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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): August 7, 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 Second 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: August 7, 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 Second Quarter Report to Stockholders of the Registrant.
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EXHIBIT 20.1
1996 SECOND QUARTER REPORT
To Our Stockholders:
Second quarter net income was $6.6 million or 24 cents per share compared with
36 cents per share in 1995. Net operating revenues rose to $83.3 million, a 9
percent increase over the same period last year. This performance was SPS'
first year over year decrease in the 17 quarters since our initial public
offering and we are very disappointed.
Net income for the six months ended June 30 was $17.6 million, or 65 cents per
share, compared to 74 cents per share for the same period in 1995. Net
operating revenues for the first half of 1996 increased 18 percent to $172.3
million.
Two major issues negatively impacted our earnings.
We continue to be affected by an industry-wide deterioration in consumer credit
quality. A higher percent of delinquent accounts in our consumer private label
credit card portfolios are reaching charge-off, and bankruptcies have increased
substantially. These high charge-offs had a significant negative impact on our
earnings for the quarter.
The second issue that affected our consumer private label credit card business
was the mix and pricing of promotional payment plans offered to our
cardholders. The pricing of these programs reflects assumptions about both
client usage and cardholder behavior, which are based on historical models and
client input. Cardholder behavior and the mix of client programs have changed
more than we anticipated resulting in a decrease in merchant discount revenue
and an increase in marketing incentive expense.
We are taking aggressive corrective measures.
We have tightened our credit policies, increased our collection efforts and
initiated a program of increasing prices with certain private label credit card
clients. However, these actions will take time to work through the portfolios.
We are also working with our clients to minimize the impact of these actions on
their credit card sales, but over the near term there may be a slowdown in the
growth of existing portfolios. There is no quick, easy fix.
The company ended the quarter with 3.3 million active consumer private label
accounts, both owned and managed, a slight decrease from last year. Credit card
loans outstanding, including securitized loans, at June 30, 1996 were $2.0
billion compared with $1.8 billion a year ago.
Our fee-based business services accounted for over half of our second quarter
revenues.
Active commercial accounts increased 20 percent year over year to 727,000.
Business with our core clients in the office supplies sector is growing and
programs for new building supplies and printing clients are taking off. We
believe strongly in the growth potential for this service.
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Network transactions increased 14 percent to 104.8 million for the quarter.
Petroleum clients and specialty retailers were the primary sources of that
growth. Although still small, we have also been successful in developing a
niche in payment processing for the parking industry. We are very pleased to
report a new contract to provide point-of-sale authorizations for Budget Rent a
Car Corporation. While, we consider network services to be a mature industry,
it is an integral part of our service offerings and we will continue to pursue
profitable opportunities.
Operational Outsourcing reported 2.1 million contacts during the second
quarter, up slightly from last year. While we have added new clients, we are
still challenged by the reduction in activities for Prodigy Services, Co. We
are pursuing many prospects and believe there is much potential for us in the
teleservicing business.
The balance of 1996 and beyond...
Projecting performance for the balance of the year is difficult. Important
variables include cardholder behavior and credit payment patterns, bankruptcy
levels and client sales performance. As indicated in our June 21 press release,
we expect charge-offs and the impact of promotional payment plans to result in
third and fourth quarter earnings significantly below last year.
We are more optimistic about next year. We have identified the problems in our
consumer private label business. We are taking aggressive corrective action and
we will get results. We expect our initiatives to have a positive impact on
earnings beginning in the first half of 1997. However, given the uncertainties
of the credit cycle, it is too soon to comment on the full year.
We are particularly pleased with our employees' response during this difficult
time. They are pulling together to control expenses and improve business
processes without sacrificing customer service. The attitude and energy
displayed throughout the organization gives us tremendous confidence in our
ability to emerge as a stronger company.
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>
June 30, December 31,
1996 1995
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(Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 9,448 $ 8,879
Cash and due from banks - restricted -- 29,000
Investments: Held to maturity - at amortized cost 52,394 47,430
Credit card loans 1,421,568 1,620,833
Allowance for loan losses (65,304) (63,704)
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Credit card loans, net 1,356,264 1,557,129
Accrued interest receivable 22,655 23,828
Accounts receivable 28,411 28,683
Due from affiliated companies 3,561 4,776
Premises and equipment, net 21,386 19,800
Deferred income taxes 26,507 26,276
Prepaid expenses and other assets 29,166 31,806
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TOTAL ASSETS $1,549,792 $1,777,607
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LIABILITIES:
Deposits:
Noninterest-bearing $ 2,902 $ 10,270
Interest-bearing 411,668 372,073
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Total deposits 414,570 382,343
Accounts payable, accrued expenses and other 39,586 44,788
Income taxes payable 2,335 11,232
Due to affiliated companies 848,028 1,110,811
Notes payable -- 2,095
Accrued recourse obligation 26,623 27,128
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Total liabilities 1,331,142 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; 27,224,000 and
27,147,000 shares issued; 27,187,000 and
27,074,000 shares outstanding at June 30, 1996
and December 31, 1995, respectively 272 271
Capital in excess of par value 80,745 79,396
Retained earnings 138,727 121,099
Common stock held in treasury, at cost, $.01
par value, 37,000 and 73,000 shares at June 30,
1996 and December 31, 1995, respectively (1,032) (1,957)
Stock compensation plan 413 501
Employee stock benefit trust (413) --
Unearned stock compensation (62) (100)
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Total stockholders' equity 218,650 199,210
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,549,792 $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 Six Months Ended
June 30, June 30,
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1996 1995 1996 1995
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Processing and service revenues $64,766 $58,969 $139,096 $114,197
Merchant discount revenue 7,375 9,285 15,219 16,963
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72,141 68,254 154,315 131,160
Interest revenue 56,194 35,444 112,146 55,532
Interest expense 18,943 16,263 41,586 25,367
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Net interest income 37,251 19,181 70,560 30,165
Provision for loan losses 26,096 11,274 52,568 15,593
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Net credit income 11,155 7,907 17,992 14,572
Net operating revenues 83,296 76,161 172,307 145,732
Salaries and employee benefits 24,471 21,480 48,671 42,497
Processing and service expenses 26,836 23,357 53,507 41,917
Other expenses 21,353 15,140 41,694 28,166
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Total operating expenses 72,660 59,977 143,872 112,580
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Income before income taxes 10,636 16,184 28,435 33,152
Income tax expense 4,043 6,399 10,807 13,090
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Net income $ 6,593 $ 9,785 $ 17,628 $ 20,062
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Net income per common share $ 0.24 $ 0.36 $ 0.65 $ 0.74
Weighted Average Common Share
Outstanding 27,183 27,114 27,150 27,096
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