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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (date of earliest event reported): November 11, 1996
SPS TRANSACTION SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-10993 36-3798295
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2500 Lake Cook Road, Riverwoods, Illinois 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 405-3700
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Item 7. Financial Statements and Exhibits.
(c) Exhibits
20.1 1996 Third Quarter Report to Stockholders of the
Registrant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SPS TRANSACTION SERVICES, INC.
Date: November 11, 1996 By: /s/ Russell J. Bonaguidi
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Russell J. Bonaguidi
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EXHIBIT INDEX
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Exhibit
Number Description of Exhibits
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20.1 1996 Third Quarter Report to Stockholders of the Registrant.
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EXHIBIT 20.1
1996 THIRD QUARTER REPORT
To Our Stockholders:
Third quarter net income was $5.6 million or 21 cents per share, a 52 percent
decrease compared with 43 cents per share last year. Net operating revenues for
the quarter decreased slightly to $79.6 million. While not a surprise, the
numbers are no less disappointing for all of us.
Net income for the nine months ended September 30 was $23.2 million or $.85 per
share compared with $1.17 for the same period in 1995. Net operating revenues
for the first nine months have increased 11 percent to $251.9 million.
An update on the issues affecting our net income.
The issues affecting our third quarter performance are most directly related to
our consumer private label credit card programs. The two primary problems are
high charge-offs related to an industry-wide deterioration in consumer credit
quality and expenses related to the mix and pricing of promotional payment
plans offered to our cardholders.
We are taking a number of corrective actions. They include:
-A change in cardholder terms.
-An increase of our collection efforts by adding collectors and expanding
call hours.
-The implementation of a portfolio improvement program that analyzes
credit risk and credit behavior scores for existing accounts, taking into
consideration their current financial condition.
-The implementation of certain client pricing revisions, including those
for promotional programs.
-The acceleration of the development schedule for new credit scoring
models.
All of these actions will have an increasingly positive impact over time. They
will serve to moderate the effects of a difficult credit environment and aid
our performance in the coming quarters.
The company ended the quarter with 3.3 million active consumer private label
accounts, both owned and managed, a 5 percent increase over last year. Credit
card loans outstanding, including securitized loans, at September 30 were $2.0
billion compared with $1.9 billion a year ago. During the quarter we
implemented a new program for The Bombay Company and announced an agreement to
manage the StarPower(SM) Credit Card for PRIMESTAR By TCI. Over the long term,
we remain optimistic about the future of our consumer private label business.
All of our fee-based business segments are healthy and continue to provide
opportunities for growth.
Network transactions processed rose 15 percent to 110.1 million compared with
95.4 million during the third quarter last year. Petroleum clients and
specialty retailers were the primary sources of growth but we also signed and
implemented Budget Rent A Car. In addition, we added a number of airport and
commercial parking facilities to our growing list of clients.
Active commercial accounts increased 18 percent year over year from 647,000 to
764,000. Growth is driven primarily by core office supply superstore clients.
Operational Outsourcing reported 2.0 million contacts, comparable to last
year's third quarter. While we have been challenged by the reduction in
services to our major client, we continue to add new clients.
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The fourth quarter...
A number of issues will affect performance. Changes in client marketing
strategies have caused a re-evaluation of the company's position on recognition
of merchant discount revenues for promotional payment plans. This change in
accounting estimate is expected to result in the deferral of $6 million to $9
million of fourth quarter merchant discount revenues into 1997. Going forward,
this change will provide us with a better matching of the revenues and expenses
associated with promotional payment plans. As outlined in previous SEC filings,
the company has also decided to implement a change reducing its estimate of
loan loss allowances required for loans intended to be securitized.
Additionally, due to the continuing rise in charge-offs, we do anticipate the
need to increase our loan loss allowance, which will more than offset any
benefit from the change in reserves for future securitized loans. Finally, as
in any year, the fourth quarter will be impacted by the strength of our
clients' holiday sales.
Looking forward...
We believe we have identified the problems in our consumer private label
business and are taking aggressive corrective action which we believe will
better position us for the future. We expect these initiatives to moderate the
effects of the adverse credit trend in the consumer credit industry affecting
our consumer private label business. We are also encouraged by the performance
of our fee-based businesses and expect continued growth. However, the industry-
wide adverse credit environment will remain a major uncertainty for 1997.
A reminder...
Except for historical information, the statements made and information provided
in this letter 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.
Thank you for your continued support.
Sincerely,
/s/ Robert L. Wieseneck /s/ Philip J. Purcell
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Robert L. Wieseneck Philip J. Purcell
President and Chief Executive Officer Chairman of the Board
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SPS TRANSACTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
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(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
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(Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 17,396 $ 8,879
Cash and due from banks - restricted -- 29,000
Investments held to maturity - at amortized cost 44,921 47,430
Credit card loans 1,433,373 1,620,833
Allowance for loan losses (65,648) (63,704)
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Credit card loans, net 1,367,725 1,557,129
Accrued interest receivable 20,904 23,828
Accounts receivable 27,810 28,683
Due from affiliated companies 4,811 4,776
Premises and equipment, net 22,507 19,800
Deferred income taxes 27,874 26,276
Prepaid expenses and other assets 28,248 31,806
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TOTAL ASSETS $1,562,196 $1,777,607
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LIABILITIES:
Deposits:
Noninterest-bearing $ 8,042 $ 10,270
Interest-bearing 457,042 372,073
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Total deposits 465,084 382,343
Accounts payable, accrued expenses and other 53,306 44,788
Income taxes payable 7,472 11,232
Due to affiliated companies 785,237 1,110,811
Notes payable -- 2,095
Accrued recourse obligation 26,591 27,128
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Total liabilities 1,337,690 1,578,397
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STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 100,000
shares authorized; none issued or outstanding
Common stock, $.01 par value, 40,000,000 and
40,000,000 shares authorized; 27,235,284 and
27,146,515 shares issued; 27,197,959 and
27,073,877 shares outstanding at September 30,
1996 and December 31, 1995, respectively 272 271
Capital in excess of par value 80,992 79,396
Retained earnings 144,325 121,099
Common stock held in treasury, at cost, $.01
par value, 37,325 and 72,638 shares at September
30, 1996 and December 31, 1995, respectively (1,032) (1,957)
Stock compensation plan 413 501
Employee stock benefit trust (413) --
Unearned stock compensation (51) (100)
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Total stockholders' equity 224,506 199,210
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,562,196 $1,777,607
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</TABLE>
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SPS TRANSACTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
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(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
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1996 1995 1996 1995
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Processing and service revenues $65,712 $58,754 $204,808 $172,951
Merchant discount revenue 10,163 9,760 25,382 26,723
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75,875 68,514 230,190 199,674
Interest revenue 53,972 48,978 166,118 104,510
Interest expense 18,238 17,809 59,824 43,176
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Net interest income 35,734 31,169 106,294 61,334
Provision for loan losses 32,037 18,992 84,605 34,585
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Net credit income 3,697 12,177 21,689 26,749
Net operating revenues 79,572 80,691 251,879 226,423
Salaries and employee benefits 23,736 22,213 72,407 64,710
Processing and service expenses 26,589 23,147 80,096 65,064
Other expenses 20,221 16,638 61,915 44,804
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Total operating expenses 70,546 61,998 214,418 174,578
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Income before income taxes 9,026 18,693 37,461 51,845
Income tax expense 3,428 6,916 14,235 20,006
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Net income $ 5,598 $11,777 $ 23,226 $ 31,839
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Net income per common share $ 0.21 $ 0.43 $ 0.85 $ 1.17
Weighted average common shares
outstanding 27,194 27,105 27,165 27,099
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