AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON July 1, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
SPS TRANSACTION SERVICES, INC.
(Name of Issuer)
SPS TRANSACTION SERVICES, INC.
MORGAN STANLEY DEAN WITTER & CO.
NOVUS CREDIT SERVICES INC.
SAIL ACQUISITION, INC.
(Name of Persons Filing Statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
845743103
(CUSIP Number of Class of Securities)
CHRISTINE A. EDWARDS, ESQ.
GENERAL COUNSEL
2500 LAKE COOK ROAD
RIVERWOODS, ILLINOIS 60015
(897) 405-3400
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Persons Filing Statement)
With copies to:
JOSEPH W. ARMBRUST, ESQ.
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
(212) 839-5300
--------------
This statement is filed in connection with (check the appropriate box):
a. |X| The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under
the Securities Exchange Act of 1934.
b. | | The filing of a registration statement under the Securities Act of 1933.
c. | | A tender offer.
d. | | None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: |X|
CALCULATION OF FILING FEE
- -------------------------------------------------------------------------------
Transaction valuation* Amount of filing fee
- ---------------------------------- ------------------------------------------
$895,696,661 $179,139.33
================================== ==========================================
* Represents the aggregate consideration (payable in cash) for the assets
of the Issuer. The amount of the filing fee, computed pursuant to Rule
0-11(c)(2) of the Securities Exchange Act of 1934, equals 1/50th of one
per cent of the cash to be received by the Issuer.
|X| Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
Amount Previously Paid: $179,139.33 Filing Party: SPS Transaction
Services, Inc.
Form or Registration No.: Schedule 14A Date filed: June 10, 1998
===============================================================================
<PAGE>
INTRODUCTORY STATEMENT
This Rule 13e-3 Transaction Statement (this "Transaction Statement") is
being filed by SPS Transaction Services, Inc., a Delaware corporation (the
"Company"), NOVUS Credit Services Inc., a Delaware corporation and the owner
of approximately 73.3% of the outstanding common stock of the Company
("NOVUS"), Morgan Stanley Dean Witter & Co., a Delaware corporation and the
parent company of NOVUS ("MSDW"), and Sail Acquisition, Inc., a Delaware
corporation and a newly formed, wholly owned subsidiary of NOVUS
("Acquisition"). The Company and Acquisition are parties to an Agreement and
Plan of Merger, dated as of June 15, 1998 (the "Merger Agreement"), pursuant
to which Acquisition will be merged with and into the Company, under the terms
and subject to the conditions set forth in the Merger Agreement. A copy of the
Merger Agreement has been filed by the Company as Appendix III to the
preliminary proxy statement of the Company (the "Proxy Statement") filed as
Exhibit (d)(1) to this Transaction Statement
The cross-reference sheet below is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Proxy Statement
of the information required to be included in response to the Items of
Schedule 13E-3. Unless otherwise indicated, all cross-references below are to
captions and subcaptions in the text of, or appendices to, the Proxy Statement
without reference to the Form of Proxy Card, Letter to Shareholders or Notice
of Meeting. The information in the Proxy Statement, including all appendices
thereto, is hereby expressly incorporated by reference, each cross reference
below being deemed to be an incorporation by reference of the portions of the
Proxy Statement referred to and the response to each item being qualified in
its entirety by the provisions of the Preliminary Proxy Statement and such
appendices. Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to such terms in the Proxy Statement.
<PAGE>
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) See "INTRODUCTION."
(b)-(d) See Cover Page and "INTRODUCTION-- Record Date; Voting
at the Special Meeting; Quorum" and "HISTORICAL MARKET
PRICE AND DIVIDEND DATA."
(e) Not Applicable.
(f) See "ANNEX VI -- COMMON STOCK PURCHASES."
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(g) See "CONTROLLING PERSONS, DIRECTORS, AND EXECUTIVE
OFFICERS OF MSDW, NOVUS, ACQUISITION AND THE COMPANY" and
"ANNEX IV - INFORMATION CONCERNING DIRECTORS AND OFFICERS
OF THE COMPANY, MSDW, NOVUS AND ACQUISITION."
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(b) See "SPECIAL FACTORS -- Background" and "CONTROLLING
PERSONS, DIRECTORS, AND EXECUTIVE OFFICERS OF MSDW,
NOVUS, ACQUISITION AND THE COMPANY -- Past Contacts,
Transactions, or Negotiations."
ITEM 4. TERMS OF THE TRANSACTION.
(a) See "PROPOSAL NO. 2-- ADOPTION OF THE MERGER
AGREEMENT--Terms of the Merger Agreement."
(b) See "PROPOSAL NO. 1-- APPROVAL OF THE SALE-- Interests
of Certain Persons in the Transactions."
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(g) See "PROPOSAL NO. 2 -- ADOPTION OF THE MERGER AGREEMENT
-- Certain Effects of the Merger" and "CONTROLLING
PERSONS, DIRECTORS, AND EXECUTIVE OFFICERS OF MSDW,
NOVUS, ACQUISITION AND THE COMPANY -- Plans or
Proposals."
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) See "SPECIAL FACTORS -- General."
<PAGE>
(b) See "FEES AND EXPENSES."
(c) & (d) Not Applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) See "SPECIAL FACTORS -- Background" and "PROPOSAL NO. 2
-- ADOPTION OF THE MERGER AGREEMENT."
(b)-(c) See "SPECIAL FACTORS -- Background."
(d) See "PROPOSAL NO. 2-- ADOPTION OF THE MERGER AGREEMENT--
Certain Effects of the Merger" and "--Certain Federal
Income Tax Consequences of the Merger."
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a)-(b) See "SPECIAL FACTORS-- Background" and "--
Recommendation of the Board of Directors; Fairness of
the Transaction" and "OPINION OF FINANCIAL ADVISOR."
(c) See "INTRODUCTION -- Matters to be Considered at the
Special Meeting " and "PROPOSAL NO.1-- APPROVAL OF THE
SALE-- Ancillary Agreements--The Voting Agreement."
(d)-(e) See "SPECIAL FACTORS-- Background" and "--Recommendation
of the Board of Directors; Fairness of the Transaction."
(f) Not Applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a)-(b), See "SPECIAL FACTORS -- Recommendation of the
(1)-(3) Board of Directors; Fairness of the Transaction."
(5)&(6)
(b)(4) See "SPECIAL FACTORS-- Opinion of Financial Advisor" and
"PROPOSAL NO. 1-- APPROVAL OF THE SALE-- Interest of
Certain Persons in the Transactions-- Relationship with
MSDW."
(c) See " WHERE YOU CAN FIND MORE INFORMATION."
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a)-(b) See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
<PAGE>
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES.
See "PROPOSAL NO. 1 -- APPROVAL OF THE SALE -- Interests
of Certain Persons in the Transactions."
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD
TO THE TRANSACTION.
(a) See "INTRODUCTION -- Record Date; Voting at the Special
Meeting; Quorum," "SPECIAL FACTORS -- Recommendation of
the Board of Directors; Fairness of the Transaction" and
"PROPOSAL NO. 1 -- APPROVAL OF THE SALE -- Ancillary
Agreement --The Voting Agreement."
(b) See "SPECIAL FACTORS-- Recommendation of the Board of
Directors; Fairness of the Transaction" and "PROPOSAL
NO. 1-- APPROVAL OF THE SALE-- Ancillary Agreements."
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) See "PROPOSAL NO. 2-- ADOPTION OF THE MERGER AGREEMENT
-- Appraisal Rights" and "ANNEX II-- SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE."
(b) & (c) Not Applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) See "SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA" of
the Proxy Statement, the Company's consolidated
financial statements and independent auditors report
related thereto appearing on pages 26 through 42 of the
Company's Annual Report to Stockholders which is
attached as Exhibit (d)(4) hereto and Item 1 of Part I
of the Form 10-Q which is attached as Exhibit (d)(2)
hereto.
(b) Not Applicable.
ITEM 15. PERSONS AND ASSETS RETAINED, EMPLOYED OR UTILIZED.
(a) See "INTRODUCTION -- Proxies."
(b) Not Applicable.
<PAGE>
ITEM 16. ADDITIONAL INFORMATION.
Not Applicable.
ITEM 17. MATERIALS TO BE FILED AS EXHIBITS.
(a) Not Applicable.
(b)(1) A report presented by Morgan Stanley to the Board of
Directors of the Company, dated April 17, 1997,
containing certain financial analyses.
(b)(2) Opinion of Financial Advisor -- See Annex I to the Proxy
Statement.
(c)(1) Agreement and Plan of Merger, dated as of June 15, 1998,
between the Company and Acquisition - See Annex III to
the Proxy Statement.
(c)(2) Voting Agreement, dated April 18, 1998, between
Associates First Capital Corporation and NOVUS Credit
Services Inc.
(d)(1) Preliminary Proxy Statement, dated July 1, 1998,
together with Form of Proxy, Letter to Shareholders and
Notice of Meeting.
(d)(2) Quarterly Report on Form 10-Q of the Company for the
three months ended March 31, 1998.
(d)(3) Annual Report on Form 10-K of the Company for the year
ended December 31, 1997.
(d)(4) Annual Report to Stockholders for the year ended
December 31, 1997.
(e) Section 262 of the General Corporation Law of the State
of Delaware-- See Annex II to the Proxy Statement.
(f) Not Applicable.
<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief, the
undersigned hereby certifies that the information set forth in this statement
is true, complete and correct.
SPS TRANSACTION SERVICES, INC.
By: /s/Thomas C. Schneider
-----------------------------
Name: Thomas C. Schneider
Title: Chairman and Chief Financial
Officer
MORGAN STANLEY DEAN WITTER & CO.
By: /s/Philip J. Purcell
-----------------------------
Name: Philip J. Purcell
Title: Chairman and Chief Executive
Officer
NOVUS CREDIT SERVICES INC.
By: /s/Michael J. Hartigan
-----------------------------
Name: Michael J. Hartigan
Title: Vice President
SAIL ACQUISITION, INC.
By: /s/Philip J. Purcell
-----------------------------
Name: Philip J. Purcell
Title: President
Dated: July 1, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- ------ -------- ------
(a) Not applicable.
(b)(1) A report presented by Morgan Stanley to the Board
of Directors of the Company, dated April 17, 1997,
containing certain financial analyses.
(b)(2) Opinion of Financial Advisor -- See Annex I to the
Proxy Statement.
(c)(1) Agreement and Plan of Merger, dated as of June 15,
1998, between the Company and Acquisition - See
Annex III to the Proxy Statement.
(c)(2) Voting Agreement, dated April 18, 1998, between
Associates First Capital Corporation and NOVUS
Credit Services Inc.
(d)(1) Preliminary Proxy Statement, dated July 1, 1998,
together with Form of Proxy, Letter to
Shareholders and Notice of Meeting.
(d)(2) Quarterly Report on Form 10-Q of the Company for
the three months ended March 31, 1998.
(d)(3) Annual Report on Form 10-K of the Company for the
year ended December 31, 1997.
(d)(4) Annual Report to Stockholders for the year ended
December 31, 1997.
(e) Section 262 of the General Corporation Law of the
State of Delaware -- See Annex II to the Proxy
Statement.
(f) Not Applicable.
Exhibit (b)(1)
PROJECT SAIL
Presentation to the Board of Directors
April 17, 1998
Morgan Stanley & Co.
Incorporated
<PAGE>
PROJECT SAIL
Table of Contents
SECTION I TRANSACTION SUMMARY
SECTION II TRADING ENVIRONMENT
SECTION III SAIL VALUATION
SECTION IV PRO FORMA IMPACT
SECTION V DRAFT FINANCIAL OPINION LETTER
APPENDIX
<PAGE>
TRANSACTION SUMMARY
<TABLE>
<CAPTION>
<S> <C>
Purchase Price for Subsidiaries: $32.50 Per Sail Share ($894
Million (1))
Estimated Price to Public Shareholders (2): $32
Other: o Assumption of $3.1 Million Retention Program
Consideration: 100% Cash
Deal Structure: o Purchase of Stock of Subsidiaries
o Purchase Accounting
o Tax Deductible Goodwill Created
Transaction Multiples (3): 20.3x 1998E EPS (I/B/E/S estimates)
18.4x 1998E EPS (Management Plan)
3.4x Book Value (As of 12/31/97)
Other Terms: o Voting Agreement
o Acquisition of
MountainWest Portfolio
o Material Adverse Change
o Post Closing
Indemnification for
Certain Items (Litigation,
Compliance, Tax, Employee
Relations, Employee
Benefits and Real
Property)
Timing: o Due Diligence Completed
o Targeted Close Third
Quarter of 1998
o Regulatory Approval
o Sail Shareholder Approval
Notes: (1) Based on fully diluted shares of 27.5 million.
(2) After fees and expenses estimated at approximately $13
million; includes advisor fees, incentive plan and certain
other deal related expenses.
(3) Based on price paid for subsidiaries.
</TABLE>
<PAGE>
[Two side-by-side charts depicting the structure of the transaction.
Chart 1, which is entitled "Step I--Purchase of the Subsidiaries" shows an
arrow from Buyer to Sail which reads "Pays cash." An arrow from Sail to Buyer
reads "Receives stock of subsidiaries of Sail" with a bullet point to the left
that reads "Buyer pays $894 million ($32.50 per share (Footnote (1) Based on
27.5 million fully diluted shares)) and a second bullet point to the left that
reads "Purchase creates $631 million tax deductible goodwill." Chart 2 which
is entitled "Step II--Going Private Transaction" shows an arrow from Sail to
26% Public Stockholders, which reads "Sail pays to public $32 per share"
(Footnote (2) After estimated transaction expenses of approximately $13
million). An arrow from 26% Public Stockholders to Sail reads "Sail receives
outstanding shares" and a bullet point below reads "Public pays capital gains
tax." A stand alone box beneath chart 2 reads "Sail repurchases the public
shares in a going private transaction. Sail will remain a legal entity for 3-5
years and loan its assets (cash) to MSDWD entities."]
<PAGE>
[Chart depicting and entitled "Stock Price Performance Since IPO" shows
the stock performance of Sail versus the S&P 500. A stand alone box to the
right of the chart entitled "Total Return" reads "Sail: 278% and S&P 500:
169%." The left axis is entitled ($ Per Sail Share). Approximate prices for
Sail at the indicated intervals are as follows:
26-Feb-92 $8.69
06-Oct-92 $17.56
18-May-93 $22.00
28-Dec-93 $30.19
09-Aug-94 $26.00
21-Mar-95 $32.00
30-Oct-95 $26.13
11-Jun-96 $24.38
21-Jan-97 $18.50
02-Sep-97 $21.00
15-Apr-98 $32.81]
<PAGE>
[Chart entitled and depicting "Stock Price Performance Last Year" depicts
Price on the left axis and the right axis of the chart shows Volume. The chart
shows a floating box in the upper left side of the chart; which is entitled
"Average Volume" and which reads "Last Year - 25,088, Last 6 Months - 29,195
and Last Month - 60,268." A floating box indicates when Sail announced 1997
earnings on 01/28/97 and brackets indicate an average volume of 74,040 from
January 29, 1998 to February 19, 1998 and an average volume of 81,000 from
March 25, 1998 to April 15, 1998.
Approximate prices and volume for Sail at the indicated intervals are as
follows:
<TABLE>
<CAPTION>
Price Volume
<S> <C> <C> <C>
15-Apr-97 $15.25 7,700
14-May-97 19.88 4,000
13-Jun-97 19.63 4,700
15-Jul-97 18.31 13,700
13-Aug-97 22.81 3,000
12-Sep-97 20.31 4,600
13-Oct-97 23.25 27,500
11-Nov-97 20.25 5,600
11-Dec-97 22.06 6,100
13-Jan-98 20.06 3,800
12-Feb-98 28.38 99,000
16-Mar-98 26.13 26,900
15-Apr-98 32.81 32,800]
</TABLE>
<PAGE>
RELATIVE MARKET PERFORMANCE
One Year Total Return(1)
Credit Commercial Electronic/Card TeleServices
Card Finance Processing
- ----------------- ------------- ----------------- -------------------
Capital One Associates BA Merchant Svcs. APAC
Household FINOVA First Data Corp. Teleservices
MBNA National Processing National Techteam
Nova Corp. Precision Response
Paymentech Sitel
PMT Services Sykes Enterprises
Teletech
[Chart depicting one year total return, with percentage on the left side
of the chart ranging from (100)% to 150% and each of the Company's primary
business operations along the bottom portion of the chart, with shaded boxes
that indicate their respective percentages of return which are: Sail--115%,
Credit Card--108%, Commercial Finance--57%, Electronic/Card Processing--37%
and TeleServices--(36)%.]
<PAGE>
BUSINESS MIX
($MM)
Contribution Margin(1) Contribution Margin(1)(2)
$103 Million $124 Million
1997A 1998E(1)
[Pie chart depicting the Company's [Pie chart depicting the Company's
primary business operations (in primary business operation (in
millions of dollars): TeleServices millions of dollars): TeleServices
$6 (59%), Network Transaction $11 (9%), Network Transaction
Services $15 (15%), Commercial Services $16 (13%), Commercial
Accounts Processing $12 (12%), Accounts Processing $18 (15%),
Consumer Credit Card Services $59 Consumer Credit Card Services $71
(58%).] (57%).]
Contribution Margin $102.6 Contribution Margin $124.2
Corporate Overhead (40.3) Corporate Overhead (45.6)
---- ----
Pre-tax 62.3 Pre-tax 78.5
Taxes 23.8 Taxes 30.0
---- ----
Net Income $38.5 Net Income $48.5
===== =====
Notes: (1) Pre-tax before corporate overhead allocations.
(2) Management estimates.
(3) Includes royalty payments.
<PAGE>
VALUATION SUMMARY
($ Per Share) (1)
[Chart depicting valuation, with left side of chart that has two
sections, the top section is entitled "Stand-Alone Valuation," which reads
"Business Line Valuation:", "Wall Street Case" and "Management Case" and
"Dividend Discount Valuation," and the bottom section is entitled "Acquisition
Valuation," which reads "30% Premium." The bottom line ranges from $15 to $40.
Blocks in the chart indicate that: The Wall Street Case ranges from $20 to
$23, the Management Case ranges from $22 to $26, Dividend Discount Valuation
ranges from $21 to $26 and 30% Premium ranges from $26 to $34.]
<PAGE>
<TABLE>
<CAPTION>
PEER COMPARISON
Consumer Credit Card Services (1) Commercial Account Processing (1)
- -------------------------------------------------- --------------------------------------------------------
PEERS SAIL (2) PEERS SAIL (2)
----- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Return on Managed Return on Managed
Assets 1.49 % 1.04 % Receivables 1.66 % 0.93 %
Delinquency Ratio (3) 5.2 9.6 Delinquency Ratio (3) 2.0 5.6
Net Charge Off Ratio 5.0 9.2 Net Charge Off Ratio 1.2 5.4
92-97 Receivables 92-97 Receivables
Growth 32 25 Growth 20 39
Price/ 5 Year Price/ 5 Year
Company 98 EPS Growth Company 98 EPS Growth
- ------- ------ ------ ------- ------ ------
MBNA 25.1 x 23 % Associates 22.8 x 18 %
Household 17.7 19 CIT 16.7 13
Capital One 25.8 18 FINOVA 21.8 16
MEAN 22.9 X 20 % MEAN 20.4 X 16 %
</TABLE>
Notes: (1) Financial information as of or for the year ended 12/31/97.
Market information as of 04/15/98. I/B/E/S estimates as of
04/15/98.
(2) Estimated based on business line results.
(3) Indicates 30+ days delinquency for Consumer Credit Card
Services and 60+ days delinquency for Commercial Account
Processing.
<PAGE>
<TABLE>
<CAPTION>
PEER COMPARISON
Network Transaction Services (1) TeleServices (1)
- ------------------------------------------------------- ------------------------------------------------------
PEERS SAIL (2) PEERS SAIL(2)
----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
94-97 Revenue Growth (3) 31 % 9 % 94-97 Revenye Growth 74% 9 %)
LTM EBIT Margin 17 18 LTM EBIT Margin 9 9
</TABLE>
<TABLE>
<CAPTION>
Price/ 5 Year P/E to Price/ 5 Year P/E to
Company 98 EPS Growth Growth Company 98 EPS Growth Growth
- ------------------- -------- ------ ------ ----------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
First Data 19.6 x 16 % 1.2 x APAC TeleServices 16.3 x 30 % 0.5 %
BA Merchant 18.3 20 0.9 National Techteam 33.3 30 1.1
Services
Nova Corporation 42.1 25 1.7 Precision 23.7 48 0.5
Response
PMT Services 29.9 30 1.0 Sitel 29.5 33 0.9
Paymentech 30.4 19 1.6 Sykes Enterprises 25.1 36 0.7
National 17.7 15 1.2 Teletech 40.0 38 1.1
Processing
MEAN 26.4 X 21 % 1.3 X MEAN 28.0 X 36 % 0.8 X
</TABLE>
Notes: (1) Financial information as of most recent filings. Market
information as of 04/15/98. I/B/E/S estimates as of 04/15/98
and calendarized to a 12/31 year end.
(2) Estimated based on business line results.
(3) Based on fiscal year 94 except Nova Corporation (03/95) and PMT
Services (07/95) and Paymentech (06/95) and most recent filings
for 1997.
<PAGE>
BUSINESS LINE TRADING VALUATION
($ Millions, except per share data)
<TABLE>
<CAPTION>
I. VALUATION MANAGEMENT ESTIMATE
98E NET PRICE/98E NET INCOME
BUSINESS SEGMENT INCOME MULTIPLE RANGE VALUE RANGE COMMENTS
- ---------------------- ------- -------------------- ------------- --------------------------------------
<S> <C> <C> <C> <C>
Consumer Credit Card o Growth and profitability below peers
Services $26.7 13.0x -- 5.0x $347 -- $401 o Client concentration
Commercial Account o Strong relationships/business with
Processing 6.7 16.0 -- 18.0 108 -- 121 superstores
o Industry / client concentrations
Network Transaction o Scale
Services 6.1 12.0 -- 16.0 73 -- 98 o Industry / client concentration
o Lower growth prospects
TeleServices 4.3 14.0 -- 18.0 61 -- 78 o Strong industry reputation
o Customer concentration an issue
o Significant growth and margin
improvement in 98
Other 4.6 NPV Analysis at 15% 11 -- 11 o Royalty arrangement has been
terminated
o Revenues run through middle of 2000
TOTAL MANAGEMENT
ESTIMATE $48.5 12.4 X -- 14.6 X $600 -- $709
PER SHARE BASIS (1) $1.76 $22 -- $26
II. VALUATION BASED ON I/B/E/S ESTIMATE
IBES ESTIMATE $44.0 12.4 X -- 14.6 X $544 -- $643
PER SHARE BASIS (1) $1.60 $20 -- $23
</TABLE>
Note: (1) Based on fully diluted shares of 27.5 million.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF HISTORICAL STATISTICS
CONSUMER CREDIT CARD SERVICES COMMERCIAL ACCOUNT PROCESSING
- -------------------------------------------------------------- ----------------------------------------------------------
1994 1995 1996 1997 1998E 1994 1995 1996 1997 1998E
---- ---- ---- ---- ----- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth in Growth in
Mgd. Loans 64% 101% -1% -15% 33% Mgd. Rec. 59% 46% 52% -1% 37%
Return on Return on
Mgd. Loans 3.53% 1.71% 0.45% 1.04% 1.27% Mgd. Rec. 0.76% 1.41% 1.13% 0.93% 1.23%
NETWORK TRANSACTION SERVICES TELESERVICES
- -------------------------------------------------------------- ----------------------------------------------------------
1994 1995 1996 1997 1998E 1994 1995 1996 1997 1998E
---- ---- ---- ---- ----- ---- ---- ---- ---- -----
Revenue Revenue
Growth -10% 9% 10% 8% 1% Growth 60% 1% 13% 12% 35%
Pre-Tax Pre-Tax
Margin 20% 19% 13% 18% 20% Margin 12% 9% 7% 9% 14%
</TABLE>
<PAGE>
DIVIDEND DISCOUNT VALUATION
Model Assumptions - 1998 through 2003 (1)
Consumer Credit Card Services Commercial Account Processing
- ------------------------------------ ---------------------------------------
Growth in Managed Loans 10% Growth in Managed Receivables 15%
Return on Managed Loans 1.27% Return on Managed Receivables 1.23%
Network Transaction Services TeleServices
- ------------------------------------ ---------------------------------------
Revenue Growth 10% Revenue Growth 15%
Pre-Tax Margin 20% Pre-Tax Margin 14%
Note: (1) Based on management forecast for 1998 and Morgan Stanley estimates
for 1999 - 2003.
<PAGE>
DIVIDEND DISCOUNT VALUATION
Implied Value
Cost of Equity (1) 13% -- 15%
Terminal P/E Multiple (1) 14 x -- 16 x
IMPLIED VALUE
- - Total $588 -- $714
- - Per Share (1) $21 -- $26
Note: (1) See Appendix. Based on relative contribution of businesses.
(2) Based on fully diluted shares of 27.5 million.
<PAGE>
PRECEDENT TRANSACTIONS
<TABLE>
<CAPTION>
RECEIVABLES PREMIUM TO NCO RATE RETURN ON
TRANSACTION DATE PURCHASED RECEIVABLES (2) MGD. REC.
- -------------------- ---- ----------- ----------- -------- ---------
($MM)
<S> <C> <C> <C> <C> <C>
SPS/Tandy & Mc Duff 1994 $670 0.0 % n.a. n.a.
SPS/Computer City & 1995 230 15.0 n.a. n.a.
Incredible Universe
Fleet/Advanta 10/28/97 11,500 4.8(1) 7.4 % 0.7 %
Chase/BONY 10/21/97 4,000 est.(3) 9.0 est.(3) n.a. n.a.
</TABLE>
Notes: (1) Assumes half of earnout is paid.
(2) For the last full quarter ended before transaction.
(3) Based on estimates reported in trade publications.
<PAGE>
PRECEDENT TRANSACTIONS
Implied Valuation
<TABLE>
<CAPTION>
ACQUISITION VALUATION IMPLIED VALUATION
- --------------------- -------------------------
<S> <C> <C>
Consumer Credit Card Services
5% - 10% Premium $94 $188
Book Value (1) 263 263
--------- --------
Acquisition value of consumer receivable portfolio 357 451
Net present value of royalty payments 11 11
Purchase Price 894 894
--------- --------
Value attributed to other 3 business lines 526 432
TRADING VALUATION OF OTHER 3 BUSINESS LINES (2) 241 297
IMPLIED PREMIUM FOR 3 BUSINESS LINES $284 $135
PREMIUM PERCENTAGE 118% 46%
</TABLE>
Notes: (1) Based on 12/31/97 shareholders equity.
(2) Based on trading valuation analysis.
<PAGE>
FINANCIAL IMPACT
Pro Forma Merger Analysis
$894 Million Purchase Price
<TABLE>
<CAPTION>
WALL STREET CASE (1) MANAGEMENT CASE (2)
-------------------
1998E EARNINGS
<S> <C> <C>
Associates $1,219 $1,219
Sail 44 49
---------------------- -------------------
$1,263 $1,268
AFTER TAX ADJUSTMENTS
Synergies (3) $26 $26
Cost of Debt (4) (34) (34)
Goodwill Amortization (5) (25) (25)
---------------------- --------------------
$1,230 $1,234
GAAP EARNINGS
% Change 0.9 % 1.3%
EPS Impact $0.03 $0.04
CASH EARNINGS
% Change 4.2% 4.6%
EPS Impact $0.15 0.16
</TABLE>
(1) Based on IBES estimates as of 04/15/98 for Associates and Sail.
(2) Based on IBES estimates as of 04/15/98 for Associates and management
projections for Sail.
(3) Assumes 15% synergies based on projected operating expenses of $293
million for 1998.
(4) Assumes 80 bps spread to 10 year treasury as of 04/15/98.
(5) Assumes new goodwill created in transaction ($631 million) will be
amortized over 15 years and tax deductible at a rate of 40%.
<PAGE>
FINANCIAL IMPACT
Pro Forma Merger Analysis (1)
$894 Million Purchase Price
[Three side-by-side charts which are a pro forma merger analysis of 1998E
Earnings, 1998E Cash Earnings and Debt/Equity. Two columns in each chart
indicate Associates stand-alone position and Associations/Sail combined
position respectively. The 1998E Earnings chart with a Wall Street Case(2)
with two columns (the first which represents Associates alone and the second
which represents Associates/Sail combined) showing a 1% increase $3.50 to
$3.53 and a Management Case(3) showing a 1% increase from $3.50 to $3.54. The
1998E Cash Earnings chart with a Wall Street Case(2) with two columns (see
parenthesis above) showing a 4% increase from $3.62 to $3.77 and a Management
Case (3) with two columns (see parenthesis above) showing a 5% increase from
$3.62 to $3.79. The Debt/Equity chart shows two columns (see parenthesis
above), which indicate a 7.8x to 8.0x increase from Associates to
Associates/Sail combined respectively.]
Notes: (1) Assumes synergies equal to 15% of projected operating expenses
of $293 million for 1998. Assumes cost of debt equal to 6.4%
(80 bps spread to 10 year treasury as of 04/15/98). Tax
deductible goodwill created of $631 million and amortized over
15 years. Assumes tax rate of 40%.
(2) Based on IBES estimates as of 04/15/98 for Associates and Sail.
(3) Based on IBES estimates as of 04/15/98 for Associates and
management projections for Sail.
<PAGE>
PRELIMINARY DRAFT FOR
INFORMATION PURPOSES ONLY
April 17, 1998
Board of Directors
SPS Transaction Services, Inc.
2500 Lake Cook Road
Riverwoods, IL 60015
Members of the Board:
We understand that SPS Transaction Services, Inc. ("SPS" or the "Company") and
Associates First Capital Corporation ("Associates") propose to enter into a
Stock Purchase Agreement, substantially in the form of a draft dated as of
April 16, 1998 (the "Stock Purchase Agreement"), which provides for the sale
(the "Sale") by SPS to Associates of all the issued and outstanding capital
stock of SPS Payment Systems, Inc. and Hurley State Bank (collectively, the
"Subsidiaries") for $894 million in cash subject to adjustment in certain
circumstances (the "Aggregate Consideration"). We further understand that, at
or immediately prior to the closing of the Sale, the Subsidiaries shall
discharge in full all intercompany debt due to SPS or its affiliates which is
outstanding as of the closing. SPS and SPS Acquisition also propose to enter
into an Agreement and Plan of Merger, substantially in the form of the draft
dated as of April 13, 1998 (the "Merger Agreement"), which provides for the
merger (the "Merger") of SPS Acquisition with and into SPS. Pursuant to the
Merger, each issued and outstanding share of Common Stock, par value $1 per
share, of SPS (the "SPS Common Stock"), other than shares held by Novus Credit
Services Inc. ("NOVUS") or its affiliates or as to which dissenters' rights
have been perfected, will be converted into the right to receive not less than
$32 in cash (the "Per Share Consideration"). The terms and conditions of the
Sale and the Merger are more fully set forth in the Stock Purchase Agreement
and Merger Agreement, respectively.
You have asked for our opinion as to whether (i) the Aggregate Consideration
to be paid by Associates pursuant to the Stock Purchase Agreement is fair from
a financial point of view to SPS and (ii) the Per Share Consideration to be
paid to holders of shares of SPS Common Stock (other than shares held by Novus
or its affiliates) pursuant to the Merger Agreement is fair from a financial
point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of SPS;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning SPS prepared by the management of
SPS;
(iii) analyzed certain financial projections prepared by the management
of SPS;
(iv) discussed the past and current operations and financial condition
and the prospects of SPS with senior executives of SPS;
(v) reviewed the reported prices and trading activity of SPS Common
Stock;
(vi) compared the financial performance of SPS and the prices and
trading activity of SPS Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable precedent transactions;
(viii) participated in discussions and negotiations among representatives
of SPS and Associates and their financial and legal advisors;
(ix) reviewed the Stock Purchase Agreement, Merger Agreement and
certain related documents; and
(x) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of SPS. We have
not made any independent valuation or appraisal of the assets or liabilities
of SPS, nor have we been furnished with any such appraisals. In addition, we
have assumed the Sale and the Merger will be consummated in accordance with
the terms set forth in the Stock Purchase Agreement and Merger Agreement,
respectively. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of,
the date hereof.
We have acted as financial advisor to the Board of Directors of SPS in
connection with this transaction and will receive a fee for our services.
Morgan Stanley & Co. Incorporated is an affiliate of Morgan Stanley Dean
Witter & Co. ("Morgan Stanley"), which owns approximately 73.5% of the
outstanding shares of Common Stock of SPS, and four officers of Morgan Stanley
or its affiliates are members of the Board of Directors of SPS. In addition,
the Chairman of the Board and Chief Financial Officer of SPS is an officer of
Morgan Stanley. In the past, Morgan Stanley & Co. Incorporated and its
affiliates have provided financial advisory and financing services for SPS and
have received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of SPS and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in
any filing with the Securities and Exchange Commission in connection with the
Sale. In addition, we express no opinion or recommendation as to how holders
of SPS Common Stock should vote in connection with the Sale and the Merger.
Based on the foregoing, we are of the opinion on the date hereof that (i) the
Aggregate Consideration to be paid by Associates pursuant to the Stock
Purchase Agreement is fair from a financial point of view to SPS and (ii) the
Per Share Consideration to be paid to holders (other than shares held by Novus
or its affiliates) of shares of SPS Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: __________________________________
R. Bradford Evans
Managing Director
<PAGE>
<TABLE>
<CAPTION>
COMPARISON OF SELECTED COMPARABLE COMPANIES(1)
- ---------------------------------------------------------------------------------------------------------------
CREDIT CARDS
92-97 CAGR NET CHG-OFFS DELINQ./EOP
MARKET PRICE/98E PRICE/99E RETURN ON ON MANAGED /AVG.MGD. MGD.
INSTITUTION VALUE EPS EPS MGD. LOANS RECEIVABLES RECEIVABLES RECEIVABLES(2)
- -------------- ----- --------- --------- ---------- ----------- ----------- --------------
($MM)
<S> <C> <C> <C> <C> <C> <C> <C>
SAIL $893 20.5X 19.2X 1.04%(3) 25%(4) 9.2% 9.6 %
MBNA $17,980 25.1x 20.5x 1.44% 38% 4.0% 4.6 %
Household 14,599 17.7 14.5 1.58 10 4.5(5) 4.8(5)
Capital One 5,772 25.8 21.5 1.46 48 6.6 6.2
MEAN (6) -- 22.9X 18.8 X 1.49% 32% 5.0% 5.2 %
</TABLE>
Notes: (1) (Financial information as of or for the year ended 12/31/97.
Market information as of 04/15/98. I/B/E.S estimates as of
04/15/98.
(2) 30+ days delinquency except Household which is 60+ days past
due.
(3) Estimated based on business line results.
(4) Estimated CAGR on managed receivable excluding Tandy
acquisition is 16%
(5) Excludes commercial.
(6) Excludes Sail.
<PAGE>
<TABLE>
<CAPTION>
COMPARISON OF SELECTED COMPARABLE COMPANIES(1)
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL FINANCE
RETURN ON 92-97 CAGR NET CHG-OFFS DELINQ./EOP
MARKET PRICE/98E PRICE/99E AVG. MDG. ON MANAGED /AVG.MGD. MGD.
INSTITUTION VALUE EPS EPS Receivables RECEIVABLES RECEIVABLES RECEIVABLES
- -------------- ----- --------- --------- ----------- ----------- ----------- -----------
($MM)
<S> <C> <C> <C> <C> <C> <C> <C>
SAIL $893 20.5X 19.2X 0.93%(2) 39% 5.4% 5.6 %
Associates $27,655 22.8x 19.5x 1.92% 19% 2.4(3) 2.2 %(3)
CIT 5,548 16.7 14.9 1.36(4) 13 0.6(3) 1.7(3)
FINOVA 3,479 21.8 18.8 1.71 30 0.6 2.1
MEAN(5) -- 20.4X 17.7X 1.66% 20% 1.2% 2.0 %
</TABLE>
Notes: (1) Financial information as of or for the year ended 12/31/97.
Market information as of 04/15/98. IBES earnings estimated as
of 04/15/98
(2) Estimated based on business line results..
(3) As a percentage of owned receivables.
(4) Excludes non-recurring charges.
(5) Excludes Sail.
<PAGE>
<TABLE>
<CAPTION>
COMPARISON OF SELECTED COMPARABLE COMPANIES(1)
- -----------------------------------------------------------------------------------------------------------------------------------
NETWORK SERVICES
PRICE/EPS(3) AGG. VALUE/LTM
MARKET AGGREGATE -------------- 5 YEAR P/98 LTM -----------------
COMPANY STOCK PRICE VALUE VALUE(2) 1998E 1999E GROWTH EPS/GROWTH REVENUES LTM EBIT REV. EBIT
- ------------- ----------- ----- --------- ----- ----- ------ ---------- -------- -------- ------ ------
($MM) ($MM) ($MM) ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Data $32.19 $14,451 $15,791 19.6x 17.1x 16% 1.2x $5,188 $1,175 3.0x 13.4x
BA Merchant 16.88 821 792 18.3 15.3 20 0.9 161 56 4.9 14.2
Services
Nova 32.44 944 978 42.1 27.0 25 1.7 336 28 2.9 34.5
Corporation
PMT Services 20.50 982 997 29.9 23.1 30 1.0 323 31 3.1 31.7
Paymentech 18.88 676 609 30.4 24.2 19 1.6 204 30 3.0 20.6
National 12.56 635 598 17.7 16.1 15 1.2 406 42 1.5 14.2
Processing
MEAN -- -- -- 26.4X 20.5X 21.% 1.3X -- -- 3.1X 21.4X
MEDIAN -- -- -- 24.8 20.1 20 1.2 -- -- 3.0 17.4
Notes: (1) Financial information as of most recent filings. Market information as of 04/15/98
(2) Aggregate value defined as equity value plus debt and preferred less cash.
(3) Based on I/B/E/S as of 04/15/98. Earning estimates calendarized to a 1/2/31 year-end.
When not available, calendar year 1999 EPS calculated by applying I/B/E/S 5 year growth
rates to calendar year 1998 EPS.
</TABLE>
<PAGE>
<TABLE>
COMPARISON OF SELECTED COMPARABLE COMPANIES(1)
- -----------------------------------------------------------------------------------------------------------------------------------
TELESERVICES
<CAPTION>
PRICE/EPS(3) AGG. VALUE/LTM
MARKET AGGREGATE -------------- 5 YEAR P/98 LTM ----------------
COMPANY STOCK PRICE VALUE VALUE(2) 1998E 1999E GROWTH EPS/GROWTH REVENUES LTM EBIT REV. EBIT
- ------------- ----------- ----- --------- ----- ----- ------ ---------- -------- -------- ------ ------
($MM) ($MM) ($MM) ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
APAC $ 11.44$ $560 $586 16.3x 11.8x 30 % 0.5 x $356 $38 1.6x 15.3x
TeleServices
National 9.31 140 115 33.3 18.6 30 1.1 81 (6) 1.4 NM
Techteam
Precision 9.00 194 189 23.7 13.8 48 0.5 144 4 1.3 45.6
Response
Sitel 12.69 803 926 29.5 20.1 33 0.9 491 35 1.9 26.5
Sykes 21.06 824 790 25.1 17.8 36 0.7 313 33 2.5 23.9
Enterprises
Teletech 15.19 861 869 40.0 31.0 38 1.1 263 31 3.3 28.0
MEAN -- -- -- 28.0 X 18.9.X 36% 0.8x -- -- 2.0X 27.9X
MEDIAN -- -- -- 27.3 18.2 34 0.8 -- -- 1.8 26.5
Notes: (1) Financial information as of most recent filings. Market information as of 04/15/98.
(2) Aggregate value defined as equity value plus debt and preferred less cash.
(3) Based on I/B/E/S as of 04/15/98.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROJECTIONS
- ----------------------------------------------------------------------------------------------------------------------------------
($ MILLIONS)
PLAN (1) MORGAN STANLEY ESTIMATES (2)
------------------------- ----------------------------------------------------------
CONSUMER CREDIT CARD SERVICES 1998 1999 2000 2001 2002 2003
- ----------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Average Managed Receivables $2,111 $2,322 $2,554 $2,810 $3,091 $3,400
% Growth in Receivables 10% 10% 10% 10% 10%
Return on Managed Receivables 1.27% 1.27% 1.27% 1.27% 1.27% 1.27%
Net Income $26.7 $29.4 $32.3 $35.6 $39.1 $43.0
COMMERCIAL ACCOUNT PROCESSING
- -----------------------------
Average Managed Receivables $548 $630 $725 $833 $958 $1,102
% Growth in Receivables 15% 15% 15% 15% 15%
Return on Managed Receivables 1.23% 1.23% 1.23% 1.23% 1.23% 1.23%
Net Income $6.7 $7.7 $8.9 $10.2 $11.8 $13.5
NETWORK TRANSACTION SERVICES
- ----------------------------
Revenues $48.2 $53.0 $58.3 $64.2 $70.6 $77.6
Growth 10% 10% 10% 10% 10%
Pretax Margin 20% 20% 20% 20% 20% 20%
Pretax Income $9.9 $10.9 $11.9 $13.1 $14.4 $15.9
Net Income $6.1 $6.7 $7.4 $8.1 $8.9 $9.8
TELESERVICES
- ------------
Revenues $50.5 $58.1 $66.8 $76.8 $88.3 $101.6
Growth 15% 15% 15% 15% 15%
Pretax Margin 14% 14% 14% 14% 14% 14%
Pretax Income $7.0 $8.1 $9.3 $10.7 $12.2 $14.1
Net Income $4.3 $5.0 $5.7 $6.6 $7.6 $8.7
SAIL TOTAL EARNINGS PROJECTIONS
- -------------------------------
Net Income $43.9 $48.8 $54.3 $60.5 $67.4 $75.1
</TABLE>
Notes: (1) Based on Management Plan. Excludes royalty payments.
(2) Estimates based on sector growth and margin trends.
<PAGE>
<TABLE>
KEY ASSUMPTIONS
- ----------------------------------------------------------------------------------------------------------------------------------
COST OF EQUITY
<CAPTION>
BETAS(1)
CONSUMER CREDIT CARD SERVICES COMMERCIAL ACCOUNT PROCESSING
----------------------------- -----------------------------
<S> <C> <C>
MBNA 1.26 Associates 1.14
Household 1.13 FINOVA 1.04
----
Capital One 1.18 MEAN BETA 1.09
----
MEAN BETA 1.19
NETWORK TELESERVICES
------- ------------
First Data Corporation 1.18 APAC Teleservices 1.38
BA Merchant Services 0.83 National Techteam 1.47
Nova Corporation 0.79 Precision Response 0.96
PMT Services 1.04 Sitel 1.43
Paymentech 0.92 Sykes enterprises 0.99
National Processing 1.22 Teletech 1.38
---- ----
MEAN BETA 1.00 MEAN BETA 1.27
COST OF EQUITY CALCULATION(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer 61.% 1.19 Risk Free Rate of Return(3) 5.59%
Commercial 15% 1.09 Weighted Beta 1.16
Network 14% 1.00 Market Risk Premium 7.40
----
TeleServices 10% 1.27 COST OF EQUITY 14.14%
----
WEIGHTED BETA 1.16
Notes: (1) Based on the predicted beta from Barra's Beta Book January 1998 edition.
(2) Using a weighted average beta based on business line contribution for '98 Management Plan.
(3) The 10-year Treasury yield on 04/15/98.
</TABLE>
<PAGE>
<TABLE>
KEY ASSUMPTIONS
-------------------------------------------------------------------------------------------------------------------
Terminal Multiple Analysis
<CAPTION>
BASED ON CURRENT BUSINESS MIX (1998E) BASED ON FUTURE BUSINESS MIX (2003E)
----------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
Consumer 61% 14.0 x Consumer 57% 14.0 x
Commercial 15% 17.0 Commercial 18% 17.0
Network 14% 14.0 Network` 13% 14.0
TeleServices 10% 16.0 TeleServices 12% 16.0
BLENDED FORWARD MULTIPLE 14.7 X 14.8 X
</TABLE>
Exhibit (c)(1)
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of June 15, 1998, is
entered into between SPS Transaction Services, Inc., a Delaware corporation
("SPS"), and Sail Acquisition, Inc., a Delaware corporation ("Acquisition"). SPS
and Acquisition are hereinafter sometimes collectively referred to as the
"Constituent Corporations."
W I T N E S S E T H :
WHEREAS, SPS and Acquisition are corporations duly organized and
existing under the laws of the State of Delaware, governed by the provisions of
the General Corporation Law of the State of Delaware ("DGCL") and of their
respective Certificates of Incorporation and By-laws;
WHEREAS, on the date of this Agreement, SPS has authority to issue
40,100,000 shares of capital stock, divided into two classes, namely: 100,000
shares of preferred stock, par value $1 per share ("Preferred Stock"), and
40,000,000 shares of common stock, par value $1 per share ("Common Stock");
WHEREAS, on the date of this Agreement, NOVUS Credit Services Inc.
("Parent") is directly or indirectly the beneficial owner of 20,000,000 shares
of Common Stock (the "Control Shares");
WHEREAS, Acquisition is a wholly owned subsidiary of Parent;
WHEREAS, SPS has entered into a Stock Purchase Agreement, dated April
18, 1998, with Associates First Capital Corporation ("Associates") pursuant to
which SPS has agreed to sell to Associates substantially all of SPS's assets,
consisting of all of the issued and outstanding capital stock of SPS's two
subsidiaries, SPS Payment Systems, Inc. and Hurley State Bank, for a purchase
price of $895,696,661 in cash (the "Sale");
WHEREAS, the Board of Directors of SPS has ordered the distribution to
the stockholders of SPS other than Parent of their proportionate share of the
net proceeds from the Sale;
WHEREAS, the respective Boards of Directors of SPS and Acquisition
have, by resolutions duly adopted, approved this Agreement;
WHEREAS, Parent has adopted this Agreement as the sole stockholder of
Acquisition; and
WHEREAS, the Board of Directors of SPS has directed that this
Agreement be submitted to a vote of its stockholders;
NOW, THEREFORE, in consideration of the mutual agreements and covenants
set forth herein, SPS and Acquisition hereby agree as follows:
1. Merger. Acquisition shall be merged with and into SPS (the
-------
"Merger"), and SPS shall be the surviving corporation (hereinafter sometimes
referred to as the "Surviving Corporation"). The Merger shall become effective
upon the date and at the time of filing of a certificate of merger with the
Secretary of State of the State of Delaware (the "Effective Time").
2. Governing Documents. The Certificate of Incorporation of SPS, as in
-------------------
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation without change or amendment until
thereafter amended in accordance with the provisions thereof and applicable
laws, and the By-laws of SPS, as in effect immediately prior to the Effective
Time, shall be the By-laws of the Surviving Corporation without change or
amendment until thereafter amended in accordance with the provisions thereof, of
the Certificate of Incorporation of the Surviving Corporation and applicable
laws.
3. Succession. At the Effective Time, the separate existence of
-----------
Acquisition shall cease, and SPS shall become entitled to all the rights,
privileges, powers and franchises of a public and private nature, and be subject
to all the obligations, duties, restrictions and disabilities of each of the
Constituent Corporations; and all property, real, personal and mixed, and all
debts due to each of the Constituent Corporations on whatever account, as well
as stock subscriptions and all other things in action belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation; and all
and every other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of the respective Constituent Corporations;
and the title to any real estate vested, by deed or otherwise, in either of such
Constituent Corporations shall not revert or be in any way impaired by reason of
the Merger, but all rights of creditors and all liens upon any property of
Acquisition shall be preserved unimpaired. To the extent permitted by law, any
claim existing or action or proceedings pending by or against either of the
Constituent Corporations may be prosecuted as if the Merger had not taken place.
All debts, liabilities and duties of the respective Constituent Corporations
shall thenceforth attach to the Surviving Corporation and may be enforced
against it to the same extent as if such debts, liabilities and duties had been
incurred or contracted by it. All corporate acts, plans, policies, agreements,
arrangements, approvals and authorizations of Acquisition, its stockholder,
Board of Directors and committees thereof, officers and agents which were valid
and effective immediately prior to the Effective Time, shall be taken for all
purposes as the acts, plans, policies, agreements, arrangements, approvals and
authorizations of the Surviving Corporation and shall be as effective and
binding thereon as the same were with respect to Acquisition. The employees and
agents of Acquisition shall become the employees and agents of the Surviving
Corporation and continue to be entitled to the same rights and benefits which
they enjoyed as employees and agents of Acquisition. The requirements of any
plans or agreements of Acquisition involving the issuance or purchase by
Acquisition of certain shares of its capital stock shall be satisfied by the
issuance or purchase of a like number of shares of the Surviving Corporation.
4. Directors. The members at the Effective Time of the Board of
----------
Directors of SPS shall thereafter be the members of the Board of Directors of
the Surviving Corporation until removed or replaced in accordance with the
provisions of the Surviving Corporation's By-laws, Certificate of Incorporation
and applicable laws.
5. Further Assurances. From time to time, as and when required by the
-------------------
Surviving Corporation or by its successors or assigns, there shall be executed
and delivered on behalf of Acquisition such deeds and other instruments, and
there shall be taken or caused to be taken by it all such further and other
action, as shall be appropriate, advisable or necessary in order to vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation the
title to and possession of all property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Acquisition, and otherwise to
carry out the purposes of this Agreement, and the officers and directors of the
Surviving Corporation are fully authorized in the name and on behalf of
Acquisition or otherwise, to take any and all such action and to execute and
deliver any and all such deeds and other instruments.
6. Conversion of Shares. At the Effective Time, by virtue of the
----------
Merger and without any action on the part of the holder thereof:
(a) each share of Common Stock issued and outstanding
immediately prior to the Effective Time, other than the Control
Shares, shall be cancelled and be converted into, and become the
right to receive: (i) in the case of such shares other than
Dissenting Shares (defined below), upon compliance with the
conditions set forth in Section 9(b), a cash payment equal to $32.02
(the "Merger Consideration"), without interest; and (ii) in the case
of Dissenting Shares, the consideration set forth in Section 7
hereof;
(b) each Control Share issued and outstanding immediately
prior to the Effective Time, shall continue to be an issued and
outstanding share of capital stock of the Surviving Corporation, with
the same rights and privileges attached to such share immediately
prior to the Effective Time, but shall not be entitled to any
payment, consideration or other distribution by reason of the Merger;
and
(c) each share of capital stock of Acquisition, issued and
outstanding immediately prior to the Effective Time, shall be
cancelled and extinguished and no consideration shall be paid
therefor.
7. Dissenting Shares. Notwithstanding anything in this Agreement to
-------------------
the contrary, shares of Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by stockholders that
have not voted such shares in favor of the Merger but have, instead, delivered a
written demand for the appraisal of such shares in the manner provided in the
DGCL (such shares, the "Dissenting Shares") shall not be converted into or
represent the right to receive the Merger Consideration and the holders thereof
shall only be entitled to such rights as are granted by Section 262 of the DGCL.
Each holder of Dissenting Shares that becomes entitled to payment for such
shares as pursuant to Section 262 of the DGCL shall receive payment therefor
from the Surviving Corporation in accordance with the DGCL; provided however,
-------- --------
that (i) if any such holder of Dissenting Shares shall have failed to establish
that it is entitled to appraisal rights as provided in Section 262 of the DGCL,
or (ii) if any such holder of Dissenting Shares shall have effectively withdrawn
the demand for appraisal of such shares or lost the right to appraisal and
payment of such shares under Section 262 of the DGCL, or (iii) if neither the
Surviving Corporation nor such holder of Dissenting Shares shall have filed a
petition demanding a determination of the value of all Dissenting Shares within
the time provided in Section 262 of the DGCL, such holder or holders (as the
case may be) shall forfeit the right to appraisal of such shares and each such
share of Common Stock shall thereupon be deemed to have been converted, as of
the Effective Time, into and represent the right to receive from the Surviving
Corporation the Merger Consideration, without interest thereon, as provided in
Section 6 hereof.
8. Condition to Merger. The consummation of the Merger shall be
---------------------
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) consummation of the Sale;
(b) the Merger Agreement shall have been adopted by the
holders of a majority of shares of Common Stock issued and
outstanding; and
(c) no statute, rule, regulation, decree, order or
injunction shall have been promulgated, enacted, entered or enforced
by any United States federal or state government, governmental agency
or authority or court which remains in effect and prohibits,
restrains, enjoins or restricts the consummation of the Merger.
9. Exchange of Certificates.
-------------------------
(a) From and after the Effective Time, a bank or trust
company to be designated by SPS (the "Exchange Agent") shall act as
exchange agent in effecting the exchange of the Merger Consideration
for certificates representing shares of Common Stock entitled to
payment pursuant to Section 6 (the "Certificates").
(b) Promptly after the Effective Time, the Exchange Agent
shall mail to each record holder of Certificates a letter of
transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent) and
instructions for use in surrendering Certificates and receiving the
Merger Consideration therefor. Upon the surrender of each Certificate,
together with such letter of transmittal duly executed and completed
in accordance with the instructions thereto, the holder of such
Certificate shall be unconditionally entitled to receive in exchange
therefor an amount equal to the Merger Consideration multiplied by the
number of shares of Common Stock formerly represented by such
Certificate, and such Certificate shall be cancelled. Until so
surrendered, each such Certificate shall represent solely the right to
receive, upon compliance with the conditions set forth in this
Subsection 9(b), an amount equal to the Merger Consideration
multiplied by the number of shares of Common Stock formerly
represented by such Certificate. No interest shall be paid or accrue
on the Merger Consideration payable upon the surrender of the
Certificates. If any Merger Consideration is to be paid to a person
(the "Payee") other than the person in whose name the Certificate
surrendered in exchange therefor is registered (the "Record Holder"),
such Certificate shall be accompanied by all documents required to
evidence and effect the transfer of the rights represented by such
Certificate from the Record Holder to the Payee, and it shall be a
condition to such exchange that the person requesting such exchange
shall pay to the Exchange Agent any transfer or other taxes required
by reason of the payment of such Merger Consideration to the Payee, or
that such person shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable.
Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of shares of Common Stock for
any Merger Consideration delivered to a public official pursuant to
applicable abandoned property, escheat and similar laws.
(c) Promptly following the date which is 180 days after the
Effective Time, the Exchange Agent's duties shall terminate, and any
funds deposited with the Exchange Agent that remain unclaimed by
holders of Certificates shall be paid to the Surviving Corporation
upon demand. Thereafter, each holder of a Certificate may surrender
such Certificate to the Surviving Corporation along with the
applicable letter of transmittal and (subject to applicable abandoned
property, escheat and similar laws) receive in exchange therefor an
amount equal to the Merger Consideration multiplied by the number of
shares of Common Stock formerly represented by such Certificate,
without any interest thereon, but shall have no greater rights against
the Surviving Corporation than may be accorded to general creditors of
the Surviving Corporation.
(d) After the Effective Time, there shall be no transfers on
the stock transfer books of the Surviving Corporation of any shares of
Common Stock other than the Control Shares. If, after the Effective
Time, Certificates (other than Certificates relating to the Control
Shares) are presented to the Surviving Corporation or the Exchange
Agent, they shall be canceled and exchanged for the applicable Merger
Consideration, as provided herein, subject to applicable law in the
case of Dissenting Shares.
10. Options.
-------
(a) Prior to the Effective Time, the Board of Directors of
SPS (or, if appropriate, any committee thereof) shall adopt
appropriate resolutions and use its reasonable good faith efforts to
take all other actions necessary to provide for the surrender to the
issuer, effective at the Effective Time, of all the outstanding stock
options, warrants or rights to purchase shares of Common Stock
heretofore granted (collectively, the "Options") under any outstanding
stock option plan or pursuant to any outstanding warrant agreement or
any other outstanding plan, program or arrangement of SPS providing
for the issuance or grant of any other interest in respect of the
capital stock of SPS or any Subsidiary of SPS (collectively, the
"Stock Plans") on terms such that, immediately prior to the Effective
Time, (i) each Option, whether or not then vested or exercisable,
shall no longer be exercisable for the purchase of shares of Common
Stock, but shall entitle each holder thereof, in cancellation and
settlement therefor, to payments in cash (less any applicable
withholding taxes, the "Cash Payment"), at the Effective Time, equal
to the product of (x) the total number of shares of Common Stock
subject to such Option, whether or not then vested or exercisable, and
(y) the excess of the Merger Consideration over the per-share exercise
price of such Option, each such Cash Payment to be paid to each holder
of an outstanding Option at the Effective Time, and (ii) each share of
Common Stock previously issued in the form of a grant of restricted
stock or grant of contingent shares shall become fully vested, whether
or not then vested; provided, however, that with respect to any person
--------- -------
subject to Section 16 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder (the "Exchange
Act"), such surrender to the issuer under either clause (i) or (ii)
above shall be approved in advance by the Board of Directors of SPS
(or an appropriate committee thereof) so as to cause such dispositions
to be exempt under Rule 16b-3. Any then outstanding stock appreciation
rights or limited stock appreciation rights shall be canceled
immediately prior to the Effective Time without any payment therefor,
notwithstanding the terms of any Stock Plan. Notwithstanding any other
provision of this Section 10 to the contrary, the Cash Payment may be
withheld with respect to any Option until necessary consents and
releases are obtained.
11. Amendment. Subject to applicable law, this Agreement may be
---------
amended, modified or supplemented, at any time before or after adoption of this
Agreement by the stockholders of SPS, by written agreement of the parties
hereto at any time prior to the Effective Time with respect to any of the
terms contained herein; provided, however, after the adoption of this Agreement
by the stockholders of SPS, no such amendment shall be made which by law
requires the further approval of the stockholders of SPS without such further
approval.
12. Abandonment. At any time prior to the Effective Time, whether
------------
before or after the adoption of this Agreement by the stockholders of SPS, this
Agreement may be terminated, and the Merger may be abandoned by the Board of
Directors of SPS and Acquisition, notwithstanding approval of this Agreement
by the stockholders of SPS, or by the stockholder of Acquisition, or both, if,
in the opinion of the Board of Directors of SPS and Acquisition, circumstances
arise which make the Merger for any reason inadvisable.
13. Counterparts. In order to facilitate the filing and recording of
-------------
this Agreement, the same may be executed in two counterparts, both of which
shall constitute one and the same agreement.
14. Interpretation. The headings contained in this Agreement are for
---------------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Miscellaneous. This Agreement (i) constitutes the entire agreement
-------------
and supersedes all other prior agreements and understandings, both written and
oral, between the parties, with respect to the subject matter hereof, (ii) is
not intended to confer upon any other person any rights or remedies hereunder,
(iii) shall not be assigned by operation of law or otherwise and (iv) shall be
governed by the laws of the State of Delaware, without regard to principles of
conflicts of law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
SPS TRANSACTION SERVICES, INC.
By:/s/Thomas C. Schneider
-------------------------
Name: Thomas C. Schneider
Title: Chairman and Chief
Financial Officer
SAIL ACQUISITION, INC.
By:/s/Philip J. Purcell
-------------------------
Name: Philip J. Purcell
Title: President
Exhibit (c)(2)
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of April 18, 1998, by
Associates First Capital Corporation, a Delaware corporation ("Purchaser"), and
NOVUS Credit Services Inc. (the "Parent"), a stockholder of SPS Transaction
Services, Inc., a Delaware corporation (the "Company").
RECITALS
A. Purchaser and the Company are concurrently herewith entering into a
Stock Purchase Agreement dated as of the date hereof (a copy of which has been
provided to the Parent) (the "Stock Purchase Agreement"), pursuant to which
Purchaser shall acquire all of the issued and outstanding shares of capital
stock of each of the Subsidiaries (as defined in the Stock Purchase Agreement).
B. The Parent is a significant stockholder of the Company.
C. The execution and delivery of this Agreement is a condition to
Purchaser entering into the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties hereby
agree as follows:
1. Voting. At the meeting of the Company's stockholders convened to
------
consider and vote upon the authorization of the transactions contemplated by the
Stock Purchase Agreement (the "Stock Sale"), the Parent shall vote or cause to
be voted all of the shares of common stock of the Company, par value $0.01 per
share (the "Company Common Stock"), owned of record by it at the record date for
such vote (a) in favor of the authorization of the transactions contemplated by
the Stock Purchase Agreement and (b) against (i) approval of any proposal made
in opposition to or in competition with the Stock Sale or any of the other
transactions contemplated by the Stock Purchase Agreement, (ii) any merger,
consolidation, sale of assets, business combination, share exchange,
reorganization or recapitalization of the Company or any of its subsidiaries,
with or involving any party other than the Purchaser or one of its subsidiaries,
(iii) any liquidation or winding up of the Company, and (iv) any other action
that may reasonably be expected to impede, interfere with, delay, postpone or
attempt to discourage the Stock Sale or the other transactions contemplated by
the Stock Purchase Agreement or result in a breach of any of the covenants,
representations, warranties or other obligations or agreements of the Company
under the Stock Purchase Agreement which would materially and adversely affect
the Company or its ability to consummate the transactions contemplated by the
Stock Purchase Agreement.
2. No Solicitation. The Parent shall not, directly or indirectly: (i)
---------------
take any action to seek, initiate or solicit any offer from any person, entity
or group to acquire any shares of capital stock of the Company or its
subsidiaries, to merge or consolidate with the Company or its subsidiaries, or
to otherwise acquire any significant portion of the assets of the Company or its
subsidiaries except for acquisitions solely of inventory in the ordinary course
of business (a "Third Party Acquisition Offer"), or (ii) engage in negotiations
or discussions concerning a Third Party Acquisition Offer or the business or
assets of the Company or its subsidiaries with, or disclose financial
information relating to the Company or its subsidiaries, or any confidential or
proprietary trade or business information relating to the business of the
Company or its subsidiaries to, or afford access to the properties, books or
records of the Company or its subsidiaries to, any third party that may be
considering a Third Party Acquisition Offer. The Parent shall immediately cease
and cause to be terminated all existing discussions and negotiations, if any,
with any parties conducted heretofore with respect to any Third Party
Acquisition Offer.
3. No Transfer. The Parent shall not sell, pledge, assign or otherwise
-----------
transfer or dispose of, or authorize, propose or agree to the sale, pledge,
assignment or other transfer or disposition of, any of its shares of Company
Common Stock.
4. Best Efforts; Additional Agreements and Provisions. Subject to the
--------------------------------------------------
terms and conditions of this Agreement, each of the parties hereto agrees to use
its, his or her best efforts to take, or cause to be taken, all action and to
do, or cause to be done, all things reasonably necessary, proper, or advisable
in accordance with applicable law to consummate and make effective the
transactions contemplated by this Agreement and the Stock Purchase Agreement. If
any further action is reasonably necessary or desirable to carry out the
purposes of this Agreement or the Stock Purchase Agreement, each party to this
Agreement shall take all such action.
5. Representations and Warranties. The Parent represents and warrants
------------------------------
to Purchaser as follows:
(a) Organization. The Parent is a corporation duly organized
and validly existing under the laws of the State of Delaware.
(b) Corporate Power. The Parent has the requisite power and
authority to enter into this Agreement, and to perform its obligations hereunder
and to consummate the transactions contemplated hereby.
(c) Validity. This Agreement has been duly and validly
executed and delivered by the Parent and constitutes a valid and legally binding
obligation thereof, enforceable in accordance with its terms. The Parent has
full legal power, authority and right to vote all shares of Company Common Stock
in favor of the authorization of the transactions contemplated by the Stock
Purchase Agreement without the consent or approval of, or any other action on
the part of, any other person or entity.
(d) Authority to Vote Shares. The Parent owns of record a
total of 20,000,000 shares of Company Common Stock. The Parent has full legal
power, authority and right to vote all shares of Company Common Stock in favor
of the authorization of the transactions contemplated by the Stock Purchase
Agreement without the consent or approval of, or any other action on the part
of, any other person or entity.
(e) Noncontravention. Neither the execution and delivery of
this Agreement, nor the consummation of any of the transactions contemplated
hereby or by the Stock Purchase Agreement, nor compliance with any of the
provisions hereof or thereof, will violate, conflict with, or result in a breach
of any provisions of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination or suspension of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any lien upon any of the properties or assets of the Parent under,
any of the terms, conditions or provision of any agreement or instrument to
which the Parent is a party or any statute, rule, regulation, judgment, order,
decree or other legal requirement applicable to the Parent; except for any such
breach, violation, conflict or default which, individually or in the aggregate,
would not prevent the Parent from casting all votes necessary to authorize the
transactions contemplated by the Stock Purchase Agreement.
(f) Litigation. There is no claim, action, proceeding or
investigation pending or, to the knowledge of the Parent, threatened against or
relating to the Parent before any court or governmental or regulatory authority
or body and the Parent is not subject to any outstanding order, writ, injunction
or decree which, if determined adversely, individually or in the aggregate,
could reasonably be expected to prevent the Parent from performing its
obligations hereunder.
6. Termination. This Agreement may be terminated upon the earliest to
-----------
occur of (i) the termination of the Stock Purchase Agreement pursuant to Article
IX thereof; (ii) the consummation of the Stock Sale; and (iii) the date which is
9 months after the date hereof. In the event of a termination of this Agreement
pursuant to this Section 6, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of any party hereto; provided,
however, that nothing herein shall release any party hereto from any liability
for any breach of this Agreement.
7. Miscellaneous.
-------------
(a) Notices. All notices and other communications hereunder
shall be in writing (including telex or similar writing) and shall be deemed
given if delivered in person or by messenger, cable, telegram or telex or
facsimile transmission or by a reputable overnight delivery service which
provides for evidence of receipt to the parties at the following addresses or
telecopier numbers (or at such other address, or telecopy number for a party as
shall be specified by like notice):
if to the Parent at:
NOVUS Credit Services Inc.
2500 Lake Cook Road
Riverwoods, IL 60015
Telecopy No.: (847) 405-3755
Attention: General Counsel, Credit Services
if to Purchaser at:
Associates First Capital Corporation
250 E. Carpenter Freeway
Irving, TX 75062
Telecopy No.: (972) 652-5798
Attention: General Counsel
(b) Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(c) Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement.
(d) Entire Agreement. This Agreement (including the documents
and instruments referred to herein) constitutes the entire agreement and
supersedes all prior and contemporaneous agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
(e) Severability; Savings. The invalidity or unenforceability
or any provision of this Agreement shall not affect the validity or
enforceability of any other provisions of this Agreement, which shall remain in
full force and effect. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law.
(f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the principles of conflicts of law of such state.
(g) Assignment. Neither this Agreement nor any of the rights,
interest or obligations hereunder shall be assigned by any party hereto, whether
by operation of law or otherwise, without the express prior written consent of
each of the other parties hereto. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors, heirs, legal representatives and
permitted assigns.
(h) Remedies. In addition to all other remedies available, the
parties agree that, in the event of a breach by a party of any of its
obligations hereunder, the non-breaching party shall be entitled to specific
performance or injunctive relief.
(i) Defined Terms. All capitalized terms used herein and not
defined herein shall have the meaning set forth in the Stock Purchase Agreement.
IN WITNESS WHEREOF, each of the parties hereto have signed this
Agreement as of the date first above written.
ASSOCIATES FIRST CAPITAL CORPORATION
By /s/ Joseph N. Scarpinato
---------------------------------
Name: Joseph N. Scarpinato
Title: Executive Vice President
NOVUS CREDIT SERVICES INC.
By /s/ Thomas C. Schneider
---------------------------------
Name: Thomas C. Schneider
Title: Chief Financial Officer
Exhibit (d)(1)
SCHEDULE 14A
(Rule 14a-10)
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant {x}
Filed by a Party other than the Registrant { }
Check the appropriate box:
{x } Preliminary Proxy Statement
{ } Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
{ } Definitive Proxy Statement
{ } Definitive Additional Materials
{ } Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
SPS TRANSACTION SERVICES, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
{ } No fee required.
{x } Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
_______________________________________________________________
2) Aggregate number of securities to which transaction applies:
_______________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
_______________________________________________________________
4) Proposed maximum aggregate value of transaction:
$895,696,661
---------------------------------------------------------------
<PAGE>
5) Total fee paid:
$179,139.33
---------------------------------------------------------------
{x} Fee paid previously with preliminary materials.
{ } Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid:
_______________________________________________________________
2) Form, Schedule or Registration Statement No.:
_______________________________________________________________
3) Filing Party:
_______________________________________________________________
4) Date Filed:
_______________________________________________________________
PRELIMINARY COPY, DATED JULY 1, 1998
[SPS LOGO]
2500 LAKE COOK ROAD
RIVERWOODS, ILLINOIS 60015
, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of our
stockholders that will be held on _____________, 1998, at 10:00 a.m. Central
Time, at the Chicago Botanic Garden, Education Center, 1000 Lake Cook Road, in
Glencoe, Illinois 60022.
At the Special Meeting, you will be asked to approve the sale by the
Company of substantially all of its assets, consisting of all the issued and
outstanding capital stock of the Company's two subsidiaries, SPS Payment
Systems, Inc. and Hurley State Bank, to Associates First Capital Corporation,
pursuant to a Stock Purchase Agreement, dated April 18, 1998, between the
Company and Associates, for a purchase price of $895,696,661 in cash (the
"Sale"). You will also be asked to adopt an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of June 15, 1998, between the Company and Sail
Acquisition, Inc., a wholly owned subsidiary of NOVUS Credit Services Inc. The
Merger will be effected as soon as practicable after the closing of the Sale
and is being undertaken as a means of distributing to the public stockholders
of the Company their pro rata portion of the net proceeds of the Sale. In the
Merger, each outstanding share of the Company's common stock (other than
common stock held by NOVUS or by any stockholders who perfect their statutory
appraisal rights under Delaware law) will be converted into the right to
receive $32.02 in cash, without interest thereon. Because the Company will
bear the entire income tax liability on the gain resulting from the Sale and
Morgan Stanley Dean Witter & Co. (the parent company of NOVUS) has agreed to
contribute $500,000 to the Company to defray the expenses incurred by the
Company in connection with the Sale and Merger, the per share amount allocable
to NOVUS will be effectively less than $32.02 per share.
APPROVAL OF THE SALE AND ADOPTION OF THE MERGER AGREEMENT REQUIRE
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE COMPANY'S OUTSTANDING
COMMON STOCK. NOVUS OWNS APPROXIMATELY 73.3% OF THE COMPANY'S OUTSTANDING
COMMON STOCK AND HAS AGREED WITH ASSOCIATES TO VOTE ALL OF THE SHARES OWNED BY
IT IN FAVOR OF THE SALE. IN ADDITION, NOVUS INTENDS TO VOTE ALL SUCH SHARES IN
FAVOR OF ADOPTION OF THE MERGER AGREEMENT. AS A RESULT, THE TRANSACTIONS WILL
BE APPROVED AT THE SPECIAL MEETING WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER
STOCKHOLDER.
Your Board of Directors, after careful consideration, has determined
that both the Sale and the Merger are fair to you and in your best interests.
Therefore, the Board recommends that you vote FOR approval of the Sale and
adoption of the Merger Agreement.
Detailed information concerning both the Sale and the Merger is set
forth in the attached Proxy Statement, which we urge you to read carefully.
Thank you for your support over the years.
Sincerely,
Thomas C. Schneider
Chairman of the Board
PLEASE DO NOT SEND STOCK CERTIFICATES AT THIS TIME.
<PAGE>
SPS TRANSACTION SERVICES, INC.
2500 LAKE COOK ROAD
RIVERWOODS, ILLINOIS 60015
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, __________, 1998
A Special Meeting of Stockholders (the "Special Meeting") of SPS
Transaction Services, Inc. (the "Company") will be held on ___________,
1998, at the Chicago Botanic Garden, Education Center, 1000 Lake Cook
Road, Glencoe, Illinois 60022 at 10:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve the sale by the
Company of substantially all of its assets, consisting of all the
issued and outstanding capital stock of the Company's two
subsidiaries, SPS Payment Systems, Inc. and Hurley State Bank, to
Associates First Capital Corporation, a Delaware corporation
("Associates"), for a purchase price of $895,696,661 in cash (the
"Sale"), upon the terms and subject to the conditions set forth in a
Stock Purchase Agreement, dated April 18, 1998 (the "Purchase
Agreement"), between the Company and Associates.
2. To consider and vote upon a proposal to adopt the Agreement and Plan
of Merger, dated as of June 15, 1998 (the "Merger Agreement"),
between the Company and Sail Acquisition, Inc., a Delaware
corporation ("Acquisition") and a wholly owned subsidiary of NOVUS
Credit Services Inc., a Delaware corporation ("NOVUS"), pursuant to
which Acquisition will be merged with and into the Company (the
"Merger"), with the Company being the surviving corporation. In the
Merger, each share of the Company's common stock, par value $0.01
per share (the "Common Stock"), outstanding at the effective time of
the Merger (other than Common Stock held by NOVUS or any
stockholders who perfect their statutory appraisal rights under
Delaware law), will be converted into the right to receive $32.02 in
cash, without interest thereon.
3. To transact such other business as may be properly brought before
the Special Meeting, or any adjournments or postponements thereof.
The Sale and the Merger are more fully described in the attached
Proxy Statement and Annexes thereto.
Stockholders not voting in favor of adoption of the Merger Agreement
and who otherwise comply with the provisions of Section 262 of the General
Corporation Law of the State of Delaware will have the right, if the Merger is
consummated, to demand appraisal of the fair market value of their shares of
Common Stock. A copy of Section 262 is attached to the Proxy Statement as
Annex II. See "PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT--Appraisal
Rights" in the accompanying Proxy Statement for a description of the
procedures required to preserve and obtain appraisal rights.
Holders of record of Common Stock at the close of business on
____________, 1998, will be entitled to notice of and to vote on all matters
presented at the Special Meeting and at any adjournments or postponements
thereof.
By Order of the Board of Directors,
Michael J. Hartigan, Jr.
Secretary
_____________, 1998
PLEASE DO NOT SEND STOCK CERTIFICATES AT THIS TIME.
<PAGE>
PRELIMINARY COPY, DATED JULY 1, 1998
SPS LOGO
-----------------------------------------------------------------------
PROXY STATEMENT
-----------------------------------------------------------------------
SPECIAL MEETING OF STOCKHOLDERS
, 1998
This proxy statement is being furnished to the stockholders of SPS
Transaction Services, Inc. ("We" or the "Company") in connection with the
solicitation of proxies on behalf of the Board of Directors of the Company
(the "Board of Directors") for a Special Meeting of the Company's stockholders
(the "Stockholders") to be held on __________, 1998, at 10:00 a.m. Central
Time, at the Chicago Botanic Garden, Education Center, 1000 Lake Cook Road,
Glencoe, Illinois 60022, and at any adjournments and postponements thereof.
The purposes of the Special Meeting are to consider and act upon (i) a
proposal to approve the sale by the Company of substantially all of its
assets, consisting of all the issued and outstanding capital stock of the
Company's two subsidiaries, SPS Payment Systems, Inc., a Delaware corporation,
and Hurley State Bank, a South Dakota state bank, to Associates First Capital
Corporation, a Delaware corporation ("Associates"), pursuant to a Stock
Purchase Agreement, dated April 18,1998 (the "Purchase Agreement"), between
the Company and Associates, for a purchase price of $895,696,661 in cash (the
"Sale") and (ii) a proposal to adopt the Agreement and Plan of Merger, dated
as of June 15, 1998 (the "Merger Agreement"), between the Company and Sail
Acquisition, Inc., a Delaware corporation ("Acquisition") and a wholly owned
subsidiary of NOVUS Credit Services Inc., a Delaware corporation ("NOVUS"),
pursuant to which Acquisition will be merged with and into the Company (the
"Merger"), with the Company being the surviving corporation.
The Merger will be effected as soon as practicable after the closing
of the Sale to distribute to the public Stockholders their pro rata portion of
the net proceeds of the Sale. In the Merger, each share of the Company's
common stock, par value $0.01 per share (the "Common Stock"), outstanding at
the effective time of the Merger (other than Common Stock held by NOVUS or by
any Stockholders who perfect their statutory appraisal rights under Delaware
law) will be converted into the right to receive $32.02 in cash, without
interest thereon. Because the Company will bear the income tax liability on
the gain resulting from the Sale and Morgan Stanley Dean Witter & Co. (the
parent company of NOVUS) has agreed to contribute $500,000 to the Company to
defray the expenses incurred by the Company in connection with the Sale and
the Merger, the per share amount allocable to NOVUS is effectively less than
$32.02 per share.
The Board of Directors, after careful consideration, has approved
the Purchase Agreement and the Merger Agreement and has determined that both
the Sale and the Merger are fair to and in the best interests of the
Stockholders and recommends that Stockholders approve the Sale and adopt the
Merger Agreement.
CONCURRENTLY WITH THE PARTIES' EXECUTION OF THE PURCHASE AGREEMENT,
NOVUS AND ASSOCIATES ENTERED INTO A VOTING AGREEMENT (THE "VOTING AGREEMENT"),
PURSUANT TO WHICH NOVUS HAS AGREED TO VOTE, OR CAUSE TO BE VOTED, ALL OF THE
SHARES OF COMMON STOCK OWNED OF RECORD OR CONTROLLED BY NOVUS (REPRESENTING
APPROXIMATELY 73.3% OF THE COMMON STOCK ISSUED AND OUTSTANDING ON THE RECORD
DATE) AND ENTITLED TO VOTE AT THE SPECIAL MEETING IN FAVOR OF THE SALE. SEE
"INTRODUCTION" AND "PROPOSAL NO. 1 -- APPROVAL OF THE SALE -- ANCILLARY
AGREEMENTS -- THE VOTING AGREEMENT." IN ADDITION, NOVUS INTENDS TO VOTE IN
FAVOR OF THE ADOPTION OF THE MERGER AGREEMENT. BECAUSE NOVUS WILL VOTE THE
SHARES OF COMMON STOCK THAT IT OWNS IN FAVOR OF THE APPROVAL OF THE SALE AND
THE ADOPTION OF THE MERGER AGREEMENT, THE SALE AND THE MERGER AGREEMENT WILL
BE APPROVED AND ADOPTED, RESPECTIVELY, AT THE SPECIAL MEETING EVEN IF NO OTHER
STOCKHOLDER VOTES IN FAVOR OF THEM.
These proxy materials are being mailed on or about _______________,
1998, to holders of record on _______________, 1998 (the "Record Date") of the
Common Stock. Each outstanding share of Common Stock entitles the holder
thereof to one vote. As of the Record Date, there were [27,310,497] shares of
Common Stock outstanding. The presence in person or by proxy of 51% of such
shares shall constitute a quorum.
<PAGE>
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OF MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
You may revoke your Proxy at any time prior to its exercise by filing
with the Secretary of the Company an instrument of revocation or a duly
executed proxy bearing a later date or by attending the Special Meeting and
voting in person. Appearance at the Special Meeting by a Stockholder who has
given a valid proxy will not, by itself, constitute a revocation of such
proxy. If shares of Common Stock are represented by more than one properly
executed proxy, the executed proxy bearing the latest date will be voted at
the Special Meeting. For more information concerning proxies, see
"INTRODUCTION - Proxies."
The date of this Proxy Statement is _________________, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS.............................1
SUMMARY..................................................................1
INTRODUCTION.............................................................8
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING.......................8
RECORD DATE; VOTING AT THE SPECIAL MEETING; QUORUM....................8
PROXIES...............................................................9
SPECIAL FACTORS..........................................................10
GENERAL...............................................................10
BACKGROUND............................................................10
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE TRANSACTION.11
OPINION OF FINANCIAL ADVISOR..........................................12
PROPOSAL NO. 1--APPROVAL OF THE SALE.....................................15
TERMS OF THE PURCHASE AGREEMENT.......................................15
ANCILLARY AGREEMENTS..................................................20
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS......................21
REGULATORY APPROVALS..................................................22
PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT.........................23
TERMS OF THE MERGER AGREEMENT.........................................23
EFFECTIVE TIME........................................................24
PAYMENT FOR SHARES AND SURRENDER OF STOCK CERTIFICATES................24
CERTAIN EFFECTS OF THE MERGER.........................................25
ACCOUNTING TREATMENT..................................................25
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.................25
APPRAISAL RIGHTS......................................................26
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA..........................29
CONTROLLING PERSONS, DIRECTORS AND EXECUTIVE OFFICERS OF MSDW, NOVUS,
ACQUISITION AND THE COMPANY..............................................31
BACKGROUND OF NAMED PERSONS...........................................31
PAST CONTACTS, TRANSACTIONS, OR NEGOTIATIONS..........................31
PLANS OR PROPOSALS....................................................32
INTEREST IN THE COMPANY'S SECURITIES..................................32
CONTRACTS, ARRANGEMENTS, OR UNDERSTANDINGS CONCERNING THE COMPANY'S
SECURITIES............................................................32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................33
MANAGEMENT SERVICES AGREEMENT WITH NOVUS.............................33
FINANCING AGREEMENTS WITH MSDW; INTEREST RATE SWAP AND CAP
AGREEMENTS..........................................................33
THIRD PARTY PROCESSING AND COOPERATIVE NETWORK SERVICE AGREEMENT
AND TERMINAL SERVICE AGREEMENT WITH NOVUS SERVICES.................33
SYSTEM ACCESS AGREEMENT WITH NOVUS SERVICES..........................34
SERVICE AGREEMENT WITH NOVUS SERVICES................................34
DEBIT CARD PROCESSING LETTER AGREEMENT AND SALES LEAD LETTER
AGREEMENT WITH NOVUS SERVICES......................................34
MARKETING SERVICES AGREEMENT WITH NOVUS..............................34
<PAGE>
SERVICE AGREEMENT WITH MOUNTAINWEST..................................35
OPERATIONAL OUTSOURCING SERVICE AGREEMENT WITH MOUNTAINWEST..........35
HEADQUARTERS LEASE WITH NOVUS........................................35
SERVICE AGREEMENT WITH NEW CASTLE....................................35
HISTORICAL MARKET PRICE AND DIVIDEND DATA...............................37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........38
FEES AND EXPENSES.......................................................39
WHERE YOU CAN FIND MORE INFORMATION.....................................40
INDEPENDENT PUBLIC ACCOUNTANTS..........................................40
OTHER MATTERS...........................................................40
ANNEX I - OPINION OF FINANCIAL ADVISOR..................................I-1
ANNEX II - SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE
OF DELAWARE..........................................................II-1
ANNEX III - THE MERGER AGREEMENT......................................III-1
ANNEX IV - INFORMATION CONCERNING DIRECTORS AND OFFICERS OF THE
COMPANY, MSDW, NOVUS AND ACQUISITION.................................IV-1
ANNEX V - COMMON STOCK PURCHASES........................................V-1
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
Q: Why is the Company selling its business?
A: The Board of Directors has determined that a sale of substantially
all of the Company's assets and a subsequent distribution to you of
your proportionate interest in the net proceeds from that sale is in
your best interest. The Board reached this determination after it was
informed that Morgan Stanley Dean Witter & Co. desired to dispose of
the 73.3% interest in the Company that it holds through NOVUS, and
after a long and thorough sales process where we and our financial
advisor solicited indications of interest in a possible transaction
from all candidates that we believed to be potential acquirors of the
Company.
Q: Why is the transaction structured as a sale of the stock of the
Company's subsidiaries - SPS Payment Systems, Inc. and Hurley State
Bank?
A: The sale of the stock of SPS Payment Systems and Hurley State Bank
will transfer substantially all of the Company's assets to
Associates. The transaction is structured in this way in order to
enable Associates, the Company, SPS Payment Systems and Hurley State
Bank to make certain joint elections under federal and state tax laws
to allow SPS Payment Systems and Hurley State Bank to have a higher
tax basis in their assets after their sale to Associates. This
structure benefits stockholders by enabling Associates to agree to a
higher price than if the transaction were structured as a merger.
Q: What is the purpose of the merger following the sale?
A: The purpose of the merger is to distribute to you your pro rata
portion of the net proceeds from the sale of the Company's business.
Q: What will I receive after the consummation of the sale and the
merger?
A: You will receive your pro rata portion of the net proceeds from the
sale, which will be equal to $32.02 for each share of the Company's
common stock that you own, unless you perfect your statutory
appraisal rights under Delaware law. We intend to distribute the net
proceeds from the sale as soon as practicable after the consummation
of the sale and the merger.
Q: Should I send my stock certificates now?
A: No. After the merger is completed, we will send to you written
instructions for exchanging your stock certificates for your pro rata
share of the net proceeds from the sale.
Q: What do I need to do now?
A: Just indicate on your proxy card how you want to vote, and sign and
mail it in the enclosed return envelope as soon as possible, so that
your shares may be represented at the Special Meeting. If you sign
and send in your proxy card and do not indicate how you want to vote,
your shares will be voted in favor of approval of the sale and
adoption of the merger agreement. If you do not vote or you abstain,
it will have the effect of a vote against approval of the sale and
adoption of the merger agreement.
The Special Meeting will take place on ____________, 1998. You may
attend the Special Meeting and vote your shares in person, rather
than signing and mailing your proxy card. In addition, you may take
back your proxy up to and including the day of the Special Meeting by
following the directions on page 10 and either change your vote or
attend the meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will vote your shares only if you provide instructions on
how to vote. You should instruct your broker to vote your shares,
following the directions provided by your broker.
<PAGE>
Q: What vote is required to approve the transactions?
A: The affirmative vote of a majority of the outstanding shares of the
Company's common stock is required to approve the sale and adopt the
merger agreement.
NOVUS, which owns 73.3% of the Company's outstanding common stock,
has agreed with Associates to vote all of the shares owned by it in
favor of the sale. NOVUS also intends to vote in favor of adoption of
the merger agreement. Therefore, NOVUS will vote a sufficient number
of shares to approve the sale and adopt the merger agreement at the
Special Meeting without the vote of any other stockholder.
Q: When will the sale and the merger be completed?
A: We are working toward completing the sale and the merger as quickly
as possible. In addition to stockholder approval, we and Associates
also must obtain regulatory approvals. We hope to complete the
transactions as early as [August 1998.]
Q: What are my tax consequences?
A: The transactions will result in a distribution of cash to you. Your
receipt of cash in exchange for your shares of common stock will be a
taxable transaction for federal income tax purposes and may also be a
taxable transaction under applicable state, local, foreign or other
tax laws. You will recognize a gain or loss equal to the difference,
if any, between the amount of cash you receive for your stock in the
merger (i.e. $32.02 per share) and your adjusted tax basis in such
stock.
In general, you will recognize the gain or loss as of the time of the
merger. In general, such gain or loss will be a capital gain or loss,
provided the common stock is a capital asset in your hands at the
time of the merger, and will be long-term capital gain or loss if you
have held the common stock for more than eighteen months at such
time, mid-term capital gain or loss if you have held the stock for
more than one year but not more than eighteen months, or short-term
capital gain or loss if you have held the common stock for one year
or less.
Q: What will happen to the Company after the transaction?
A: After the sale and the merger, NOVUS will own 100% of the Company's
capital stock. The Company will sell substantially all of its assets
in the sale and after the merger the Company intends to cease its
current operations. The Company's assets after completion of the sale
and merger, the settlement of all expenses associated with the
transactions, and the subsequent distribution to you of your share of
the net proceeds of the sale will be the portion of the net proceeds
of the sale attributable to NOVUS' 73.3% interest and its liabilities
will include its indemnification obligations under the Purchase
Agreement and its income tax liabilities relating to the sale.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the sale and the merger or if you
would like additional copies of the Proxy Statement, you should contact:
SPS Transaction Services, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60016
Attention: Investor Relations
Phone Number: (847) 405-3400
<PAGE>
SUMMARY
This summary is not complete and is qualified in its entirety by the
more detailed information contained elsewhere in this Proxy Statement, the
information and documentary material in the Annexes hereto and the documents
to which we have referred you. See "Where You Can Find More Information". As
used herein, "We" or the "Company" means SPS Transaction Services, Inc., a
Delaware corporation, and one or more of its subsidiaries (including SPS
Payment Systems, Inc., a Delaware corporation ("SPS Payment"), and Hurley
State Bank, a South Dakota state chartered bank ("HSB" and together with SPS
Payment, the "Subsidiaries")). As used herein, "NOVUS" means NOVUS Credit
Services Inc. a Delaware corporation. As used herein, "Acquisition" means Sail
Acquisition, Inc., a Delaware corporation. As used herein, "Associates" means
Associates First Capital Corporation, a Delaware corporation. Cross-references
in this Summary are to the captions of sections in the Proxy Statement.
Stockholders should read the entire Proxy Statement and the Annexes hereto.
THE PARTIES
THE COMPANY
We provide technology outsourcing services to our clients. We operate
our businesses primarily through two wholly owned subsidiaries, SPS Payment
and HSB, and are a 73.3%-owned subsidiary of NOVUS. Our main businesses are
electronic processing of point-of-sale credit card transactions,
administration of private-label credit card programs, account processing for
commercial customers, and customized operating services such as software
technical support. Our principal executive offices are located at 2500 Lake
Cook Road, Riverwoods, Illinois 60015. Our telephone number is (847) 405-3400.
NOVUS
NOVUS is a wholly owned subsidiary of Morgan Stanley Dean Witter &
Co. ("MSDW"), a diversified financial services company, and is the owner of
73.3% of the issued and outstanding shares of the Company's Common Stock.
NOVUS' principal executive offices are located at 2500 Lake Cook Road,
Riverwoods, Illinois 60015. NOVUS' telephone number is (847) 405-0900.
ACQUISITION
NOVUS organized Acquisition on April 17, 1998 to facilitate the
consummation of the Merger (as defined below) and owns all of its capital
stock. Acquisition has not conducted any unrelated activities since its
organization. Acquisition's principal executive offices are located at 2500
Lake Cook Road, Riverwoods, Illinois 60015. Acquisition's telephone number is
(847) 405-0900.
ASSOCIATES
Associates is a leading diversified consumer and commercial finance
organization which provides finance, leasing and related services to individual
consumers and businesses in the United States and internationally. Associates
believes that it is the largest publicly-traded finance company in the United
States based on aggregate net finance receivables outstanding. Associates'
principal executive offices are located at 250 East Carpenter Freeway, Irving,
Texas 75062. Associates' telephone number is (972) 652-4000.
THE SPECIAL MEETING
We will hold the Special Meeting on __________, 1998 at the Chicago
Botanic Garden, Education Center, 1000 Lake Cook Road, Glencoe, Illinois 60022
at 10:00 a.m. local time. At the Special Meeting, you will be asked:
o to approve the Sale (as hereinafter defined) pursuant to the Stock
Purchase Agreement, dated April 18, 1998 (the "Purchase Agreement"),
between the Company and Associates, and
<PAGE>
o to adopt the Agreement and Plan of Merger, dated as of June 15, 1998
(the "Merger Agreement"), between the Company and Acquisition.
RECORD DATE; VOTING POWER
You are entitled to vote at the Special Meeting if you owned shares
at the close of business on ___________, 1998 (the "Record Date"). On the
Record Date, there were [27,310,497] shares of Common Stock entitled to vote
at the Special Meeting. NOVUS owned 20,000,000 (or 73.3%) of such shares. You
will have one vote at the Special Meeting for each share of Common Stock you
owned on the Record Date.
VOTE REQUIRED
The affirmative vote of a majority of the shares of Common Stock
outstanding on the Record Date is required to approve the Sale and adopt the
Merger Agreement. NOVUS has agreed with Associates to vote all shares of
Common Stock owned by it in favor of the approval of the Sale and intends to
vote all of its shares in favor of the adoption of the Merger Agreement. As a
result, the Stockholders (as hereinafter defined) will approve the Sale and
adopt the Merger Agreement even if no other Stockholder votes in favor of such
approval and adoption. See "PROPOSAL NO. 1 - APPROVAL OF THE SALE - Ancillary
Agreements - The Voting Agreement."
THE SALE
GENERAL
In the Purchase Agreement, we agreed to sell all of the capital stock
of our two wholly owned operating subsidiaries, SPS Payment and HSB, to
Associates for $895,696,661 in cash (the "Sale"). The closing of the Sale is
subject to certain conditions, including the receipt of certain regulatory
approvals and the approval by the Stockholders.
In order to provide for the distribution to the public Stockholders
of their pro rata portion of the net proceeds from the Sale, we entered into
the Merger Agreement. Pursuant to the terms of the Merger Agreement,
Acquisition will merge with and into the Company (the "Merger") with the
Company as the surviving corporation (the "Surviving Corporation"), and each
outstanding share of Common Stock (other than Common Stock held by NOVUS or
any Stockholders who perfect their statutory appraisal rights under Delaware
law) will be converted into the right to receive $32.02 in cash, without
interest thereon. The Merger will be consummated as soon as practicable after
the closing of the Sale. For a description of the events leading to the
approval of the Sale and the Merger Agreement by the Company's Board of
Directors, see "SPECIAL FACTORS--Background." For a description of the
calculation of the per share amount to be distributed in the Merger, see
"PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT--Terms of the Merger
Agreement--Determination of Merger Consideration."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has unanimously approved the Purchase
Agreement and the Merger Agreement and the related transactions, including the
Sale and the Merger, and recommends that you vote FOR the approval of the Sale
and FOR adoption of the Merger Agreement. See "SPECIAL FACTORS--Recommendation
of the Board of Directors; Fairness of the Transaction."
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
In deciding to approve the Sale and the Merger, the Board of
Directors considered the opinion of Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), the financial advisor to the Company. On April 17, 1998, Morgan
Stanley delivered its oral opinion to the Board of Directors to the effect
that as of such date (i) the consideration to be paid by Associates pursuant
to the Purchase Agreement is fair from a financial point of view to the
Company and (ii) the per share consideration to be paid to the Stockholders
(other than NOVUS) pursuant to the Merger Agreement is fair from a financial
point of view to such Stockholders. Morgan Stanley subsequently confirmed its
<PAGE>
oral opinion by delivery to the Board of Directors of a written opinion dated
the date hereof. A copy of the written opinion of Morgan Stanley is attached
as Annex I to this Proxy Statement. WE ENCOURAGE YOU TO READ THIS OPINION
CAREFULLY AND IN ITS ENTIRETY. See "SPECIAL FACTORS--Opinion of Financial
Advisor."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION.
Certain members of the Company's management and the Board of
Directors have interests in the Sale and the Merger in addition to the
interests of the Company's Stockholders generally. See "PROPOSAL NO.
1--APPROVAL OF THE SALE--Interests of Certain Persons in the Transactions."
BACKGROUND
For a description of the events leading to the approval of the
Purchase Agreement and the Merger Agreement by the Board of Directors, see
"SPECIAL FACTORS--Background."
Conditions to the Sale
The obligation of the Company and Associates to consummate the Sale
is subject to the satisfaction of certain conditions, including the following:
o approval of the Sale by the Stockholders;
o no legal restraints or prohibitions existing that prevent the
consummation of the Sale;
o receipt of all necessary regulatory approvals;
o the accuracy of the representations of each party to the
Purchase Agreement contained therein; and
o the repayment of all intercompany debt owing to the Company
from its subsidiaries.
Termination of the Purchase Agreement
Even if the Stockholders approve the Sale, the Company and Associates
can mutually agree to terminate the Purchase Agreement at any time. Either
party can terminate the Purchase Agreement if:
o the Sale is not completed by February 28, 1999; or
o a governmental authority prohibits the Sale.
In addition, Associates may terminate the Purchase Agreement if the Company
fails to obtain Stockholder approval at a duly held Stockholders' meeting.
Ancillary Agreements
The Voting Agreement. NOVUS has agreed with Associates to vote all of
the shares of Common Stock owned by NOVUS in favor of the Sale. On the Record
Date, NOVUS owned 20,000,000 shares of Common Stock (representing
approximately 73.3% of the then outstanding Common Stock). See
"INTRODUCTION--Record Date; Voting at the Special Meeting" and "PROPOSAL NO.
1--APPROVAL OF THE SALE--Ancillary Agreements--The Voting Agreement."
The Assumption Agreement. As a condition to the consummation of the
Sale, the Company and Associates will enter into an assumption agreement
pursuant to which Associates will assume certain liabilities and obligations
of the Company. See "PROPOSAL NO. 1--APPROVAL OF THE SALE --Ancillary
Agreements -- The Assumption Agreement."
<PAGE>
The Interim Servicing Agreement. As a condition to the consummation
of the Sale, NOVUS and Associates will enter into an interim servicing
agreement pursuant to which NOVUS will provide certain services to Associates
with respect to the operation of the Subsidiaries for a period of up to seven
and one-half (7 1/2) months after the closing of the Sale. See "PROPOSAL NO.
1--APPROVAL OF THE SALE --Ancillary Agreements --ThE Interim Servicing
Agreement."
THE MERGER
GENERAL
To distribute to the public Stockholders their pro rata portion of
the net proceeds from the Sale, the Company entered into the Merger Agreement
with Acquisition. Pursuant to the terms of the Merger Agreement, Acquisition
will be merged with and into the Company, with the Company as the Surviving
Corporation, and each share of Common Stock outstanding at the effective time
of the Merger (other than Common Stock held by NOVUS or any Stockholders who
perfect their statutory appraisal rights under Delaware law) will be converted
into the right to receive $32.02 in cash, without interest thereon. The Merger
will be consummated as soon as practicable after the consummation of the Sale.
PAYMENT FOR SHARES OF COMMON STOCK AND SURRENDER OF STOCK CERTIFICATES
Promptly after the effective time of the Merger, the Company will
send to you a transmittal letter containing instruction for the surrender of
certificates previously representing Common Stock. The transmittal letter will
set forth the procedure for surrendering such certificates for exchange to
__________, as the paying agent (the "Exchange Agent"). In order to receive
the payment to which you will be entitled as a result of the Merger, you will
be required, following the Merger, to surrender your stock certificate(s),
together with a duly executed and properly completed transmittal letter (and
any other required documents), to the Exchange Agent. You should surrender
certificates formerly representing shares of Common Stock only with a
transmittal letter. You should not send any stock certificates with the
enclosed proxy card. After surrendering the certificates, you will promptly
receive, in exchange for your certificates, cash in an amount equal to the
product of the number of shares of Common Stock formerly represented by your
certificate(s) and $32.02. No interest will be paid on the cash payable upon
the surrender of your certificate(s). See "PROPOSAL NO. 2--ADOPTION OF THE
MERGER AGREEMENT--Payment for Shares and Surrender of Stock Certificates."
CERTAIN EFFECTS OF THE MERGER
<PAGE>
Following the Merger, NOVUS will own 100% of the Company's
outstanding capital stock and the holders of Common Stock immediately prior to
the Merger other than NOVUS ("Existing Stockholders") will cease to have
ownership interests in the Company or rights as Stockholders (other than
statutory appraisal rights, in the case of those Stockholders who perfect such
rights under Delaware law). The Existing Stockholders will no longer benefit
from any increases in the value of the Company or any payment of dividends on
Common Stock and will no longer bear the risk of any decreases in the value of
the Company. The Company will sell substantially all of its assets in the
Sale, and after the Merger the Company intends to cease its current
operations. The Company's assets after completion of the Sale and Merger, the
payment of all expenses associated with the transactions and the subsequent
distribution to minority Stockholders of their share of net proceeds will be
the portion of the net proceeds of the Sale attributable to NOVUS' 73.3%
interest and its liabilities will include its indemnification obligations
under the Purchase Agreement and its income tax liabilities relating to the
Sale.
As a result of the Merger, the Common Stock will cease to be quoted
on the New York Stock Exchange (the "NYSE") and the Company will no longer be
required to file periodic reports with the Securities and Exchange Commission.
See "PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT--Certain Effects of the
Merger."
CONDITIONS TO THE MERGER
The obligations of the Company and Acquisition to effect the Merger
are subject to certain conditions, including the following:
o consummation of the Sale, and
o adoption of the Merger Agreement by the Stockholders.
See "PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT--Terms of the Merger
Agreement--Conditions to the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Your receipt of cash in exchange for shares of Common Stock in
connection with the Merger will be a taxable transaction for federal income
tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"),
and also may be a taxable transaction under applicable state, local, foreign
and other tax laws. Please consult your own tax advisor with respect to the
tax consequences of the Merger to you, including the applicability and the
effect of federal, state, local, foreign and other tax laws. To review the tax
consequences to you in greater detail, see "PROPOSAL NO. 2--ADOPTION OF THE
MERGER AGREEMENT--Certain Federal Income Tax Consequences of the Merger."
APPRAISAL RIGHTS
The Company is incorporated under the laws of the State of Delaware.
Under Delaware law, if you do not vote in favor of the Merger and if you
deliver a written demand for appraisal prior to the Special Meeting, you will
have a right to obtain, upon the consummation of the Merger, a cash payment
for the "fair value" of your shares of Common Stock (excluding any element of
value arising from the accomplishment or expectation of the Merger). In order
to exercise such rights, you must comply with all the procedural requirements
provided by Delaware law, a description of which is provided in "PROPOSAL NO.
2--ADOPTION OF THE MERGER AGREEMENT--Appraisal Rights" herein. The full text
of the applicable provision of Delaware law is attached to this Proxy
Statement as Annex II. Such "fair value" would be determined in judicial
proceedings, the result of which cannot be determined. If you fail to take any
of the steps required under Delaware law, you may lose your appraisal rights.
See "PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT--Terms of the Merger
Agreement" and "--Appraisal Rights."
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated financial data presented below for, and as
of the end of, each of the years in the five-year period ended December 31,
1997 are derived from the consolidated financial statements of the Company,
which have been audited by Deloitte & Touche LLP, independent certified public
accountants. The summary consolidated financial data presented below for the
three-month periods ended March 31, 1998 and 1997 and as of March 31, 1998 and
1997 are derived from the unaudited consolidated financial statements of the
Company included herein. In management's opinion, the unaudited information
has been prepared on a basis consistent with the audited consolidated
financial statements of the Company. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of results which
may be expected for the entire year.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,(1) YEAR ENDED DECEMBER 31,(1)
--------------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Unaudited)
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $82,264 $90,430 $346,885 $320,920 $311,992 $245,802 $205,494
Total operating 66,604 78,391 284,585 283,427 241,883 183,441 156,563
expenses
Pretax income 15,660 12,039 62,300 37,493 70,109 62,361 48,931
Income taxes 5,763 4,648 23,800 14,247 26,636 24,626 18,283
Net income 9,897 7,391 38,500 23,246 43,473 37,735 30,648
Basic earnings per 0.36 0.27 1.41 0.86 1.60 1.40 1.14
common share
Diluted earnings per 0.36 0.27 1.41 0.85 1.59 1.38 1.12
common share
Ratio of earnings to 1.9 1.6 1.8 1.5 2.0 6.0 6.3
fixed charges(2)
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, (1) AS OF DECEMBER 31,(1)
------------------- ---------------------------------------------------------------
BALANCE SHEET DATA 1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Credit card loans $1,169,727 $1,498,421 $1,295,787 $1,637,507 $1,620,833 $679,857 $246,710
Total assets 1,389,753 1,628,517 1,512,403 1,760,785 1,777,607 768,493 309,537
Deposits 544,708 478,541 510,294 463,435 382,343 205,537 72,852
Due to affiliates 474,539 831,706 639,066 982,547 1,110,811 161,573 55,869
Stockholders' equity 274,076 231,971 263,035 224,392 199,210 155,704 116,581
Return on average 14.9% 13.1% 15.8% 11.0% 24.5% 27.7% 30.2%
stockholders' equity
Book value per $ 10.06 $ 8.53 $ 9.67 $ 8.26 $ 7.35 $ 5.76 $ 4.32
share-Basic
Book value per $ 9.98 $ 8.48 $ 9.60 $ 8.20 $ 7.28 $ 5.69 $ 4.27
share-Diluted
SUPPLEMENTAL DATA
Total loans(3) $1,749,727 $2,078,421 $1,875,787 $2,217,507 $2,229,992 $1,109,857 $676,710
(1) In thousands, except percentages, ratios and per share data.
(2) For the purpose of calculating the ratio of
earnings to fixed changes, "earnings" consist of
income before income taxes and fixed charges.
"Fixed charges" consist of interest costs,
including interest on deposits, and that portion of
rent expense estimated to be representative of the
interest factor.
</TABLE>
<PAGE>
(3) Total loans represent both owned and securitized credit
card loans.
<PAGE>
INTRODUCTION
This Proxy Statement is being furnished to holders of common stock,
par value $0.01 per share ("Common Stock"), of SPS Transaction Services, Inc.
(the "Company") in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board") for use at a Special Meeting of the
Company's stockholders (the "Stockholders") to be held on ____________, 1998
at 10:00 am Central Time, at the Chicago Botanic Garden, Education Center,
1000 Lake Cook Road, Glencoe, Illinois 60022 and at any adjournments or
postponements thereof (the "Special Meeting"). This Proxy Statement, the
enclosed Notice of Special Meeting of Stockholders and the form of proxy are
first being mailed to Stockholders on or about _________, 1998.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The purposes of the Special Meeting are to consider and act upon (i)
a proposal to approve the sale by the Company of substantially all of its
assets, consisting of all the issued and outstanding capital stock of the
Subsidiaries to Associates, pursuant to the Purchase Agreement for a purchase
price of $895,696,661 in cash and (ii) a proposal to adopt the Merger
Agreement, pursuant to which Acquisition will be merged with and into the
Company with the Company being the Surviving Corporation. The Merger will be
effected as soon as practicable after the closing of the Sale and is being
undertaken to distribute to the public Stockholders their pro rata portion of
the net proceeds of the Sale. Upon consummation of the Merger, each share of
Common Stock (other than Common Stock held by NOVUS or by any stockholders who
perfect their statutory appraisal rights under Delaware law) will be converted
into the right to receive $32.02 in cash, without interest thereon (the
"Merger Consideration"). Since the Company will bear the entire income tax
liability on the gain resulting from the Sale and MSDW (the parent company of
NOVUS) has agreed to contribute $500,000 to the Company to defray the expenses
incurred by the Company in connection with the Sale and the Merger, the per
share amount allocable to NOVUS is effectively less than $32.02 per share.
NOVUS BENEFICIALLY OWNS AND HAS THE RIGHT TO VOTE AT THE SPECIAL
MEETING A SUFFICIENT NUMBER OF SHARES TO APPROVE THE SALE AND ADOPT THE MERGER
AGREEMENT UNDER DELAWARE LAW WITHOUT THE APPROVAL OF ANY OTHER STOCKHOLDER.
PURSUANT TO A VOTING AGREEMENT, NOVUS HAS AGREED TO VOTE ALL SHARES OWNED BY
IT IN FAVOR OF THE SALE. IN ADDITION, NOVUS INTENDS TO VOTE ALL SUCH SHARES IN
FAVOR OF THE ADOPTION OF THE MERGER AGREEMENT. ACCORDINGLY, NO ACTION BY ANY
OTHER STOCKHOLDER IS REQUIRED TO APPROVE THE SALE AND ADOPT THE MERGER
AGREEMENT. SEE "PROSPOSAL NO. 1 - APPROVAL OF THE SALE - ANCILLARY AGREEMENTS
- - THE VOTING AGREEMENT."
RECORD DATE; VOTING AT THE SPECIAL MEETING; QUORUM
The Board has fixed ____, 1998 as the Record Date for the
determination of Stockholders entitled to notice of and to vote at the Special
Meeting. Accordingly, only Stockholders of record as of the close of business
on the Record Date will be entitled to notice of and to vote at the Special
Meeting and at any and all adjournments or postponements thereof. The Common
Stock is the only class of capital stock of the Company outstanding and
entitled to vote at the Special Meeting. As of the Record Date, there were
outstanding _________ shares of Common Stock, held by approximately ________
holders of record. For purposes of the Special Meeting, the presence, in
person or represented by proxy, of Stockholders entitled to cast at least 51%
of the votes which all Stockholders are entitled to cast shall constitute a
quorum. The presence of NOVUS at the Special Meeting will satisfy the quorum
requirement without the presence at the Special Meeting of any other
Stockholder.
Under Delaware law, the affirmative vote of the holders of a majority
of the shares of Common Stock outstanding as of the Record Date is required to
approve the Sale and adopt the Merger Agreement. NOVUS, which owns 20,000,000
shares of Common Stock (representing approximately 73.3% of the Common Stock
issued and outstanding) on the Record Date, has entered into an agreement (the
"Voting Agreement") with Associates to vote in favor of the approval of the
Sale. In addition, NOVUS intends to vote in favor of the adoption of the
Merger Agreement. As a result, the Stockholders will approve the Sale and
adopt the Merger Agreement, even if no minority Stockholders vote in favor of
such approval and adoption. For additional information concerning the
<PAGE>
Voting Agreement, see "PROPOSAL NO. 1--APPROVAL OF THE SALE--
Ancillary Agreements--The Voting Agreement."
As of the Record Date, all executive officers and directors of the
Company as a group beneficially owned ___ shares of Common Stock (including
options to purchase ___ shares of Common Stock that are exercisable within 60
days of the date hereof), representing approximately ___% of the then
outstanding shares (assuming the exercise of such options).
Participants in the SPS Transaction Services, Inc. START Plan (Savings
Today Affords Retirement Tomorrow) (the "SPS START") who receive this Proxy
Statement in their capacity as such participants will receive a voting
instruction form in lieu of a proxy card. The SPS START trustee will, subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), vote the shares, in person or by proxy, in accordance with
voting instructions it receives on or before _________, 1998. The SPS START
trustee will, subject to the requirements of ERISA, vote all shares for which
timely instructions are not received in direct proportion to the voting of
shares for which timely instructions are received.
To the knowledge of the Company, no person or group, other than
NOVUS, is the beneficial owner of more than 5% of the outstanding shares of
Common Stock. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
PROXIES
All shares of Common Stock represented at the Special Meeting by
properly executed proxies received prior to or at the Special Meeting, unless
such proxies previously have been revoked, will be voted at the Special
Meeting in accordance with the specifications in the proxies. If no such
specifications are made, the proxies will be voted FOR approval of the Sale
and FOR adoption of the Merger Agreement.
Any person giving a proxy may revoke it at any time before its
exercise by filing with the Secretary of the Company an instrument of
revocation or a duly executed proxy bearing a later date, or by attending the
Special Meeting and voting in person. Management does not know of any matters
to be presented at the Special Meeting other than those set forth in this
Proxy Statement and the accompanying Notice. If other matters should properly
come before the Special Meeting, the proxy holders will vote on such matters
in accordance with their best judgment, unless such authority is withheld.
Shares of Common Stock represented at the Special Meeting by a properly
executed, dated and returned proxy will be treated as present at the Special
Meeting for purposes of determining a quorum, without regard to whether the
proxy is marked as casting a vote or abstaining. Proxies relating to shares of
Common Stock held in "street name" by brokers will be counted as shares of
Common Stock present for purposes of determining the presence of a quorum, but
will not be treated as shares having voted at the Special Meeting as to the
Sale and Merger Agreement if instructions as to how to vote thereon are not
given by the beneficial owners thereof to the broker. Abstentions will be
treated as shares of Common Stock that are present at the Special Meeting for
purposes of determining whether a quorum exists but will have the effect of
votes against approval of the Sale and the adoption of the Merger Agreement.
In light of the treatment of abstentions and broker non-votes and the fact
that the affirmative votes required to authorize the Sale and adopt the Merger
Agreement are stated percentages of the total number of outstanding shares of
Common Stock on the Record Date, abstentions and broker non-votes will have
the same effect as votes against the authorization of the Sale and adoption of
the Merger Agreement. Because of NOVUS's agreement to vote its shares in favor
of the Sale and its intention to vote its shares in favor of the adoption of
the Merger Agreement, no action of any other Stockholder is required to
approve the Sale or to adopt the Merger Agreement. See "PROPOSAL NO.
1--APPROVAL OF THE SALE--Ancillary Agreements--The Voting Agreement."
The Board is soliciting the proxies and all expenses of this
solicitation, including the cost of preparing and mailing this Proxy
Statement, will be paid by the Company out of the proceeds of the Sale. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers, and
employees will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses in connection with such solicitation. Arrangements will
also be made with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares of Common Stock held of
record by such custodians, nominees
<PAGE>
and fiduciaries, and the Company may reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith.
Stockholders have the right to demand judicial appraisal of their
shares of Common Stock in connection with the Merger by following the
procedures prescribed in Section 262 of the General Corporation Law of the
State of Delaware (the "DGCL"). See "PROPOSAL NO. 2 -- ADOPTION OF THE MERGER
AGREEMENT -- Appraisal Rights" and Annex II.
Stockholders should not send any stock certificates with their proxy
cards.
SPECIAL FACTORS
GENERAL
Upon the terms and subject to the conditions contained in the
Purchase Agreement, including the requisite vote of the Stockholders and
receipt of all necessary regulatory approvals, including applicable bank
regulatory approvals and approvals under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended ("HSR Act"), the Company will sell
substantially all its assets, consisting of the stock of the Subsidiaries, to
Associates for $895,696,661. To distribute to public Stockholders the net
proceeds of the Sale, the Company will merge with Acquisition upon the terms
and subject to the conditions contained in the Merger Agreement, including
adoption of the Merger Agreement by the requisite vote of Stockholders. As a
result of the Merger, public Stockholders will receive $32.02 per share of
Common Stock.
Following the Merger, NOVUS will be the sole Stockholder of the
Company, and the Company will remain liable for the taxes due that result from
the sale of its assets in the Sale and will retain certain indemnification
obligations to Associates under the Purchase Agreement. This structure was
agreed to by the Company and Associates in order to achieve the most tax
efficient structure for all parties and, thereby, the best available price for
the Stockholders.
BACKGROUND
On December 17, 1996, at a special meeting of the Company's Board of
Directors, the Board received a proposal from Dean Witter, Discover & Co. (a
predecessor to MSDW) to acquire the shares of Common Stock that NOVUS, then a
Dean Witter, Discover & Co. subsidiary, did not already own. The closing price
on the NYSE for the Common Stock on that date was $15.875 per share. The Board
formed a Special Committee (the "Special Committee"), consisting entirely of
its independent directors, to consider the proposal. Dean Witter, Discover &
Co. subsequently sent to the Special Committee a letter offering to pay $18.50
per share for the Common Stock not owned by NOVUS. The Special Committee,
after consultation with its independent financial and legal advisors,
determined to reject the offer. Dean Witter, Discover & Co. determined not to
pursue the transaction and the Special Committee was dissolved in April 1997.
At the regular meeting of the Board on October 27, 1997, MSDW
confirmed to the Board that it was no longer interested in acquiring the
Common Stock owned by the public. MSDW further informed the Board that it
desired to dispose of its 73.3% interest in the Company because of a change in
its corporate strategy following the merger between Dean Witter, Discover &
Co. and Morgan Stanley Group Inc. in May 1997 that formed MSDW. After
discussion and after receiving advice of legal counsel as to the Board's legal
responsibilities and fiduciary duties, the Board unanimously determined to
explore its business alternatives, including the possibility of a sale of the
Company. The Board then invited representatives of Morgan Stanley to review
the prospects of a transaction involving the sale of the Company to a third
party.
At a special meeting held on November 19, 1997, the Board received a
presentation from Morgan Stanley that included Morgan Stanley's recommendation
on the available alternatives to effecting a sale of the Company and the
procedures to employ in connection with a sale process in order to obtain the
best available price for the Stockholders. The Board discussed the procedures
recommended by Morgan Stanley and authorized its officers to execute an
engagement letter to retain Morgan Stanley as its financial adviser on terms
approved by the independent
<PAGE>
directors. In approving such terms, the independent directors considered an
agreement by MSDW to contribute $500,000 to help defray the expenses incurred in
any transaction that might result. The engagement letter was executed on
December 7, 1997.
In December 1997 and January 1998, Morgan Stanley sent information
concerning the Company to over 20 potential buyers and discussions were then
held by representatives of the Company and Morgan Stanley with those potential
buyers that expressed preliminary interest. By January 30, 1998, in accordance
with agreed procedures, the Company received indications of value from a
number of potential buyers, and the Company determined to hold further
discussions with those potential buyers that the Company, with the assistance
of Morgan Stanley, determined to have presented the highest valuations. During
this period, the Company's Chairman had several conversations with individual
members of the Board for the purpose of briefing them on the progress of the
discussions and obtaining their views on various issues.
During the first two weeks of February, there were several meetings
between Company management and representatives of certain of the potential
buyers that presented the highest valuations in order to facilitate their
continued due diligence investigations and, in particular, to discuss the
Company's recent operating results. At a regular meeting of the Board on
February 13, 1998, the Board received a presentation from management and
Morgan Stanley as to the progress of the discussions and the advantages of the
transaction being structured as a sale of assets. In order to accommodate this
structure, the Company determined that the distribution of the net proceeds
from the transaction to the public Stockholders should be effected through a
cash-out merger (which is the Merger herein). Since all of the economic terms
of the transaction would be determined through an arm's length negotiation
with an unrelated third party and the Merger would be undertaken solely as a
means of distributing the pro rata portion of the net proceeds to the public
Stockholders resulting from the transaction negotiated with Associates, no
person was required to be, and accordingly no person was, retained as an
unaffiliated representative to act on behalf of Stockholders for purposes of
negotiating the terms of the Merger.
By March 13, 1998, pursuant to agreed procedures, the Company
received offers from several potential buyers, including Associates. At a
telephonic meeting held on March 18, 1998, the Board authorized management and
Morgan Stanley to proceed with negotiations with the potential buyers that had
submitted offers and instructed management to provide such potential buyers
with full access to Company information and data.
On April 7, 1998, following additional due diligence investigation by
the remaining potential buyers, Associates increased its offer to the
equivalent of $895,696,661, which was superior to the other offers. The
Company thereupon determined to concentrate its efforts on the negotiation of
an agreement with Associates. In a series of conference calls from April 7
through April 17, 1998, representatives of Morgan Stanley, the Company, NOVUS,
Associates and their respective legal advisors finalized the terms of the
Purchase Agreement, the Voting Agreement and the Interim Services Agreement.
At a special meeting of the Board held at the Company's headquarters
on April 17, 1998, the Board received from its financial and legal advisors
and from management detailed descriptions and analyses of the Sale and of the
Merger. Morgan Stanley delivered its oral opinion that, as of such date, the
consideration to be received by the Company in the Sale was fair to the
Company from a financial point of view and that the per share consideration to
be received by the Stockholders (other than NOVUS) pursuant to the Merger was
fair from a financial point of view. On April 18, 1998, the Board convened
another special meeting telephonically and considered the matters discussed at
the April 17 meeting as well as the various factors described below, and
approved the Sale and the Merger Agreement by the unanimous vote of all of the
directors.
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE TRANSACTION
The Board believes that the terms of the Purchase Agreement and the
Merger Agreement and the transactions contemplated thereby are fair to and in
the best interests of the Company and its Stockholders. Accordingly, at a
special meeting held telephonically on April 18, 1998, the Board, by the
unanimous vote of all directors (including the Company's three independent
directors), approved the Purchase Agreement and the Merger Agreement and the
transactions contemplated thereby and determined to recommend that the
Stockholders approve the Sale and adopt the Merger Agreement.
<PAGE>
In determining to recommend the approval of the Sale and adoption of
the Merger Agreement, the Board considered a number of factors, including the
following:
(i) that the Company's 73.3% stockholder, which could effectively
transfer control of the Company to a third party without any
Board action, had informed the Board that it wished to dispose
of its interest;
(ii) presentations by management and Morgan Stanley, the Company's
financial advisor, regarding the financial condition, results of
operations, business and prospects of the Company;
(iii)the presentations of Morgan Stanley described below under
"Opinion of Financial Advisor" and the oral opinion of Morgan
Stanley delivered April 17, 1998 to the effect that, as of such
date, (i) the consideration to be paid by Associates pursuant to
the Purchase Agreement was fair from a financial point of view
to the Company and (ii) the per share consideration to be paid
to the Stockholders (other than NOVUS) pursuant to the Merger
Agreement was fair from a financial point of view to such
Stockholders;
(iv) that the Associates offer was the highest offer received by the
Company as a result of its sales process;
(v) that MSDW had agreed to contribute $500,000 to the Company to
defray the expenses incurred in connection with the Sale and the
Merger;
(vi) that NOVUS, through its 100% interest in the Company after the
Merger, would bear the federal income tax liability on the gain
resulting from the Sale; and
(vii)that the per share value represented by the purchase price to
be paid by Associates in the Sale, while slightly lower than the
closing market price on April 17, 1998, the last trading day
prior to the announcement of the Sale, was higher than the
market price of the Common Stock that had generally prevailed
during the preceding months and was 61% higher than the closing
market price for the Common Stock on November 19, 1997 (the date
the Board determined to commence the process that resulted in
the Purchase Agreement).
The Board did not undertake a separate analysis of each of these
factors nor did the Board reach a separate conclusion with respect to each
such factor in its determination to approve the Sale and adopt the Merger
Agreement. In view of the above, and the variety of factors considered by the
Board in reaching its conclusion to approve the Sale and the Merger Agreement,
the Board did not find it practicable to and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination to approve the Sale and the Merger Agreement. However, as a
general matter, the Board believed that the factors heretofore described
supported its decision to approve the Sale and the Merger Agreement.
BASED ON THE FOREGOING, THE BOARD RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR APPROVAL OF THE SALE AND FOR ADOPTION OF THE MERGER AGREEMENT.
MSDW, NOVUS and Acquisition have concluded, based solely on the
conclusions and recommendations of the Board, that the consideration to be
paid to the Stockholders in the Merger is fair to, and in the best interests
of, the Stockholders. In reaching this conclusion, MSDW, NOVUS and Acquisition
have taken into consideration the factors referred to above as having been
taken into account by the Board. MSDW, NOVUS and Acquisition did not find it
practicable to quantify or otherwise attach relative weights to the specific
factors considered by the Board.
OPINION OF FINANCIAL ADVISOR
The Company retained Morgan Stanley to act as its financial advisor
in connection with the Sale and related matters based upon its qualifications,
expertise and reputation, as well as Morgan Stanley's prior investment banking
relationship and familiarity with the Company. At the April 17, 1998 meeting
of the Board, Morgan Stanley delivered an oral opinion to the Board that, as
of such date and subject to certain considerations noted in such opinion, (i)
the aggregate consideration to be paid by Associates pursuant to the Purchase
Agreement was fair
<PAGE>
from a financial point of view to the Company and (ii) the per share
consideration to be paid to Stockholders (other than NOVUS) pursuant to the
Merger Agreement was fair from a financial point of view to such holders. Morgan
Stanley subsequently confirmed its April 17, 1998 oral opinion by delivery to
the Board of a written opinion dated as of the date of this Proxy Statement
THE FULL TEXT OF MORGAN STANLEY'S OPINION, DATED AS OF THE DATE OF
THIS PROXY STATEMENT, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX I TO THIS PROXY STATEMENT. STOCKHOLDERS ARE
URGED TO, AND SHOULD, READ THE MORGAN STANLEY OPINION CAREFULLY AND IN ITS
ENTIRETY. MORGAN STANLEY'S OPINION IS DIRECTED TO THE BOARD AND IT DOES NOT
ADDRESS ANY OTHER ASPECT OF THE SALE OR THE MERGER NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW TO VOTE AT THE SPECIAL MEETING.
THE SUMMARY OF THE OPINION OF MORGAN STANLEY SET FORTH IN THIS PROXY STATEMENT
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with rendering its opinion dated as of the date of this
Proxy Statement, Morgan Stanley, among other things: (i) reviewed certain
publicly available financial statements and other information of the Company;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of the
Company; (iii) analyzed certain financial projections of the Company prepared
by the management of the Company; (iv) discussed the past and current
operations and financial condition and the prospects of the Company with
senior executives of the Company; (v) reviewed the reported prices and trading
activity for the Common Stock; (vi) compared the financial performance of the
Company and the prices and trading activity of the Common Stock with that of
certain other comparable publicly-traded companies and their securities; (vii)
reviewed the financial terms, to the extent publicly available, of certain
comparable precedent transactions; (viii) participated in discussions and
negotiations among representatives of the Company and their financial and
legal advisors; (ix) reviewed the Purchase Agreement, Merger Agreement and
certain related documents; and (x) performed such other analyses and
considered such other factors as it deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon
without independent verification the accuracy and completeness of the
information reviewed by it. With respect to the financial projections prepared
in connection with evaluating the consideration to be received in the Sale,
Morgan Stanley assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company. Morgan Stanley has not made any
independent valuation or appraisal of the assets or liabilities of the
Company, nor has Morgan Stanley been furnished with any such appraisals. In
addition, Morgan Stanley assumed the Sale and the Merger will be consummated
in accordance with the terms set forth in the Purchase Agreement and the
Merger Agreement, respectively. Morgan Stanley's opinion is necessarily based
on economic, market and other conditions as in effect on, and the information
made available to Morgan Stanley as of, the date hereof.
The following is a summary of the financial analyses performed by
Morgan Stanley and reviewed with the Board on April 17, 1998 in connection
with rendering its oral opinion on such date.
Business Line Valuation. Morgan Stanley performed a business line
valuation of the Company that estimated values for the Company's four main
business lines (consumer credit card services, commercial account processing,
network transaction services and teleservices) and the net present value of
certain payments due to the Company through mid-2000 under its Systems Access
Agreement with NOVUS for purposes of evaluating the fairness of the
consideration to be received in the Sale. As part of this analysis, Morgan
Stanley estimated the value of the business lines by multiplying its 1998
earnings contribution by a 1998 earnings multiple based on an analysis of
comparable companies in each business line. Morgan Stanley used two sets of
earnings projections for purposes of this analysis. One case was based on
management estimates (the "Management Case") while a second case was based on
most recently available Institutional Brokers Estimate System ("IBES")
estimates (the "IBES Case"). IBES is a data service that monitors and
publishes compilations of earnings estimates produced by selected research
analysts regarding companies of interest to institutional stockholders. The
contribution to 1998 earnings from the business lines was 57% from consumer
credit card services, 15% from commercial accounts processing, 13% from
network transaction services, 9% from teleservices and 6% from other.
<PAGE>
Morgan Stanley analyzed certain publicly traded companies considered
to be reasonably similar to the Company in each of the four business lines
(together, the "Comparable Companies"). For purposes of the Comparable
Companies analysis, Morgan Stanley included the following companies in the
four business segments: the consumer credit card services group included MBNA,
Household and Capital One; the commercial account processing group included
Associates, CIT and FINOVA; the network transaction services group included
First Data, BA Merchant Services, Nova Corporation, PMT Services, Paymentech
and National Processing; and the teleservices group included APAC
TeleServices, National Techteam, Precision Response, Sitel, Sykes Enterprises
and Teletech.
Based on the Management Case and a weighed average range of price to
1998 earnings multiples of 12.4x to 14.6x, Morgan Stanley calculated an
implied trading valuation range of $600 million to $709 million, or $22 to $26
per share. Morgan Stanley also applied the weighted average range of price to
1998 earnings multiples to the IBES case and derived an implied trading
valuation range of $544 million to $643 million, or $20 to $23 per share.
Dividend Discount Valuation. Morgan Stanley performed a dividend
discount valuation to determine a range of present values of the Common Stock
assuming the Company continued to operate as a stand-alone entity for purposes
of evaluating the fairness of the consideration to be received in the Sale.
This range was determined by adding (i) the present value of the estimated
future dividend stream that the Company could generate and (ii) the present
value of the "terminal value" of the Common Stock at the end of year 2002. To
determine a projected dividend stream, Morgan Stanley assumed an
equity/managed receivables ratio of 13%. Morgan Stanley used the Management
Case for 1998 and assumed the same profitability in each of the business lines
as 1998 for 1999 - 2003 and assumed a 10% growth rate in earnings in consumer
credit card services and network transaction services and a 15% growth rate in
commercial account processing and teleservices. The "terminal value" of the
Common Stock at the end of the period was determined by applying two price -
to - earnings multiples (14x and 16x) to year 2003 projected earnings. The
dividend stream and terminal values were discounted to present values using
discount rates of 13% and 15%, which Morgan Stanley viewed as a reasonable
discount rate range for the Company. Based on the above assumptions, the stand
- - alone value of the Common Stock ranged from $21 to $26 per share.
Implied Acquisition Valuation. As part of its analysis of the
acquisition valuation, Morgan Stanley applied a 30% control premium to the
implied valuation range derived from the business line valuation and the
dividend discount valuation. Morgan Stanley estimated the implied acquisition
values of the Common Stock to range from approximately $26 to $34 per share.
In connection with its written opinion dated as of the date of this
Proxy Statement, Morgan Stanley confirmed the appropriateness of its reliance
on the analyses used to render its April 17, 1998 opinion by performing
procedures to update certain of such analyses and by reviewing the assumptions
upon which such analyses were based and the factors considered in connection
therewith.
No company or transaction used in the business line valuation is
identical to the Company. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
financial and operating characteristics of the Company and other factors that
could affect the public trading value of the companies to which they are being
compared. Mathematical analysis (such as determining the average or median) is
not in itself a meaningful method of using comparable transaction data or
comparable company data.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all its
analyses as a whole and did not attribute any particular weight to any
analysis or factor considered by it. Morgan Stanley believes that selecting
any portion of its analyses, without considering all analyses, would create an
incomplete view of the process underlying its opinion. In addition, Morgan
Stanley may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of
the actual value of the Company.
In performing its analyses, Morgan Stanley made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of the Company. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely
<PAGE>
as a part of Morgan Stanley's analyses conducted in connection with the delivery
of Morgan Stanley's opinion. The analyses do not purport to be appraisals or to
reflect the prices at which the Company might actually be sold. Because such
estimates are inherently subject to uncertainty, none of the Company, Morgan
Stanley or any other person assumes responsibility for their accuracy. In
addition, as described above, Morgan Stanley's opinion and the information
provided by it to the Board were two of many factors taken into consideration by
the Board in making its determination to approve the Purchase Agreement and the
Merger Agreement and the transactions contemplated thereby. Consequently, the
Morgan Stanley analyses described above should not be viewed as determinative of
the opinion of the Board or the view of the Company management with respect to
the value of the Company or of whether the Board or the management of the
Company would have been willing to agree to different consideration. The
consideration to be received by the Company pursuant to the Purchase Agreement
was determined through negotiations between the Company and Associates and their
respective advisors and was approved by the entire Board.
Morgan Stanley acted as financial advisor to the Board in connection
with the Sale and will receive a fee for its services. The Company engaged
Morgan Stanley to act as its financial advisor based upon Morgan Stanley's
qualifications, expertise and reputation as well as Morgan Stanley's prior
investment banking relationship and familiarity with the Company. Morgan
Stanley is an internationally recognized investment banking and advisory firm.
As part of its investment banking business, Morgan Stanley is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, negotiated underwriting, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuation for estate, corporate and other purposes.
Morgan Stanley is an affiliate of MSDW, which through NOVUS (its
wholly owned subsidiary) owns approximately 73.3% of the outstanding shares of
Common Stock of the Company, and five officers of MSDW or its affiliates
(including the chairman of the board and chief executive officer of MSDW) are
members of the Board. In addition, the Chairman of the Board and Chief
Financial Officer of the Company is an officer and director of MSDW. In the
past, Morgan Stanley and its affiliates have provided financial advisory and
financing services for the Company and have received fees for the rendering of
those services.
Pursuant to a letter dated December 7, 1997, the Company has agreed
to pay Morgan Stanley: (i) an advisory fee estimated to be between $100,000
and $150,000 that is payable if the Sale is not consummated and (ii) a
transaction fee estimated to be approximately $4.3 million that is payable
upon the consummation of the Sale. In addition, the Company has agreed, among
other things, to reimburse Morgan Stanley for all reasonable out-of-pocket
expenses incurred in connection with the services provided by Morgan Stanley,
and to indemnify and hold harmless Morgan Stanley and certain related parties
from and against certain liabilities and expenses, which may include certain
liabilities under the federal securities laws, in connection with its
engagement.
PROPOSAL NO. 1--APPROVAL OF THE SALE
Stockholders are being asked to approve the Sale pursuant to the
Purchase Agreement. The following summary of certain terms and provisions of
the Purchase Agreement is qualified in its entirety by reference to the
Purchase Agreement, which is set forth as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference. See "WHERE YOU CAN FIND MORE INFORMATION."
If the Sale pursuant to the Purchase Agreement is not approved by the
Stockholders at the Special Meeting, the Sale will not be consummated and
Proposal No. 2 will not be acted upon.
TERMS OF THE PURCHASE AGREEMENT
GENERAL. The Purchase Agreement sets forth the terms and conditions
of the Sale. If the Stockholders approve the Sale in accordance with the
provisions of the DGCL, and the other conditions contained in the Purchase
Agreement are satisfied or waived, the Company will sell all of the issued and
outstanding shares of capital stock of the Subsidiaries to Associates and the
Company will receive upon closing ("Closing") of the Sale $895,696,661 in
immediately available funds. Pursuant to the terms of the Purchase Agreement,
Associates has also agreed to lend, or contribute capital to or purchase stock
of, the Subsidiaries in order to fund the payment by the Subsidiaries of all
amounts owing to the Company by the Subsidiaries or their subsidiaries (the
"Intercompany Indebtedness").
<PAGE>
The Intercompany Indebtedness will be repaid on the date of the Closing (the
"Closing Date") immediately prior to the Closing.
REPRESENTATIONS AND WARRANTIES. The Purchase Agreement includes
representations and warranties by the Company regarding the following: (i) the
authorization, execution and delivery of the Purchase Agreement; (ii) assuming
authorization by the Stockholders, the validity, enforceability and binding
nature of the Purchase Agreement; (iii) the noncontravention (except as
specified) by the Purchase Agreement of any charter, by-law or organizational
document, of any contract, commitment, agreement or arrangement, of any
judgment, order, decree, law or statute; (iv) the absence of the need (except
as specified) of any consents, approvals, permits or authorizations; (v) the
organization, existence and good standing of the Subsidiaries; (vi) the
ownership of the capital stock of the Subsidiaries; (vii) the capitalization
of the Subsidiaries; (viii) ownership of other equity interests; (ix)
compliance with the Securities and Exchange Commission (the "SEC") reporting
requirements and the accuracy of information contained in such reports; (x)
the absence of certain changes or events; (xi) pending or threatened
litigation; (xii) payment of taxes and other tax matters; (xiii) employee
benefit plans; (xiv) labor matters; (xv) the absence of the need (except as
specified) of any governmental authorizations or approvals; (xvi) the
inapplicability of certain "anti-takeover" statutes; (xvii) the required vote
of the Stockholders; (xviii) broker's and finder's fees; (xix) guarantees;
(xx) computer systems; (xxi) contracts and commitments; (xxii) insurance;
(xxiii) ownership of personal property; (xxiv) leased and owned property;
(xxv) compliance with certain laws concerning credit cards and related
agreements; (xxvi) credit cardholder agreements; and (xxvii) the accuracy of
certain data and records.
The Purchase Agreement includes representations and warranties by
Associates regarding the following: (i) the organization, existence and good
standing of the Associates; (ii) the noncontravention by the Purchase
Agreement of any charter, by-law or organizational document, or any contract,
commitment, agreement or arrangement, of any judgment, order, decree, law or
statute; (iii) the accuracy of certain information to be supplied in
connection with the preparation of this Proxy Statement; (iv) the financial
ability of Associates to perform its obligations under the Purchase Agreement;
and (v) the absence of certain changes.
CONDUCT OF BUSINESS PENDING THE CLOSING. The Company has agreed that,
prior to the Closing, the Company shall (i) cause the business of the
Subsidiaries and their subsidiaries (the "Operating Companies") to be
conducted in the ordinary course in substantially the same manner as
heretofore conducted; (ii) make all reasonable efforts consistent with past
practices to preserve the Operating Companies' relationships with customers
and others with whom they deal; and (iii) maintain in effect all insurance as
to which the Operating Companies are beneficiaries. The Company has further
agreed that, prior to the Closing, except as consented to by Associates in
writing or as expressly provided for in the Purchase Agreement, neither of the
Subsidiaries shall:
(i) amend their certificate of incorporation or by-laws
or similar documents;
(ii) except for amounts necessary to repay the Intercompany
Indebtedness, declare or pay any dividend or make any other
distribution to their stockholders whether or not upon or in respect
of any shares of their capital stock except for dividends necessary
to pay any required tax payments by the Company or any required
payments on the indebtedness of the Company;
(iii) redeem or otherwise acquire any shares of their
capital stock or issue any capital stock or any option, warrant or
right relating thereto or any securities convertible into or
exchangeable for any shares of capital stock;
(iv) acquire by merger or consolidation, purchase or any
other manner, any business or any corporation, partnership,
association or other business organization or division thereof or
otherwise acquire any assets that are material, individually or in
the aggregate, to the Operating Companies;
(v) sell, lease or otherwise dispose of any of their assets
that are material, individually or in the aggregate, to the Operating
Companies, except in the ordinary course of business;
(vi) enter into or amend any agreement, contract or other
arrangement by which the Operating Companies or any of their
properties or assets are bound which has an aggregate future
liability or
<PAGE>
receivable to any person in excess of $1,000,000 or is not terminable by the
Operating Companies, as the case may be, by notice of not more than 60 days for
an aggregate cost of less than $1,000,000;
(vii) purchase any private label credit card portfolio
involving a purchase price in excess of $10,000,000; or
(viii) agree, whether in writing or otherwise, to do any of
the foregoing.
NO SOLICITATION. The Company has agreed it will not, and will not
permit its Subsidiaries or any of their respective directors, officers,
stockholders or representatives to, directly or indirectly, encourage,
solicit, initiate or participate in discussions or negotiations with, or
provide any information or assistance to, any person or group (other than
Associates and its respective representatives) concerning any merger, sale of
securities, sale of substantial assets or similar transaction involving the
Company and its Subsidiaries; provided, however, that if the officers or
directors of the Company shall be required by their fiduciary obligations
under applicable law, based upon the advice of outside counsel to the Company,
to enter into any such negotiations or discussions or to provide any such
information or assistance to any third party, the Company may do so only if
(A) the Board is advised by its financial advisor that the third party has the
financial resources to consummate a "Superior Acquisition," and the Board
determines that the third party is likely to submit a bona fide offer to
consummate a Superior Acquisition (a "Third Party Acquisition Offer"); (B) the
Company has provided Associates, as soon as reasonably practicable and in any
event prior to such discussions, negotiations, disclosure or assistance,
notice of the Company's intent to enter into such discussions or negotiations
or to provide such information and/or assistance, the identity of such third
party and, as soon as reasonably practicable after such terms are known by the
Company, the terms of the Third Party Acquisition Offer; and (C) such third
party has signed and delivered to the Company a confidentiality agreement.
The Company has agreed to orally notify Associates immediately,
followed by prompt written notice, of the receipt and the terms of any Third
Party Acquisition Offer from any person, entity or group (other than from
Associates), or of any request for information or access, with respect to any
Third Party Acquisition Offer, or any indication from any person, entity or
group that it or another person, entity or group is considering making a Third
Party Acquisition Offer or such a request, which notice shall include the
identity of the third party.
For purposes of the foregoing paragraphs, a "Superior Acquisition" is
a transaction in which any person or group proposes to commence a tender offer
to acquire all of the outstanding company stock of the Company, or proposes a
merger, consolidation or a sale of substantially all of the assets of the
Company, pursuant to which the per share tender offer price or the per share
merger or consolidation price or, in the case of an asset sale, the quotient
obtained by dividing the aggregate purchase price for the assets by the total
number of shares of Common Stock outstanding, is higher than the quotient
obtained by dividing 895,696,661 by the total number of shares of Common Stock
outstanding.
CERTAIN OTHER COVENANTS. The Company has agreed as follows: (i) to
cause the Subsidiaries to give Associates and its officers, employees,
representatives, counsel and accountants full access, during normal business
hours and upon reasonable notice, to the assets, personnel, properties,
financial statements, contracts, books, records, working papers and other
relevant information pertaining thereto of the Subsidiaries, to cause the
Subsidiaries to furnish to Associates and its officers, employees,
representatives, counsel and accountants such financial and operating data and
other information with respect to the assets and business of the Subsidiaries
as Associates shall from time to time reasonably request; provided, however,
that such access shall be in a manner that does not unreasonably interfere
with the normal operation of the Company's business; (ii) to take all action
necessary to obtain the required Stockholder approval of the Purchase
Agreement and transactions contemplated thereby (including the preparation and
filing with the SEC of any required Schedule 14A or 14C); (iii) to discharge
in full, at or immediately prior to the Closing, any and all amounts due from
the Operating Companies to the Company or companies affiliated with the
Company (other than the Operating Companies) which are outstanding at the
Closing Date; (iv) from and after the Closing Date, to refrain from soliciting
or employing former Company employees hired by Associates on the Closing Date
for a period of two years; and (v) to maintain its corporate existence through
the second anniversary of the Closing.
<PAGE>
In addition, the Company has agreed, at its sole cost and expense,
immediately prior to Closing, to make all necessary and proper consolidation
and elimination entries between the Company and the Subsidiaries and to make a
capital contribution to the Subsidiaries such that after such contribution the
assets obtained by Associates from the purchase of all the issued and
outstanding capital stock of the Subsidiaries pursuant to the Purchase
Agreement shall have a net value to Associates in accordance with generally
accepted accounting principles equal to the net assets of the Company on a
consolidated basis, reduced by certain specified amounts. For purposes of
reference, the amount of the net assets of the Company on a consolidated basis
was equal to $263,035,000 at December 31, 1997 (audited) and $274,076,000 at
March 31, 1998 (unaudited). Therefore, the amount of net assets to be obtained
by Associates at Closing will be equal to $274,076,000 plus the amount of net
income (or less the amount of any loss, as the case may be) recognized by the
Company on a consolidated basis for the period beginning April 1, 1998 through
the Closing Date, reduced by certain specified amounts.
Associates has agreed to offer continued employment to all current
employees of the Company and its subsidiaries, including any such employees
who are absent from active employment for any reason as of the Closing Date as
well as certain specified employees of NOVUS. All such employees whose
employment is continued with Associates are referred to herein as the "Hired
Employees." The continued employment of the Hired Employees shall not be
construed to limit the ability of Associates to terminate the employment of
any Hired Employee at any time for any reason, and the employment of the Hired
Employees shall be subject to all of Associates' practices and policies,
including its policy of employment-at-will, except to the extent such Hired
Employees are otherwise party to an employment agreement. Associates will
employ the Hired Employees at the same salary and wages and with benefits that
are, in the aggregate, substantially similar or superior to those provided by
the Company or the Subsidiaries, as the case may be, immediately prior to the
Closing Date. Subject to the provisions described below, nothing in the
Purchase Agreement shall limit Associates' right, at any time, to modify,
amend or terminate any salary and wages payable, or benefit provided, to any
or all Hired Employees on or after the Closing Date, including without
limitation any Employee Welfare Benefit Plan or any Employee Pension Benefit
Plan to the extent permitted by law; provided, however, that (i) for a period
of at least 12 months following the Closing Date, Associates and its
subsidiaries shall provide for the payment of severance benefits, salary
continuation, salary in lieu of notice and similar benefits to any Hired
Employee whose employment is terminated by Associates or its subsidiaries for
any reason other than cause or long term disability, and the amount of such
benefits shall be determined in accordance with the Company's severance policy
in effect as of the date of the Purchase Agreement and (ii) thereafter the
Hired Employees shall be entitled to such severance benefits, salary
continuation, salary in lieu of notice or similar benefits that Associates
provides to its other employees. For the purposes hereof, "Employee Pension
Benefit Plan" means any employee pension benefit plan within the meaning of
section 3(2) of ERISA, regardless of whether such plan is subject to ERISA,
"Employee Welfare Benefit Plan" means any employee welfare benefit plan within
the meaning of section 3(1) of ERISA, regardless of whether such plan is
subject to ERISA.
Associates has also agreed as follows: (i) to abide by the terms of
its existing confidentiality agreement with the Company, except as specified;
(ii) to take certain actions if required by the Worker Adjustment and
Retraining Notification Act; (iii) to take any action necessary to secure
regulatory approval for the Sale; (iv) to supply any requested information to
the Company in connection with the preparation of the Proxy Statement and that
such information will not contain an untrue statement of material fact or omit
to state any material fact; and (v) to assume all obligations and liabilities
of the Company (except as specified) as of the Closing Date.
The Company and Associates have each agreed: (i) subject to the terms
and conditions of the Purchase Agreement, to use its best efforts consistent
with applicable legal requirements to cause the Closing to occur including
cooperating in filing any necessary applications, reports or other documents
with, giving any notices to, and seeking any consents from, all governmental
entities and all third parties as may be required by the Company, on the one
hand, and Associates, on the other hand, in connection with the consummation
of the transactions contemplated by the Purchase Agreement, and in seeking
necessary consultation with and prompt favorable action by any such
governmental entity or third party; (ii) to file as promptly as practicable,
with the United States Federal Trade Commission (the "FTC") and the United
States Department of Justice (the "DOJ") the notification and report form, if
any, required for the Sale and any supplemental information requested in
connection therewith pursuant to the HSR Act and any such notification and
report form and supplemental information shall be in substantial compliance
with the requirements of the HSR Act; and (iii) when reasonably requested by
the other, to execute and deliver, or cause to be executed and delivered, all
such documents and instruments and to take, or cause to be taken,
<PAGE>
all such further acts or other actions as the other may deem reasonably
necessary or desirable to consummate the Sale.
CONDITIONS TO CLOSING. The respective obligations of each of the
Company and Associates to effect the Sale will be subject to the following
conditions: (i) no statute, rule, regulation, executive order, decree,
temporary restraining order, preliminary or permanent injunction or other
order shall have been enacted, entered, promulgated, enforced or issued by any
governmental entity and no other legal restraint or prohibition preventing the
Sale or any related transaction shall be in effect; (ii) the waiting period
under the HSR Act applicable to the Sale will have terminated or expired;
(iii) the Company and Associates will have fulfilled all applicable filing and
reporting requirements, obtained all necessary consents and approvals and all
applicable waiting periods will have expired; (iv) the Sale and all related
transactions will have been approved by the Stockholders as required by
Delaware law; and (v) if required, the Sale and all related transactions will
have been approved by the stockholders of Associates as required by Delaware
law.
The obligation of the Company to effect the Sale will be subject to
the following additional conditions:
(i) The representations and warranties of Associates
contained in the Purchase Agreement qualified as to materiality will
be true and correct, and those not so qualified will be true and
correct in all material respects, as of April 18, 1998 and as of the
time of the Closing as though made as of such time, except to the
extent such representations and warranties expressly relate to an
earlier date (in which case such representations and warranties
qualified as to materiality shall be true and correct, and those not
so qualified shall be true and correct in all material respects, on
and as of such earlier date). Associates will have duly performed,
complied with and satisfied in all material respects all covenants,
agreements and conditions required by the Purchase Agreement to be
performed, complied with or satisfied by it by the time of the
Closing;
(ii) There shall not be threatened, instituted or pending
any suit, action, investigation, inquiry or other proceeding by or
before any court or governmental or other regulatory or
administrative agency or commission requesting an order, judgment or
decree (except those in which the Company is a plaintiff directly or
derivatively) which, in the reasonable judgment of the Company,
would, if issued, be reasonably likely to restrain or prohibit the
consummation of the Sale or require rescission of the Purchase
Agreement or such transactions or result in material damages to the
Company, and there shall not be in effect any injunction, writ,
preliminary restraining order or any order of any nature issued by a
court or governmental agency of competent jurisdiction directing that
the Sale not be consummated as so provided or any statute, rule or
regulation enacted or promulgated that makes consummation of the Sale
illegal;
(iii) Associates will have delivered the items to be
delivered and made the payments to the Company and the Subsidiaries
as required by the Purchase Agreement; and
(iv) Each Subsidiary will have discharged in full any and
all amounts due from such Subsidiary (or such Subsidiary's
subsidiary) to the Company or companies affiliated with the Company
(other than the Subsidiaries or their subsidiaries) that are
outstanding at the Closing Date.
The obligation of Associates to effect the Sale will be subject to
the following additional conditions:
(i) The representations and warranties of the Company
contained in the Purchase Agreement qualified as to materiality will
be true and correct, and those not so qualified will be true and
correct in all material respects, as of April 18, 1998 and as of the
time of the Closing as though made as of such time, except to the
extent such representations and warranties expressly relate to an
earlier date (in which case such representations and warranties
qualified as to materiality shall be true and correct, and those not
so qualified shall be true and correct in all material respects, on
and as of such earlier date). The Company will have duly performed,
complied with and satisfied in all material respects all covenants,
agreements and conditions required by the Purchase Agreement to be
performed, complied with or satisfied by it by the time of the
Closing;
(ii) There shall not be threatened, instituted or pending
any suit, action, investigation, inquiry or other proceeding by or
before any court or governmental or other regulatory or
administrative agency or
<PAGE>
commission requesting an order, judgment or decree (except those in which the
Company is a plaintiff directly or derivatively) which, in the reasonable
judgment of the Company, would, if issued, be reasonably likely to restrain or
prohibit the consummation of the Sale or require rescission of the Purchase
Agreement or such transactions or result in material damages to the Company, and
there shall not be in effect any injunction, writ, preliminary restraining order
or any order of any nature issued by a court or governmental agency of competent
jurisdiction directing that the Sale not be consummated as so provided or any
statute, rule or regulation enacted or promulgated that makes consummation of
the Sale illegal; and
(iii) NOVUS will have executed and delivered the Interim
Servicing Agreement (as hereinafter defined).
TAX MATTERS. The Company and Associates have agreed: (i) to make
joint elections (with the Subsidiaries) under Sections 338(g) and 338(h)(10)
of the Code and under any similar provisions of state law with respect to the
Sale, and (ii) for United States federal income tax purposes to mutually agree
to a purchase price and allocation of that price among the assets of the
Subsidiaries that are deemed to have been acquired pursuant to Section 338 of
the Code.
The Company has agreed to indemnify Associates for all taxes, other
than taxes for which there are reserves as of the Closing Date, imposed upon
the Subsidiaries or for which the Subsidiaries may otherwise be liable for any
taxable year or period that ends on or before the Closing Date and, with
respect to any taxable year or period beginning before and ending after the
Closing Date, the portion of such taxable year ending on and including the
Closing Date. Associates has agreed to indemnify the Company for all taxes
imposed upon the Subsidiaries or for which the Subsidiaries may otherwise be
liable for any taxable year or period that begins after the Closing Date and,
with respect to any taxable year or period beginning before and ending after
the Closing Date, the portion of such taxable year beginning after the Closing
Date. In addition, Associates has agreed to bear all transfer taxes which may
be imposed or assessed as a result of the Sale.
INDEMNIFICATION. The Company has agreed, for a specified period of
time after the Closing, to indemnify Associates in the proportion that the
number of shares of Common Stock issued and outstanding in the name of NOVUS
immediately prior to the Closing Date bears to the total number of shares of
Common Stock issued and outstanding immediately prior to the Closing Date,
against certain losses, liabilities, claims, damages or expenses (including
reasonable legal fees and expenses) ("Claims") which arise out of, or are
based upon, or result from the breach of certain of the Company's
representations contained in the Purchase Agreement, subject to such Claims
exceeding certain threshold amounts and subject to a limitation on the maximum
amount recoverable for all such Claims.
TERMINATION. The Purchase Agreement may be terminated and the Sale
may be abandoned at any time prior to the Closing: (i) by the mutual written
consent of the Company and Associates; (ii) by either the Company or
Associates if the Closing does not occur on or prior to February 28, 1999
(other than due to the failure of the party seeking to terminate the Purchase
Agreement to perform its obligations required to be performed as a condition
to Closing); (iii) by either the Company or Associates, if any governmental
entity shall have issued a judgment, order or decree or taken any other action
permanently enjoining, restraining or otherwise prohibiting any of the
transactions contemplated by the Purchase Agreement, and such judgment, order
or decree or other action shall have become final and nonappealable; or (iv)
by Associates, if approval of the Stockholders will not have been obtained by
reason of the Company's failure to call a Stockholders' meeting or the failure
to obtain the required vote upon a vote held at the duly held meeting of the
Stockholders or at any adjournment thereof.
TERMINATION FEE. Associates has agreed to pay a break-up fee of $10
million to the Company if: (i) the Purchase Agreement is terminated because
the Closing has not occurred by February 28, 1999, (ii) the failure to close
by such date is due to reasons related to bank regulatory requirements
affecting Associates and (iii) the Company is not then subject to any
governmental order preventing the Company from consummating the Sale.
ANCILLARY AGREEMENTS
THE VOTING AGREEMENT. NOVUS and Associates have entered into the
Voting Agreement pursuant to which NOVUS has agreed to vote all of the shares
of Common Stock owned by it (a) in favor of the Sale and (b)
<PAGE>
against (i) any proposal made in opposition to the Sale; (ii) any merger,
consolidation, sale of assets, business combination, or reorganization of the
Company or any of its Subsidiaries, with or involving any party other than
Associates; (iii) any liquidation or winding up of the Company; and (iv) any
other action that may reasonably be expected to impede, interfere with, delay,
postpone or attempt to discourage the Sale. In addition, NOVUS has agreed not to
sell or transfer any of the shares of Common Stock owned by it. On the Record
Date, NOVUS owned 20,000,000 shares of Common Stock, representing approximately
73.3% of the then issued and outstanding shares of Common Stock.
NOVUS has also agreed that it will not, directly or indirectly: (i)
take any action to seek, initiate or solicit any offer from any person, entity
or group to acquire any shares of capital stock of the Company or its
subsidiaries, to merge or consolidate with the Company or its subsidiaries, or
to otherwise acquire any significant portion of the assets of the Company or
its subsidiaries except for acquisitions solely of inventory in the ordinary
course of business (a "Third Party Offer"), or (ii) engage in negotiations or
discussions concerning a Third Party Offer or the business or assets of the
Company or its subsidiaries with, or disclose financial information relating
to the Company or its subsidiaries, or any confidential or proprietary trade
or business information relating to the business of the Company or its
subsidiaries to, or afford access to the properties, books or records of the
Company or its subsidiaries to, any third party that may be considering a
Third Party Offer.
The Voting Agreement will terminate on the earliest to occur of (i)
the prior termination of the Purchase Agreement; (ii) the consummation of the
Sale; or (iii) January 18, 1999. Unless the Voting Agreement is terminated in
accordance with its terms, NOVUS' obligation to vote in favor of the Sale is
unconditional and absolute.
THE ASSUMPTION AGREEMENT. At Closing, the Company and Associates will
enter into an assumption agreement pursuant to which Associates will agree to
assume and agree to pay, perform and discharge when due any and all
liabilities and obligations of the Company whether absolute, contingent, known
or unknown, accrued or otherwise that arise out of or relate to any period
prior to the Closing; provided, however, Associates will not assume any fees
and expenses incurred by the Company in connection with the execution and
delivery of the Purchase Agreement and the consummation by the Company of the
transaction contemplated thereby.
THE INTERIM SERVICING AGREEMENT. At Closing, NOVUS and Associates
will enter into an interim servicing agreement (the "Interim Servicing
Agreement") pursuant to which, for seven and one-half months from the Closing
Date, NOVUS will provide certain administrative services to the Subsidiaries
after the Closing of the Sale.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendations of the Board, Stockholders should
be aware that certain members of the Board and certain executive officers of
the Company have certain interests in the Sale and the Merger that are in
addition to the interests of the Stockholders generally and which may present
them with potential conflicts of interest in connection with the transactions.
The Board was aware of these interests and considered them, among other
matters, in approving the Purchase Agreement, the Merger Agreement and the
transactions contemplated thereby.
RELATIONSHIP WITH MSDW. MSDW through NOVUS (its wholly owned
subsidiary) owns approximately 73.3% of the outstanding shares of Common
Stock. Five officers of MSDW or its affiliates (including the Chairman of the
Board and Chief Executive Officer of MSDW) are members of the Board. In
addition, the Chairman of the Board and Chief Financial Officer of the Company
is an officer and director of MSDW. Morgan Stanley, the financial advisor to
the Company, is a wholly owned subsidiary of MSDW. Morgan Stanley will receive
as compensation for its services to the Company a fee of approximately $4.3
million upon consummation of the Sale. MSDW has agreed to contribute $500,000
to the Company to defray the expenses incurred by the Company in connection
with the Sale and the Merger. In addition, since the Company will bear the
entire federal income tax liability on the gain resulting from the Sale and
will remain responsible for other tax liabilities and certain indemnification
obligations under the Purchase Agreement, the per share amount of the net
proceeds from the Sale allocable to NOVUS' shares will be effectively less
than $32.02 per share.
THE RETENTION PLAN. Certain of the Company's officers, including Mr.
Robert L. Wieseneck, the Company's President and Chief Executive Officer, are
beneficiaries (the "Plan Participants") under the Company's
<PAGE>
Senior Management Retention Plan (the "Retention Plan"). The Retention Plan was
adopted by the Board at its special meeting on November 19, 1997. The Board
adopted the Retention Plan in order to maintain the focus of key executives of
the Company on the management of the Company's business while discussions with
prospective purchasers of the Company were in progress. The Retention Plan
provides for the creation of two retention pools. The first pool will equal
one-half of the prior year's total cash compensation (including deferred bonus)
of the Plan Participants who remain as employees in good standing as of the
close of any sale transaction and will be distributed immediately after the
closing of the Sale. The amount to be received by each Plan Participant from the
first retention pool shall be determined by the Compensation Committee of the
Board immediately prior to closing. The second retention pool will equal
one-half of the prior year's total cash compensation (including deferred bonus)
of qualifying members who (1) do not have a position with the Company,
Associates or MSDW after the closing of the Sale, (2) who leave the Company for
"good reason" (as defined in the Retention Plan) within one year after the
closing of the Sale or (3) who are terminated other than for cause by the
Company or Associates within one year of the closing of the Sale. The amount
distributed to each Plan Participant entitled to a distribution from the second
retention pool shall equal 50% of their prior year's total cash compensation
(including deferred bonus). Associates has agreed to assume all of the Company's
obligations under the Retention Plan.
THE INCENTIVE PLAN. Certain of the Company's officers, including Mr.
Wieseneck, are participants in the Company's Incentive Plan (the "Incentive
Plan"). The Incentive Plan was adopted by the Board at its special meeting in
November 19, 1997. The Board adopted the Incentive Plan to incent certain key
members of the Company's senior management to maximize the purchase price paid
on any potential sale transaction involving the Company in order to achieve
the greatest value for Stockholders. The Plan provides for the participants to
receive an amount (the "Incentive Amount") equal to 3% of the gross proceeds
of a 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 Common
Stock outstanding at the time of any such sale transaction. The allocation of
the Incentive Amount to the participants in the Incentive Plan will be
determined by the Compensation Committee of the Board immediately prior to the
closing of the Sale and will be paid at Closing.
SALE OF MOUNTAINWEST RECEIVABLES. Contemporaneously with the
execution of the Purchase Agreement, MountainWest Financial Corporation, a
subsidiary of NOVUS ("MountainWest"), entered into a Sale and Purchase
Agreement with Associates Capital Bank, Inc., an indirect subsidiary of
Associates ("ACB"), pursuant to which MountainWest agreed to sell to ACB all
of its rights to certain accounts that are serviced by the Company, the
receivables related to such accounts (the "Credit Receivables") and the rights
and privileges of MountainWest under the merchant service agreements and
certain other assets relating to the accounts. ACB has agreed to pay a
purchase price equal to the total amount of Credit Receivables outstanding on
the day before the closing of the sale multiplied by 1.0345, subject to
certain post-closing adjustments.
SHARE OWNERSHIP. As of the Record Date, executive officers and
directors of the Company owned of record or beneficially an aggregate of
[564,270] shares of Common Stock for which they will receive the Merger
Consideration. In addition, the executive officers and directors of the
Company hold options to purchase an aggregate of __________ shares of Common
Stock at a weighted average exercise price of $____ per share. As of the
Effective Time (as defined below) of the Merger, such options, whether or not
otherwise vested or exercisable, shall entitle the holder thereof to payments
in cash equal to the product of (x) the total number of shares of Common Stock
subject to such option, and (y) the excess of the Merger Consideration over
the per share exercise price of such option.
REGULATORY APPROVALS
HART-SCOTT-RODINO ACT. Under the HSR Act, and the rules that have
been promulgated thereunder by the FTC, the Sale may not be consummated unless
certain information has been furnished to the Antitrust Division of the DOJ
(the "Antitrust Division") and the FTC and certain waiting period requirements
have been satisfied. The Company and Associates filed notification and report
forms under the HSR Act with the FTC and the Antitrust Division on June 10,
1998. The Company and Associates received early termination of the required
waiting period under the HSR Act on June 19, 1998.
BANK REGULATORY APPROVALS. Under the federal Change in Bank Control
Act and the rules promulgated thereunder by the Federal Deposit Insurance
Corporation ("FDIC"), certain transactions, including the Sale, require
<PAGE>
the submission of a notice to the FDIC. Such transactions may be consummated at
the expiration of a specified time period, if the notice is not disapproved by
the FDIC, or earlier, if the FDIC affirmatively indicates its intent not to
disapprove the notice. The specified time period also may be extended by the
FDIC. The affirmative approval of the South Dakota Division of Banking also is
required with respect to the change in control of HSB prior to consummation of
the Sale.
OTHER REGULATORY APPROVALS. The Company believes that there are no
other material approvals of regulatory bodies that are required in order to
consummate the Sale or the Merger.
PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT
Stockholders are being asked to adopt the Merger Agreement. The
purpose of the Merger is to distribute to the public Stockholders their pro
rata portion of the net proceeds of the Sale.
TERMS OF THE MERGER AGREEMENT
The following is a summary of the Merger Agreement, the full text of
which is attached hereto as Annex III. Stockholders are urged to read the
Merger Agreement in its entirety for a more complete description of the
Merger.
GENERAL. The Merger Agreement sets forth the terms and conditions
upon and subject to which the Merger is to be effected. If the Merger
Agreement is adopted by the Stockholders in accordance with the provisions of
the DGCL, and the other conditions contained in the Merger Agreement are
satisfied or waived, Acquisition will merge with and into the Company, the
separate corporate existence of Acquisition will cease, and the Company will
continue as the Surviving Corporation, operating as a direct, wholly owned
subsidiary of NOVUS. The Merger will become effective at the time that a
Certificate of Merger is filed with the Secretary of State of the State of
Delaware.
At the Effective Time, each share of Common Stock (other than shares
of Common Stock held by NOVUS and by any Stockholders who perfect their
statutory appraisal rights under the DGCL) will, by virtue of the Merger and
without any action on the part of the holder thereof, be converted solely into
the right to receive $32.02 in cash, without interest thereon. Such shares of
Common Stock will no longer be outstanding and will be cancelled. Each share
of Common Stock held by NOVUS will continue to be an issued and outstanding
share of the capital stock of the Company, with the same rights and privileges
attached to such share immediately prior to the Effective Time, but shall not
be entitled to any payment, consideration or other distribution by reason of
the Merger.
Holders of shares of Common Stock who do not vote to adopt the Merger
Agreement and who otherwise strictly comply with the provisions of the DGCL
regarding statutory appraisal rights have the right to seek a determination of
the fair value of their shares of Common Stock and payment in cash therefor in
lieu of the Merger Consideration to which they would otherwise be entitled.
See "--Appraisal Rights."
STOCK OPTIONS. Prior to the Effective Time, the Board shall take all
action necessary to cancel, as of the Effective Time, each option outstanding
under any of the Company's stock option plans on terms such that each option,
whether or not otherwise exercisable, will no longer be exercisable for the
purchase of shares of Common Stock, but shall entitle the holder thereof, in
cancellation and settlement therefor, to a payment in cash (less any
applicable withholding taxes, the "Cash Payment") equal to the product of (x)
the total number of shares of Common Stock subject to such option, whether or
not then vested or exercisable, and (y) the excess of the Merger Consideration
over the per-share exercise price of such option, each such Cash Payment to be
paid to each holder of an outstanding option at the Effective Time.
DETERMINATION OF MERGER CONSIDERATION. The Merger Consideration to be
distributed in connection with the Merger was determined by deducting
estimated expenses of $13,563,000 which are expected to be incurred by the
Company in connection with the Sale and the Merger and the amount payable to
option holders in the Merger from the gross proceeds of the Sale. The expenses
incurred by the Company include the payment of the Incentive Amount under the
Incentive Plan, the fee to its financial advisor, Morgan Stanley, legal fees
and various other fees and expenses incurred in connection with the Special
Meeting. The $13,563,000 in expenses deducted from the
<PAGE>
gross proceeds of the Sale gives effect to the $500,000 that MSDW has agreed to
contribute to the Company to defray its expenses incurred in connection with the
Sale and the Merger. To the extent that expenses are greater than anticipated,
the Company will pay such expenses out of the portion of the net proceeds of the
Sale allocable to NOVUS.
CONDITIONS TO THE MERGER. The respective obligations of each of the
Company and Acquisition to effect the Merger are subject to the condition that
(i) the Sale has closed; (ii) the Merger Agreement has been adopted by the
holders of a majority of the shares of Common Stock issued and outstanding;
and (iii) no statute, rule, regulation, decree, order or injunction shall have
been promulgated, enacted, entered or enforced by any United States federal or
state government, governmental agency or authority or court which remains in
effect and prohibits, restrains, enjoins or restricts the consummation of the
Merger.
ABANDONMENT. At any time prior to the Effective Time, the Merger
Agreement may be terminated, and the Merger may be abandoned by the Board,
notwithstanding adoption of the Merger Agreement by the Stockholders, or by
the stockholder of Acquisition, or both, if, in the opinion of the Board,
circumstances arise which make the Merger for any reason inadvisable.
EFFECTIVE TIME
The Merger will be effective as of the date and time of filing of a
Certificate of Merger with the Secretary of State of the State of Delaware
(the "Effective Time") in accordance with the DGCL.
PAYMENT FOR SHARES AND SURRENDER OF STOCK CERTIFICATES
As a result of the Merger, holders (other than NOVUS) of certificates
formerly evidencing shares of Common Stock will cease to have any equity
interest in the Company. Promptly after the Effective Time, the Company will
furnish each record holder of shares of Common Stock (other than NOVUS) a
transmittal letter containing instructions with respect to the surrender of
certificates previously representing shares of Common Stock. The transmittal
letter will set forth the procedure for surrendering such certificates for
exchange to the Exchange Agent. After the Effective Time and until
surrendered, each stock certificate which represented shares of Common Stock
(other than shares held by the Company, NOVUS, any of their respective
subsidiaries and Stockholders who perfect their statutory appraisal rights
under Delaware law) will evidence only the right to receive the Merger
Consideration for each share of Common Stock represented. In order to receive
the Merger Consideration, each former Stockholder will be required, following
the Effective Time, to surrender such Stockholder's stock certificate(s),
together with a duly executed and properly completed transmittal letter (and
any other required documents), to the Exchange Agent. Thereafter, the
Stockholder will receive as promptly as practicable in exchange therefor cash
in an amount equal to the product of the number of shares of Common Stock
formerly represented by such Stockholder's certificate(s) and $32.02. No
interest will be paid on the cash payable upon the surrender of such
certificate(s).
After the Effective Time, there will be no transfers of shares of
Common Stock (other than shares held by NOVUS) on the stock transfer books of
the Company. If, after the Effective Time, certificates theretofore
representing shares of Common Stock (other than shares held by NOVUS) are
presented for transfer, they will be cancelled and exchanged for the Merger
Consideration pursuant to the terms of the Merger Agreement.
No transfer taxes will be payable in connection with any such payment
for shares of Common Stock, except that if the check for such payment is to be
delivered to a person other than the person in whose name the certificates
surrendered are registered, the person requesting delivery of the check must,
prior to the delivery thereof, either (a) pay to the Exchange Agent any
resulting transfer taxes or other taxes or (b) establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not applicable.
Notwithstanding the foregoing, neither the Exchange Agent nor any
party to the Merger Agreement will be liable to any holder of stock
certificates for any amount paid to a public official pursuant to any
applicable abandoned property, escheat or similar law. Except as otherwise
indicated in the immediately preceding paragraph, the Company will pay all
charges and expenses, including those of the Exchange Agent, in connection
with the
<PAGE>
exchange of stock certificates for the Merger Consideration. MSDW has agreed to
contribute $500,000 to the Company to defray the expenses incurred by the
Company in connection with the Sale and the Merger.
CERTAIN EFFECTS OF THE MERGER
Following the Merger, NOVUS will own 100% of the Surviving
Corporation's outstanding capital stock and the Existing Stockholders will
cease to have any ownership interests in the Company or rights of
shareholders. The Existing Stockholders will no longer benefit from any
increases in the value of the Company or any payment of dividends on the
Common Stock of the Company and will no longer bear the risk of any decreases
in value of the Company. The Company will sell substantially all of its assets
in the Sale and, after the Merger, the Company intends to cease its current
operations. The Company's assets after completion of the Sale and the Merger,
the settlement of all expenses associated with the transactions and the
subsequent distribution to public Stockholders of their share of the net
proceeds of the Sale will be the portion of the net proceeds of the Sale
attributable to NOVUS' 73.3% interest and its liabilities will include its
indemnification obligations under the Purchase Agreement and its income tax
liabilities related to the Sale.
As a result of the Merger, the Common Stock of the Company will cease
to be quoted on the NYSE and the Company will no longer be required to file
periodic reports with the Commission.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase," as such term is
used under generally accepted accounting principles, for accounting and
financial reporting purposes. Accordingly, a determination of the fair value
of the Company's assets and liabilities will be made in order to allocate the
purchase price to the assets acquired and the liabilities assumed.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of certain federal income tax consequences
of the Merger to Stockholders who receive the Merger Consideration. This
summary is based on the Code and Treasury Regulations (including Proposed
Regulations and Temporary Regulations) promulgated thereunder, official
pronouncements and judicial decisions, all as in effect on the date hereof and
all of which are subject to change, possibly with retroactive effect. This
summary does not purport to discuss all tax consequences of the Merger to all
Stockholders. In particular, the summary does not discuss the tax consequences
of the Merger to any Stockholder that is subject to special tax rules, such as
any Stockholder that is an insurance company, tax-exempt organization,
financial institution, foreign person or broker dealer or who has acquired
his, her or its shares upon the exercise of options or otherwise as
compensation.
The receipt of cash by a Stockholder in exchange for shares of Common
Stock pursuant to the Merger will be a taxable transaction for federal income
tax purposes and may also be a taxable transaction under applicable state,
local, foreign or other tax laws. In general, a Stockholder will recognize a
gain or loss equal to the difference, if any, between the amount of cash
received for his, her or its stock in the Merger (i.e., $32.02 per share) and
the Stockholder's adjusted tax basis in such stock. A Stockholder will
recognize such gain or loss as of the Effective Time. In general, such gain or
loss will be a capital gain or loss, provided the Common Stock is a capital
asset in the hands of the holder at the Effective Time, and will be long-term
capital gain or loss if the Common Stock has been held for more than eighteen
months at such time, mid-term capital gain or loss if the Common Stock has
been held for more than a year but not more than eighteen months at such time,
or short-term capital gain or loss if the stock has been held for one year or
less.
BACKUP WITHHOLDING. The Company or the Exchange Agent will be
required to withhold 31% of the gross proceeds payable to a Stockholder or
other payee in the Merger unless the Stockholder or payee provides, in a
properly completed substitute Form W-9 included with the transmittal letter
(see "PROPOSAL NO. 2--ADOPTION OF THE MERGER AGREEMENT -- Payment for Shares
and Surrender of Stock Certificates"), the Stockholder's taxpayer
identification number and certifies under penalties of perjury that such
number is correct and that the Stockholder is not subject to backup
withholding, unless an exemption applies under applicable law and regulations.
<PAGE>
Therefore, unless such an exemption exists and is demonstrated in a manner
satisfactory to the Company or the Exchange Agent, in accordance with the
instructions that will accompany the substitute Form W-9, each Stockholder
should complete and sign the substitute Form W-9 that will be made available
to the Stockholder with the transmittal letter, so as to provide the
information and certification necessary to avoid backup withholding.
EACH STOCKHOLDER SHOULD CONSULT THE STOCKHOLDER'S OWN TAX ADVISOR
WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN THE
STOCKHOLDER'S INDIVIDUAL CIRCUMSTANCES AND WITH RESPECT TO THE STATE, LOCAL OR
OTHER INCOME TAX CONSEQUENCES OF THE MERGER. FURTHER, ANY STOCKHOLDER WHO IS A
CITIZEN OF A COUNTRY OTHER THAN THE UNITED STATES SHOULD CONSULT THE
STOCKHOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE TAX TREATMENT IN SUCH
COUNTRY OF THE MERGER AND WITH RESPECT TO THE QUESTION OF WHETHER THE TAX
CONSEQUENCES DESCRIBED ABOVE MAY BE ALTERED BY REASON OF THE PROVISIONS OF THE
INTERNAL REVENUE CODE APPLICABLE TO FOREIGN PERSONS OR THE PROVISIONS OF ANY
TAX TREATY APPLICABLE TO THE STOCKHOLDER.
APPRAISAL RIGHTS
Holders of record of Common Stock who properly demand appraisal of
their shares and who otherwise comply with the applicable statutory procedures
summarized herein will be entitled to appraisal rights under Section 262 of
the DGCL in connection with the Merger. The following discussion is not a
complete statement of the law pertaining to appraisal rights under the DGCL
and is qualified in its entirety by reference to the full text of Section 262
which is reprinted in its entirety as Annex II to this Proxy Statement.
Under the DGCL, record holders of shares of Common Stock who follow
the procedures set forth in Section 262 and who have not voted in favor of the
Merger will be entitled to have their shares of Common Stock appraised by the
Delaware Court of Chancery and to receive payment in cash of the "fair value"
of such shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, as determined by such court. A person having a beneficial interest
in shares of Common Stock held of record in the name of another person, such
as a broker or nominee, must act promptly to cause the record holder to follow
the steps summarized below properly and in a timely manner to perfect
appraisal rights.
Under Section 262, where a merger agreement is submitted for adoption
at a meeting of stockholders, as in the case of the Special Meeting, not less
than 20 days prior to such meeting, the company must notify each of the
holders of shares of capital stock at the close of business on the record date
for such meeting that such appraisal rights are available and include in each
such notice a copy of Section 262. This Proxy Statement constitutes such
notice and the applicable statutory provision of the DGCL is attached to this
Proxy Statement as Annex II. Any Stockholder who wishes to exercise appraisal
rights should review the following discussion and Annex II carefully because
the failure to timely and properly comply with the procedures specified in
Section 262 will result in the loss of appraisal rights under the DGCL.
A Stockholder wishing to exercise appraisal rights must deliver to
the Company, before the taking of the vote on the adoption of the Merger
Agreement at the Special Meeting, a written demand for appraisal of such
holder's shares of Common Stock and such shares must not be voted in favor of
adoption of the Merger Agreement. A holder of shares wishing to exercise such
holder's appraisal rights must be the record holder of the shares on the date
the written demand for appraisal is made and must continue to hold the shares
of record through the effective date of the Merger. Accordingly, a holder of
shares who is the record holder of shares on the date the written demand for
appraisal is made, but who thereafter transfers such shares prior to the
consummation of the Merger, will lose any right to appraisal in respect of
such shares. A holder of shares who votes against adoption of the Merger
Agreement will not be deemed to have satisfied the notice requirement of such
holder with respect to appraisal rights merely by so voting. The written
demand for appraisal must be in addition to and separate from any proxy or
vote abstaining from or against adoption of the Merger Agreement.
Only a holder of record of shares of Common Stock is entitled to
assert appraisal rights for the shares of Common Stock registered in that
holder's name. A demand for appraisal should be executed by or on behalf of
the holder of record fully and correctly, as the holder's name appears on the
stock certificates.
<PAGE>
If shares of Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
for appraisal should be made in that capacity, and if the shares of Common
Stock are owned of record by more than one person, as in a joint tenancy or
tenancy in common, the demand should be executed by or on behalf of all joint
owners. An authorized agent, including one for two or more joint owners, may
execute the demand for appraisal on behalf of a holder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, he or she is acting as agent for such owner or
owners. A record holder such as a broker who holds shares of Common Stock as
nominee for several beneficial owners may exercise appraisal rights with
respect to the shares of Common Stock held for one or more beneficial owners
while not exercising such rights with respect to the shares of Common Stock
held for other beneficial owners; in such case, the written demand should set
forth the number of shares of Common Stock as to which appraisal is sought and
the number of shares of Common Stock held in the name of the record owner.
When no number of shares is expressly mentioned, the demand will be presumed
to cover all shares held in the name of the record owner. Stockholders who
hold their shares of Common Stock in brokerage accounts or other nominee forms
and who wish to exercise appraisal rights are urged to consult with their
brokers to determine the appropriate procedures for the making of a demand for
appraisal by such nominee. All written demands for appraisal of shares of
Common Stock should be delivered to SPS Transaction Services, Inc. 2500 Lake
Cook Road, Riverwoods, Illinois 60015, Attention: Secretary, so as to be
received before the taking of the vote on the adoption of the Merger Agreement
and the Merger at the Special Meeting.
Within 10 days after the Effective Time, the Company, as the
Surviving Corporation, must send a notice as to the effectiveness of the
Merger to each person who has satisfied the appropriate provisions of Section
262. Within 120 days after the Effective Time, but not thereafter, the
Surviving Corporation or any such Stockholder who has satisfied the foregoing
conditions and is otherwise entitled to appraisal rights under Section 262,
may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares of Common Stock held by all such
Stockholders. If no such petition is filed, appraisal rights will be lost for
all Stockholders who had previously demanded appraisal of their shares of
Common Stock. Stockholders seeking to exercise appraisal rights should assume
that the Surviving Corporation will not file a petition with respect to the
appraisal of the value of shares of Common Stock and that the Surviving
Corporation will not initiate any negotiations with respect to the "fair
value" of shares of Common Stock. Accordingly, Stockholders who wish to
exercise their appraisal rights should regard it as their obligation to take
all steps necessary to perfect their appraisal rights in the manner prescribed
in Section 262.
Within 120 days after the Effective Time, any Stockholder who has
complied with the provisions of Section 262 will be entitled, upon written
request, to receive from the Surviving Corporation a statement setting forth
the aggregate number of shares of Common Stock not voted in favor of adoption
of the Merger Agreement and with respect to which demands for appraisal were
received by the Company, and the number of holders of such shares of Common
Stock. Such statement must be mailed within ten days after the written request
therefore has been received by the Surviving Corporation or within ten days
after expiration of the time for delivery of demands for appraisal under
Section 262, whichever is later.
If a petition for appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of shares
of Common Stock entitled to appraisal rights and will appraise the "fair
value" of the shares of Common Stock, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. Stockholders considering seeking appraisal should be aware that
the fair value of their shares of Common Stock as determined under Section 262
could be more than, the same as or less than the value of the Merger
Consideration that they would otherwise receive if they did not seek appraisal
of their shares of Common Stock and that investment banking opinions as to
fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262. The Delaware Supreme Court has stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community are otherwise admissible in court"
should be considered in the appraisal proceedings. In addition, Delaware
courts have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a dissenter's exclusive remedy. The Court
will also determine the amount of interest, if any, to be paid upon the
amounts to be received by persons whose shares of Common Stock have been
appraised. The costs of the action may be determined by the Court and taxed
upon the parties as the Court deems equitable. The Court may also order that
all or a portion of the expenses incurred by any holder of shares of Common
Stock in connection with an appraisal, including without limitation,
reasonable
<PAGE>
attorneys' fees and the fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all of the shares entitled
to appraisal.
Any Stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote his or her
shares of Common Stock for any purpose nor, after the Effective Time, be
entitled to the payment of dividends or other distributions thereon.
If no petition for an appraisal is filed within the time provided, or
if a Stockholder delivers to the Surviving Corporation a written withdrawal of
his or her demand for an appraisal and an acceptance of the Merger, within 60
days after the Effective Time or with the written approval of the Surviving
Corporation thereafter, then the right of such Stockholder to an appraisal
will cease and such Stockholder shall be entitled to receive the Merger
Consideration, without interest, as if he or she had not demanded appraisal of
his or her shares of Common Stock. However, no appraisal proceeding pending in
the Court of Chancery will be dismissed as to any Stockholder without the
approval of the Court, which approval may be conditioned on such terms as the
Court deems just.
STOCKHOLDERS DESIRING TO EXERCISE THEIR APPRAISAL RIGHTS SHOULD
STRICTLY COMPLY WITH THE PROCEDURES SET FORTH IN SECTION 262 OF THE DGCL.
FAILURE TO FOLLOW ANY OF SUCH PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER
OF APPRAISAL RIGHTS UNDER SECTION 262 OF THE DGCL.
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated financial data presented below for, and as
of the end of, each of the years in the five-year period ended December 31,
1997 are derived from the consolidated financial statements of the Company,
which financial statements have been audited by Deloitte & Touche LLP,
independent certified public accountants. The summary consolidated financial
data presented below for the three-month periods ended March 31, 1998 and 1997
and as of March 31, 1998 and 1997 are derived from the unaudited consolidated
financial statements of the Company included herein. In management's opinion,
the unaudited information has been prepared on a basis consistent with the
audited consolidated financial statements of the Company. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of results which may be expected for the entire year.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
31,(1) YEAR ENDED DECEMBER 31,(1)
------------------------ ------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Unaudited)
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $82,264 $90,430 $346,885 $320,920 $311,992 $245,802 $205,494
Total operating expenses 66,604 78,391 284,585 283,427 241,883 183,441 156,563
Pretax income 15,660 12,039 62,300 37,493 70,109 62,361 48,931
Income taxes 5,763 4,648 23,800 14,247 26,636 24,626 18,283
Net Income 9,897 7,391 38,500 23,246 43,473 37,735 30,648
Basic earnings per 0.36 0.27 1.41 0.86 1.60 1.40 1.14
common share
Diluted earnings per 0.36 0.27 1.41 0.85 1.59 1.38 1.12
common share
Ratio of earning to 1.9 1.6 1.8 1.5 2.0 6.0 6.3
fixed charges(2)
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,(1) AS OF DECEMBER 31,(1)
---------------- ----------------------------------------------------------
BALANCE SHEET DATA 1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Credit card loans $1,169,727 $1,498,421 $1,295,787 $1,637,507 $1,620,833 $679,857 $246,710
Total assets 1,389,753 1,628,517 1,512,403 1,760,785 1,777,607 768,493 309,537
Deposits 544,708 478,541 510,294 463,435 382,343 205,537 72,852
Due to affiliates 474,539 831,706 639,066 982,547 1,110,811 161,573 55,869
Stockholders' equity 274,076 231,971 263,035 224,392 199,210 155,704 116,581
Return on average 14.9% 13.1% 15.8% 11.0% 24.5% 27.7% 30.2%
stockholders' equity
Book value per $ 10.06 $ 8.53 $ 9.67 $ 8.26 $ 7.35 $ 5.76 $ 4.32
share-Basic
Book value per $ 9.98 $ 8.48 $ 9.60 $ 8.20 $ 7.28 $ 5.69 $ 4.27
share-Diluted
SUPPLEMENTAL DATA
Total loans(3) $1,749,727 $2,078,421 $1,875,787 $2,217,507 $2,229,992 $1,109,857 $676,710
</TABLE>
--------------------------
(1) In thousands, except percentages, ratios and per
share data.
<PAGE>
(2) For the purpose of calculating the ratio of
earnings to fixed charges, "earnings" consist of
income before income taxes and fixed charges.
"Fixed charges" consist of interest costs,
including interest on deposits, and that portion of
rent expense estimated to be representative of the
interest factor.
(3) Total loans represent both owned and securitized
credit card loans
<PAGE>
CONTROLLING PERSONS, DIRECTORS AND EXECUTIVE
OFFICERS OF MSDW, NOVUS, ACQUISITION AND
THE COMPANY
BACKGROUND OF NAMED PERSONS
The Company, MSDW, NOVUS and Acquisition have jointly filed a Rule
13E-3 Transaction Statement with the Commission with respect to the Merger.
The principal executive offices of MSDW are located at 1585 Broadway, New
York, New York 10036, telephone number (212) 761-4000. The principal executive
offices of NOVUS, Acquisition and the Company are set forth in this Proxy
Statement under the caption "SUMMARY - THE PARTIES." MSDW, NOVUS, Acquisition
and the Company are all Delaware corporations.
Set forth on Annex IV hereto for each controlling person, director
and executive officer of MSDW, NOVUS, Acquisition and the Company
(collectively, the "Named Persons") is such person's: (i) name; (ii) business
address; (iii) present principal occupation or employment, if such person is
an individual, and the name and address of the organization in which such
individual conducts such principal occupation or employment; and (iv) material
occupation, positions, offices and employments during the past five years, if
such person is an individual, and the name and address of the organizations in
which such individual conducted such material occupations, positions, offices,
and employments. All of the Named Persons are United States citizens.
During the past five years neither the Company, MSDW, NOVUS,
Acquisition nor any Named Person has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or was a party to a
civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree, or final order enjoining further violations of, or
prohibiting activities subject to, federal or state securities laws or finding
any violations of such laws.
All information in the Proxy Statement concerning the Named Persons
and any affiliates and associates referred to herein is to the best knowledge
of the Company.
PAST CONTACTS, TRANSACTIONS, OR NEGOTIATIONS
Except as described in this Proxy Statement, since January 1, 1996,
neither MSDW, NOVUS, Acquisition nor any Named Person has had any contacts,
negotiations or transactions with the Company concerning any acquisition,
acquisition of securities, consolidation, election of directors, merger,
tender offer, or sale or other transfer of a material amount of assets.
<PAGE>
PLANS OR PROPOSALS
Except as described in this Proxy Statement, neither the Company,
MSDW, NOVUS, Acquisition nor any Named Person has any plan or proposal
concerning any extraordinary corporate transaction involving the Company, any
sale or transfer of a material amount of the Company's assets, any change in
the Board or management, any material change in the Company's present divided
rate or the Company's present policy on indebtedness or capitalization, or any
other change in the Company's corporate structure or business.
INTEREST IN THE COMPANY'S SECURITIES
Except as described in this Proxy Statement, neither the Company,
MSDW, NOVUS, Acquisition, any pension, profit sharing, or similar plan of the
Company, MSDW, NOVUS, or Acquisition, any Named Person, nor any associate or
majority owned subsidiary of the Company, MSDW, NOVUS, or Acquisition
beneficially owns any shares of the Common Stock or has engaged in any
transaction involving the shares of Common Stock during the past 60 days. The
trustee for the SPS START (the Company's 401(k) plan) purchased 16,678 shares
of Common Stock on the open market on May 8, 1998. In addition, the trustee
for the Company's Tax Deferred Equity Participation Plan beneficially owns
33,486 shares of Common Stock.
CONTRACTS, ARRANGEMENTS, OR UNDERSTANDINGS CONCERNING THE COMPANY'S SECURITIES
Except as described in this Proxy Statement, neither the Company,
MSDW, NOVUS, Acquisition, nor any Named Person has any arrangement, contract,
relationship, or understanding with any person with respect to any security of
the Company, including any arrangement, contract, relationship, or
understanding concerning the transfer or the voting of any security of the
Company, any joint venture, any loan or option arrangement, any put or call,
any guarantee of a loan, any guarantee against loss, or any giving or
withholding of any authorization, consent, or proxy.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT WITH NOVUS
The Company and NOVUS are parties to a Management Services Agreement,
dated as of January 1, 1992 (the "Management Services Agreement"), pursuant to
which NOVUS furnishes certain executive, accounting, financial, legal, tax,
organizational, regulatory, insurance, personnel, employee benefit plans,
management information systems, sales, marketing, purchasing, real estate and
other services to the Company upon the Company's request. The nature and
extent of the services provided by NOVUS under the Management Services
Agreement and the annual rates charged for such services are made in
accordance with the same policies and procedures under which NOVUS establishes
such charges for its other subsidiaries and divisions. The Management Services
Agreement is automatically renewed for successive one-year terms unless
terminated as of the end of any term by either party upon 180 days written
notice. The rates charged historically have reflected the Company's
proportionate share of direct expenses (based upon estimates of time the
various personnel have allocated to the Company) and the Company's
proportionate share of allocated expenses (based upon a pre-determined formula
that considers the relative level of personnel, revenues and income of the
Company). The Management Services Agreement does not prohibit the Company from
obtaining similar services from third parties.
FINANCING AGREEMENTS WITH MSDW; INTEREST RATE SWAP AND CAP AGREEMENTS
Effective September 1, 1995, the Company and MSDW entered into an
Amended and Restated Borrowing Agreement (the "Borrowing Agreement"), an
Amended and Restated Bridge Agreement and a facility fee letter agreement (the
"Facility Fee Agreement") (collectively, the "Financing Agreements"), pursuant
to which MSDW has agreed to provide loans to the Company. Such loans may be
either long- or short-term, as determined by MSDW and the Company, but will in
any event mature upon the termination of the Borrowing Agreement. The maximum
amount available under the Borrowing Agreement is $1.1 billion. The interest
rate to be paid by the Company is equal to MSDW's actual cost of funds. The
Borrowing Agreement expires on November 20, 1998.
In connection with the Company's financing agreements with MSDW,
under the Facility Fee Agreement, the Company has agreed to pay certain
monthly facility fees to MSDW. In addition, the Company or SPS Payment may
enter into interest rate swap and cap agreements from time to time with either
MSDW or NOVUS pursuant to which the cost of funds borrowed on a floating rate
basis by the Company, SPS Payment or HSB may effectively be fixed.
THIRD PARTY PROCESSING AND COOPERATIVE NETWORK SERVICE AGREEMENT AND TERMINAL
SERVICE AGREEMENT WITH NOVUS SERVICES
Pursuant to a Third Party Processing and Cooperative Network Service
Agreement, dated as of January 2, 1992, as amended (the "Processing and
Service Agreement"), NOVUS Services, Inc. ("NOVUS Services," successor to
Discover Card Services, Inc.), an affiliated entity, and SPS Payment share
electronic data links for VISA, MasterCard and American Express for the
purposes of authorizing and completing NOVUS Services' transaction processing
services. Effective January 1, 1998, SPS Payment and NOVUS Services amended
the Processing and Service Agreement to extend its initial term through
January 1, 2003. The Processing and Service Agreement will continue in effect
thereafter unless terminated by either party upon 180 days written notice. In
addition, pursuant to a Terminal Service Agreement, dated as of January 1,
1992, as amended (the "Terminal Service Agreement"), SPS Payment provides
terminal maintenance, repair and preparation services to NOVUS Services. The
Terminal Service Agreement is renewed for successive one-year terms unless the
parties fail to agree on pricing for the additional term at least 180 days
prior to the commencement of any additional term. The rates charged for the
services provided by and to SPS Payment under the Processing and Service
Agreement are determined by an allocation of costs (based on proportionate
transaction volume). Such rates can only be changed by the mutual agreement of
the parties. Under the Terminal Service Agreement, maintenance and repair fees
are charged on a per item basis.
<PAGE>
SYSTEM ACCESS AGREEMENT WITH NOVUS SERVICES
SPS Payment and NOVUS Services both participate in the transaction
processing industry. Each sells and leases terminals to its customers and
provides credit card transaction processing services through these terminals.
Both processing programs utilize the same communications network. NOVUS
Services and SPS Payment entered into a System Access Agreement, effective
August 1, 1992, as amended (the "System Access Agreement"). Pursuant to the
System Access Agreement, SPS Payment provides NOVUS Services with access to
certain applications of SPS Payment's point-of-sale transaction processing
system that will assist NOVUS Services in its marketing of third-party
transaction processing services. NOVUS Services pays SPS Payment a per
transaction fee for all point-of-sale transactions processed through the
network by SPS Payment and NOVUS Services for NOVUS Services clients, except
for those transactions generated by certain large NOVUS Services clients that
have a direct interface with the NOVUS Services authorization system. NOVUS
Services has agreed to annual minimum usage requirements. As contemplated by
the agreement, NOVUS Services may compete with SPS Payment in the processing
of certain transactions, although SPS Payment will receive fees from NOVUS
Services for such transactions. The term of the System Access Agreement
expires on August 1, 2000.
SERVICE AGREEMENT WITH NOVUS SERVICES
Effective September 1, 1996, SPS Payment entered into a Service
Agreement (the "Service Agreement") with NOVUS Services in connection with
NOVUS Services' co-brand and affinity card programs, whereby SPS Payment
provides NOVUS Services credit card processing services, including credit
review, authorization, collection and other related services for the specified
programs. NOVUS Services pays SPS Payment a fee based upon the services
provided, which fee can be increased if NOVUS Services does not achieve
certain monthly minimum usage requirements. As long as NOVUS Services meets
such minimum usage requirements, SPS Payment has agreed not to provide certain
similar services to any third-party direct competitor of NOVUS Services. The
initial term of the Service Agreement expires on the date two years after a
specified minimum usage requirement is first achieved. Thereafter, the term of
the Agreement will be renewed for additional one-year terms unless terminated
by either party upon 90 days written notice prior to the end of any term.
DEBIT CARD PROCESSING LETTER AGREEMENT AND SALES LEAD LETTER AGREEMENT WITH
NOVUS SERVICES
Pursuant to a Debit Card Processing Letter Agreement, dated August
30, 1994 (the "Processing Letter Agreement"), NOVUS Services forwards requests
for debit card transaction processing services from its merchant customers to
SPS Payment, and SPS Payment provides such services pursuant to separate
agreements with such merchants. SPS Payment then pays NOVUS Services a per
transaction fee for each debit transaction so processed (for which SPS Payment
receives a separate fee from the merchant customers), and a per location fee
for each new merchant location established on SPS Payment's system through the
Processing Letter Agreement. The Processing Letter Agreement had an initial
term of three years and will remain in effect for successive one-year terms
thereafter unless terminated by either party upon 90 days written notice
before the end of any term. In addition, pursuant to a Sales Lead Letter
Agreement, dated January 26, 1995 (the "Sales Lead Letter Agreement"), NOVUS
Services provides SPS Payment with sales lead referrals for merchants in
connection with SPS Payment's electronic transaction processing services
business. For each such referred merchant, SPS Payment pays NOVUS Services an
amount equal to 10% of the annual net profit attributed to the transaction
processing services provided by SPS Payment to such merchant. The Sales Lead
Letter Agreement is renewed for one-year terms each January 1 unless
terminated by either party upon 60 days written notice prior to the end of any
term.
MARKETING SERVICES AGREEMENT WITH NOVUS
SPS Payment and NOVUS are parties to an Amended and Restated
Marketing Services Agreement, dated January 1, 1996, as amended (the
"Marketing Services Agreement"), pursuant to which SPS Payment provides
marketing and sales services to NOVUS for the benefit of MountainWest. As
compensation for such services, NOVUS has agreed to pay to SPS Payment an
annual fee based on MountainWest's after-tax return on certain of its assets.
The Marketing Services Agreement will continue until the day preceding the
earliest to occur of (i) the date SPS Payment no longer provides services to
MountainWest under the MountainWest Service Agreement (as hereinafter
defined); (ii) the assignment of the MountainWest Service Agreement to a
third-party that is not an affiliate of NOVUS; or (iii) the date on which SPS
Payment and NOVUS are no longer affiliates.
<PAGE>
SERVICE AGREEMENT WITH MOUNTAINWEST
SPS Payment and MountainWest are parties to a Service Agreement,
dated as of November 1, 1990, as amended (the "MountainWest Service
Agreement"), pursuant to which SPS Payment provides an accounts receivable
system and various credit services for MountainWest. Under the MountainWest
Service Agreement, SPS Payment administers the programs for private label
credit cards issued by MountainWest, which owns the credit card loans that are
generated through use of such credit cards. SPS Payment generally charges
MountainWest one all-inclusive fee for the services it provides with respect
to consumer accounts, and one all-inclusive fee for those it provides with
respect to commercial accounts, in each case under the programs owned by
MountainWest. The fee for commercial accounts is generally based on the total
number of such accounts and related customer inquiries under the programs for
such accounts. The fee for consumer accounts is based on a percentage of the
outstanding receivables relating to consumer accounts under the programs for
such accounts. These all-inclusive fees are derived from historical component
pricing for individual services. Effective January 1, 1996, SPS Payment and
MountainWest amended the MountainWest Service Agreement to extend its term
through December 31, 1998. The term of the MountainWest Service Agreement
continues thereafter for consecutive one-year periods unless terminated by
either party upon 180 days written notice prior to January 1 of any year.
OPERATIONAL OUTSOURCING SERVICE AGREEMENT WITH MOUNTAINWEST
Pursuant to a Service Agreement, dated as of February 1, 1994, as
amended (the "Outsourcing Service Agreement"), between SPS Payment and
MountainWest, SPS Payment handles customer telephone inquiries in connection
with MountainWest's Prime Option credit card program, including inquiries
regarding matters such as account activation and balances, sales activity,
payment history, billing statements and lost and stolen cards. SPS Payment
generally charges MountainWest on a per call basis based on volume service
levels and the type of services provided. The fees for services are consistent
with the pricing methodology that SPS Payment uses to charge other operational
outsourcing clients. The initial term of the Outsourcing Service Agreement
expired on February 1, 1998 but the Agreement has been automatically renewed
for a one-year period until February 1, 1999 and will be automatically renewed
for additional one-year terms unless terminated by either party upon 60 days
written notice prior to the term's expiration. MountainWest may also terminate
the Outsourcing Service Agreement upon 60 days notice.
HEADQUARTERS LEASE WITH NOVUS
SPS Payment leases its headquarters, which cover approximately 94,950
square feet in Riverwoods, Illinois, from NOVUS pursuant to a Lease Agreement,
dated February 1, 1993 (the "Lease Agreement"), for a specified base rent that
includes real estate taxes and administrative and operating expenses and is
subject to adjustments so that the base rental rate will not exceed the base
rental rate charged to any NOVUS subsidiary or affiliate that is also
headquartered in the building. Effective February 1, 1997, SPS Payment and
NOVUS amended the Lease Agreement to extend its term through January 31, 2000,
to increase the square footage under the Lease Agreement, and to provide that
the Lease Agreement is renewable at SPS Payment's option for one three-year
term at a specified base rental per square foot. SPS Payment also has a lease
for approximately 2,400 additional square feet of office space in the same
building in Riverwoods, Illinois, from NOVUS pursuant to a Lease Agreement
made January 1, 1997, for a specified base rent that includes real estate
taxes and administrative and operating expenses and is subject to adjustments
so that the base rental will not exceed the base rental charged to any NOVUS
subsidiary or affiliate that is also headquartered in the building. The term
of the lease covering this additional space also expires January 31, 2000, and
the lease is renewable at SPS Payment's option for one three-year term at a
specified base rental per square foot.
SERVICE AGREEMENT WITH NEW CASTLE
SPS Payment and Discover Card Bank of New Castle ("New Castle") are
parties to a Service Agreement, dated as of January 1, 1991 (the "New Castle
Service Agreement"), pursuant to which SPS Payment provides New Castle with an
accounts receivable system and performs certain credit services for New Castle
in connection with its private label credit card program. As compensation for
such services, New Castle pays SPS Payment a fee calculated as a specified
percentage of the monthly average of the accounts receivable balance for each
private label program serviced pursuant to this Agreement. The term of the New
Castle Service Agreement commenced January
<PAGE>
1, 1991, and continues in effect thereafter unless terminated by either party by
notice given at least 180 days prior to an anniversary date of the New Castle
Service Agreement.
<PAGE>
HISTORICAL MARKET PRICE AND DIVIDEND DATA
Shares of Common Stock are listed for trading on the NYSE under the
symbol "PAY." The table below sets forth, for the calendar quarters indicated,
the reported high and low sale prices of the Common Stock as quoted on the
NYSE. As of the Record Date, the Company had ___ holders of record of Common
Stock. The closing market price for Common Stock on April 17, 1998, the last
trading day prior to the announcement of the proposed Sale, was $33.00. On
______, 1998, the latest practicable trading day prior to the date of this
Proxy Statement, the closing market price for the Common Stock was $_____. At
the Effective Time, the shares of Common Stock will cease to be traded on the
NYSE.
The Company has never paid any cash dividends on the Common Stock.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1996
First Quarter $32.50 $28.75
Second Quarter 30.75 17.00
Third Quarter 18.13 13.50
Fourth Quarter 18.75 14.00
YEAR ENDED DECEMBER 31, 1997
First Quarter 19.50 15.00
Second Quarter 20.88 15.00
Third Quarter 23.50 18.13
Fourth Quarter 23.94 19.38
YEAR ENDED DECEMBER 31, 1998
First Quarter 29.63 19.75
Second Quarter (through June 30, 1998) 34.13 27.31
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information with respect to the outstanding shares of
Common Stock and of common stock of MSDW beneficially owned by each director
of the Company, the Chief Executive Officer and the four other most highly
compensated executive officers of the Company, the directors and executive
officers of the Company as a group and all beneficial owners of more than 5%
of the Common Stock is furnished as of December 31, 1997. As of December 31,
1997, the Company was a 73.3% majority owned subsidiary of NOVUS, which in
turn is a wholly owned, direct subsidiary of MSDW.
<TABLE>
<CAPTION>
COMPANY MSDW
COMMON STOCK COMMON STOCK
------------------------------------- --------------- ------ ---------------
NUMBER OF PERCENT OF NUMBER OF PERCENT
NAME SHARES (1) CLASS (2) SHARES (1) OF CLASS (2)
------------- ------------- ------ ---------------- --------------- ------ ---------------
<S> <C> <C> <C> <C>
Robert W. Archer................... 97,614 (3) * 67,400 (4) *
Richard F. Atkinson................ 87,590 (5) * 98,560 (6) *
Serge Uccetta...................... 13,170 (7) * 5,816 (8) *
David J. Peterson.................. 22,478 (9) * 4,129 (10) *
Robert L. Wieseneck................ 209,036 (11) * 246,970 (12) *
Frank T. Cary...................... 15,508 (13) * 0 --
Charles F. Moran................... 8,395 (14) * 19,076 (15) *
Mitchell M. Merin.................. 500 * 554,718 (16) *
Philip J. Purcell.................. 22,052 (17) * 2,659,866 (18) *
Thomas C. Schneider................ 1,002 * 1,117,801 (19) *
Dennie M. Welsh.................... 7,404 (20) * 0 --
Christine A. Edwards............... 2,002 * 571,976 (21) *
NOVUS Credit Services Inc.......... 20,000,000 73.3 0 --
2500 Lake Cook Road
Riverwoods, IL 60015
All directors and executive
officers as a group (17 persons)... 564,270 2.1 5,163,495 *
- ---------------------
</TABLE>
1. To the knowledge of the Company, each holder has sole voting and
investment power with respect to the shares listed unless otherwise
indicated. The number of shares includes shares of Common Stock owned
through the SPS START and the Company's Employee Stock Purchase Plan and
shares of MSDW common stock owned through the SPS START, the Dean Witter
START Plan (Savings Today Affords Retirement Tomorrow) and the MSDW
Employee Stock Purchase Plan as of December 31, 1997. The number of
shares has been rounded to the nearest whole share.
2. Shares subject to options exercisable within 60 days of December 31, 1997
are considered outstanding for the purpose of determining the percent of
the class held by the holder of such option, but not for the purpose of
computing and the percentage held by others. Percentages less than one
percent are denoted by an asterisk.
3. Includes 84,384 shares subject to options and 10,000 shares held through
a partnership.
4. Includes 57,400 shares subject to options.
5. Includes 76,916 shares subject to options.
6. Includes 84,991 shares subject to options.
7. Includes 12,333 shares subject to options.
8. Includes 5,500 shares subject to options.
9. Includes 21,333 shares subject to options.
10. Includes 1,625 shares subject to options.
<PAGE>
11. Includes 166,908 shares subject to options, 15,763 owned jointly with Mr.
Wieseneck's spouse, 10,000 shares owned jointly with his brother and
12,936 shares owned by Mr. Wieseneck's children.
12. Includes 202,947 shares subject to options, 33,716 shares owned jointly
with Mr. Wieseneck's spouse, 6,206 shares owned jointly with his brother
and 4,101 shares owned by Mr. Wieseneck's children.
13. Includes 5,912 shares subject to options.
14. Includes 4,248 shares subject to options.
15. Includes 19,076 shares owned jointly with Mr. Moran's spouse.
16. Includes 304,403 shares subject to options.
17. Includes 2,050 shares held in custodial accounts on behalf of Mr.
Purcell's children for which he is custodian, as to which Mr. Purcell
disclaims beneficial ownership.
18. Includes (1) 22,605 shares owned by Mr. Purcell's spouse, (2) 10,344 held
in custodial accounts on behalf of Mr. Purcell's children for which he is
custodian, as to which Mr. Purcell disclaims beneficial ownership, (3)
1,407,737 shares subject to options and (4) 56,055 shares corresponding
to stock unit awards granted under certain of MSDW's equity-based
employee benefit plans. The shares corresponding to the stock unit awards
are held in trust and subject to certain voting agreements between MSDW,
various employees of MSDW and the trustee of the trust that holds the
shares on behalf of such employees.
19. Includes (1) 489,344 shares subject to options and (2) 10,834 shares
corresponding to stock unit awards granted under certain of MSDW's
equity-based employee benefit plans. The shares corresponding to the
stock unit awards are held in trust and subject to certain voting
agreements between MSDW, various employees of MSDW and the trustee of the
trust that holds the shares on behalf of such employees.
20. Includes 7,404 shares subject to options.
21. Includes (1) 339,372 shares subject to options and (2) 9,771 shares
corresponding to stock unit awards granted under certain of MSDW's
equity-based employee benefit plans. The shares corresponding to the
stock unit awards are held in trust and subject to certain voting
agreements between MSDW, various employees of MSDW and the trustee of the
trust that holds the shares on behalf of such employees.
FEES AND EXPENSES
The Company estimates that the fees and expenses in connection with
the Sale and Merger will be as set forth below. The Company will pay all of
these fees and expenses except that MSDW has agreed to contribute $500,000 to
the Company to defray such expenses.
Filing Fees..........................................$179,139
Investment Banking Fees and Expenses...............$4,442,258
Incentive Amount...................................$8,049,523
Legal Fees and Expenses............................$1,222,000
Printing and Mailing Costs............................$65,000
Exchange Agent Fees and Expenses......................$15,000
Miscellaneous........................................ $90,080
TOTAL .........................................$14,063,000
The Company will reimburse banks, custodians, fiduciaries, nominees,
securities dealers, trust companies and other persons for their reasonable
expenses in forwarding this proxy statement to the Stockholders. The Company
will also reimburse such persons for their reasonable expenses in forwarding
to the beneficial owners of the common stock the letter of transmittal and the
instructions thereto that the Exchange Agent will send to the Stockholders
following consummation of the Merger. The Company has also agreed to indemnify
the Exchange Agent against certain liabilities and expenses in connection with
the Merger.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"), including the Rule 13-E Transaction Statement on Schedule 13E-3
filed in connection with the Merger. Such reports and other information may be
inspected and copied or obtained by mail upon payment of the Commission's
prescribed rates at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W. Room 1024, Washington, D.C. 20549 and at
the following regional offices of the Commission: New York Regional Office, 7
World Trade Center, New York, New York 10048, and Chicago Regional Office, 500
West Madison Avenue, 14th Floor, Chicago, Illinois 60661. Certain reports,
proxy statements and other information filed by the Company may also be
obtained at the Commission's World Wide Web site, located at
http://www.sec.gov. The Company also files reports and other information with
the NYSE. Such reports and other information may be inspected at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
The Commission allows us to "incorporate by reference" information
into this Proxy Statement, which means that we can disclose important
information to you by referring you to another document filed separately with
the Commission. The information incorporated by reference is deemed to be part
of this Proxy Statement, except for any information superseded by information
in this Proxy Statement. This Proxy Statement incorporates by reference the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, Amendment No.1 thereto on Form 10-K/A filed on April 30, 1998, Quarterly
Report on Form 10-Q for quarter ended March 31, 1998 and Current Reports on
Form 8-K dated April 22, 1998 and May 5, 1998. These documents contain
important information about the Company and its financial performance.
We are also incorporating by reference additional documents that we
file with the Commission between the date of this Proxy Statement and date of
the Special Meeting.
Documents incorporated by reference are available from us without
charge, excluding all exhibits unless we have specifically incorporated by
reference an exhibit in this Proxy Statement. Stockholders may obtain
documents incorporated by reference in this Proxy Statement by requesting them
in writing or by telephone from SPS Transaction Services Inc., 2500 Lake Cook
Road, Riverwoods, Illinois 60015, Attention: Investor Relations, (847)
405-3400.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP serves as the Company's independent public
accountants. A representative of Deloitte & Touche LLP will be at the Special
Meeting to answer questions, as appropriate, by Stockholders and will have the
opportunity to make a statement if so desired.
OTHER MATTERS
The Board of Directors knows of no other matter to be acted upon at
the meeting. However, if any other matters are properly brought before the
meeting, the persons named in the accompanying form of proxy will vote thereon
in accordance with their best judgment, unless such authority is withheld.
BY ORDER OF THE BOARD OF DIRECTORS
SPS TRANSACTION SERVICES, INC.
Riverwoods, Illinois
___________, 1998
<PAGE>
ANNEX I
OPINION OF FINANCIAL ADVISOR
PRELIMINARY DRAFT FOR
INFORMATION PURPOSES ONLY
July __, 1998
Board of Directors
SPS Transaction Services, Inc.
2500 Lake Cook Road
Riverwoods, IL 60015
Members of the Board:
We understand that SPS Transaction Services, Inc. ("SPS" or the
"Company") and Associates First Capital Corporation ("Associates") have
entered into a Stock Purchase Agreement dated as of April 18, 1998 (the "Stock
Purchase Agreement") which provides for the sale (the "Sale") by SPS to
Associates of all the issued and outstanding capital stock of SPS Payment
Systems, Inc. and Hurley State Bank (collectively, the "Subsidiaries") for
$895.7 million in cash (the "Aggregate Consideration"). We further understand
that, at or immediately prior to the closing of the Sale, the Subsidiaries
shall discharge in full all intercompany debt due to SPS or its affiliates
which is outstanding as of the closing. In addition, SPS and Sail Acquisition,
Inc., ("Sail Acquisition"), a wholly owned subsidiary of NOVUS Credit
Services, Inc. ("NOVUS"), have entered into an Agreement and Plan of Merger,
dated as of June 15, 1998 (the "Merger Agreement"), which provides for the
merger (the "Merger") of Sail Acquisition with an into SPS as soon as
practicable after the closing of the Sale. Pursuant to the Merger, each issued
and outstanding share of Common Stock, par value $1 per share, of SPS (the
"SPS Common Stock"), other than shares held by NOVUS or its affiliates or as
to which dissenters' rights have been perfected, will be converted into the
right to receive not less than $32 in cash (the "Per Share Consideration").
The terms and conditions of the Sale and the Merger are more fully set forth
in the Stock Purchase Agreement and Merger Agreement, respectively.
You have asked for our opinion as to whether (i) the Aggregate
Consideration to be paid by Associates pursuant to the Stock Purchase
Agreement is fair from a financial point of view to SPS and (ii) the Per Share
Consideration to be paid to holders of shares of SPS Common Stock (other than
NOVUS) pursuant to the Merger Agreement is fair from a financial point of view
to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements
and other information of SPS;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning SPS prepared by the
management of SPS;
(iii) analyzed certain financial projections prepared by the
management of SPS;
(iv) discussed the past and current operations and financial
condition and the prospects of SPS with senior executives
of SPS;
(v) reviewed the reported prices and trading activity of SPS
Common Stock;
(vi) compared the financial performance of SPS and the prices
and trading activity of SPS Common Stock with that of
certain other comparable publicly-traded companies and
their securities;
<PAGE>
(vii) reviewed the financial terms, to the extent publicly
available, of certain comparable precedent transactions;
(viii) participated in discussions and negotiations among
representatives of SPS and Associates and their financial
and legal advisors;
(ix) reviewed the Stock Purchase Agreement, Merger Agreement and
certain related documents; and
(x) performed such other analyses and considered such other
factors as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of SPS.
We have not made any independent valuation or appraisal of the assets or
liabilities of SPS, nor have we been furnished with any such appraisals. In
addition, we have assumed the Sale and the Merger will be consummated in
accordance with the terms set forth in the Stock Purchase Agreement and Merger
Agreement, respectively. Our opinion is necessarily based on economic, market
and other conditions as in effect on, and the information made available to us
as of, the date hereof.
We have acted as financial advisor to the Board of Directors of SPS
in connection with this transaction and will receive a fee for our services.
Morgan Stanley & Co. Incorporated is an affiliate of Morgan Stanley Dean
Witter & Co. ("Morgan Stanley"), which owns approximately 73.3% of the
outstanding shares of Common Stock of SPS, and five officers of Morgan Stanley
or its affiliates, including the Chairman of the Board and Chief Executive
Officer of Morgan Stanley are members of the Board of Directors of SPS. In
addition, the Chairman of the Board and Chief Financial Officer of SPS is an
officer and director of Morgan Stanley. In the past, Morgan Stanley & Co.
Incorporated and its affiliates have provided financial advisory and financing
services for SPS and have received fees for the rendering of these services.
It is understood that this letter is for the information of the Board
of Directors of SPS and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing with the Securities and Exchange Commission in
connection with the Sale. In addition, we express no opinion or recommendation
as to how holders of SPS Common Stock should vote in connection with the Sale
and the Merger.
Based on the foregoing, we are of the opinion on the date hereof that
(i) the Aggregate Consideration to be paid by Associates pursuant to the Stock
Purchase Agreement is fair from a financial point of view to SPS and (ii) the
Per Share Consideration to be paid to holders (other than NOVUS) of shares of
SPS Common Stock pursuant to the Merger Agreement is fair from a financial
point of view to such holders.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:______________________________
R. Bradford Evans
Managing Director
<PAGE>
ANNEX II
SECTION 262 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
262 APPRAISAL RIGHTS. - (a) any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to ss.228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder " means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of
a nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or
more shares, or fractions thereof, solely of stock of a corporation, which
stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class
or series of stock of a constituent corporation in a merger or consolidation
to effected pursuant to ss.251 (other than a merger effected pursuant to
ss.251(g) of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by
more than 2,000 holders; and further provided that no appraisal rights shall
be available for any shares of stock of the constituent corporation surviving
a merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of
ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss.251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a., b.
and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss.253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
<PAGE>
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those set
forth in subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to ss.228
or ss.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for any
or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section; provided
that, if the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the effective
date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within
10 days after such effective date; provided, however, that if such second
notice is sent more than 20 days following the sending of the first notice,
such second notice need only be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is required to give
either notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the notice is
given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the
<PAGE>
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and place
fixed for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the list
at the addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
<PAGE>
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
120, L. `97, eff. 7-1-97.)
<PAGE>
ANNEX III
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of June 15, 1998, is
entered into between SPS Transaction Services, Inc., a Delaware corporation
("SPS"), and Sail Acquisition, Inc., a Delaware corporation ("Acquisition").
SPS and Acquisition are hereinafter sometimes collectively referred to as the
"Constituent Corporations."
W I T N E S S E T H :
WHEREAS, SPS and Acquisition are corporations duly organized and
existing under the laws of the State of Delaware, governed by the provisions
of the General Corporation Law of the State of Delaware ("DGCL") and of their
respective Certificates of Incorporation and By-laws;
WHEREAS, on the date of this Agreement, SPS has authority to issue
40,100,000 shares of capital stock, divided into two classes, namely: 100,000
shares of preferred stock, par value $1 per share ("Preferred Stock"), and
40,000,000 shares of common stock, par value $1 per share ("Common Stock");
WHEREAS, on the date of this Agreement, NOVUS Credit Services Inc.
("Parent") is directly or indirectly the beneficial owner of 20,000,000 shares
of Common Stock (the "Control Shares");
WHEREAS, Acquisition is a wholly owned subsidiary of Parent;
WHEREAS, SPS has entered into a Stock Purchase Agreement, dated April
18, 1998, with Associates First Capital Corporation ("Associates") pursuant to
which SPS has agreed to sell to Associates substantially all of SPS's assets,
consisting of all of the issued and outstanding capital stock of SPS's two
subsidiaries, SPS Payment Systems, Inc. and Hurley State Bank, for a purchase
price of $895,696,661 in cash (the "Sale");
WHEREAS, the Board of Directors of SPS has ordered the distribution
to the stockholders of SPS other than Parent of their proportionate share of
the net proceeds from the Sale;
WHEREAS, the respective Boards of Directors of SPS and Acquisition
have, by resolutions duly adopted, approved this Agreement;
WHEREAS, Parent has adopted this Agreement as the sole stockholder
of Acquisition; and
WHEREAS, the Board of Directors of SPS has directed that this
Agreement be submitted to a vote of its stockholders;
NOW, THEREFORE, in consideration of the mutual agreements and
covenants set forth herein, SPS and Acquisition hereby agree as follows:
1. Merger. Acquisition shall be merged with and into SPS (the
"Merger"), and SPS shall be the surviving corporation (hereinafter sometimes
referred to as the "Surviving Corporation"). The Merger shall become effective
upon the date and at the time of filing of a certificate of merger with the
Secretary of State of the State of Delaware (the "Effective Time").
2. Governing Documents. The Certificate of Incorporation of SPS, as
in effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation without change or amendment until
thereafter amended in accordance with the provisions thereof and applicable
laws, and the By-laws of SPS, as in effect immediately prior to the Effective
Time, shall be the By-laws of the Surviving Corporation without change or
amendment until thereafter amended in accordance with the provisions thereof,
of the Certificate of Incorporation of the Surviving Corporation and
applicable laws.
<PAGE>
3. Succession. At the Effective Time, the separate existence of
Acquisition shall cease, and SPS shall become entitled to all the rights,
privileges, powers and franchises of a public and private nature, and be
subject to all the obligations, duties, restrictions and disabilities of each
of the Constituent Corporations; and all property, real, personal and mixed,
and all debts due to each of the Constituent Corporations on whatever account,
as well as stock subscriptions and all other things in action belonging to
each of the Constituent Corporations, shall be vested in the Surviving
Corporation; and all and every other interest shall be thereafter as
effectually the property of the Surviving Corporation as they were of the
respective Constituent Corporations; and the title to any real estate vested,
by deed or otherwise, in either of such Constituent Corporations shall not
revert or be in any way impaired by reason of the Merger, but all rights of
creditors and all liens upon any property of Acquisition shall be preserved
unimpaired. To the extent permitted by law, any claim existing or action or
proceedings pending by or against either of the Constituent Corporations may
be prosecuted as if the Merger had not taken place. All debts, liabilities and
duties of the respective Constituent Corporations shall thenceforth attach to
the Surviving Corporation and may be enforced against it to the same extent as
if such debts, liabilities and duties had been incurred or contracted by it.
All corporate acts, plans, policies, agreements, arrangements, approvals and
authorizations of Acquisition, its stockholder, Board of Directors and
committees thereof, officers and agents which were valid and effective
immediately prior to the Effective Time, shall be taken for all purposes as
the acts, plans, policies, agreements, arrangements, approvals and
authorizations of the Surviving Corporation and shall be as effective and
binding thereon as the same were with respect to Acquisition. The employees
and agents of Acquisition shall become the employees and agents of the
Surviving Corporation and continue to be entitled to the same rights and
benefits which they enjoyed as employees and agents of Acquisition. The
requirements of any plans or agreements of Acquisition involving the issuance
or purchase by Acquisition of certain shares of its capital stock shall be
satisfied by the issuance or purchase of a like number of shares of the
Surviving Corporation.
4. Directors. The members at the Effective Time of the Board of
Directors of SPS shall thereafter be the members of the Board of Directors of
the Surviving Corporation until removed or replaced in accordance with the
provisions of the Surviving Corporation's By-laws, Certificate of
Incorporation and applicable laws.
5. Further Assurances. From time to time, as and when required by the
Surviving Corporation or by its successors or assigns, there shall be executed
and delivered on behalf of Acquisition such deeds and other instruments, and
there shall be taken or caused to be taken by it all such further and other
action, as shall be appropriate, advisable or necessary in order to vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation the
title to and possession of all property, interests, assets, rights,
privileges, immunities, powers, franchises and authority of Acquisition, and
otherwise to carry out the purposes of this Agreement, and the officers and
directors of the Surviving Corporation are fully authorized in the name and on
behalf of Acquisition or otherwise, to take any and all such action and to
execute and deliver any and all such deeds and other instruments.
6. Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof:
(a) each share of Common Stock issued and outstanding
immediately prior to the Effective Time, other than the Control
Shares, shall be cancelled and be converted into, and become the
right to receive: (i) in the case of such shares other than
Dissenting Shares (defined below), upon compliance with the
conditions set forth in Section 9(b), a cash payment equal to $32.02
(the "Merger Consideration"), without interest; and (ii) in the case
of Dissenting Shares, the consideration set forth in Section 7
hereof;
(b) each Control Share issued and outstanding immediately
prior to the Effective Time, shall continue to be an issued and
outstanding share of capital stock of the Surviving Corporation, with
the same rights and privileges attached to such share immediately
prior to the Effective Time, but shall not be entitled to any
payment, consideration or other distribution by reason of the Merger;
and
(c) each share of capital stock of Acquisition, issued and
outstanding immediately prior to the Effective Time, shall be
cancelled and extinguished and no consideration shall be paid
therefor.
7. Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, shares of Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by stockholders
that have not voted such shares in favor of the Merger but have, instead,
delivered a written demand for the appraisal
<PAGE>
of such shares in the manner provided in the DGCL (such shares, the "Dissenting
Shares") shall not be converted into or represent the right to receive the
Merger Consideration and the holders thereof shall only be entitled to such
rights as are granted by Section 262 of the DGCL. Each holder of Dissenting
Shares that becomes entitled to payment for such shares as pursuant to Section
262 of the DGCL shall receive payment therefor from the Surviving Corporation in
accordance with the DGCL; provided however, that (i) if any such holder of
Dissenting Shares shall have failed to establish that it is entitled to
appraisal rights as provided in Section 262 of the DGCL, or (ii) if any such
holder of Dissenting Shares shall have effectively withdrawn the demand for
appraisal of such shares or lost the right to appraisal and payment of such
shares under Section 262 of the DGCL, or (iii) if neither the Surviving
Corporation nor such holder of Dissenting Shares shall have filed a petition
demanding a determination of the value of all Dissenting Shares within the time
provided in Section 262 of the DGCL, such holder or holders (as the case may be)
shall forfeit the right to appraisal of such shares and each such share of
Common Stock shall thereupon be deemed to have been converted, as of the
Effective Time, into and represent the right to receive from the Surviving
Corporation the Merger Consideration, without interest thereon, as provided in
Section 6 hereof.
8. Condition to Merger. The consummation of the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) consummation of the Sale;
(b) the Merger Agreement shall have been adopted by the
holders of a majority of shares of Common Stock issued and
outstanding; and
(c) no statute, rule, regulation, decree, order or
injunction shall have been promulgated, enacted, entered or enforced
by any United States federal or state government, governmental agency
or authority or court which remains in effect and prohibits,
restrains, enjoins or restricts the consummation of the Merger.
9. Exchange of Certificates.
(a) From and after the Effective Time, a bank or trust company
to be designated by SPS (the "Exchange Agent") shall act as exchange
agent in effecting the exchange of the Merger Consideration for
certificates representing shares of Common Stock entitled to payment
pursuant to Section 6 (the "Certificates").
(b) Promptly after the Effective Time, the Exchange Agent
shall mail to each record holder of Certificates a letter of
transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent) and
instructions for use in surrendering Certificates and receiving the
Merger Consideration therefor. Upon the surrender of each
Certificate, together with such letter of transmittal duly executed
and completed in accordance with the instructions thereto, the holder
of such Certificate shall be unconditionally entitled to receive in
exchange therefor an amount equal to the Merger Consideration
multiplied by the number of shares of Common Stock formerly
represented by such Certificate, and such Certificate shall be
cancelled. Until so surrendered, each such Certificate shall
represent solely the right to receive, upon compliance with the
conditions set forth in this Subsection 9(b), an amount equal to the
Merger Consideration multiplied by the number of shares of Common
Stock formerly represented by such Certificate. No interest shall be
paid or accrue on the Merger Consideration payable upon the surrender
of the Certificates. If any Merger Consideration is to be paid to a
person (the "Payee") other than the person in whose name the
Certificate surrendered in exchange therefor is registered (the
"Record Holder"), such Certificate shall be accompanied by all
documents required to evidence and effect the transfer of the rights
represented by such Certificate from the Record Holder to the Payee,
and it shall be a condition to such exchange that the person
requesting such exchange shall pay to the Exchange Agent any transfer
or other taxes required by reason of the payment of such Merger
Consideration to the Payee, or that such person shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or
is not applicable. Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder of
shares of Common Stock for any Merger Consideration delivered to a
public official pursuant to applicable abandoned property, escheat
and similar laws.
<PAGE>
(c) Promptly following the date which is 180 days after the
Effective Time, the Exchange Agent's duties shall terminate, and any
funds deposited with the Exchange Agent that remain unclaimed by
holders of Certificates shall be paid to the Surviving Corporation
upon demand. Thereafter, each holder of a Certificate may surrender
such Certificate to the Surviving Corporation along with the
applicable letter of transmittal and (subject to applicable abandoned
property, escheat and similar laws) receive in exchange therefor an
amount equal to the Merger Consideration multiplied by the number of
shares of Common Stock formerly represented by such Certificate,
without any interest thereon, but shall have no greater rights
against the Surviving Corporation than may be accorded to general
creditors of the Surviving Corporation.
(d) After the Effective Time, there shall be no transfers on
the stock transfer books of the Surviving Corporation of any shares
of Common Stock other than the Control Shares. If, after the
Effective Time, Certificates (other than Certificates relating to the
Control Shares) are presented to the Surviving Corporation or the
Exchange Agent, they shall be canceled and exchanged for the
applicable Merger Consideration, as provided herein, subject to
applicable law in the case of Dissenting Shares.
10. Options. Prior to the Effective Time, the Board of Directors of SPS
(or, if appropriate, any committee thereof) shall adopt appropriate resolutions
and use its reasonable good faith efforts to take all other actions necessary to
provide for the surrender to the issuer, effective at the Effective Time, of all
the outstanding stock options, warrants or rights to purchase shares of Common
Stock heretofore granted (collectively, the "Options") under any outstanding
stock option plan or pursuant to any outstanding warrant agreement or any other
outstanding plan, program or arrangement of SPS providing for the issuance or
grant of any other interest in respect of the capital stock of SPS or any
subsidiary of SPS (collectively, the "Stock Plans") on terms such that,
immediately prior to the Effective Time, (i) each Option, whether or not then
vested or exercisable, shall no longer be exercisable for the purchase of shares
of Common Stock, but shall entitle each holder thereof, in cancellation and
settlement therefor, to payments in cash (less any applicable withholding taxes,
the "Cash Payment"), at the Effective Time, equal to the product of (x) the
total number of shares of Common Stock subject to such Option, whether or not
then vested or exercisable, and (y) the excess of the Merger Consideration over
the per-share exercise price of such Option, each such Cash Payment to be paid
to each holder of an outstanding Option at the Effective Time, and (ii) each
share of Common Stock previously issued in the form of a grant of restricted
stock or grant of contingent shares shall become fully vested, whether or not
then vested; provided, however, that with respect to any person subject to
Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Exchange Act"), such surrender to the issuer under
either clause (i) or (ii) above shall be approved in advance by the Board of
Directors of SPS (or an appropriate committee thereof) so as to cause such
dispositions to be exempt under Rule 16b-3. Any then outstanding stock
appreciation rights or limited stock appreciation rights shall be canceled
immediately prior to the Effective Time without any payment therefor,
notwithstanding the terms of any Stock Plan. Notwithstanding any other provision
of this Section 10 to the contrary, the Cash Payment may be withheld with
respect to any Option until necessary consents and releases are obtained.
11. Amendment. Subject to applicable law, this Agreement may be
amended, modified or supplemented, at any time before or after adoption of
this Agreement by the stockholders of SPS, by written agreement of the parties
hereto at any time prior to the Effective Time with respect to any of the
terms contained herein; provided, however, after the adoption of this
Agreement by the stockholders of SPS, no such amendment shall be made which by
law requires the further approval of the stockholders of SPS without such
further approval.
12. Abandonment. At any time prior to the Effective Time, whether
before or after the adoption of this Agreement by the stockholders of SPS,
this Agreement may be terminated, and the Merger may be abandoned by the Board
of Directors of SPS and Acquisition, notwithstanding approval of this
Agreement by the stockholders of SPS, or by the stockholder of Acquisition, or
both, if, in the opinion of the Board of Directors of SPS and Acquisition,
circumstances arise which make the Merger for any reason inadvisable.
<PAGE>
13. Counterparts. In order to facilitate the filing and recording of
this Agreement, the same may be executed in two counterparts, both of which
shall constitute one and the same agreement.
14. Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Miscellaneous. This Agreement (i) constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, between the parties, with respect to the subject matter
hereof, (ii) is not intended to confer upon any other person any rights or
remedies hereunder, (iii) shall not be assigned by operation of law or
otherwise and (iv) shall be governed by the laws of the State of Delaware,
without regard to principles of conflicts of law.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.
SPS TRANSACTION SERVICES, INC.
By: /s/ Thomas C. Schneider
-----------------------------
Name: Thomas C. Schneider
Title: Chairman and Chief Financial Officer
SAIL ACQUISITION, INC.
By: /s/ Philip J. Purcell
-----------------------------
Name: Philip J. Purcell
Title: President
<PAGE>
ANNEX IV
INFORMATION CONCERNING DIRECTORS AND OFFICERS OF
THE COMPANY, MSDW, NOVUS AND ACQUISITION
1. Set forth below are the name, age, business address, position with
SPS Transaction Services, Inc., present principal occupation or employment and
five-year employment history of each director and executive officer of SPS
Transaction Services, Inc. Directors are indicated by asterisk. Each person
listed below is a citizen of the United States. Unless otherwise indicated,
the address of the following individuals is 2500 Lake Cook Road, Riverwoods,
Illinois 60015. All officers serve at the pleasure of the Board of Directors
of SPS Transaction Services, Inc.
Present Principal Occupation or
Employment/Material Positions
Name (Age) Held During the Past Five Years
---------- -------------------------------
Thomas C. Schneider (61)* Chief Financial Officer and Director
of the Company since its formation and
Chairman of the Board of Directors of
the Company since April 1997;
Executive Vice President and Director
of MSDW since May 1997; Chief
Strategic and Administrative Officer
of MSDW from May 1997 until June 1998;
Executive Vice President and Chief
Financial Officer of Dean Witter,
Discover & Co. ("DWD") from 1987 to
May 1997; Executive Vice President and
Chief Financial Officer of NOVUS since
1987 and Director of NOVUS since 1986;
Chief Financial Officer of Dean Witter
Reynolds Inc. ("DWR") since 1987,
Executive Vice President of DWR since
1984 and Director of DWR since 1981.
Philip J. Purcell (54)* Director of the Company since its
formation and Chairman of the Board of
Directors from its formation to April
1997; Chairman of the Board of
Directors and Chief Executive Officer
of MSDW since May 1997; Chairman of
the Board of Directors and Chief
Executive Officer of DWD from August
1986 to May 1997; Chairman of the
Board of Directors and Chief Executive
Officer of DWR and NOVUS since 1986;
Trustee or Director of approximately
87 registered investment companies for
which Morgan Stanley Dean Witter
Advisors Inc. ("Advisors") serves as
investment manager or investment
adviser.
Robert L. Wieseneck (60)* President, Chief Executive Officer and
Director of the Company since its
formation; President of SPS Payment
since 1987 and Director of SPS Payment
since 1988; President and Director of
HSB since 1989; Director of NOVUS
since 1991 and Executive Vice
President of NOVUS from December 1986
to April 1987 and since April 1988.
Christine A. Edwards (45)* Director of the Company since April
1997, General Counsel of the Company
since 1993 and Secretary of the
Company from its formation until 1997;
Executive Vice President, Chief Legal
Officer and Secretary of MSDW since
May 1997; Executive Vice President,
General Counsel and Secretary of DWD
from January 1991 to May 1997;
Director, Executive Vice President,
General Counsel and Secretary of DWR
since January 1991; Director,
Executive Vice President, General
Counsel and Secretary of NOVUS since
January 1991.
<PAGE>
Mitchell M. Merin (44)* Director of the Company since 1994;
President and Chief Executive Officer
of Advisors since 1997; Executive Vice
President and Chief Administrative
Officer of DWD from 1994 until 1997;
Executive Vice President of DWR since
1990 and Chief Administrative Officer
since 1994; Executive Vice President
of NOVUS since 1994 and Director since
1994.
Frank T. Cary (77)* Director of the Company since 1992;
Chief Executive Officer of
International Business Machines
Corporation ("IBM") from 1973 until
1981 and Chairman of the Board of IBM
from 1973 until 1983; Director of
Celgene Corporation, Cygnus
Therapeutic Systems, ICOS Corporation,
Lexmark International, Inc., Lincare,
Inc., Seer Technology Inc. and
Teltrend Inc.
Charles F. Moran (68)* Director of the Company since its
formation; Director of HSB since
January 1996; Senior Vice President,
Administration of Sears, Roebuck and
Co. ("Sears") from 1989 until his
retirement in 1993; Director of
Thermadyne Holdings Inc., Donnelley
Enterprise Solutions Inc. and
Advantica Restaurant Group Inc.
Dennie M. Welsh (55)* Director of the Company since 1993;
Senior Vice President of IBM since
January 1998; Senior Vice President
and Group Executive, IBM Global
Services from April 1997 until
December 1997 and General Manager, IBM
Global Services from January 1995
until April 1997; Chairman of the
Board of Directors of Integrated
Systems Solutions Corporation, a
wholly owned subsidiary of IBM, and
President and Chief Executive Officer
from 1991 until 1993.
Robert W. Archer (60) Senior Vice President -
Sales/Operations of the Company and of
SPS Payment since 1997; Senior Vice
President - Sales and Senior Vice
President of SPS Payment from 1994 to
1997; Vice President -- Sales from
1992 until 1994 and Vice President of
SPS Payment from 1988 until 1994.
Richard F. Atkinson (61) Senior Vice President -- Private Label
Consumer of the Company and of SPS
Payment since 1997; Senior Vice
President -- Operations of the Company
and Senior Vice President of SPS
Payment from 1994 until 1997; Vice
President -- Operations from 1992
until 1994 and Vice President of SPS
Payment from 1986 until 1994; Senior
Vice President of HSB since 1991.
David J. Peterson (40) Senior Vice President -- Commercial
Technology Services of the Company and
of SPS Payment since 1997; Vice
President -- Network Services and
Corporate Development from 1995 to
1997 and Vice President -- Corporate
Development from 1994 until 1995;
investment banker for DWR from 1987
until 1993.
Russell J. Bonaguidi (47) Vice President and Controller of the
Company since 1994; Vice President and
Controller of HSB and SPS Payment
since 1994; National Manager of Credit
Card Banking for Sears from 1992 until
1994 and Vice President -- Controller
of Prime Option Services, Inc. (an
affiliate of the Company) from 1990
until 1992.
<PAGE>
Robert J. Ferkenhoff (55) Vice President and Chief Information
Officer of the Company since 1994 and
of SPS Payment since 1993; Vice
President -- Information Technology
from 1993 until 1994 and Vice
President -- Information Services for
Sears Merchandise Group from 1989
until 1993.
Larry H. Myatt (54) Vice President -- Marketing and
Administration of the Company and of
SPS Payment since 1996; Vice President
-- Marketing and Product Development
from 1992 until 1996 and Vice
President of SPS Payment since 1986.
Ruth M. O'Brien (44) Vice President -- TeleServices of the
Company and of SPS Payment since 1996;
Director of Operational Outsourcing
for SPS Payment and Director of Client
Services for SPS Payment from 1994
until 1996, and from 1990 until 1994,
respectively.
Serge J. Uccetta (52) Vice President -- Private Label
Commercial of the Company and of SPS
Payment since 1997; Vice President --
Card Services from 1995 to 1996 and
Vice President -- Card Services of SPS
Payment since 1993; Director of
Commercial Accounts from 1993 until
1995; Director -- Strategic Programs
of Citibank from 1991 until 1993.
Mary Ann Warniment (48) Vice President -- Electronic Marketing
of the Company and of SPS Payment
since 1997; Vice President -
Electronic Information Services from
1993 to 1997 and Vice President of SPS
Payment since 1990; Vice President --
Information Technology from 1992 until
1993.
<PAGE>
2. Set forth below are the name, age, business address, position with
Morgan Stanley Dean Witter & Co., present principal occupation or employment
and five-year employment history of each director and executive officer of
Morgan Stanley Dean Witter & Co. Directors are indicated by asterisk. Each
person listed below is a citizen of the United States. Unless otherwise
indicated, the address of the following individuals is 1585 Broadway, New
York, New York 10036. All officers serve at the pleasure of the Board of
Directors of Morgan Stanley Dean Witter & Co.
Present Principal Occupation or
Employment/Material Positions
Name (Age) Held During the Past Five Years
---------- -------------------------------
Philip J. Purcell (54)* Chairman of the Board of Directors and
Chief Executive Officer of MSDW since
the merger of Morgan Stanley Group
Inc. ("MSG") with and into DWD on May
31, 1997 (the "MSDW Merger"); Chairman
of the Board of Directors and Chief
Executive Officer of DWD from August
1986 until the MSDW Merger; Chairman
of the Board of Directors and Chief
Executive Officer of DWR and NOVUS
since 1986; Trustee or Director of
approximately 87 registered investment
companies for which Advisors serves as
investment manager or investment
adviser; Director of the Company since
its formation and Chairman of the
Board of Directors from its formation
to April 1997.
John J. Mack (53)* President, Chief Operating Officer and
Director of MSDW since the MSDW
Merger; Director and Managing Director
of Morgan Stanley & Co. Incorporated
("MS&Co.") since January 1979 and
President from June 1993 to May 1997;
President of MSG from June 1993 until
the MSDW Merger; Chairman of MSG's
Operating Committee from March 1992
until the MSDW Merger; Director and a
Managing Director of MSG from December
1987 until the MSDW Merger.
Thomas C. Schneider(61)* Director and Executive Vice President
of MSDW since the MSDW Merger; Chief
Strategic and Administrative Officer
of MSDW from the MSDW Merger until
June 1998; Executive Vice President
and Chief Financial Officer of DWD
from 1987 to May 1997; Executive Vice
President and Chief Financial Officer
of NOVUS since 1987 and Director of
NOVUS since 1986; Chief Financial
Officer of DWR since 1987, Executive
Vice President of DWR since 1984 and
Director of DWR since 1981; Chief
Financial Officer and Director of the
Company since its formation and
Chairman of the Board of Directors
since April 1997.
Robert P. Bauman (67)* Director of MSDW since the MSDW Merger
and Director of MSG from April 1996
until the MSDW Merger; Non-executive
Chairman of British Aerospace PLC from
May 1994 until May 1998; Chairman of
BTR PLC since May 1998 and Deputy
Chairman and non-executive Director of
BTR PLC from October 1997 until May
1998; Chief Executive Officer of
SmithKline Beecham Plc from 1989 until
April 1994; Director of CIGNA
Corporation since 1990 and Union
Pacific Corporation since 1987;
Non-executive Director of Reuters
Holdings PLC since March 1994.
<PAGE>
Edward A. Brennan (64)* Director of MSDW since the MSDW Merger
and Director of DWD from February 1993
until the MSDW Merger; Former Chairman
of the Board of Directors, President
and Chief Executive Officer of Sears,
having served in such capacities for
more than five years until his
retirement in August 1995; Director of
AMR Corporation since October 1997,
Minnesota Mining and Manufacturing
Company since May 1986, The Allstate
Corporation ("Allstate") since
February 1993, Unicom Corporation
since September 1995, Dean Foods
Company and The SABRE Group Holdings,
Inc. since March 1996.
Diana D. Brooks(47)* Director of MSDW since December 1997;
President and Chief Executive Officer
of Sotheby's Holdings, Inc. since
April 1994; President and Chief
Executive Officer of Sotheby's
Worldwide Auction Business from April
1993 to April 1994 and of Sotheby's
North America from November 1992 to
April 1993.
Clarence B. Rogers, Jr. (68)* Director of MSDW since the MSDW Merger
and Director of DWD from February 1993
to the MSDW Merger; Chairman of the
Board of Directors of Equifax Inc.
since October 1992; Chairman of the
Board of Directors of ChoicePoint Inc.
since August 1997; Chief Executive
Officer of Equifax for more than five
years until December 1995; Director of
Sears, Briggs & Stratton Corporation,
Oxford Industries, Inc. and Teleport
Communications Group, Inc.
Richard B. Fisher (61)* Director and Chairman of the Executive
Committee of the Board of Directors of
MSDW since the MSDW Merger; Chairman
of the Board of Directors of MS&Co.
since January 1991 and Director and
Managing Director of MS&Co. since July
1970; Chairman of the Board of
Directors and Managing Director of MSG
from January 1991 until the MSDW
Merger; Managing Director of MSG from
July 1975 until the MSDW Merger;
Director of MSG from July 1975 to
December 1990; President of MSG from
January 1984 until December 1990.
Miles L. Marsh (50)* Director of MSDW since the MSDW Merger
and Director of DWD from December 1996
until the MSDW Merger; Chairman and
Chief Executive Officer of Fort James
Corporation since August 1997;
Chairman of James River Corporation
from January 1996 until August 1997
and President and Chief Executive
Officer from October 1995 until August
1997; Chairman and Chief Executive
Officer of Pet Inc. from March 1991 to
February 1995; Director of GATX
Corporation and Whirlpool Corporation.
Laura D'Andrea Tyson (51)* Director of MSDW since the MSDW Merger
and Director of MSG from April 1997
until the MSDW Merger; Dean, Haas
School of Business, University of
California Berkeley since July 1998;
Class of 1939 Professor of Economics
and Business Administration at the
University of California, Berkeley
since January 1997; served from
January 1993 through March 1995 as the
16th Chair of the White House Council
of Economic Advisors and from April
1995 through December 1996 as Chair of
the President's National Economic
Council and the President's National
Economic Advisor; Director of
Ameritech Corporation since April 1997
and Eastman Kodak Company since May
1997.
<PAGE>
Daniel B. Burke (69)* Director of MSDW since the MSDW Merger
and Director of MSG from February 1994
until the MSDW Merger; Chief Executive
Officer of Capital Cities/ABC, Inc.
("Capital Cities") from 1990 until he
retired in February 1994; President
and Chief Operating Officer of Capital
Cities from 1986 until February 1994
and Director from 1967 until February
1996; Director of Consolidated Rail
Corporation, Darden Restaurants, Inc.,
Rohm and Haas Company and The
Washington Post Company.
C. Robert Kidder (53)* Director of MSDW since the MSDW Merger
and Director of DWD from July 1993
until the MSDW Merger; Chairman of the
Board of Directors and Chief Executive
Officer of Borden, Inc. since January
1995; Chairman and Chief Executive
Officer of Duracell International Inc.
from August 1991 to October 1994;
Director of AEP Industries Inc. and
Electronic Data Systems Corporation.
Michael A. Miles (59)* Director of MSDW since the MSDW Merger
and Director of DWD from February 1993
to May 1994 and from January 1995 to
May 1997; Special limited partner in
Forstmann Little & Company since
January 1995; Chairman of the Board of
Directors and Chief Executive Officer
of Philip Morris Companies Inc. from
September 1991 to July 1994; Director
of Sears, Allstate, Time Warner Inc.
and Dell Computer Corporation.
Allen E. Murray (69)* Director of MSDW since the MSDW Merger
and Director of MSG from November 1992
until the MSDW Merger; Chairman of the
Board of Directors and Chief Executive
Officer of Mobil Corporation ("Mobil")
from February 1986 until his
retirement in March 1994, and Director
from May 1977 until March 1994;
President and Chief Operating Officer
of Mobil from November 1984 until
March 1993; Director of Lockheed
Martin Corporation, Metropolitan Life
Insurance Company and Minnesota Mining
and Manufacturing Company.
Robert G. Scott (52) Executive Vice President and Chief
Financial Officer of MSDW since the
MSDW Merger; Director and Managing
Director of MS&Co. since 1979 and
Chief Financial Officer since May
1997; Head of Investment Banking for
MS&Co. from 1994 to 1996; Head of
Worldwide Corporate Finance for MS&Co.
from 1992 to 1994.
Christine A. Edwards (45) Executive Vice President, Chief Legal
Officer and Secretary of MSDW since
the MSDW Merger; Executive Vice
President, General Counsel and
Secretary of DWD from January 1991
until the MSDW Merger; Director,
Executive Vice President, General
Counsel and Secretary of DWR since
January 1991; Director, Executive Vice
President, General Counsel and
Secretary of NOVUS since January 1991;
Director of the Company since April
1997, General Counsel of the Company
since 1993 and Secretary of the
Company from its formation until 1997.
John H. Schaefer (46) Executive Vice President and Chief
Strategic and Administrative Officer
of MSDW since June 1998; Managing
Director-Strategic Planning and
Capital Allocation of MSDW from the
MSDW Merger until June 1998; Executive
Vice President and Director of
Corporate Finance of DWR from 1991
until the MSDW Merger.
<PAGE>
3. Set forth below are the name, age, business address, position with
NOVUS Credit Services Inc., present principal occupation or employment and
five-year employment history of each director and executive officer of NOVUS
Credit Services Inc. Directors are indicated by asterisk. Each person listed
below is a citizen of the United States. Unless otherwise indicated, the
address of the following individuals is 2500 Lake Cook Road, Riverwoods,
Illinois 60015. All officers serve at the pleasure of the Board of Directors
of NOVUS Credit Services Inc.
Present Principal Occupation or
Employment/Material Positions
Name (Age) Held During the Past Five Years
---------- -------------------------------
Philip J. Purcell (54)* Chairman of the Board of Directors and
Chief Executive Officer of NOVUS and
DWR since 1986; Chairman of the Board
of Directors and Chief Executive
Officer of MSDW since the MSDW Merger;
Chairman of the Board of Directors and
Chief Executive Officer of DWD from
August 1986 until the MSDW Merger;
Trustee or Director of approximately
87 registered investment companies for
which Advisors serves as investment
manager or investment adviser;
Director of the Company since its
formation and Chairman of the Board of
Directors from its formation to April
1997.
Thomas C. Schneider (61)* Executive Vice President and Chief
Financial Officer of NOVUS since 1987
and Director of NOVUS since 1986;
Executive Vice President and Director
of MSDW since the MSDW Merger; Chief
Strategic and Administrative Officer
of MSDW from the MSDW Merger to June
1998; Executive Vice President and
Chief Financial Officer of DWD from
1987 to May 1997; Chief Financial
Officer of DWR since 1987, Executive
Vice President of DWR since 1984 and
Director of DWR since 1981; Chief
Financial Officer and Director of the
Company since its formation and
Chairman of the Board of Directors
since April 1997.
Robert L. Wieseneck (60)* Director of NOVUS since 1991 and
Executive Vice President of NOVUS from
December 1986 to April 1987 and since
April 1988; President of SPS Payment
since 1987 and Director of SPS Payment
since 1988; President and Director of
HSB since 1989; President, Chief
Executive Officer and Director of the
Company since its formation.
Christine A. Edwards (45)* Director, Executive Vice President,
General Counsel and Secretary of NOVUS
since 1991; Executive Vice President,
Chief Legal Officer and Secretary of
MSDW since the MSDW Merger; Executive
Vice President, General Counsel and
Secretary of DWD from January 1991
until the MSDW Merger; Director,
Executive Vice President, General
Counsel and Secretary of DWR since
January 1991; Director of the Company
since April 1997 and General Counsel
of the Company since 1993; Secretary
of the Company from its formation
until 1997.
Mitchell M. Merin (44)* Executive Vice President of NOVUS
since 1994 and Director of NOVUS since
1994; President and Chief Executive
Officer of Advisors since 1997;
Executive Vice President and Chief
Administrative Officer of DWD from
1994 until 1997; Executive Vice
President of DWR since 1990 and Chief
Administrative Officer of DWR since
1994; Director of the Company since
1994.
<PAGE>
Thomas R. Butler (55)* Executive Vice President and Director
of NOVUS since 1986; President of
NOVUS Services from 1986 until 1990
and since 1995 and Chief Operating
Officer since 1995; Executive Vice
President of DWD from 1993 until 1997;
Director of the Company from 1992
until 1997.
Nancy S. Donovan (46)* Director of NOVUS since 1986 and
Executive Vice President since 1989;
President and Chief Operating Officer
of NOVUS Financial Corporation
(formerly the consumer finance
division of Sears Consumer Financial
Corporation) since 1989; and Executive
Vice President of DWD from 1992 until
1993.
William L. Hodges (50)* Director of NOVUS since 1991 and
Executive Vice President from 1995
until 1996; Executive Vice President
of NOVUS Services since 1994 and
Senior Vice President from 1988 until
1994.
Robert E. Wood II (60)* Director of NOVUS since 1987 and
Senior Executive Vice President from
1993 until 1994; Executive Vice
President of NOVUS Services since
1994; Senior Executive Vice President
and Chief Administrative Officer of
DWD from 1988 until 1994; Director of
the Company from 1992 until 1994.
B.J. Martin (64)* Director of NOVUS since 1989 and
Executive Vice President since 1991;
Director of MountainWest since 1991
and Chairman of the Board of Directors
of MountainWest from 1991 until 1998.
<PAGE>
4. Set forth below are the name, age, business address, position with
Sail Acquisition, Inc., present principal occupation or employment and
five-year employment history of each director and executive officer of Sail
Acquisition, Inc. Directors are indicated by asterisk. Each person listed
below is a citizen of the United States. Unless otherwise indicated, the
address of the following individuals is 2500 Lake Cook Road, Riverwoods,
Illinois 60015. All officers serve at the pleasure of the Board of Directors
of Sail Acquisition, Inc.
Present Principal Occupation or
Employment/Material Positions
Name (Age) Held During the Past Five Years
--------- -------------------------------
Philip J. Purcell (54)* Chairman of the Board of Directors and
President of Acquisition since its
formation; Chairman of the Board of
Directors and Chief Executive Officer
of MSDW since the MSDW Merger;
Chairman of the Board of Directors and
Chief Executive Officer of DWD from
August 1986 until the MSDW Merger;
Chairman of the Board of Directors and
Chief Executive Officer of DWR and
NOVUS since 1986; Trustee or Director
of approximately 87 registered
investment companies for which
Advisors serves as investment manager
or investment adviser; Director of the
Company since its formation and
Chairman of the Board of Directors
from its formation to April 1997.
Robert G. Scott (52)* Vice President, Treasurer and Director
of Acquisition since its formation;
Executive Vice President and Chief
Financial Officer of MSDW since the
MSDW Merger; Director and Managing
Director of MS&Co. since 1979 and
Chief Financial Officer since May
1997; Head of Investment Banking for
MS&Co. from 1994 to 1996; Head of
Worldwide Corporate Finance for MS&Co.
from 1992 to 1994.
Christine A. Edwards (45)* Vice President, Secretary and Director
of Acquisition since its formation;
Executive Vice President, Chief Legal
Officer and Secretary of MSDW since
the MSDW Merger; Executive Vice
President, General Counsel and
Secretary of DWD from January 1991
until the MSDW Merger; Director,
Executive Vice President, General
Counsel and Secretary of DWR since
January 1991; Director, Executive Vice
President, General Counsel and
Secretary of NOVUS since January 1991;
Director of the Company since April
1997, General Counsel of the Company
since 1993 and Secretary of the
Company from its formation until 1997.
Thomas C. Schneider (61)* Vice President and Director of
Acquisition since its formation;
Executive Vice President and Director
and Executive Vice President of MSDW
since the MSDW Merger; Chief Strategic
and Administrative Officer of MSDW
from the MSDW Merger until June 1998;
Executive Vice President and Chief
Financial Officer of DWD from 1987 to
May 1997; Executive Vice President and
Chief Financial Officer of NOVUS since
1987 and Director of NOVUS since 1986;
Chief Financial Officer of DWR since
1987, Executive Vice President of DWR
since 1984 and Director of DWR since
1981; Chief Financial Officer and
Director of the Company since its
formation and Chairman of the Board of
Directors since April 1997.
Michael J. Hartigan, Jr. Vice President and Assistant Secretary
of Acquisition since its formation;
Vice President, Associate General
Counsel and Secretary of the Company,
SPS Payment and NOVUS since April
<PAGE>
1997; Vice President, Assistant
General Counsel and Assistant
Secretary of the Company, SPS Payment
and NOVUS from 1992 to April 1997.
<PAGE>
ANNEX V
COMMON STOCK PURCHASES
The following chart contains certain information regarding purchases
of shares of common stock by the Company from January 1, 1996 through and
including the date of this Proxy Statement, including the number of shares
purchased, total cost (in thousands and including expenses), average cost per
share (including expenses) and ranges of purchase price.
<TABLE>
<CAPTION>
AVERAGE COST
SHARES TOTAL COST PER SHARE PRICE RANGE
---------- -------------- ------------ -----------
1996:
<S> <C> <C> <C> <C> <C>
1st quarter 7,101 $220 $30.98 $30.75 - $31.25
2nd quarter -- -- -- -- --
3rd quarter -- -- -- -- --
4th quarter 17,420 $280 $16.07 $15.50 - $16.25
1997:
1st quarter -- -- -- -- --
2nd quarter -- -- -- -- --
3rd quarter -- -- -- -- --
4th quarter 19,000 $420 $22.11 $21.56 - $22.56
1998:
1st quarter -- -- -- -- --
2nd quarter through
June 30, 1998 -- -- -- -- --
</TABLE>
<PAGE>
[FRONT OF PROXY CARD]
SPS TRANSACTION SERVICES, INC.
This Proxy is solicited on behalf of the Board of Directors of SPS
Transaction Services, Inc.
The undersigned hereby appoints ___________, ___________ and
___________, or any one of them, proxies with full power of substitution to
vote at the Special Meeting of Stockholders of SPS Transaction Services, Inc.
to be held on ____________ __, 1998, and any adjournments or postponements
thereof, as follows:
(1) Proposal to approve the sale by the Company of substantially all
of its assets, consisting of all the issued and outstanding
capital stock of the Company's two subsidiaries, SPS Payment
Systems, Inc. and Hurley State Bank, to Associates First Capital
Corporation, a Delaware corporation ("Associates") for a
purchase price of $895,696,661 in cash, upon the terms and
subject to the conditions set forth in the Purchase Agreement,
dated April 18, 1998 (the "Purchase Agreement"), between the
Company and Associates.
FOR AGAINST ABSTAIN
(2) Proposal to adopt the Agreement and Plan of Merger, dated as of
June 15, 1998 (the "Merger Agreement"), between the Company and
Sail Acquisition, Inc., a Delaware corporation ("Acquisition")
and a wholly owned subsidiary of NOVUS Credit Services Inc., a
Delaware corporation ("NOVUS"), pursuant to which Acquisition
will be merged with and into the Company (the "Merger"), with
the Company being the surviving corporation. In the Merger, each
share of the Company's common stock, par value $0.01 per share
(the "Common Stock"), outstanding at the effective time of the
Merger (other than Common Stock held by NOVUS or any
stockholders who perfect their statutory appraisal rights under
Delaware law), will be converted into the right to receive
$32.02 in cash, without interest thereon.
FOR AGAINST ABSTAIN
(3) In the discretion of the proxy holder, upon all matters presented
at the Special Meeting but which were not known to the Board of
Directors at a reasonable time before the solicitation of this
proxy and upon such other business as may properly come before the
Special Meeting, including any adjournments or postponements
thereof.
FOR AGAINST ABSTAIN
When properly executed, this Proxy will be voted in the manner directed
above. If no direction is made, it will be voted FOR proposals (1), (2) and (3)
above.
<PAGE>
[REVERSE OF PROXY CARD]
The undersigned acknowledges receipt of the Notice of Special Meeting of
Stockholders and the Proxy Statement (with all enclosures and attachments) dated
___________ __, 1998. The undersigned ratifies all that the proxies or any of
them or their substitutes may lawfully do or cause to be done by virtue hereof
and revokes all former proxies.
DATED _________ __, 1998
_________________________________
Signature
_________________________________
Signature if held jointly
Please sign this proxy exactly as your
name(s) appears below. If the stock is
registered in the names of two or more
persons, each must sign. Executors,
administrators, trustees, guardians,
attorneys and corporate officers should
add their titles.
IMPORTANT: PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY IN THE ENVELOPE
PROVIDED. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
Exhibit (d)(2)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file Number 1-10993
SPS TRANSACTION SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3798295
(State of incorporation) (I.R.S. Employer
Identification No.)
2500 Lake Cook Road, Riverwoods, IL 60015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 405-3400
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1998, the Registrant had 27,279,469 shares of common stock,
$0.01 par value, outstanding.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 15,384 $ 14,730
Investments held to maturity - at amortized cost 36,896 36,617
Credit card loans 1,169,727 1,295,787
Allowance for loan losses (74,822) (79,726)
---------- ----------
Credit card loans, net 1,094,905 1,216,061
Accrued interest receivable 14,221 21,847
Accounts receivable 25,666 29,349
Due from affiliated companies 16,561 9,921
Amounts due from asset securitizations 97,715 93,260
Premises and equipment, net 31,951 32,895
Deferred income taxes 41,603 43,059
Prepaid expenses and other assets 14,851 14,664
---------- ----------
TOTAL ASSETS $1,389,753 $1,512,403
========== ==========
LIABILITIES:
Deposits:
Noninterest-bearing $ 4,513 $ 6,206
Interest-bearing 540,195 504,088
---------- ----------
Total deposits 544,708 510,294
Accounts payable, accrued expenses and other 78,215 80,283
Income taxes payable 18,215 19,725
Due to affiliated companies 474,539 639,066
---------- ----------
Total liabilities 1,115,677 1,249,368
---------- ----------
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; 27,305,021 and
27,276,269 shares issued; 27,277,357 and
27,206,883 shares outstanding at March 31,
1998 and December 31, 1997, respectively 273 273
Capital in excess of par value 81,792 81,586
Retained earnings 192,680 182,845
Common stock held in treasury, at cost, $.01
par value, 27,644 and 69,386 shares at March
31, 1998 and December 31, 1997, respectively (611) (1,662)
Stock compensation related adjustments (58) (7)
---------- ----------
Total stockholders' equity 274,076 263,035
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,389,753 $1,512,403
========== ==========
See notes to unaudited consolidated financial statements.
</TABLE>
<TABLE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(In thousands, except per share data)
<CAPTION>
Three Months Ended
March 31,
-------------------
<S> <C> <C>
1998 1997
-------- --------
(Unaudited)
Processing and service revenues $ 68,142 $ 75,309
Merchant discount revenue 2,966 3,138
-------- --------
71,108 78,447
Interest revenue 55,206 64,076
Interest expense 17,039 20,382
-------- --------
Net interest income 38,167 43,694
Provision for loan losses 27,011 31,711
-------- --------
Net credit income 11,156 11,983
-------- --------
Net operating revenues 82,264 90,430
Salaries and employee benefits 28,187 29,523
Processing and service expenses 22,391 28,327
Other expenses 16,026 20,541
-------- --------
Total operating expenses 66,604 78,391
-------- --------
Income before income taxes 15,660 12,039
Income tax expense 5,763 4,648
-------- --------
Net income $ 9,897 $ 7,391
======== ========
Basic earnings per common share $ 0.36 $ 0.27
Diluted earnings per common share $ 0.36 $ 0.27
Basic weighted average common
shares outstanding 27,249 27,197
Diluted weighted average common
shares outstanding 27,465 27,367
See notes to unaudited consolidated financial statements.
</TABLE>
SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(In thousands)
Three Months Ended
March 31,
----------------------
1998 1997
-------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,897 $ 7,391
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 2,925 3,294
Provision for loan losses 27,011 31,711
Compensation payable in common stock 818 --
Deferred income taxes 1,456 994
(Increase) decrease in operating assets:
Amounts due from affiliated companies (6,640) 5,933
Accrued interest receivable and accounts receivable 11,309 8,704
Amounts due from asset securitizations (4,455) --
Prepaid expenses and other assets (526) 677
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other (1,157) 1,584
Income taxes payable (1,510) (5,579)
Amounts due to affiliated companies 3,778 2,743
-------- --------
Net cash from operating activities 42,906 57,452
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments held to maturity - purchases (37,279) (56,084)
Investments held to maturity - maturities 37,000 42,000
Net principal collected on credit card loans 92,678 101,905
Purchases of premises and equipment, net (936) (2,519)
-------- --------
Net cash from investing activities 91,463 85,302
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in noninterest-bearing deposits (1,693) (4,659)
Net increase in interest-bearing deposits 36,107 19,765
Net decrease in due to affiliated companies (168,305) (153,584)
Proceeds from exercise of stock options 176 1
Purchase of treasury stock, at cost -- 70
-------- --------
Net cash from financing activities (133,715) (138,407)
-------- --------
Increase in cash and due from banks 654 4,347
Cash and due from banks, beginning of period 14,730 15,205
-------- --------
Cash and due from banks, end of period $ 15,384 $ 19,552
======== ========
See notes to unaudited consolidated financial statements.
SPS TRANSACTION SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
A. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SPS Transaction
Services, Inc. (the "Company") and its subsidiaries. The Company is a 73.3%
majority owned subsidiary of NOVUS Credit Services Inc., which in turn is a
wholly owned, direct subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW").
The Company provides a range of technology outsourcing services including the
processing of credit and debit card transactions, consumer private label credit
card programs, commercial account processing services, and call center customer
service activities in the United States. SPS Payment Systems, Inc. ("SPS"), a
wholly owned subsidiary of the Company, is incorporated in the State of
Delaware. Hurley State Bank ("HSB"), a wholly owned subsidiary of the Company,
is chartered as a bank by the State of South Dakota and is insured by the
Federal Deposit Insurance Corporation.
The Consolidated Balance Sheet as of March 31, 1998, and the Consolidated
Statements of Income for the three months ended March 31, 1998 and 1997, and the
Consolidated Statements of Cash Flows for the three months ended March 31, 1998
and 1997 are unaudited; however, in the opinion of management, all adjustments,
consisting only of normal recurring accruals necessary for fair presentation,
have been reflected. All material intercompany balances and transactions have
been eliminated. Certain reclassifications have been made to prior year amounts
to conform to current presentation.
The 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.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1997 Annual Report to Stockholders and Annual Report on Form 10-K. The results
of operations for the interim periods should not be considered indicative of
results to be expected for the full year.
B. EARNINGS PER SHARE
As of December 31, 1997 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 maintains the
current earning per share ("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 EPS amounts of prior periods have been restated in accordance with
SFAS No. 128. The adoption of SFAS No. 128 has not had a material effect on the
Company's EPS calculations.
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 three months ended March 31, 1998,
and 1997, is the result of including weighted common share equivalents totaling
215,865 and 169,845, respectively, in the computation of diluted earnings per
share.
C. OTHER ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
presentation of comprehensive income. SFAS No. 130 did not have any effect on
the Company's financial statements for the periods presented as net income
represents total comprehensive income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the disclosure requirements related to
segments. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997, and interim reporting is not required until interim periods beginning
after initial year of application.
As of January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the capitalization of certain costs related to
the development or purchase of internal-use computer software. The adoption of
SOP 98-1 was not material to the Company's consolidated financial position or
results of operations.
D. ALLOWANCE FOR LOAN LOSSES
<TABLE>
The changes in the allowance for loan losses were as follows:
<CAPTION>
Three Months Ended
March 31,
------------------
(In Thousands)
1998 1997
------- -------
<S> <C> <C>
Balance, beginning of period $ 79,726 $88,397
Additions:
Provision for loan losses 27,011 31,711
Deductions:
Charge-offs (38,091) (41,361)
Less: recoveries 6,176 5,647
------- -------
Net charge-offs (31,915) (35,714)
------- -------
Balance, end of period $74,822 $84,394
======= =======
</TABLE>
At March 31, 1998, there were $61.9 million in loans past due 30 days through
89 days, and $49.2 million in loans past due 90 days through 179 days.
Credit card loans sold through asset securitization transactions and serviced
by the Company totaled $580.0 million at March 31, 1998 and 1997.
E. SUBSEQUENT EVENT
On April 18, 1998, the Company and Associates First Capital Corporation ("The
Associates") entered into a stock purchase agreement (the "Purchase Agreement")
pursuant to which the Company has agreed to sell and The Associates has agreed
to acquire substantially all of the assets of the Company, consisting of all of
the capital stock of the Company's two wholly-owned operating subsidiaries - SPS
Payment Systems, Inc. and Hurley State Bank, for a price of approximately $896
million in cash, upon the terms and subject to the conditions of the Purchase
Agreement, including certain regulatory approvals and approval by the Company's
stockholders. The Associates has also agreed to fund the repayment of all
intercompany indebtedness of SPS Payment Systems, Inc. and Hurley State Bank,
and their subsidiaries, owing to the Company or its affiliates.
The per share price that will be distributed to the Company's public
stockholders, which will be approximately $32, will be greater than the per
share price to be received by MSDW, since MSDW will assume certain liabilities
and obligations incurred by the Company in connection with the sale. The
distribution of the purchase price to the Company's public stockholders will be
effected pursuant to a merger of the Company with an indirect subsidiary of MSDW
as soon as practical after the closing of the sale of assets. The per share
amount to be received by the public stockholders will be set forth in the
Company's proxy statement that will be mailed to stockholders in connection with
a special stockholders meeting to vote upon the sale and the merger. Holders of
options to purchase Company common stock who have not previously exercised their
options will receive in the merger an amount of cash per share underlying such
option equal to the amount, if any, by which the per share purchase price paid
in the merger to public stockholders of Company stock exceeds the exercise price
of the options.
NOVUS Credit Services Inc., a subsidiary of MSDW that owns approximately 73.3
percent of all the Company's outstanding stock ("NOVUS"), has entered into a
voting agreement with The Associates pursuant to which NOVUS has agreed to vote
all shares of the Company owned by it in favor of the transactions contemplated
by the Purchase Agreement. The voting agreement is terminable upon the earliest
to occur of (i) the prior termination of the Purchase Agreement, (ii) the
consummation of the sale transaction contemplated by the Purchase Agreement and
(iii) January 18, 1999. Unless the Voting Agreement is terminated in accordance
with its terms, NOVUS's obligation to vote in favor of the transactions
contemplated by the Purchase Agreement is unconditional and absolute. The sale
is expected to be completed during the third quarter of 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On April 18, 1998, the Company and The Associates entered into the Purchase
Agreement pursuant to which the Company has agreed to sell and The Associates
has agreed to acquire substantially all of the assets of the Company, consisting
of all of the capital stock of the Company's two wholly-owned operating
subsidiaries - SPS Payment Systems, Inc. and Hurley State Bank, for a price of
approximately $896 million in cash, upon the terms and subject to the conditions
of the Purchase Agreement, including certain regulatory approvals and approval
by the Company's stockholders. The Associates has also agreed to fund the
repayment of all intercompany indebtedness of SPS Payment Systems, Inc. and
Hurley State Bank, and their subsidiaries, owing to the Company or its
affiliates.
RESULTS OF OPERATIONS
The Company's net operating revenues consist of processing and service
revenues, merchant discount revenue and net credit income, which are derived as
a result of its four principal business services: 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. 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 includes revenues received as a result of Commercial Accounts
Processing and those Consumer Credit Card Services which the Company
administers, but for which it does not act as the card issuer or own the credit
card loans. Managed program revenues are derived from fees based on the volume
of the services provided and on services provided in the administration of
credit life insurance programs.
HSB programs primarily consist of late fee revenue assessed on those Consumer
Credit Card Services accounts for which the Company issues the credit card on
behalf of the client and owns the credit card loans that are generated through
the use of the card.
Servicing fees on securitized loans are revenues derived from credit card
loans that have been sold to investors through asset securitizations. Such
revenues are the result of the fees earned for servicing the underlying credit
card accounts. Loan securitizations have the effect of converting portions of
net credit income, merchant discount revenue and credit card fees to a component
of processing and service revenues for the credit card accounts that are
securitized.
Merchant discount revenue is derived from the Company's owned Consumer Credit
Card Services, portions of which are 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.
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.
The following table presents, for the periods indicated, the percentage
relationship that certain statement of income items bear to net operating
revenues and the period-to-period percentage dollar increase or decrease in each
item.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Period-to-Period
--------------------
1998 1997 Change
------ ------ ------
<S> <C> <C> <C>
NET OPERATING REVENUES:
Processing and service revenues 82.8% 83.3% (9.5)%
Merchant discount revenue 3.6 3.4 (5.5)
Net credit income 13.6 13.3 (6.9)
----- ----- -----
100.0 100.0 (9.0)
OPERATING EXPENSES:
Salaries and employee benefits 34.3 32.7 (4.5)
Processing and service expenses 27.2 31.3 (21.0)
Other expenses 19.5 22.7 (22.0)
----- ----- -----
81.0 86.7 (15.0)
Income before income taxes 19.0 13.3 30.1
Income tax expense 7.0 5.1 24.0
----- ----- -----
Net income 12.0% 8.2% 33.9 %
===== ===== =====
</TABLE>
Net income for the three months ended March 31, 1998 was $9.9 million, an
increase of $2.5 million, or 33.9%, over the same period a year ago. Both basic
and diluted earnings per common share were $0.36 for the three month period,
compared to $0.27 in the prior year's first quarter.
Net operating revenues for the first quarter of 1998 declined to $82.3
million, a decrease of 9% over the same period last year. The decrease in net
operating revenues resulted primarily from a decrease in processing and service
revenues and net interest income and was partially offset by a decrease in
provision for loan losses expense.
Processing and service revenues decreased 9.5% to $68.1 million for the three
months ended March 31, 1998, as compared to $75.3 million for the same period
last year. Processing and service revenues, representing 82.8% and 83.3% of net
operating revenues for the three months ended March 31, 1998 and 1997,
respectively, consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(In Thousands)
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
Transaction processing services $22,254 $24,462
Managed programs 22,765 23,395
HSB programs 11,109 14,019
Servicing fees on securitized loans 12,014 13,433
------- -------
$68,142 $75,309
======= =======
</TABLE>
SUPPLEMENTAL INFORMATION
Components of servicing fees on securitized loans:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
(In Thousands)
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Processing and service revenues $ 3,455 $ 4,529
Merchant discount revenue 1,103 1,121
Interest revenue 27,692 28,071
Interest expense (8,316) (8,154)
Provision for loan losses (11,920) (12,134)
------- -------
Servicing fees on securitized
loans $12,014 $13,433
======= =======
</TABLE>
The decrease in revenues from transaction processing services resulted
primarily from a lower volume of TeleServices minutes processed and decreased
revenues from the sale and servicing of point-of-sale terminals, partially
offset by increased revenues associated with the higher volume of Network
Transaction Services point-of-sale transactions processed. The number of
TeleServices service minutes processed totaled 12.4 million, down 27% from 17.0
million. For the three months ended March 31, 1998, the number of point-of-sale
transactions processed totaled 113.7 million, up 12% from 101.9 million in the
same period in 1997.
The decrease in revenues from Managed programs resulted primarily from a
decrease 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, partially offset by an increase in the volume of Commercial Account
Processing.
The decrease in revenues from HSB programs was due to a decrease in late
fee revenue resulting 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 2.9 million active consumer
private label accounts, both owned and managed, at March 31, 1998, compared with
3.2 million accounts at March 31, 1997. Active commercial accounts grew 5.5% to
1,003,000 at March 31, 1998, compared to 951,000 at March 31, 1997.
The decrease in servicing fees on securitized loans was due primarily to
lower late fee revenue on securitized loans.
Merchant discount revenue decreased 5.5% to $3.0 million for the three months
ended March 31, 1998, as compared to $3.1 million for the same period last year.
The decrease in merchant discount revenue resulted from decreased sales activity
related to the decline in credit card loans. As of March 31, 1998, $3.5 million
of merchant discount revenue has been deferred which will be amortized and
recognized as interest income over the life of the promotional payment plans.
Merchant discount revenue was 3.6% and 3.4% of net operating revenues for the
three months ended March 31, 1998 and 1997, respectively.
For the three months ended March 31, 1998, net credit income decreased 6.9%
from the same period a year ago to $11.2 million as a result of lower net
interest income partially offset by a decrease in the provision for loan losses.
The decrease in interest revenue resulted primarily from the decrease in credit
card receivables and the accretion of $3.3 million of deferred merchant discount
revenue into interest income during the first quarter of 1998 related to
interest-deferred promotional payment plans as compared to $5.7 million in the
first quarter of 1997. The decrease in interest revenue was partially offset by
a higher yield on credit card loans. The decrease in interest expense was due to
a decrease in average borrowings associated with the decline in credit card
loans, partially offset by a 41 basis point increase in average interest rates
on borrowings. The decrease in the provision for loan losses is primarily
attributable to a decrease in the amount of net charge-offs due in part to a
decline in the amount of credit card loans outstanding.
The decline in credit card loans outstanding is related to certain portfolios
that are in paydown, such as the Incredible Universe and McDuff portfolios,
which were 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 10.33% in the first quarter of
1998 from 9.09% in the first quarter of 1997, however, the Company did
experience a decline in delinquency rates from December 31, 1997 to March 31,
1998. The Company expects to experience a higher net charge-off rate for 1998 as
compared to 1997. In addition, the Company's lower average credit card loans
outstanding in the first quarter of 1998 compared to the same period in 1997
also contributed to the increased charge-off percentage. In 1997, the Company
intensified its measures to reduce future charge-offs and continues 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
credit quality are subject to uncertainties that could cause actual results to
differ materially from what has been described above.
Factors that influence the level and direction of credit card loan
delinquencies and charge-offs include changes in consumer spending and payment
behaviors, bankruptcy trends, the seasoning of the Company's loan portfolio,
interest rate movements and their impact on consumer behavior, and the rate and
magnitude of changes in the Company's credit card loan portfolio, including the
overall mix of accounts, products and loan balances within the portfolio.
For the three months ended March 31, 1998, total operating expenses of $66.6
million represented a decrease of 15.0% over the same period last year. Total
operating expenses as a percentage of net operating revenues decreased to 81.0%
for the three months ended March 31, 1998, as compared to 86.7% for the same
period a year ago.
For the three months ended March 31, 1998, salaries and employee benefits
totaled $28.2 million, a decrease of 4.5% from $29.5 million from the same
period a year ago. The Company had approximately 638 fewer full-time equivalent
employees at March 31, 1998 compared to March 31, 1997, reflective of reduced
staffing levels in the Company's TeleServices and Consumer Credit Card Services
businesses.
Processing and service expenses include data processing, communications and
account processing expenses, which are influenced, in part, by changes in
transaction volume. For the three months ended March 31, 1998, such expenses
declined to $22.4 million, or 21.0% on a period-to-period basis. The decrease in
processing and service expenses resulted from decreased credit life insurance
expense and expenses associated with a lower volume of TeleServices and Consumer
Credit Card Services. Processing and service expenses as a percentage of net
operating revenues decreased to 27.2% for the three months ended March 31, 1998,
as compared to 31.3% for the comparable prior year period.
Other expenses include expenses relating to business development, merchant
marketing, occupancy, advertising and promotion, cost of terminals sold, credit
card fraud and other miscellaneous employee and administrative expenses. For the
three months ended March 31, 1998 and 1997, other expenses totaled $16.0 million
and $20.5 million, respectively. The decrease in other expenses of 22.0%
resulted from decreased fraud losses, collection agency fees and merchant
marketing incentives, partially offset by increased credit marketing expense.
Other expenses were 19.5% and 22.7% of net operating revenues for the three
months ended March 31, 1998 and 1997, respectively.
The table below presents certain information regarding the Company's credit card
loan net charge-offs, allowance for loan losses, and delinquency information
with supplemental total loan information regarding the Company's credit card
loan portfolio as of and for the year-to-date periods.
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997 December 31, 1997
----------------------------------------------------------------------
Total Total Total
Owned Loans* Owned Loans* Owned Loans*
----- ----- ----- ----- ----- -----
(Dollars in Thousands) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Average credit card loans $1,252,475 $1,832,475 $1,593,771 $2,173,771 $1,390,998 $1,970,998
Period-end credit card
loans $1,169,727 $1,749,727 $1,498,421 $2,078,421 $1,295,787 $1,875,787
Net charge-offs as a % of
average credit card loans 10.33% 9.70% 9.09% 8.93% 9.42% 9.16%
Allowance for loan losses as a
% of period-end credit card
loans 6.40% 5.57% 5.63% 5.15% 6.15% 5.46%
Accruing loans contractually
past due as to principal and
interest payments $61,865 $86,678 $74,948 $97,939 $74,085 $100,413
30-89 days 5.29% 4.95% 4.95% 4.71% 5.72% 5.35%
$49,157 $67,464 $56,778 $74,190 $60,360 $ 79,433
90-179 days 4.20% 3.86% 3.79% 3.61% 4.66% 4.23%
* Total loans represents both owned and securitized credit card loans.
</TABLE>
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, HSB, targets the maintenance of capital levels
considered for regulatory purposes to be "well-capitalized" as defined by the
FDIC Improvement Act of 1991.
The Company'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 MSDW.
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
MSDW, and generally have a maturity of two to 10 years. As of March 31, 1998,
CDs outstanding were $540.2 million, of which institutional CDs represented
$265.3 million and retail CDs represented $274.9 million.
HSB maintains a loan securitization program with Barton Capital Corporation
("BCC"), and at March 31, 1998, outstanding loans under such program were $300.0
million. HSB also maintains a loan securitization program with Receivables
Capital Corporation ("RCC"), and at March 31, 1998, outstanding loans under such
program were $280.0 million. At March 31, 1998, $580.0 million or 33.1% of the
HSB program loans had been sold through loan securitizations.
The BCC loan securitization program, which had been scheduled to expire in
April 1998, has been amended; it now is scheduled to expire on April 15, 1999.
The RCC loan securitization program is scheduled to expire in October 1998. The
amended and restated agreements with BCC and RCC include the elimination of the
MSDW 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." 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.
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 MSDW,
pursuant to which MSDW has agreed to provide financing to the Company. MSDW and
the Company have extended the term of the Borrowing Agreement to November 20,
1998 and have reduced the maximum amount available under the Borrowing Agreement
to $1.1 billion from $1.2 billion. At April 30, 1998, the Company had $399.2
million outstanding under the Borrowing Agreement. Under the Facility Fee
Agreement, the Company pays 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 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 $42.9
million and $57.5 million for the three months ended March 31, 1998 and 1997,
respectively.
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 $91.5
million and $85.3 million for the three months ended March 31, 1998 and 1997,
respectively. The net principal collected on credit card loans, representing the
difference between payments received from cardholders and sales made using the
cards, provided cash of $92.7 million and $101.9 million for the three months
ended March 31, 1998 and 1997, respectively.
Cash flows from financing activities primarily consist of borrowings and
deposits. Such financing activities resulted in net uses of cash of $133.7
million and $138.4 million for the three months ended March 31, 1998 and 1997,
respectively. Amounts due to affiliated companies resulted in net uses of cash
of $168.3 million and $153.6 million for the three months ended March 31, 1998
and 1997, respectively, partially offset by interest-bearing deposits which
resulted in net proceeds of cash of $36.1 million and $19.8 million for the
three months ended March 31, 1998 and 1997, respectively. At March 31, 1998 and
1997, the Company had cash equivalents of $15.4 million and $19.6 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 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 $426.7 million and $460.8 million at March 31, 1998 and
1997, respectively.
At March 31, 1998, the Company had no interest rate cap agreements. At March
31, 1997, the Company had outstanding interest rate cap agreements with notional
amounts of $10.0 million.
At March 31, 1998 and 1997, the Company's interest rate swap agreements had
maturities ranging from July 1998 to December 2000, and from October 1997 to
December 2000, respectively.
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 Company has established a Year 2000 Project Team to develop and manage a
company-wide compliance process. Based upon current information, the Company
estimates that company-wide Year 2000 expenditures for 1998 through 1999 will be
approximately $12 million. 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(see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
PART II - OTHER INFORMATION
Item 1. 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 2. Changes in Securities.- None.
Item 3. Defaults Upon Senior Securities.- None
Item 4. Submission of Matters to a Vote of Security Holders.- None.
Item 5. Other Information.- None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
2.1 Stock Purchase Agreement dated April 18, 1998, between SPS
Transaction Services, Inc. and Associates First Capital Corporation.
10.1 Fifth Amendment to the Amended and Restated Borrowing Agreement dated
as of April 2, 1998 between the Company and MSDW.
10.2 Amendment to the Facility Fee Letter Agreement dated as of April 2,
1998, between the Company and MSDW.
10.3 First Amendment to the Amended and Restated Credit Card Receivables
Purchase Agreement dated as of April 15, 1998, among HSB, the Company,
SPS, MSDW, BCC and Societe Generale.
11.0 Computation of Earnings per Common Share.
27.0 Financial Data Schedule
27.1 Restated Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for year ended December 31, 1996.
(b) Reports on Form 8-K.
A Current Report on form 8-K, dated April 21, 1998, was filed with the
Securities and Exchange Commission reporting Item 7 relating to the Company's
first quarter earnings release.
A Current Report on form 8-K, dated April 18, 1998, was filed with the
Securities and Exchange Commission reporting Items 5 and 7 relating to the
Company's agreement with Associates First Capital Corporation to sell
substantially all of the assets of the Company to Associates First Capital
Corporation.
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.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPS TRANSACTION SERVICES, INC.
------------------------------
(Registrant)
Date: May 14, 1998 By:/s/ Russell J. Bonaguidi
----------------- -----------------------------------
Russell J. Bonaguidi
Vice President and Controller (Duly
Authorized Officer and Principal
Accounting Officer)
EDGAR
Exhibit Description of Exhibits
- ------- -----------------------
2.1 Stock Purchase Agreement dated April 18, 1998, between SPS
Transaction Services, Inc. and Associates First Capital Corporation.
10.1 Fifth Amendment to the Amended and Restated Borrowing Agreement dated
as of April 2, 1998 between the Company and MSDW.
10.2 Amendment to the Facility Fee Letter Agreement dated as of April 2,
1998, between the Company and MSDW.
10.3 First Amendment to the Amended and Restated Credit Card Receivables
Purchase Agreement dated as of April 15, 1998, among HSB, the
Company, SPS, MSDW, BCC and Societe Generale.
11.0 Computation of Earnings per Common Share.
27.0 Financial Data Schedule
27.1 Restated Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for year ended December 31, 1996.
Exhibit (d)(3)
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.
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 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 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.
- - 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.
- - 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."
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.
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.
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.
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
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
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.
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.
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.
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).
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).
-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.
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
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>
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>
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>
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.
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
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 (d)(4)
CLIENTACTIVE
[SPS Transaction Services Logo]
SPS Transaction Services, Inc.
1997 Annual Report
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>
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>
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>
Active Consumer
Credit Card Accounts
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>
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>
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,
[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.
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
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.
[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."
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.
PRO
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]
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.
ACTIVE
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.
[DAVID EDMONDSON PHOTO]
DAVE EDMONDSON, Sr. V.P. Marketing, RadioShack
"Working together toward the combined goals of improving sales and portfolio
profitability, we reinvented and reinvigorated our private label credit card."
INTER
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.
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]
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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
loans that have been sold to investors through asset securitizations. Such
revenues are the result of the fees earned for servicing the underlying credit
card accounts. Loan securitizations have the effect of converting portions of
net credit income, merchant discount revenue and credit card fees to a
component of processing and service revenues for the credit card accounts that
are securitized.
Merchant discount revenue is derived from the Company's owned Consumer Credit
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>
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.
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>
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY In thousands
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.
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.
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.
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.
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.
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.
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 PLAN
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>
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>
<TABLE>
<CAPTION>
A reconciliation from the statutory federal income tax rate to the effective income tax rate is as follows:
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>
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>
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.
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>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS (UNAUDITED)
In thousands
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.
<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>
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
<TABLE>
<CAPTION>
QUARTERLY INFORMATION (UNAUDITED)
In thousands, except
per share data
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
- -----------------------------------------------------------------------------------------------------------
(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.
</TABLE>
<TABLE>
<CAPTION>
5-YEAR SELECTED FINANCIAL DATA
In thousands, except
per share data
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.
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.
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.
(C) 1998 SPS Transaction Services, Inc. Printed in USA
SPS Transaction Services, Inc. 1997 Annual Report
SPS Transaction Services, Inc.
2500 Lake Cook Road
Riverwoods, Illinois 60015
