of an increase in the fees payable
pursuant to this Agreement, NOVUS may exercise its right to terminate
this Agreement as set forth in Section 5.2(b)(iv) below."
2. Billing and Payment. Section 2.5 of the Terminal Service Agreement is
amended by deleting the first sentence in its entirety and replacing it with
the following provision:
"Prior to each calendar year, NOVUS Services shall provide Company with
its projected volume of terminal deployments for the following calendar
year. Effective as of January 1, 1997, Company shall invoice NOVUS
Services at the beginning of each calendar year for the projected
volume of new terminal deployments during such calendar year, based on
projections provided by NOVUS Services. Company shall reconcile the
projected and actual volume of terminal deployments after the end of
each calendar year and shall make any adjustments by means of a debit
or credit, as applicable, to NOVUS Services."
3. Term and Termination. Section 5.2(a) of the Terminal Service Agreement
is deleted in its entirety and replaced with the following provision:
"This Agreement shall be effective on the date first written above for
an initial term which shall extend from January 1, 1992 until December
31, 1993. This Agreement shall remain in effect after the initial term
for two successive three (3) year terms commencing January 1, 1994.
Thereafter, this Agreement shall remain in effect for successive one
(1) year terms provided that neither party has provided notice of
termination of the Agreement, as set forth in Section 5.2(b) below."
4. Term and Termination. Section 5.2(b) of the Terminal Service Agreement
is amended by adding new sections 5.2(b)(iii) and (iv) as set forth below:
"(iii) by either party upon written notice to the other party at least
one hundred eighty (180) days' prior to the expiration of the initial
term, or any subsequent term, of the Agreement.
(iv) by NOVUS Services upon thirty (30) days' written notice to
Company following receipt of notice, as described in Section 2.4 above,
of any increases to the fees applicable to the Agreement."
5. Non-Exclusivity. Section 5.10 of the Terminal Service Agreement is
deleted in its entirety and replaced with the following provision:
"This Agreement and the rights granted hereunder to each of the parties
are non-exclusive. Nothing in this Agreement shall prevent either party
from engaging in or offering arrangements similar to those set forth
herein with other parties."
6. The amended Schedule of Services and Schedule of Fees attached hereto
shall be effective as of the dates thereon.
7. This Second Amendment shall be effective on the date first written
above.
8. Any capitalized terms used herein and not otherwise defined shall have
the meanings given to them in the Terminal Service Agreement. Except as
provided in this Second Amendment, or as necessary and appropriate to give
meaning to the terms of this Second Amendment, the terms and conditions of the
Terminal Service Agreement shall remain in full force and effect.
The parties, intending to be legally bound, have executed this Second
Amendment.
SPS PAYMENT SYSTEMS, INC. NOVUS SERVICES, INC.
By:/s/Thomas W. Clarke By:/s/Tony Leal, Jr.
--------------------------------- ----------------------------
Name: Thomas W. Clarke Name: Tony Leal, Jr.
--------------------------------- ----------------------------
Title: Vice President Network Services Title: Vice President
--------------------------------- ----------------------------
Exhibit 10.66
SPS SENIOR MANAGEMENT RETENTION PLAN
Coverage:
- --------
Limited to the senior management group that would be critical to operating the
Company in the event it were to be acquired at some future point in time by a
third party (the "Purchaser"). The benefits under this Plan are in addition to
any severance rights or benefits that would otherwise be available to
participating members.
Members: Robert L. Wieseneck
Patrick Albright
Richard F. Atkinson
Robert W. Archer
Russell J. Bonaguidi
Sherry Bowden
Robert J. Ferkenhoff
Douglas Harrison
Stephen W. Maxwell
Larry H. Myatt
Ruth M. O'Brien
Duane Stremmel
Serge J. Uccetta
Mary Ann Warniment
Objective and Approach:
- ----------------------
This Plan is designed to:
1. Focus the key executives on managing the business and, in the event of any
sale of the Company, successfully completing such sale, and
2. Reduce the distraction to such key executives of worrying about whether
they have a future in the Company in the event of any such sale.
Term:
- ----
This Plan shall lapse and be of no further force and effect upon the third
anniversary of its adoption.
Pool Size:
- ---------
To achieve this objective, two retention pools will be created. The sum of
the two retention pools will not exceed the prior year's total cash
compensation (including deferred bonus) of the members.
Distribution:
- ------------
The first retention pool will equal one-half the prior year's total cash
compensation (including deferred bonus) of those members who remain as
employees in good standing at the close of the transaction and will be
distributed completely to them immediately after the close of any sale
transaction. This first retention pool will be allocated to the members based
on the judgment of the Compensation Committee of the SPS Board, advised by the
Chairman and CEO, which judgment will be made immediately prior to closing.
The second retention pool equals one-half the prior year's total cash
compensation (including deferred bonus) of qualifying members who do not have a
position in the Company, the Purchaser or Morgan Stanley Dean Witter & Co.
after the close of the transaction, who leave the Company for "good reason" (as
defined in Exhibit A to this Plan) within one year after closing of any sale,
or who are terminated other than for cause by the Company or the Purchaser
within one year after the closing of any sale. The amount distributed to each
such member will equal 50% of their prior year's total cash compensation
(including deferred bonus). For this purpose, any member who is terminated for
"cause" (as defined in Exhibit A to this Plan), or who voluntarily retires (as
opposed to retiring for "good reason" as defined in Exhibit A to this Plan),
shall not be eligible to receive any distributions under this paragraph.
Distribution will be made within thirty days of notification of termination.
Any amounts not distributed from these two pools will be returned to the
Company.
EXHIBIT A
"Good Reason" Conditions imposed on the employee when the Company makes the
employee's working conditions difficult, intolerable or unpleasant such that a
reasonable person would have no alternative but to resign his or her
employment.
"Cause" Shall be defined to include, but not be limited to, (i) any act or
omission which constitutes a breach by the employee of the obligations
(fiduciary or otherwise) to the Company or any of its Subsidiaries or
affiliates or the failure or refusal of the employee to perform satisfactorily
any duties reasonably required of the employee after written notification by
the Company or any of its Subsidiaries or affiliates of such breach, failure or
refusal of the employee within ten (10) business days of such notification
(other than by reason of the incapacity of the employee due to physical or
mental illness) to correct such breach, failure or refusal, (ii) the commission
by the employee of any dishonest or fraudulent act injurious to any of the
Company, its Subsidiaries or affiliates, (iii) any other act or omission which
is materially injurious to the financial interests or business reputation of
any of the Company, its Subsidiaries or affiliates, (iv) conviction of or the
entry of any plea other than "not guilty" with regard to any such policy or
felony, or (v) any violation of the Company's substance abuse policy as such
policy may be amended by the Company from time to time.
Exhibit 10.67
SPS INCENTIVE PLAN
Coverage:
- --------
Limited to a senior management group that can most directly affect the success
of any potential sale of the Company or any potential sale of substantially all
of the Company's assets to another unaffiliated company and maximize value to
the shareholders.
Members: Robert L. Wieseneck
Richard F. Atkinson
Robert W. Archer
Russell J. Bonaguidi
Sherry Bowden
Robert J. Ferkenhoff
Douglas Harrison
Stephen W. Maxwell
Larry H. Myatt
Ruth M. O'Brien
David J. Peterson
Serge J. Uccetta
Objective and Approach:
- ----------------------
Incent the members of senior management most able to maximize the price to be
paid in any potential sale transaction. The objective of any sale would be to
achieve the greatest possible shareholder value. This Incentive Plan
recognizes the ability of a small group of senior management to have a major
impact on the price. Accordingly, the Board of Directors has determined that
the members receive an amount equal to 3% of the proceeds above a base price.
Pool Size:
- ---------
Pool equals 3% of the gross proceeds of sale of the Company or substantially
all of its assets above a base price equal to $23.00 per share multiplied by
the total number of shares of the Company's common stock outstanding at the
time of any sale transaction.
Exclusion: This plan does not include the sale of any assets managed, but not
owned by SPS.
Distribution of Pool:
- --------------------
The amount distributed to an individual member of the pool is at the discretion
of the Compensation Committee of the Board based on the recommendations of the
Chairman after consultation with the CEO, which shall be made immediately prior
to closing of any sale transaction.
The entire pool will be distributed to the members who are employees in good
standing on the day of a sale's closing.
Exhibit 11.0
SPS Transaction Services, Inc.
Basic and Diluted Earnings per Common Share
Year Ended December 31, 1997, 1996 and 1995
(In thousands, except per share amounts)
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Net Income $38,500 $23,246 $43,473
======= ======= =======
BASIC EARNINGS PER COMMON SHARE:
Basic weighted average common shares
outstanding 27,211 27,171 27,093
======= ======= =======
Basic earnings per common share $ 1.41 $ 0.86 $ 1.60
======= ======= =======
DILUTED EARNINGS PER COMMON SHARE:
Basic weighted average common shares
outstanding 27,211 27,171 27,093
Diluted effect of stock options 188 204 289
------- ------- -------
Diluted weighted average common shares
outstanding 27,399 27,375 27,382
======= ======= =======
Diluted earnings per common share $ 1.41 $ 0.85 $ 1.59
======= ======= =======
