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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File Number: 0-23856
TRANSACTION NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or jurisdiction of incorporation or organization)
54-1555332
(I.R.S. Employer Identification Number)
1939 ROLAND CLARKE PLACE
RESTON, VA 20191
(Address of principal executive offices)
(703) 453-8300
(Registrant's telephone number, including area code)
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 requirement for the past 90 days. X Yes No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Shares Outstanding as of August 9, 1996
12,265,799 Shares of Common Stock, $0.01 par value
Page 1 of 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSACTION NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1996 1995
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(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,329 $ 18,681
Short-term investments 8,979 4,551
Accounts receivable, net of allowance for
doubtful accounts of $462 and $432, respectively 8,679 7,716
Other current assets 599 630
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Total current assets 31,586 31,578
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EQUIPMENT, at cost:
Network equipment 20,320 17,067
Office equipment 2,497 1,249
Less - Accumulated depreciation (8,061) (6,291)
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14,756 12,025
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INTANGIBLE ASSETS:
Software and intangibles 13,555 12,090
Less - Accumulated amortization (2,419) (1,701)
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11,136 10,389
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OTHER ASSETS 1,006 1,350
NOTE RECEIVABLE - 3,600
LONG-TERM INVESTMENTS 5,882 2,406
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Total assets $ 64,366 $ 61,348
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES:
Current portion of capital lease obligations $ 5 $ 18
Accounts payable and accrued expenses 5,810 5,781
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Total current liabilities 5,815 5,799
DEFERRED INCOME TAX, net of current amount 956 956
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Total liabilities 6,771 6,755
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STOCKHOLDERS' EQUITY
Common Stock 123 81
Additional paid-in capital 48,733 48,160
Unearned compensation (91) (106)
Accumulated equity 8,830 6,458
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Total stockholders' equity 57,595 54,593
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Total liabilities and stockholders' equity $ 64,366 $ 61,348
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The accompanying notes are an integral part of these balance sheets.
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TRANSACTION NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1996 1995 1996 1995
-------- ------- -------- --------
Revenues $ 13,168 $ 9,743 $ 24,101 $ 18,164
Cost of network services 7,147 5,215 13,373 9,866
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Gross profit 6,021 4,528 10,728 8,298
--------- --------- --------- --------
Other operating expenses:
Engineering & development 691 502 1,380 1,065
Selling, general & administrative 2,021 1,416 3,737 2,689
Depreciation 1,004 727 1,917 1,408
Amortization of intangibles 379 240 718 480
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Total other operating expenses 4,095 2,885 7,752 5,642
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Income from operations 1,926 1,643 2,976 2,656
Interest income 450 101 850 203
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Income before provision for income
taxes 2,376 1,744 3,826 2,859
Provision for income taxes 903 663 1,454 1,087
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Net income $ 1,473 $ 1,081 $ 2,372 $ 1,772
--------- --------- --------- --------
--------- --------- --------- --------
Net income per common and
equivalent share $ 0.12 $ 0.10 $ 0.19 $ 0.16
--------- --------- --------- --------
--------- --------- --------- --------
Weighted average common and
equivalent shares outstanding 12,710 10,983 12,624 10,967
--------- --------- --------- --------
--------- --------- --------- --------
The accompanying notes are an integral part of these statements.
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TRANSACTION NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,372 $ 1,772
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,635 1,888
Stock option compensation 15 29
Loss (gain) on disposal of equipment 7 (7)
Increase in accounts receivable (963) (1,167)
Decrease (increase) in other current assets 31 (289)
Decrease (increase) in other assets 344 (1,412)
Increase in accounts payable and accrued expenses 43 561
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Net cash provided by operating activities 4,484 1,375
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (4,521) (2,648)
Purchase of intangible assets (1,465) (3,050)
Proceeds from disposal of equipment 13 58
Repayment of note receivable 3,600
Purchases of short-term investments (4,428) ---
Purchases of long-term investments (3,476) ---
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Net cash used in investing activities (10,277) (5,640)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options, warrants and employee stock
purchase plan 454 128
Repayment of equipment notes and capital leases (13) (165)
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Net cash provided by (used in) financing activities 441 (37)
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (5,352) (4,302)
CASH AND CASH EQUIVALENTS, beginning of period 18,681 7,313
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 13,329 $ 3,011
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Common Stock issued for 401k matching contribution $ 161 $ 56
Cash paid for income taxes $ 1,512 $ 18
The accompanying notes are an integral part of these statements.
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TRANSACTION NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Transaction Network Services, Inc. (the "Company" or "TNS") was
incorporated on August 20, 1990, in the state of Delaware and is a nationwide
communications network company specializing in transaction-oriented data
services. The Company currently addresses two primary markets through its
service offerings: (1) the point-of-sale/point-of-service ("POS") transaction
market through its TransXpress-Registered Trademark- network services, and (2)
the telephone call billing validation and fraud control market through its
CARD*TEL-Registered Trademark- telecommunications services. The Company provides
participants in these markets with high speed, reliable, inexpensive
communications for real-time validation necessary to reduce losses resulting
from the bad debt and fraud often associated with credit cards, debit cards and
"0+" telephone calls.
The financial statements include the accounts of Transaction Network
Services, Inc. and of Fortune Telecommunications, Inc. ("FTI") which was a
wholly owned subsidiary from the date of its acquisition, June 6, 1994, through
February 28, 1995, when FTI was merged into the Company. Significant
intercompany accounts have been eliminated in consolidation.
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of interim period results. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes that its disclosures are adequate to make the information presented
not misleading. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K. The results of operations for the three
and six month periods ended June 30, 1996 and 1995 are not necessarily
indicative of the results to be expected for the full year.
STOCK SPLIT
On April 18, 1996, the Company declared a 3-for-2 stock split of the
outstanding shares of its Common Stock. This stock split entitled shareholders
to receive one additional share for each two outstanding shares of Common Stock
held of record as of the close of business on April 30, 1996. The payable date
was May 10, 1996. All share and per share data presented have been
retroactively adjusted to reflect the stock split.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The Company considers all securities purchased with a maturity of three
months or less to be cash equivalents.
At December 31, 1995 and June 30, 1996, the Company's securities consisted
primarily of U.S. government and government agency securities, investment grade
corporate bonds, money market accounts (classified as cash equivalents), and
overnight reverse repurchase agreements (classified as cash equivalents), all of
which the Company has both the positive intent and ability to hold until
maturity. These securities are reported at amortized cost.
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The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those instruments.
SHORT TERM AND LONG TERM INVESTMENTS
The fair values of the investments, which consist of U.S. government and
government agency securities and investment grade corporate bonds, are
estimated based on quoted market prices on national exchanges and
approximate the carrying amounts.
REVENUE RECOGNITION
The Company recognizes revenue as the related services are performed.
Advance payments for services are deferred and recognized as revenue when
earned. As of January 1, 1996 the Company began reporting a single line item of
revenue which includes POS services revenue, Telecom services revenue and
International revenue. POS services revenue from the Company's POS transaction
communications business, is derived primarily from the transmission through its
network of transaction information between merchant or service provider POS
terminals and transaction-processing computer centers. Telecom services
revenue consists primarily of fees charged on a per query basis to customers for
telephone call fraud-control and billing validation services. International
revenue currently consists primarily of development fees and hardware sales
revenue, and in the future may consist also of maintenance and software license
fee revenue and royalties.
RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to conform
with current period presentation.
2. PUBLIC OFFERING:
On August 16, 1995, the Company completed a public offering of 1,800,000
shares of Common Stock (not adjusted for the April 18, 1996 three-for-two stock
split). Of the 1,800,000 shares, 1,000,000 were sold by the Company and 800,000
were sold by selling shareholders. After underwriting discounts, commissions
and other professional fees, net proceeds to the Company from the offering were
approximately $23 million.
3. PURCHASE OF INTANGIBLE ASSETS
On June 30, 1995, the Company completed the purchase from Intellicall of
certain contract rights related to Intellicall's telephone call validation and
fraud control services, including Intellicall's validation services contracts
with customers. The Company also purchased a validation services contract with
Intellicall and an exclusive U.S. license to Intellicall's VICS software
(excluding certain markets). Intellicall also agreed not to compete for ten
years with the Company in the provision of validation services and to
exclusively market the Company's validation services to Intellicall's customers
(excepting, in each case, such excluded markets). The Company paid $3 million in
cash at closing for these assets. The cost of these assets has been included in
intangible assets in the December 31, 1995 accompanying balance sheet. The
Company will amortize the cost of these assets over ten years.
On March 29, 1996, the Company completed an asset purchase from AMNEX, Inc.
("AMNEX") of AMNEX's proprietary fraud-control system and related databases.
The transaction also provided for a ten year exclusive Service Agreement, a
joint Marketing Agreement to cross-sell each other's services and a Warrant
Agreement giving the Company the right to purchase 100,000 shares of AMNEX
Common Stock at $3.91. The Company paid approximately $1.5 million in cash for
these assets. In connection with the Asset Purchase Agreement, the Company has
agreed to purchase additional assets from AMNEX which AMNEX acquired in a
subsequent business combination
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for approximately $200,000. These assets include assets used to provide fraud
control, and billing validation services. The Company will amortize the cost of
these assets over five to ten years.
4. INCOME TAXES
The Company recorded a provision for income taxes of $903,000 and
$1,454,000 for the three and six month periods ended June 30, 1996. The
Company's provision for income taxes for the three and six month periods ended
June 30, 1996 is based upon the anticipated effective income tax rate of 38%.
This effective income tax rate differs from the Federal statutory rate as
follows:
Statutory Federal income tax rate 35.0%
Effect of graduated rate (1.0)
State income taxes, net of Federal benefit 4.0
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Anticipated effective income tax rate 38.0%
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5. NOTE RECEIVABLE
On October 10, 1995, the Company funded a $3.6 million promissory note to
Pond Building, L.L.C., the purchaser of the office building in which the
Company's headquarters are located. The note was paid in full on June 10, 1996.
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Item 2.
TRANSACTION NETWORK SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in August 1990 to build and operate a
communications network focused on the network services needs of the POS
(Point-of-Sale/Point-of-Service) transaction processing industry. Between
August 1990 and May 1991, the Company was primarily engaged in raising capital
from investors and in the initial development of its network. In June 1991 the
Company transmitted its first POS transaction, and since then has increased its
average daily transaction volume from approximately 17,000 in the third quarter
of 1991 to more than 5.3 million in the second quarter of 1996. In June 1994,
the Company acquired Fortune Telecommunications, Inc. ("FTI") of Ft. Lauderdale,
Florida, which provided customers in the telecommunications industry with
telephone call fraud control and billing validation services. In 1995, the
Company reorganized around its two key service offerings: (1) POS services which
include the Company's TransXpress-Registered Trademark- network services for the
POS transaction processing industry, and (2) Telecom services which include
FTI's CARD*TEL-Registered Trademark- telephone call billing validation and fraud
control services and other services targeted primarily to the telecommunications
industry. TNS has strengthened its position in the telephone call billing
validation and fraud control market through the purchase of assets -- primarily
contract rights, marketing and services agreements, non-compete agreements and
computer software and databases -- from Intellicall Corporation in June of 1995
and from AMNEX, Inc. in March of 1996. In the first quarter of 1996, the
Company began to recognize revenue for products and services sold
internationally and continues to actively market its products and services to
potential international customers.
RESULTS OF OPERATIONS
REVENUES
Total revenues increased by 35% to $13,168,000 for the three month period
ended June 30, 1996 from $9,743,000 for the same period in 1995 and by 33% to
$24,101,000 for the first six months of 1996 from $18,164,000 for the same
period in 1995. Of the $3,425,000 and $5,937,000 increase for the three and six
month periods, 76% and 67%, respectively, was due to the increased usage of the
TNS network by the Company's POS services customers. Telecommunications
service customers contributed 18% and 26% of the growth for the three and six
month periods. The remaining 6% and 7% of the growth for the three and six
month periods resulted primarily from development fees derived from the
Company's International activities. As of January 1, 1996 the Company began
reporting a single line item of revenue which includes POS services revenue,
Telecom services revenue and International revenue.
The growth in POS services revenue resulted primarily from an increase in
transaction volume and associated revenue from the Company's existing POS
customers. POS transaction volume increased by 66% to 483 million from 291
million transactions for the second quarter of 1996 versus 1995 and by 55% to
824 million for the six month period ended June 30, 1996 from 531 million for
the same period in 1995. The transaction volume growth rate exceeded the revenue
growth rate primarily because the average revenue per transaction declined by
approximately 22% for the three month period. This decline in average revenue
per transaction occurred as a result of several factors. First Data Corporation
("FDC"), the Company's largest customer, entered into a new five year service
contract with TNS which resulted in a significant price reduction for FDC
effective January 1, 1996. Under the terms of the contract, FDC has agreed to a
minimum revenue commitment to TNS of $55 million over the term of the contract.
Average revenue per transaction also declined as a result of price discounts
based on increasing transaction volumes for many customers, contract
renegotiations with several customers other than FDC, and from the relative
contribution to total transaction volume of certain of the Company's customers.
During the period ended June 30, 1996, the Company recognized approximately
$270,000 in revenue as a result of a prepayment of a note receivable relating to
POS services rendered during a 24 month period. The services were provided
under a loan agreement between the Company and a customer whereby amounts
charged to the customer for services rendered were converted to an interest
bearing note receivable to
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be paid over a 10-year period. The Company recognized revenues relating to the
services provided under the loan agreement on a cash basis as principal payments
were received.
Telecommunications revenue increased by 22% to $3,387,000 for the three
months ended June 30, 1996 from $2,771,0000 for the same period in 1995 and by
31% to $6,696,000 for the first six months of 1996 from $5,116,000 for the same
period in 1995. This revenue was generated primarily by fees charged on a per
query basis to telecommunications customers for the Company's telephone call
fraud control and billing validation services. The growth in revenue was due to
growth in queries processed for the Company's telecommunications customers for
the three and six month periods, and from the inclusion of the revenues derived
from the June 30, 1995 Intellicall asset purchase and to a much lesser extent
from the purchase of intangible assets including an Exclusive Services Agreement
from AMNEX, Inc.
On March 29, 1996, the Company completed an asset purchase from AMNEX, Inc.
("AMNEX") of AMNEX's proprietary fraud-control system and related databases.
The transaction also provided for a ten year exclusive Service Agreement, a
joint Marketing Agreement to cross-sell each other's services and a Warrant
Agreement giving the Company the right to purchase 100,000 shares of AMNEX
Common Stock at $3.91. The Company paid approximately $1.5 million in cash for
these assets. In connection with the Asset Purchase Agreement, the Company has
agreed to purchase additional assets from AMNEX which AMNEX acquired in a
subsequent business combination for approximately $200,000. These assets
include assets used to provide fraud control, and billing validation services.
The Company will amortize the cost of the depreciable assets over five to ten
years.
Since its acquisition in 1994, the Company's telecom services division has
grown principally through the addition of new customers, through the
acquisition of contract rights and other intangible assets, and through the
provision of new service offerings. The Company's core customers in the
fraud control and billing validation services market have not achieved growth
rates comparable with those experienced by many of the Company's POS
customers. The market for third party billing validation and fraud control
services has been adversely impacted by so-called "dial-around" and pre-paid
calling card services which use 800 WATS services to route telephone calls
made from pay phones, hotel phones, or other public use telephones to long
distance carriers other than those chosen by the telephone proprietor. These
dial-around offerings effectively divert telephone calls away from the
Company's customer base for fraud control and billing validation services
(primarily operator services providers and payphone service providers) to
other telecommunications companies with separate billing validation
databases (in many cases MCI and AT&T). As part of the Telecommunications
Act of 1996, the FCC has been authorized to mandate a payment scheme pursuant
to which payphone service providers are "fairly compensated" for all access
code calls, debit card calls, subscriber 800 and other toll-free calls which
originate on the payphone service providers' facilities but which are routed
to telecommunications carriers other than those pre-subscribed by the
payphone service providers ("dial-around compensation"). The technique which
will be used to compensate the pay phone providers for 800 calls made from
their equipment has not been determined. The FCC proposal is expected to be
announced later this year. While TNS management believes that dial-around
compensation will increase the underlying cost of these services either to
the consumer or to the telecommunications companies offering such services,
it is uncertain what impact the new rules will have on dial-around usage and
therefore on demand for TNS Telecom Services offerings.
COST OF NETWORK SERVICES
Cost of network services increased by 37% to $7,147,000 for the three
months ended June 30, 1996 from $5,215,000 for the same period in 1995 and by
36% to $13,373,000 for the first six months of 1996 from $9,866,000 for the same
period in 1995. This growth resulted primarily from increases in local access,
"800" usage charges and charges for billing validation information resulting
from increased transaction and query volume. Growth in cost of network services
also resulted from costs associated with increases in network capacity purchased
from outside vendors and from increases in other costs associated with operating
the Company's network. The reduction in average revenue per transaction was
significantly, but not fully offset by several factors, resulting in a net
increase in cost of network services as a percentage of revenue of about 1% for
the first six month period of 1996. In August 1995, a reduction in the cost per
minute of usage for local access charged by local exchange carriers went into
effect by FCC mandate, effectively reducing the Company's variable cost per
transaction. Also, the Company was able to continue to achieve economies of
scale on its network as the growth in transaction and query volume and
associated revenue was larger than the increase in recurring costs for network
capacity and network management.
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GROSS PROFIT
Gross profit increased by 33% to $6,021,000 for the three months ended
June 30, 1996 from $4,528,000 for the same period of 1995 and by 29% to
$10,728,000 for the first six months of 1996 from $8,298,000 for the same
period in 1995. This represents 45% and 46% of total revenues for the six
month period of 1996 and 1995, respectively. The 1% decrease in gross profit
as a percentage of total revenues for the six month period reflects the fact
that the reduction in average revenue per POS transaction over the periods
was largely, but not completely, offset by local access rate reductions and
network efficiencies resulting from transaction volume and query growth and
from larger than normally recorded non-transaction revenues resulting from
the prepayment of a note owed to the Company by a customer for services
rendered in previous periods. For the remainder of 1996, the incremental
increase in transaction and query volume and revenue is not anticipated to
fully offset the significant price reduction and network cost increases
associated with the new FDC contract. As a result, a continuation of gross
profit margins at levels below those recorded for comparable periods in 1995
is expected. The eventual level of the gross profit margin depends on number
of factors including total transaction and query volume growth, the relative
growth and contribution to total transaction and query volume of each of the
Company's customers, the timing and extent of the Company's network expansion
and the timing and extent of any network cost reductions of which the Company
may be able to take advantage. In addition, any significant loss or
significant reduction in the growth of transaction volume could lead to a
decline in gross margin because a significant portion of network costs are
fixed costs, and maintaining the historical gross margin level depends in
part on growth in transaction volume generating economies of scale.
ENGINEERING AND DEVELOPMENT
Engineering and development expense increased by 38% to $691,000 for the
three months ended June 30, 1996 from $502,000 for the same period of 1995 and
by 30% to $1,380,000 for the first six months of 1996 from $1,065,000 for the
same period in 1995. Engineering and development expense is composed of the
salaries, personnel expenses and other expenses related to the Company's network
equipment systems integration, software development and technology assessment
activities. These expenses are incurred primarily to develop and enhance network
software and systems, to develop specialized software and equipment for new
customers, to conduct research and develop new service offerings, and to build,
test, maintain and modify existing network software and systems. The Company has
not capitalized any costs associated with software or other development
performed by its engineering and development groups.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by 43% to $2,021,000
for the three months ended June 30, 1996 from $1,416,000 for the same period of
1995 and by 39% to $3,737,000 for the first six months of 1996 from $2,689,000
for the same period in 1995. Selling, general and administrative expenses
include sales, marketing, finance, accounting and administrative costs. The
increase in these expenses is attributable to several factors. Additional
expenses were incurred as a result of an increase in administrative staff and
expenses associated with the growth of the Company. An increase in sales costs
resulting primarily from an increase in sales staff and salary expense also
contributed to the growth in selling, general and administrative expenses. On
June 30, 1995, TNS entered into a billing agreement with Intellicall whereby,
for a $1,500,000 prepayment, Intellicall provides billing services to TNS for
telecommunications services provided by TNS to customers whose contract rights
were acquired from Intellicall by TNS. During the third quarter of 1995, TNS
began recognizing the billing services expenses associated with the Intellicall
agreement and expects that it will have fully utilized the prepayment for these
services during the next four to six years, depending on the volume of
telecommunications services billed through this agreement. In March 1996, the
Company relocated to a new headquarters facility and began incurring lease
expense on the new building at that time. Increased lease costs and other
expenses related to the relocation also contributed to the growth in selling,
general and administrative expenses. Total lease costs and building expenses
related to the new headquarters facility are expected to be approximately
$750,000 for the full year of 1996.
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DEPRECIATION
Depreciation expense increased by 38% to $1,004,000 for the three months
ended June 30, 1996 from $727,000 for the same period in 1995 and by 36% to
$1,917,000 for the first six months of 1996 from $1,408,000 for the same period
in 1995. Depreciation expense increased primarily as a result of the
acquisition of capital equipment for network expansion to support growth in the
Company's business. Capital expenditures for network and office equipment
amounted to $1,985,000 and $4,521,000 for the three and six month period ending
June 30, 1996. Depreciation expense relating to network and office equipment is
recorded using the straight line method over estimated useful lives ranging
from three to five years.
AMORTIZATION OF INTANGIBLES
The amortization of intangible assets increased by 58% to $379,000 for the
three months ended June 30, 1996 from $240,000 for the same period of 1995 and
by 50% to $718,000 for the first six months of 1996 from $480,000 for the same
period in 1995. For the three and six month periods, the increase resulted from
amortization of certain intangible assets acquired from Intellicall for
approximately $3,000,000 on June 30, 1995. On March 29, 1996, the Company
completed an asset purchase from AMNEX of AMNEX's proprietary fraud-control
system and related databases and entered into long term marketing and service
agreements with AMNEX. The Company paid approximately $1.5 million in cash for
these assets. Amortization of all existing intangible assets is expected to be
approximately $400,000 per quarter over the next several years.
INCOME TAXES
Provision for income taxes was $903,000 for the three months ended June 30,
1996 and $663,000 for the same period in 1995 and $1,454,000 for the first six
months of 1996 and $1,087,000 for the same period in 1995. The effective tax
rate in the three and six month periods ending June 30, 1996 and 1995 was
approximately 38%.
NET INCOME AND EARNINGS PER SHARE
Net income increased by 36% to $1,473,000 for the three months ended June
30, 1996 from $1,081,000 for the same period in 1995 and by 34% to $2,372,000
for the first six months of 1996 from $1,772,000 for the same period in 1995. On
April 18, 1996, the Company declared a 3-for-2 stock split of the outstanding
shares of Common Stock. This stock split entitled shareholders to receive one
additional share for each two outstanding shares of Common Stock held of record
as of the close of business on April 30, 1996. The payable date was May 10,
1996. All share and per share data presented have been retroactively adjusted
to reflect the stock split. Earnings per share grew to $0.12 for the three
months ended June 30, 1996 from $0.10 for the same period in 1995 and to $0.19
for the first six months of 1996 from $0.16 for the same period of 1995. The
weighted average number of shares outstanding used to calculate earnings per
share increased to 12,710,000 for the three months ended June 30, 1996 from
10,983,000 for the same period in 1995 and to 12,624,000 for the first six
months of 1996 from 10,967,000 for the same period of 1995. Shares outstanding
increased primarily because of the Company's stock offering in August of 1995
in which 1,000,000 shares were issued by the Company (1,500,000 as adjusted
for the April 18, 1996 three for two stock split).
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes sources and uses of cash from the Company's
Statement of Cash Flows for the six month period ended June 30, 1996.
Cash & equivalents as of December 31, 1995 $ 18,681,000
Net cash provided by operations $ 4,484,000
Investing activities:
Purchases of equipment (4,521,000)
Purchase of intangible assets (1,465,000)
Purchase of long-term investments (3,476,000)
Purchase of short-term investments (4,428,000)
Repayment of note receivable 3,600,000
Other investing activities 13,000
------------
(10,277,000)
Financing activities:
Repayment of debt (13,000)
Other financing activities 454,000
------------
441,000
Net decrease in cash & equivalents $ (5,352,000)
-------------
Cash & equivalents as of June 30, 1996 $ 13,329,000
-------------
-------------
At June 30, 1996, principal sources of liquidity were cash and cash
equivalents of $13,329,000, short term investments of $6,932,000, and a bank
line of credit of up to $1,000,000. The line of credit bears an interest rate of
2% above the prime rate of interest and was entirely unused as of June 30, 1996.
At June 30, 1996 the Company had equipment notes and capital lease
obligations of which $5,000 is current, and had long term commitments to
purchase capital equipment in the amount of approximately $2.4 million, of which
$2.0 million is contingent upon the vendor meeting delivery in accordance with
development milestones. Except for these arrangements, the Company does not have
long-term supply contracts with these or any other limited source vendors. On
September 21, 1995 the Company entered into a lease which commenced in March
1996 on an office building which the Company began to use as its headquarters
facility beginning in March 1996. The lease term is 12 years and calls for the
payment of approximately $620,000 in 1996, and for the payment to escalate every
year thereafter based a factor tied to the change in the Consumer Price Index,
but not to exceed 3% per annum, and for a fixed increase in year six of
approximately $67,000.
During the three months ended June 30, 1996 operations provided $4,484,000
in cash.
Investing activities used $10,277,000 in cash during the six months ended
June 30, 1996. For the six month period in 1996, purchases of equipment used
$4,521,000, the purchase of certain assets and agreements from AMNEX, Inc. used
$1,465,000, purchases of long term investment-grade fixed-income securities with
original maturities of more than one year used $3,476,000, purchases of short-
term investments with original maturities of less than one year but more than
three months used $4,428,000, repayment of a note receivable provided $3,600,000
and other investing activities provided $13,000.
During the three months ended June 30, 1996, financing activities provided
net cash of $454,000. For the six month period in 1996, repayment of debt used
$13,000.
The Company believes that the proceeds from its 1995 public offering of
common stock, its other existing cash balances and line of credit, other current
assets and cash flow generated by operating activities will be sufficient to
meet the capital needs of its current business activities for the foreseeable
future.
12
<PAGE>
FORWARD LOOKING STATEMENTS
Statements in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this quarterly report that are not
descriptions of historical fact may be forward looking statements that are
subject to risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors, including , but not
limited to, the Company's reliance on a limited number of major customers,
dependence on market expansion, competition, technological change and necessity
of developing new services, dependence on proprietary rights, changes in
government regulation and seasonality and fluctuations in quarterly results.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. - Not Applicable
Item 2. Changes in Securities. - Not Applicable
Item 3. Default Upon Senior Securities. - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on April 16, 1996
at 1939 Roland Clarke Place, Reston, Virginia.
The stockholders voted on the following matters as set forth in
the proxy statement:
1. ELECTION OF DIRECTORS. The stockholders voted to elect two
Class II directors, John J. McDonnell, Jr. and Jurgen Manchot,
to three-year terms expiring at the annual meeting of
stockholders in 1999. The voting tabulations for each nominee
was as follows:
John J. McDonnell, Jr. - 6,583,884 votes in favor of election;
500 votes against election; 0 abstentions; and 49,935 votes
withheld.
Jurgen Manchot - 6,583,884 votes in favor of election; 500 votes
against election, 0 abstentions; and 49,935 votes withheld.
The Company has a staggered board. In addition to the two
Class II directors elected at the annual meeting of
stockholders, the board has two Class III directors whose
terms expire at the annual meeting in 1997: William N. Melton
and Paolo Guidi; and two Class I directors whose terms expire
at the annual meeting in 1998: John S. McCarthy and Henry R.
Nichols.
2. AMENDMENT TO THE 1994 STOCK OPTION PLAN. The stockholders
approved an amendment to the Company's 1994 Stock Option Plan,
as amended, that provides for the automatic grant of options for
up to an aggregate of 25,000 shares to non-employee directors of
the Company. The voting tabulation was as follows: 6,381,896
votes in favor of the increase; 81,630 votes against the
increase; 7,993 abstentions; and 0 votes withheld.
3. RATIFICATION OF INDEPENDENT ACCOUNTANTS. The stockholders
ratified the selection of Arthur Andersen LLP as the Company's
independent accountants for the current fiscal year. The
voting tabulation was as follows: 6,628,644 votes in favor of
the ratification; 2,175 votes against the ratification; 3,500
abstentions; and 0 votes withheld.
Item 6. Exhibits and Reports on Form 8-K .
(a.) Exhibits.
Financial Data Schedule.
(b.) Reports on Form 8-K. - None
14
<PAGE>
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 thereunto duly authorized.
Transaction Network Services, Inc.
(Registrant)
Date: August 13, 1996 By: /s/ John J. McDonnell, Jr.
-----------------------------------------
John J. McDonnell, Jr.
President and Chief
Executive Officer
Date: August 13 , 1996 By: /s/ Brian K. Barnum
-----------------------------------------
Brian K. Barnum
Chief Financial Officer
(Principal Financial Officer)
15
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